On 6 May 2008, the European Commission announced that it had sent reasoned opinions (the second step of the infringement procedure under Art. 226 of the EC Treaty) to Spain and Portugal in respect of their rules under which dividends paid to foreign pension funds are taxed more heavily than those paid to domestic pension funds. It has also sent letters of formal notice (the first step of the infringement procedure) to (i) Romania and Bulgaria with regard to their rules under which outbound dividends paid to companies may be taxed more heavily than domestic dividends, and (ii) Bulgaria concerning its rules under which inbound dividends paid to companies may be taxed more heavily than domestic dividends.

Outbound dividends paid to pension funds

Income derived by pension funds is exempt in Spain. In addition, any Spanish withholding tax on the dividends received may be claimed back by pension funds. Thus, domestic dividends received by pension funds are effectively tax free. In contrast, a withholding tax of 18% is levied on dividends paid to pension funds established in other Member States or EEA/EFTA countries (Iceland, Norway and Liechtenstein), which results in a higher taxation of dividends paid to foreign pension funds. The withholding tax rate may be reduced under tax treaties.

Similarly, Portugal exempts the dividends received by domestic pension funds and levies a withholding tax of 25% on dividends paid to pension funds established in other Member States or EEA/EFTA countries.

According to the Commission, the higher tax on dividends paid to foreign pension funds may dissuade these funds from investing in the Member States concerned. In addition, it may be more difficult for the companies established in those Member States to attract capital from foreign pension funds. The higher taxation of foreign pension funds thus constitutes a restriction on the free movement of capital (Art. 56 EC Treaty and Art. 40 EEA Agreement). In some circumstances, it may also result in a restriction of the freedom of establishment (Art. 43 EC Treaty and Art. 34 EEA Agreement). The Commission is not aware of any justifications for these restrictions.

Outbound dividends paid to companies

The letter of formal notice to Romania concerns the taxation of dividends paid to companies resident in other Member States or EEA/EFTA countries. While a 10% final withholding tax is levied on domestic dividends, provided that a 15% shareholding is held in the distributing company, outbound dividends are in similar circumstances subject to a 16% withholding tax, which may be reduced under tax treaties.

Domestic dividends derived from shareholdings of more than 15% are exempt in Romania. In contrast, a final withholding tax of 10% or 16% applies to dividends paid to companies resident in Norway or other EEA/EFTA countries, respectively.

The first letter of formal notice to Bulgaria also concerns the taxation of dividends paid to companies resident in other Member States or EEA/EFTA countries. Bulgaria exempts domestic dividends from withholding or corporation tax. However, outbound dividends paid to companies resident in other Member States, having a shareholding of less than 15% in the distributing company, are subject to a 5% withholding tax (and are only exempt if the shareholding exceeds 15%). Outbound dividends paid to companies in EEA/EFTA countries are also subject to a withholding tax of 5%, regardless of the size of the shareholding.

The Commission contends that the higher taxation of outbound dividends paid to companies may constitute a restriction on the free movement of capital (Art. 56 EC Treaty and Art. 40 EEA Agreement). In some circumstances, it may result in a restriction of the freedom of establishment (Art. 43 EC treaty and Art. 34 EEA Agreement). The Commission is not aware of any justifications for these restrictions.

Inbound dividends received by companies

The second letter of formal notice to Bulgaria concerns the taxation of dividends received by companies resident in Bulgaria from companies resident in other Member States or EEA/EFTA countries. While domestic dividends received by companies resident in Bulgaria are exempt, a 10% tax applies to dividends received from companies resident in (i) other Member States if the shareholding in the distributing company is less than 15%, and (ii) EEA/EFTA countries. According to the Commission, the higher taxation of the inbound dividends concerned is likely to restrict the free movement of capital (Art. 56 EC Treaty and Art. 40 EEA Agreement). The Commission is not aware of any justifications for these restrictions.