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Withholding taxes on dividends: possible benefit to exempt taxpayers such as pension funds investing cross-border
Advocate General Geelhoed has delivered his opinion in Denkavit (C170/05) in favour of the taxpayer.
This case deals with whether French law, which levied a withholding tax on dividends, paid by a French company to its Dutch parent but not on dividends paid to a French parent, was in breach of Article 43 EC Treaty (freedom of establishment). It will be of particular interest to exempt taxpayers such as pension funds receiving dividends and interest from companies resident in other member states. They should consider whether claims should be lodged in those member states that have levied withholding taxes.
The Denkavit case
The dividends were paid prior to the Parent-Subsidiary Directive coming into force. This directive prohibits member states from levying withholding tax on a dividend paid by a subsidiary to a company resident in another member state where that company holds at least 20% of the share capital (reducing to 15% from 1 January 2007 and 10% from 1 January 2009). This case is nevertheless important since it is relevant to dividends that fall outside the scope of the directive.
The Advocate General noted that French legislation provided almost full relief for economic double taxation in respect of dividends paid by a French subsidiary to its French parent in that the distribution in the hands of the French parent was almost fully exempt. However, this treatment was not afforded to dividends paid by a French subsidiary to its Netherlands parent as French tax was levied not only on the profits of the French subsidiary but also on the dividend received by the Dutch parent (in the form of a withholding tax).
France had exercised its right to tax the Dutch parent on the French source income and by doing so it triggered an obligation to treat resident and non-residents alike. The Advocate General rejected the argument that because the French/Netherlands double taxation agreement (DTA) provided that the Netherlands should give credit for the French withholding tax against Dutch tax on the dividend, the Dutch parent was in no worse position than if no French withholding tax had been levied and that therefore the French legislation was not in breach of Article 43.
Although the Advocate General agreed that the effect of the DTA should be taken into account in assessing whether the taxpayer suffered discrimination within Article 43, the effect of the DTA must be to give equivalent treatment to that given to residents and neither can the member state escape a breach of Article 43 on grounds that the other party to the DTA has not adopted domestic tax law that might have been envisaged by the DTA. Therefore, because the Dutch parent was exempt from Dutch tax on the French dividend under domestic tax law, the Dutch parent was not in a position to obtain credit for the French withholding tax against its Dutch tax liability.
This case deals specifically with whether French domestic law contravened article 43. Article 43 applies where a company exercises its right of establishment and this arises where a company has a holding of shares in a company resident in another member state which is sufficient to give it “definite influence over the company’s decision” and allows it to “determine its activities”. Article 43 was clearly applicable in Denkavit, which essentially, dealt with wholly owned subsidiaries.
Nevertheless, it seems likely that the analysis of the Advocate General (if adopted by the Court) will equally apply to Article 56 (freedom of movement of capital) and this would not require the shareholder to have a substantial stake in the paying company. Indeed, Advocate General Geelhoed in his opinion in Test Claimants in Class IV of the ACT Group Litigation (C-374/04) made it clear that the same reasoning would apply to a claim under Article 56.
What to do now?
If this decision may be relevant to you potential claims should be identified quickly. It is not necessary to wait for the decision of the European Court, which may not materialise for several months. All member states will have time limits within which claims may be made although the period within which a claim may be made will differ in each of the member states.
Should you require any further information or assistance please contact Peter Mason or Steven Sieff. They will be able to provide further details and advice on the implications of the case to your position and can draw on the EU tax and litigation experts from across Europe who are members of our CMS EU Tax Group.
