The Treatment of dividend payments in EC Direct Tax Law
Abstract: To attain an Internal Market, in which goods, capital and natural and legal persons can move from Member States to Member State, is one of the main aims of the EU. The Treaty of Rome was laid down in order to tear down obstacles that existed and to create bonds between the Member States. The EC Treaty contained the fundamental freedoms, essential in the work towards an Internal Market. In order to attain an Internal Market, tax obstacles, for natural and legal persons, has to be removed. Unless that is done, issues concerning direct tax matters, existing due to the differences between the taxation systems of the Member States, will deter natural and legal persons from establishing themselves or to invest their capital in other Member States. The taxation of cross-border dividends is especially of interest and, as far as direct tax issues are concerned, the freedoms concerning the free movement of capital and the freedom of establishment has been especially important. If the Member States imposes a greater tax burden on outbound or inbound dividend payments as compared to dividend payments made domestically, the establishment of secondary establishments in other Member States and investments by corporations or natural persons in corporations in other Member States will be hindered and the attainment of the Internal Market will be put on hold. The treatment of cross-border dividend payments within the EU depends on the extent of the holding. For holdings of 10 % or more in the capital of a corporation, subject to other conditions being fulfilled, the preferential treatment of the Parent-Subsidiary directive applies. The directive prescribes that the Member States shall refrain from imposing a withholding tax on outbound dividend payments and to allow inbound dividend payments a relief from double taxation, either by exempting the inbound dividend from tax or at least to allow a credit for foreign corporation tax already paid. The articles prescribing this preferential treatment has been held to have direct effect and thus the weight of the directive has increased. The scope of the directive has also been widened as of late. Despite this, there remain some areas in which clarity is needed. The directive fails to give precedence to either the exemption or the credit method, based on fundamentally different objectives, and amendments has to be considered as regards the method of legislation and the wording of the directive. The ECJ has had to deal with inbound and outbound dividend payments falling outside the scope of the Parent-Subsidiary directive in numerous cases. The Court has established a clear reasoning as concerns the comparability issue and it demands that the state that has chosen to exercise its taxing jurisdiction in respect of non-residents in a way that makes them comparable to residents has to extend its preferential treatment given to residents also to non-residents. The application of this principle, and other principles adopted as concerns dividend payments, has however not been consistent during the years. This inconsistency is however due to the task and the role of the ECJ, which is to interpret the provisions in the EC Treaty and not to create any new body of law. The ECJ decides the cases brought before it on a case-by-case method, which result in this inconsistency in its case law. The principles and reasoning applied by the Court is however consistent and the Member States should seek to comply with the provisions in the EC Treaty with the guidance provided by these principles and arguments. The Court has in its most recent case law made a decision as to which path to trail in the coming years and has chosen to give precedence to taxation by the state of source. It has also indicated that it can't deal with restrictions against the fundamental freedoms when they originate from the parallel application of the different taxation systems of the Member States, which exists due to the inability of the Community legislator to harmonize the legislation of the Member States with the help of legislative acts.
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