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3.5 Dividends

Withholding taxes on dividends in the European Union (2010)???

No cambiar el orden
In 2005, 18 EU
countries exempt domestic pension funds
from paying corporation and/or income tax
and usually also withholding tax on dividend
and interest. In the case no withholding tax
exemption at source is available, domestic
funds normally have access to a refund
procedure. However, foreign pension funds
can either not qualify for the relief at source
or are denied access to the refund
procedure. As a result, non-resident pension
funds pay higher taxes on interest or
dividends than resident pension funds.

The Denkavit and Amurta cases
Over the last years, the European Court of
Justice (ECJ) has issued several rulings
in cases where non-resident corporate
shareholders suffered a higher tax burden
on their income in comparison to similar
resident corporate shareholders. In the
cases Denkavit and Amurta, the
ECJ held that it is contrary to the freedom
of establishment and the free movement
of capital under the EU Treaty if Member
States impose a higher level of withholding tax on
dividend income paid to non-resident
corporate shareholders, compared with
the level of tax applicable on dividend
payments made to comparable domestic
corporate shareholders. It follows that
dividend distributions paid to non-resident
corporate shareholders should, in principle,
not be taxed less favorably than dividends
paid to comparable resident shareholders
in line with EU law. Based on the Amurta
case, an exception to this main rule applies
if the restrictive effects of the WHT are
neutralized by means of a credit granted
under the applicable tax treaty in the
Member State where the shareholder is
As a result of this case law, many pension
and investment funds that were subject
to dividend WHT in the past have started
filing refund claims over the last few years
in various Member States, reasoning that
they are discriminated against, compared
with domestic funds. In general,
domestic funds will either be fully exempt
for their investment income or will be taxed
on a net basis (i.e., investment income
minus business costs) in a Member State.
However, comparable foreign funds are
taxable in that Member State for their
investment income derived in the State on a
gross basis (i.e., investment income without
deduction of any costs) imposing a higher
tax burden which would be contrary to EU

One of the largest Dutch
Government pension funds (ABP) reported in 2010 that it will receive a repayment from the
Norwegian tax authorities for Norwegian
dividend withholding tax (WHT) unduly
levied in 2007. ABP has filed similar requests in the past in
Austria, Denmark, France, Germany, Italy,
Portugal, Spain and Sweden. Meanwhile,
in France and Spain, these refund requests
have been assessed by the local courts,
which decided in favor of the ABP.

Some cases are complex,
particularly since it is sometimes difficult
to demonstrate that a foreign fund is really
comparable to a domestic tax exempt fund. Uncertainty may also arise
regarding the appropriate time limits within
which a refund claim should be filed.
Meanwhile, some EU Member States have
changed their tax laws in order to comply
with ECJ case law. The Netherlands, for
example, did so concerning tax-exempt
pension funds established in the EU as of
1 January 2007, and tax-exempt pension
funds established in Norway and Iceland as
of 1 January 2010.
The Commission has started special
infringement procedures against Austria,
the Czech Republic, Denmark, Estonia,
Finland , Germany, Italy, Lithuania, Poland,
Portugal, Slovenia, Spain, Sweden and the
Netherlands. Some of these countries, such
as the Netherlands, have already changed
their tax law. Other countries, like Poland, ackownoledged that its legislation was in breach of the EC law and introduced appropiate amendments.

UCITS and other Investments Funds

Following cases like Fokus Bank and
Denkavit, the European Court of Justice
(ECJ) raised in 2009 the issue whether there
are possibilities for investment funds to
reclaim European withholding taxes.
Supported by the recent judgment in the
Aberdeen case, the ECJ has now confirmed
that investment funds investing in equities
in EU Member States may wish to consider
or proceed filing protective reclaims with the
relevant tax authorities to reclaim EU
withholding taxes incurred on investment

According to the European Commission
(Commission) and several ECJ cases, this
situation is in breach of Community Law, in
particular Article 56 of the EC Treaty, the
free movement of capital within the EU.

On 18 June 2009, the ECJ issued its
judgment in the Aberdeen Property
Fininvest Alpha Oy (Aberdeen) case. In the
Aberdeen case the ECJ ruled that an EU
Member State levying dividend withholding
taxes only on dividends paid to non-resident
investment funds, while exempting
domestic investment funds from such taxes,
is incompatible with the EC Treaty.

Extension to non-EU investors
This case law not only applies to EU
Member States, but also to Norway and
Iceland which are party to the European
Economic Area (EEA) Agreement, a
treaty that similarly guarantees freedom
of establishment and free movement of
capital. This explains why Norway decided
to approve the refund request made by ABP.
Furthermore, the case law may also extend
to pension funds and investment funds
established outside the EU, such as pension
funds in the United States or Canada.
The reason is that the free movement of
capital under the EU Treaty not only applies
between Member States but also between
Member States and non-EU Member
States. However, in recent case law, the
ECJ ruled in general terms that there may
be room for Member States to successfully
rely on a particular justification based
on their relations with non-EU Member
States, which would not be acceptable in
the relations between EU Member States.
This is because the degree of economic
integration between Member States and
non-EU Member States is different from
that between EU Member States. In this
regard, the ECJ recently confirmed that the
absence of an instrument providing for the
international exchange of information may
be valid ground for discrimination against
non-EU country investments. This means
that in the absence of such an instrument,
a discriminatory WHT may be permitted.
It follows from other ECJ case law that
not every restriction applied to non-EU
countries can automatically be justified
solely because the degree of economic
integration differs. Therefore, a case-bycase
approach should be followed.

Although the Commission’s
focus remains on intra-EU situations, it recently
started to pursue the first discrimination
complaints filed by third country investors
against EU States based on Article 56 EC.


E&Y. Cambiar bastante el wording y mezclar con el de arriba

The implications of the guarantee of free movement of capital (FMC) in Article 56(1) of the EC Treaty1 for Member States’ tax systems began to emerge only in the mid-1990s. The first decision of the ECJ on the taxation of cross border dividends and free movement of capital was decided by the ECJ only in 2000. There have now been a number of rulings on what constitutes, and what justifies, a restriction on free movement of capital as it applies to taxation of dividends. The “third country dimension” of free movement of capital in relation to direct taxation first came before the Court in two cases decided in 2006, and several more are pending. The broad question yet to be answered is whether there is any substance to the EC Treaty’s guarantee of FMC between EU Member States and third countries. If the prohibition on restrictions on third country capital movements has a significant impact on EU Member States’ tax systems, what are the implications for the international tax system generally? Will third countries respond in kind, removing discriminatory measures and disincentives to cross-border investment in their tax treatment of dividends? Will the OECD adjust its Model Tax Convention?. It is too early to predict answers to these questions. There are still only limited indications from the ECJ of how this emerging issue will evolve in the EU legal order. While many of the non-tax types of restriction may easily apply in the case of third countries the tax cases raise more subtle issues of what constitutes discrimination, or restriction, in the context of an existing set of international tax norms observed by most EU Member States and their largest trading partners within the OECD. The dividend taxation cases are the most evolved of the direct tax – FMC cases, and so perhaps are the best indication of the ECJ’s likely approach as it takes on the role of the first international tax court.

The ECJ accepts that the same fundamental principles apply in third country situations as in intra-EU situations when determining whether a measure amounts to a restriction on FMC, although the issue of whether situations are objectively comparable when third country capital movements are concerned may involved different considerations. In particular, the existence of harmonizing measures such as the Parent-Subsidiary Directive may lead to the conclusion that two situations of taxpayers or investments within the EU are objectively comparable, while two situations, one within the EU and one in a third country, are not comparable. In the usual reasoning sequence of the analysis, this would mean that no restriction will be found to exist.

The ECJ is open to new justifications being put forward by Member States when the restriction affects third country capital movements. The justifications that have been accepted in intra-EU cases will undoubtedly be available to Member States defending tax measures from third country challenges. These include measures that ensure the effectiveness of fiscal supervision(this was accepted in Case 120/78, Cassis de Dijon [1979] ECR 649 as one of the original “mandatory requirements” at para. 8), that are designed to maintain a Member State’s fiscal coherence, reflect the principle of territoriality including the preservation of a balanced allocation of taxing power between Member States (and presumably between a Member State and a third country), at least in Case C-446/03 Marks & Spencer, or are necessary to prevent tax evasion or avoidance (Lankhorst-Hohorst [2002] ECR I-11779.).  The measure must also meet the standard of proportionality – that it be appropriate to achieve its purpose, and restrict no more than necessary the exercise of a fundamental freedom.

Tax avoidance justification

The justifications of ensuring the effectiveness of fiscal supervision and prevention of tax evasion and avoidance will likely be relied on most often in third country cases. The ECJ often rejects the former justification by referring to the extensive provisions for exchange of direct tax information between Member States in the Mutual Assistance Directive.87 It

seems to take the position that the existence of this directive is sufficient to overcome all compliance information difficulties among Member States. For third States, there is no equivalent multilateral instrument, although there are other mechanisms for sharing of tax information, including the Convention on Mutual Administrative Assistance in Tax Matters, sponsored by the Council of Europe and the OECD. Several EU countries have signed this Convention, as well as a number of non-EU Member States including Canada. Some tax treaties between EU Member States and third countries also contain broad provisions for exchange of tax information, and even mutual assistance in tax collection. However, the Mutual Assistance Directive is much more far-reaching and as a “domestic” EU measure, may carry more weight because it has direct effect and the Court is the ultimate interpreter of it. The existence of the Mutual Assistance Directive may be cited by the Court as a distinction between intra-EU and third state circumstances which can support a Member State’s more stringent requirements for disclosure and proof of facts and even differential tax treatment, when this would not constitute a justification for a similar restriction on capital movements between EU Member States.
Membership in the OECD, and its Code of Liberalisation of Capital Movements may also prove relevant in determining whether a restriction is justified in respect of a particular third country.

The well-established case law of the ECJ on the lack of direct effect of WTO Agreements within the EU is an example of the Court citing lack of reciprocity as a basis for giving different legal effect to different types of provision within the EU legal order. For example: ECJ 23 November 1999, C-149/96, Portugal v. Council [1999] ECR I-8395, and among others, ECJ 1 March 2005, C-377/02 Léon van Parys NV v. Belgian Intervention and Refund Board (BIRB)[2003] ECR I-10497 and ECJ 30 September 2003, C-93/02 P Biret International v Council [2003] ECR I-10497. 43
Quite specifically, the ECJ may allow the justification, always unsuccessful in intra-EU case, of preventing erosion of the national tax base or diminution of government revenues. The high degree of economic integration among EU Member States, and the quasi-federal character of its common budget and structural funds re-distribution program could support a different level of protection for Member State tax bases in relation to third countries’ tax equality claims.