Discriminatory taxation of inbound and outbound dividends

The European Commission has decided to refer Belgium to the European Court of Justice for its discriminatory taxation of dividends paid by foreign companies to Belgian private investors (inbound dividends).

Under the Belgian tax system, there is no double taxation for domestic dividends while there is for inbound dividends.

The Commission considers that this difference in treatment is contrary to the freedom of establishment and the free movement of capital, guaranteed by the EC Treaty.

The decision of the Commission is somewhat remarkable, considering that the Court in its judgement in the Kerckhaert-Morres case, delivered last last November, held that Community law, in its current state and in a situation such as that in the main proceedings, did not lay down any general criteria for the attribution of areas of competence between the Member States in relation to the elimination of double taxation within the Community.

The Commission however stresses that in its application it will take this ruling into account

The European Commission has also, on similar grounds, decided to refer Belgium, Spain, Italy, the Netherlands and Portugal to the European Court of Justice for their rules under which certain dividend payments to foreign companies (outbound dividends) may be taxed more heavily than dividend payments to domestic companies (domestic dividends).

In the Denkavit ruling of 14 December 2006 (Case C-170/05) the Court confirmed the principle that outbound dividends cannot be subject to higher taxation in the source State (the State where the subsidiary is established) than domestic dividends.

Less difficulty is to be to expected to there, as the Court in December in its judgment in the Denkavit case held that that outbound dividends cannot be subject to higher taxation in the source State (the State where the subsidiary is established) than domestic dividends.

However, the Court also held that it may be relevant to take into account whether the State of residence of the parent company gives a tax credit for the withholding tax levied by the source State

So again, the Commission will, according to the press release, "take this recent ruling into account when drafting the applications to the Court."

See press releases
1 and 2

Relevant case law:

Case C-513/04, Kerckhaert-Morres, nyr.

Case C-170/05, Denkavit, nyr