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European Commission refers Germany to ECJ over taxation of outbound dividends

On 19 March 2009, the European Commission announced that it had decided to refer Germany to the European Court of Justice over its rules on taxation of outbound dividend payments to companies, as Germany did not comply with the Commission's reasoned opinion.

Austria and Germany tax outbound dividends (dividends paid by resident companies to non-resident shareholders) more heavily than domestic dividends (dividends paid by resident companies to resident shareholders). Domestic dividends are in practice exempt from tax, whereas outbound dividends are subject to withholding taxes ranging from 5% to 25%.

Referring to the decision of the European Court of Justice (ECJ) in the Denkavit case, the Commission observed that the higher taxation of outbound dividends is incompatible with the EC Treaty and the EEA Agreement, as it restricts the free movement of capital and the freedom of establishment. The Commission noted that the discrimination exists with respect to EU Member States and those EEA/EFTA countries, which exchange information to a sufficient extent. Taking into account the infringement procedures initiated so far, the Commission appears to follow the decision of the EFTA Court in the FoKus Bank case, which took the view that it is not relevant from the point of view of the existence of a breach if a tax credit is given in the state of residence of the shareholder. The Denkavit decision, however, may suggest the opposite.

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