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Implication of EC Decision on Tax Dividends Case

Implication of EC Decision on Tax Dividends Case
1 Dec 2011

A recent European Court of Justice ("ECJ") case confirmed opportunities for foreign investors to recover German withholding taxes on investment income, principally dividends. The present ECJ case adopts a clear position on the dividends' taxation regime aggrieving recipients of dividends from other EU/EEA Member States, but remains silent on whether or not third countries would be entitled to benefit from this decision. Its logic applies to non-European investors. Taxand Luxembourg reviews the case-law and explains why investors should closely examine the opportunities for refunds and consider filing protective claims.

On 20 October 2011, the ECJ rendered its decision in the case of European Commission v. Federal Republic of Germany (C-284/09) following a reasoned opinion (under Article 226 EC treaty) brought by the European Commission on 23 July 2009, requesting Germany to amend its tax rules concerning outbound dividend payments to companies established in other EU/EEA Member States.

The ECJ held that Germany failed to fulfil its obligations under Article 63 of the Treaty of the Functioning of the European Union "TFEU" (ex-Article 56 the European Community Treaty "EC Treaty") and Article 40 of the European Economic Area Agreement "EEA Agreement" (with regards to the Republic of Iceland and The Kingdom of Norway) for taxing outbound dividends, paid to a company registered in other EU/EEA Member States, at a higher rate than dividends paid to domestic companies.

Arguments rejected by the ECJ
The ECJ did not accept the multiple arguments brought forward by Germany such as the need to maintain the coherence of the German tax system and public interest. Germany also argued unsuccessfully that it was critical to maintain a balanced allocation of the power to tax between Member States linked to the principle of territoriality, according to which each Member State is entitled to tax profits generated in its territory.

Taxand Luxembourg considers the Implication of the present decision in more detail

Taxand's Take

Based on our experience, it will take several months or maybe even years until the laws are brought in line with the recent ECJ jurisprudence. Until such law becomes effective, the applications for refunds should refer to this decision. We assume that within the next months the German Federal Ministry of Finance will issue a financial decree on how to deal with pending refunds. Hopefully, this decree will also provide guidance in regards to filing refund claims, i.e. the required evidence, term, etc. There are now more arguments supporting the claims of refund of withholding taxes for EU/EEA investors such as investment funds.

Your Taxand contacts for further queries are:
Keith O'Donnell
T. +352 26 940 257

Mariem Sahraoui

Taxand's Take Author