40 Taxation of dividends
| (25226)
5063/04
COM(03) 810
| Commission Communication: Dividend taxation of individuals in the internal market
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| Legal base | — |
| Document originated | 19 December 2003
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| Deposited in Parliament | 9 January 2004
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| Department | Inland Revenue
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| Basis of consideration | EM of 21 January 2004
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| Previous Committee Report | None; but see (22808) —: HC 152-xxxvii (2001-02), para 21 (17 July 2002)
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Cleared, but relevant to any future debate on direct taxation
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Background
40.1 In 2001 the Commission's Communication, "Towards an
internal market without tax obstacles",[78]
presented its detailed study on company taxation. This highlighted
a European Court of Justice (ECJ) ruling[79]
as important for the design of Member States' tax systems in relation
to dividend taxation. The Commission said it intended to bring
forward further Communications dealing with particular issues
raised in the study.
The document
40.2 In this present Communication the Commission sets out its
view of taxation of dividends received by individual shareholders
who are portfolio investors, looking particularly at the difference
in treatment by Member States of domestic and foreign dividends.
40.3 The Commission says:
- Member States operate differing
systems for the taxation of dividend payments in the hands of
individuals. For domestic dividends most Member States prevent
or reduce double taxation resulting from the levying of corporation
tax and income tax from the same income by either an imputation
system or a schedule-based system;
- Member States differentiate between tax treatment
for domestic and inbound or outbound dividends: this can be a
restriction on cross-border investments and result in fragmented
capital markets in the EU;
- the ECJ has considered this issue on the basis
of the provisions on the free movement of capital and has given
a clear ruling on the incompatibility of a measure which provided
for a different tax treatment of domestic and inbound dividends;
- analysis of this case law in relation to the
design of dividend taxation systems suggests Member States cannot
levy higher taxes on inbound or outbound dividends than on domestic
dividends;
- Member States when originally designing their
dividend taxation systems may have focused on their domestic effects:
this may have resulted in unlawful restrictions on inbound and
outbound dividends, so requiring them to re-examine their systems
in the light of the current Treaty provisions;
- it is possible to provide for methods of relief
compatible with the Treaty while maintaining relatively straightforward
taxation. Such changes should help to optimise the allocation
of capital in the internal market. But full neutrality would
remain out of reach in the absence of tax harmonisation;
- Member States should adopt a co-ordinated approach
to ensure rapid removal of tax obstacles, so creating a more stable
and investment-friendly environment and removing the uncertainty
created by potential legal conflict and litigation;
- the Commission wishes to promote such co-ordination
in the interests of both individual investors and businesses and
in the interest of ensuring the maximum efficiency of the internal
market.
40.4 The Commission concludes by saying that it:
"therefore calls on the Member States to work
together with it to deal quickly and effectively with the issues
examined in this Communication. If solutions cannot be found
despite the clear logic of such an approach, the Commission, in
line with its responsibility as guardian of the Treaty, will take
the necessary steps to ensure effective compliance with the Treaty,
including bringing the matter before the ECJ on the basis of Article
226 of the EC Treaty. The Commission invites the Council, the
European Parliament and the European Economic and Social Committee
to give their opinion on this Communication."
The Government's view
40.5 The Paymaster General (Dawn Primarolo) says:
"The Government will consider in detail any
proposals which emerge from any discussions on dividend taxation.
The Government's view is that the analysis by the Commission
in the Communication is slanted to support the supposition that
action is necessary and the Government is working on a more objective
evaluation of the position. It is worth noting that the UK does
not impose any withholding tax on dividends paid by UK companies
and so there is no possibility of any vulnerability to infringement
proceedings on that score."
Conclusion
40.6 The Commission seems to be using a possible
distortion of the internal market to push yet again for tax harmonisation.
We note the Government's justifiably cautious view of the Communication
and its intention to examine carefully any proposals that might
arise from it. On that basis we clear the document. But it would
be relevant to any future debate on wider direct taxation issues.
78 See headnote. Back
79
In Case No C35/48 Staatssccretaris van Financiën v. BGM Verkooijen
[2000] ECR-I 4071. Back
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