Recent referrals to the European Court of Justice

The European Court of Justice (ECJ) continues to receive a significant number of referrals from the national courts of Member States seeking clarification as to the compatibility of national tax measures with EC Treaty provisions. A number of referrals to the ECJ in the past few months may be of interest to Irish taxpayers.

Dividend withholding taxes

On 23 November 2004 the EFTA (European Free Trade Association) Court opined in the ‘Fokus Bank’ case that the Norwegian imputation tax credit system was discriminatory. Under that system Norwegian shareholders were granted a tax credit in respect of dividends paid by Norwegian companies while non-resident (German and UK) shareholders were denied a tax credit and suffered a withholding tax.

While Norway is not part of the European Union (EU) the European Economic Area (EEA) Agreement between the EU and the EEA extends certain freedoms to three EFTA States, namely Norway, Iceland and Liechtenstein. Article 40 of the EEA Agreement contains a free movement of capital provision similar to that contained in the EC Treaty. The EFTA Court ruled that this provision prohibited the Norwegian tax rule in question. In arriving at its conclusion the Court applied ECJ case law in relation to free movement of capital and effectively disregarded the fact that the shareholders were entitled to a credit under the relevant double taxation agreement for any withholding tax suffered. While it is not certain that the European Court of Justice would adopt the EFTA Court’s line of reasoning in a similar EU case, it is thought that this should be so given the approach adopted by the EFTA Court. Such a similar case may be the Denkavit case.

The Denkavit case concerns the imposition of a French withholding tax on dividends to EU shareholders up until 1991 at which point an exemption from dividend withholding tax was introduced for EU parent companies. The ECJ received the referral on 15 December 2004 from the French Administrative Supreme Court (Conseil d’Etat) which queried the compatibility of France’s withholding tax on outbound dividends with the principle of freedom of establishment under article 43 (formerly article 52) of the EC Treaty. The case concerns dividends paid between 1987 and 1989 to a Dutch company owning 99.9% and 50% of two French companies.
Under the terms of the Netherlands/France DTA the rate of withholding tax on French dividends was reduced from 25% to 5% and Denkavit International BV was entitled to a tax credit in the Netherlands for the withholding tax paid in France. Denkavit has challenged the provisions on the basis that a French parent company was entitled to receive dividends tax-free from its subsidiaries.
The ECJ will need to address three questions:
1. Is the imposition of French withholding tax in the circumstances consistent with the freedom of establishment?
2. Could the conflict be resolved by allowing the Dutch parent to credit the withholding tax paid in France against taxation in the Netherlands?
If the existence of a tax treaty is to be taken into account, does the fact that the foreign parent is not able to make use of the relief provided for in the treaty (e.g. because of losses or insufficient profits in the Netherlands) render the provision incompatible with the EC Treaty?

The Denkavit decision should clarify the application of the Fokus Bank decision to dividend payments from residents of the EU.

Ireland introduced dividend withholding tax (DWT) on 6 April 1999. However, there are a significant number of exemptions, both for dividend payments to residents and for dividend payments to non-residents. In most circumstances dividend payments to residents of EU Member States should not attract DWT provided the appropriate declarations/ certificates are put in place.

Certain non-corporate Irish resident entities, such as pension funds, are entitled to a domestic exemption from DWT. If the Denkavit decision is in line with the Fokus Bank decision, it might be possible to argue that DWT should not be deducted from dividends to the non-resident equivalents of these entities. Furthermore the legality of imposing DWT on dividend payments to third countries might also be called into question.

Pending the Denkavit decision companies and other entities in receipt of dividends from companies resident in EU Member States may wish to ascertain if :

• withholding taxes have been imposed;
• a comparable domestic shareholder would have had no liability; and
• insufficient tax capacity exists to absorb any resulting credit or no credit is available e.g. because the shareholder can avail of a participation exemption.

In such circumstances the merit of lodging a repayment claim with the relevant EU Member State should be considered.