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News

Denkavit decision will seriously affect the taxation of outbound dividends

Date : 25 December 2006


In a decision of 14 December 2006, the Court of Justice of the European Communities found in favour of Denkavit, a Dutch farming food supplier, in its case against the French Ministry of Economy, Finance and Industry last Thursday.

In the period 1987-1989, Denkavit's French subsidiary had been charged a 5% withholding tax on the dividends paid to the Dutch parent. Denkavit had questioned the legality of the withholding tax in the light of the EU rules on freedom of establishment because dividends paid by a French subsidiary to a French parent company were not taxed.

The dispute relates to the period before the adoption of Parent-Subsidiary Directive 90/435/EEC of 23 July 1990. The question was therefore based on only on the relevant provisions of the EC Treaty.

The Court of Justice agreed with Denkavit argument. The French legislation which imposes a withholding tax on dividends paid to a non-resident parent company while granting almost full exemption to a resident company is a discriminatory restriction on the freedom of establishment. It is, therefore, contrary to Articles 43 and 48 EC Treaty.

Moreover, the Court confirmed that the fact that a double tax convention that authorizes the withholding of such tax by France and the obligation for the other Member State (the Netherlands) to grant a credit for the French withholding tax does not change anything to its decision, in particular because the Netherlands parent company is unable to set off the French withholding tax against its Dutch tax liability.

This ruling will reduce the scope for Member States to impose withholding tax on dividends paid out within the EU. The decision will be particularly beneficial for European pension funds and charities. In December 2005, the European Federation for Retirement Provision had lodged complaints with the European Commission in respect of dividend taxation in Austria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Spain Italy, Latvia, Lithuania, The Netherlands, Poland, Portugal, Slovenia and Sweden.

The ruling will also be beneficial for Suez shareholders who may have been disappointed by the Kerckhaert-Morres decision.

 

 

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