European Commission v Federal Republic of Germany.

• Jurisdiction: European Union
• Celex Number: 62009CJ0284
• ECLI: ECLI:EU:C:2011:670
• Court: Court of Justice (European Union)
• Docket Number: C-284/09
• Procedure Type: Recurso por incumplimiento – fundado
• Date: 20 October 2011

Case C-284/09

European Commission

v

Federal Republic of Germany

(Failure of a Member State to fulfil obligations – Free movement of capital – Article 56 EC and Article 40 of the Agreement on the European Economic Area – Taxation of dividends – Dividends distributed to companies established in national territory and to companies established in another Member State or a State of the European Economic Area – Different treatment)

Summary of the Judgment

1. Free movement of capital – Restrictions – Tax legislation – Corporation tax – Taxation of dividends – Receiving company’s holding in the capital of the distributing company below the threshold laid down in Directive 90/435

(Art. 56(1) EC; Council Directive 90/435, Art. 3(1)(a))

2. International agreements – Agreement on the European Economic Area – Free movement of capital – National legislation taxing dividends distributed to a non-resident company more heavily than dividends distributed to a resident company – Not permissible

(EEA Agreement, Art. 40)

1. A Member State fails to fulfil its obligations under Article 56(1) EC if it taxes dividends distributed to companies established in other Member States, where the threshold for a parent company’s holding in the capital of its subsidiary laid down in Article 3(1)(a) of Directive 90/435 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended by Directive 2003/123, is not reached, more heavily in economic terms than dividends distributed to companies established in its territory.

In respect of shareholdings not covered by Directive 90/435, it is indeed for the Member States to determine whether, and to what extent, economic double taxation or a series of charges to tax on distributed profits is to be avoided and, for that purpose, to establish, either unilaterally or by conventions concluded with other Member States, procedures intended to prevent or mitigate such economic double taxation or series of charges to tax. However, this does not of itself mean that they may impose measures that contravene the freedoms of movement guaranteed by the EC Treaty.

As soon as a Member State, either unilaterally or by way of a convention, imposes a charge to tax on the income not only of resident companies but also of non-resident companies from dividends which they receive from a resident company, the situation of those non-resident companies becomes comparable to that of resident companies. In such a case, in order for non-resident companies receiving dividends not to be subject to a restriction on the free movement of capital prohibited in principle by Article 56 EC, the State in which the distributing company is resident must ensure that, under the procedures laid down by its national law in order to prevent or mitigate a series of liabilities to tax or economic double taxation, non-resident companies are subject to the same treatment as resident companies.

Such a restriction is not justified by overriding reasons in the public interest. A justification connected with the need to safeguard the balanced allocation between the Member States of the power to tax may indeed be accepted, in particular, where the system in question is designed to prevent conduct capable of jeopardising the right of a Member State to exercise its powers of taxation in relation to activities carried on in its territory. However, where a Member State has chosen not to tax recipient companies established in its territory in respect of income of this kind, it cannot rely on the need to ensure a balanced allocation between the Member States of the power to tax in order to justify the taxation of recipient companies established in another Member State. A reduction in tax revenue cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is, in principle, contrary to a fundamental freedom. Nor is such a measure justified by reasons connected with the coherence of the tax system. The argument that the tax advantage concerned is compensated by a tax disadvantage cannot succeed, since there is no direct link between the exemption from withholding tax on dividends distributed to resident companies and the taxation of those dividends, whether as income of the shareholders of those companies or on the occasion of a possible future taxable transaction.

(see paras 48, 56-57, 77-78, 83, 86, 92, 94, operative part 1)

2. A Member State fails to fulfil its obligations under Article 40 of the Agreement on the European Economic Area (EEA) if it taxes dividends distributed to companies established in Iceland and Norway more heavily in economic terms than dividends distributed to companies established in its territory.

While restrictions of the free movement of capital between nationals of States party to the EEA Agreement must be assessed in the light of Article 40 of and Annex XII to that agreement, those provisions have the same legal scope as the substantially identical provisions of Article 56 EC.

(see paras 96, 99, operative part 2)

JUDGMENT OF THE COURT (First Chamber)

20 October 2011 (*)

(Failure of a Member State to fulfil obligations – Free movement of capital – Article 56 EC and Article 40 of the Agreement on the European Economic Area – Taxation of dividends – Dividends distributed to companies established in national territory and to companies established in another Member State or a State of the European Economic Area – Different treatment)

In Case C‑284/09,

ACTION under Article 226 EC for failure to fulfil obligations, brought on 23 July 2009,

European Commission, represented by R. Lyal and B.‑R. Killmann, acting as Agents, with an address for service in Luxembourg,

applicant,

v

Federal Republic of Germany, represented by M. Lumma and C. Blaschke, acting as Agents, and Professor H. Kube,

defendant,

THE COURT (First Chamber),

composed of A. Tizzano, President of the Chamber, M. Safjan, M. Ilešič, E. Levits (Rapporteur) and J.‑J. Kasel, Judges,

Advocate General: E. Sharpston,

Registrar: B. Fülöp, Administrator,

having regard to the written procedure and further to the hearing on 9 December 2010,

having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,

gives the following

Judgment

1 By its application the Commission of the European Communities asks the Court to declare that, by taxing dividends distributed to a company with its registered office in another Member State or in the European Economic Area (EEA) more heavily in economic terms than dividends distributed to a company with its registered office in its territory, the Federal Republic of Germany has failed to fulfil its obligations under Article 56 EC where the threshold for a parent company’s holding in the capital of its subsidiary laid down in Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ 1990 L 225, p. 6), as amended by Council Directive 2003/123/EC of 22 December 2003 (OJ 2004 L 7, p. 41) (‘Directive 90/435’), is not reached, and under Article 40 of the Agreement on the European Economic Area of 2 May 1992 (OJ 1994 L 1, p. 3, ‘the EEA Agreement’), in so far as the Republic of Iceland and the Kingdom of Norway are concerned.

Legal context

The EEA Agreement

2 Article 40 of the EEA Agreement provides:

‘Within the framework of the provisions of this Agreement, there shall be no restrictions between the Contracting Parties on the movement of capital belonging to persons resident in [European Union] Member States or [European Free Trade Association (EFTA)] States and no discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested. Annex XII contains the provisions necessary to implement this Article.’

European Union law

3Article 3(1) of Directive 90/435 provides:

‘For the purposes of applying this Directive:

(a) the status of parent company shall be attributed at least to any company of a Member State which fulfils the conditions set out in Article 2 and has a minimum holding of 20% in the capital of a company of another Member State fulfilling the same conditions;

…

from 1 January 2007 the minimum holding percentage shall be 15%;

from 1 January 2009 the minimum holding percentage shall be 10%;

…’

4 Under Article 5(1) of Directive 90/435, profits which a subsidiary distributes to its parent company are exempt from withholding tax.

National legislation

Taxation of dividends generally

5 The German system of taxation of income from capital derives from the Law on Income Tax (Einkommensteuergesetz, BGBl. 2002 I, p. 4210, in the version published in BGBl. 2003 I, p. 179, ‘the EStG’) in conjunction, as regards the taxation of legal persons, with the Law on Corporation Tax (Körperschaftsteuergesetz, BGBl. 2002 I, p. 4144, ‘the KStG’). The relevant provisions, in the version applicable to the present case, were those set out in paragraphs 6 to 15 below.

6 Under Paragraph 20(1)(1) of the EStG:

‘Income from capital includes:

1. profit shares (dividends) … from shares in companies with limited liability, trading cooperatives, and mining associations which have the rights of a legal person. Other receipts also include covert distributions of profits. The receipts are not part of income in so far as they derive from distributions by a corporation for which amounts from the fiscal deposit account within the meaning of Paragraph 27 of the [KStG] are deemed to be used.’

7 Paragraph 43 of the EStG, ‘Income from capital with deduction of tax’, provides in subparagraph 1, first sentence, point 1, and third sentence:

‘In the case of the following domestic, and in the case of points 7(a) and 8 and the second sentence also foreign, income from capital, income...