Taxation of crossborder dividends and EC fundamental freedoms

Taxation of cross-border dividends and EC fundamental freedoms Prof. Dr. Joachim Englisch 1

Introduction • National systems of dividend taxation have been harmonized only to a small extent (Parent-Subsidiary Directive) • Crucial question: Must provisions to mitigate or avoid economic double taxation be available for cross-border distribution of profits on an equal footing with purely domestic dividend payments? • Other aspects not covered in this presentation: - Juridical (international) double taxation of dividends and fundamental freedoms - Most-favoured-nation treatment - Triangular constellations - Third-country involvement Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 2

Applicable fundamental freedom • Cross-border dividend payments may be covered by the substantial scope of Art. 43 EC (31 EEA) and / or Art. 56 EC (Art. 40 EEA) • In so far as both freedoms overlap (esp. substantial shareholdings), the ECJ assumes that Art. 43 EC has precedence • Due to the convergence of the fundamental freedoms with respect to the concept of forbidden restrictions and permissible justifications, the – questionable – delimination only matters in constellations with third-country involvement Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 3

Home State scenario: Comparability • The finding of an unjustified (discriminatory) restriction in the shareholder‘s State of residence presupposes the comparability of foreign-sourced and nationally-sourced dividends - In the context of Art. 56 EC, the issue of comparability will form part of the justification analysis • The ECJ resorts to a “legal motive test“ to assess comparability - Decisive criterion: do foreign-sourced dividends suffer from economic double taxation, too? • The Court‘s approach is conceptually flawed: - Comparability is a premise for assuming a restriction of Art. 56 - The criteria for assuming comparability should be determined in the light of the internal market objective: are domestic and outbound activities substitutable alternatives? Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 4

Home State scenario: Fiscal cohesion • Fiscal cohesion exceptionally permits a compensation of tax disadvantages (denial of shareholder relief) with directly related tax advantages foreign-sourced dividends • The ECJ has made a series of critical assumptions - A direct link between elements of the tax system that address different taxpayers but affect the same taxpayer is now accepted - There must be full compensation for the denial of a sharerholder relief: the latter must exactly reflect the corporation tax burden - It would be disproportionate not to take into account a foreign corporation tax burden (supranational concept of cohesion) • The supranational viewpoint adopted by the ECJ neglects the inherent limits to negative integration and provokes distortive results Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 5

Host State Scenario: Comparability • The ECJ approach towards assessing comparability of resident and non-resident shareholders depends on a possible PE involvement - Host State PE: standard approach relying on parallels in the overall tax scenario (same rules for determining taxable base) - No host State PE: “Approximation theory”; comparability depends on whether outbound dividends are subject to tax • However, the comparability criterion should be reflecting the internal market objective underlying the fundamental freedoms - A competitive relationship with the tax-privileged resident shareholders must be sufficient - Considerations regarding the balanced allocation of taxing rights should be reserved to the justification analysis - The Schumacker-doctrine is irrelevant in this context Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 6

Host State scenario: national vs. supranational view • Crucial question for assessing a restriction to the detriment of nonresident shareholders: Can (tax treaty) concessions granted by their State of residence compensate for the denial of shareholder relief? • ECJ admits this to a limited – and rather theoretical – extent: - only by way of a bilateral treaty, not unilaterally - only in case of full compensation (full credit for detrimental dividend taxation at source, including eventual reimbursement) • In fact, different national methods of avoiding economic double taxation, and dependence of the level of home State taxation on individual circumstances, generally render remedies for juridical double taxation unsuitable for a sufficiently certain compensation - A freedom-proof shift in responsability for shareholder relief requires provisions for both Member States (e. g. like PSD) Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 7

Conclusion • A shareholder relief is typically based on the legal assumption that corporation tax on distributed profits and taxation of dividends should be – at least partly – integrated to avoid economic double taxation • Considering the rationale of the fundamental freedoms – market access and undistorted competition – and their inherent limits in an internal market with disparate tax systems, it must be assumed that, as a general rule, each MS can only be held accountable for avoiding its own double taxation on an equal footing - Home state should be able to claim fiscal cohesion (at least with respect to full imputation systems) - Host state must, in principle, grant shareholder relief • A shift of responsibilities is possible, but requires a co-ordinated approach such as embodied in the PSD Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht 8