Denkavit decision will
seriously affect the taxation of outbound dividends
Date : 25 December 2006
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,
Denmark, Estonia, Finland,
France, Germany, Hungary,
Spain Italy, Latvia,
Portugal, Slovenia and Sweden.
The ruling will
also be beneficial for Suez
shareholders who may have been disappointed by the Kerckhaert-Morres decision.