Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 1

Taxation of cross-border dividendsand EC fundamental freedoms

Prof. Dr. Joachim Englisch

Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 2

Introduction

• National systems of dividend taxation have been harmonized only to a small extent (Parent-Subsidiary Directive)

• Crucial question: Must provisions to mitigate or avoid economic double taxation be available for cross-border distribution of profits on an equal footing with purely domestic dividend payments?

• Other aspects not covered in this presentation:- Juridical (international) double taxation of dividends and

fundamental freedoms- Most-favoured-nation treatment- Triangular constellations- Third-country involvement

Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 3

Applicable fundamental freedom

• Cross-border dividend payments may be covered by the substantial scope of Art. 43 EC (31 EEA) and / or Art. 56 EC (Art. 40 EEA)

• In so far as both freedoms overlap (esp. substantial shareholdings), the ECJ assumes that Art. 43 EC has precedence

• Due to the convergence of the fundamental freedoms with respect to the concept of forbidden restrictions and permissible justifications, the – questionable – delimination only matters in constellations with third-country involvement

Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 4

Home State scenario: Comparability

• The finding of an unjustified (discriminatory) restriction in the shareholder‘s State of residence presupposes the comparability of foreign-sourced and nationally-sourced dividends

- In the context of Art. 56 EC, the issue of comparability will form part of the justification analysis

• The ECJ resorts to a “legal motive test“ to assess comparability- Decisive criterion: do foreign-sourced dividends suffer from

economic double taxation, too?

• The Court‘s approach is conceptually flawed:- Comparability is a premise for assuming a restriction of Art. 56- The criteria for assuming comparability should be determined in

the light of the internal market objective: are domestic and outbound activities substitutable alternatives?

Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 5

Home State scenario: Fiscal cohesion

• Fiscal cohesion exceptionally permits a compensation of tax disadvantages (denial of shareholder relief) with directly related tax advantages for foreign-sourced dividends

• The ECJ has made a series of critical assumptions- A direct link between elements of the tax system that address

different taxpayers but affect the same taxpayer is now accepted - There must be full compensation for the denial of a sharerholder

relief: the latter must exactly reflect the corporation tax burden- It would be disproportionate not to take into account a foreign

corporation tax burden (supranational concept of cohesion)

• The supranational viewpoint adopted by the ECJ neglects the inherent limits to negative integration and provokes distortive results

Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 6

Host State Scenario: Comparability

• The ECJ approach towards assessing comparability of resident and non-resident shareholders depends on a possible PE involvement

- Host State PE: standard approach relying on parallels in the overall tax scenario (same rules for determining taxable base)

- No host State PE: “Approximation theory”; comparability depends on whether outbound dividends are subject to tax

• However, the comparability criterion should be reflecting the internal market objective underlying the fundamental freedoms

- A competitive relationship with the tax-privileged resident shareholders must be sufficient

- Considerations regarding the balanced allocation of taxing rights should be reserved to the justification analysis

- The Schumacker-doctrine is irrelevant in this context

Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 7

Host State scenario: national vs. supranational view

• Crucial question for assessing a restriction to the detriment of non-resident shareholders: Can (tax treaty) concessions granted by their State of residence compensate for the denial of shareholder relief?

• ECJ admits this to a limited – and rather theoretical – extent: - only by way of a bilateral treaty, not unilaterally- only in case of full compensation (full credit for detrimental

dividend taxation at source, including eventual reimbursement)

• In fact, different national methods of avoiding economic double taxation, and dependence of the level of home State taxation on individual circumstances, generally render remedies for juridical double taxation unsuitable for a sufficiently certain compensation

- A freedom-proof shift in responsability for shareholder relief requires provisions for both Member States (e.g. like PSD)

Prof. Dr. Joachim EnglischLehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 8

Conclusion

• A shareholder relief is typically based on the legal assumption that corporation tax on distributed profits and taxation of dividends should be – at least partly – integrated to avoid economic double taxation

• Considering the rationale of the fundamental freedoms – market access and undistorted competition – and their inherent limits in an internal market with disparate tax systems, it must be assumed that, as a general rule, each MS can only be held accountable for avoiding its own double taxation on an equal footing

- Home state should be able to claim fiscal cohesion (at least with respect to full imputation systems)

- Host state must, in principle, grant shareholder relief

• A shift of responsibilities is possible, but requires a co-ordinated approach such as embodied in the PSD