The European Court of Justice (ECJ) (Grand Chamber) ruled that art. 73b(1) of the EC Treaty (now art. 56(1) EC) did not preclude legislation of a member state which, in the context of tax on income, made dividends from shares in companies established in the territory of that state and dividends from shares in companies established in another member state subject to the same uniform rate of taxation, without providing for the possibility of setting off tax levied by deduction at source in that other member state.

Facts

The taxpayers brought an action against the Belgian tax administration in respect of the latter's refusal to allow them to set off the fixed percentage of 15 per cent of foreign tax provided for in the France-Belgium Convention to avoid double taxation and to establish mutual administrative and legal rules of assistance in the field of income tax.

The taxpayers declared that they had received sums by way of income from a French company in 1995 and 1996 respectively. In their tax return they applied to take advantage of the tax benefit provided for in the France-Belgium Convention corresponding to the French tax at source. As that tax benefit had been withdrawn by the Belgian legislature, their application was rejected.

Taking the view that denying them the right to take advantage of the tax benefit subjected dividends originating in France to a heavier tax burden than that imposed on dividends from companies established in Belgium, the taxpayers sought annulment of the decision rejecting their application, alleging, in particular, infringement of art. 73b(1) of the EC Treaty (prohibiting all restrictions on the movement of capital and payments between member states). The Court of First Instance, Ghent stayed the proceedings and made a reference to the ECJ for a preliminary ruling.

Issue

Whether art. 56(1) EC (art. 73b(1) of the EC Treaty at the time of the relevant facts) prohibited a restriction resulting from a provision in the income tax legislation of a member state (in the present case Belgium) which subjected dividends from resident companies and dividends from companies resident in another member state to the same uniform tax rate, without in the latter case providing for the setting off of tax levied at source in that other member state.

Decision

The ECJ (Grand Chamber) (ruling accordingly) said that, according to settled case law, although direct taxation fell within the competence of the member states, the latter must nonetheless exercise that competence in a manner consistent with Community law.

In Staatssecretaris van Financien v Verkooijen (Case C-35/98) [2000] ECR I-4071, Lenz v Finanzlandes-direktion für Tirol (Case C-315/02) [2004] ECR I-7063 and Manninen (Case C-319/02) [2004] ECR I-7477 the court had found that the laws of the member states at issue did not treat in the same way dividend income from companies established in the member state in which the taxpayer concerned was resident and dividend income from companies established in another member state, thereby denying recipients of the latter dividends the tax benefits granted to the others. Having concluded that the situation of taxpayers receiving dividends from companies established in another member state was not objectively different to that of taxpayers receiving dividends from companies established in the member state in which they were resident, the court held that the laws at issue amounted to restrictions of the fundamental freedoms guaranteed by the Treaty. Contrary to the taxpayers’ arguments, the present case differed inasmuch as the Belgian tax legislation did not make any distinction between dividends from companies established in Belgium and dividends from companies established in another member state. Under Belgian law both were taxed at an identical rate of 25 per cent by way of income tax.

In addition, the argument could not be upheld that, in the present case, shareholders resident in Belgium were in a different situation depending on whether they received dividends from a company established in Belgium or from a company established in another member state, such that treating them in the same way, namely by applying a uniform rate of income tax, amounted to discrimination.

Discrimination might consist not only in the application of different rules to comparable situations but also in the application of the same rule to different situations. However, in respect of the tax legislation of his state of residence, the position of a shareholder receiving dividends was not necessarily altered merely by the fact that he received those dividends from a company established in another member state, which, in exercising its fiscal sovereignty, made those dividends subject to a deduction at source by way of income tax.

In circumstances such as the present, the adverse consequences which might arise from the application of an income tax system such as the Belgian system differed from the exercise in parallel by two member states of their fiscal sovereignty. Conventions preventing double taxation were designed to eliminate or mitigate the negative effects on the functioning of the internal market resulting from the co-existence of national tax systems.

Community law, in its current state and in a situation such as the present, did not lay down any general criteria for the attribution of areas of competence between the member states in relation to the elimination of double taxation within the Community. Apart from Directive 90/435 (on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states), the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (OJ 1990 L 225, p. 10) and Directive 2003/48 on taxation of savings income in the form of interest payments (OJ 2003 L 157, p. 38), no uniform or harmonisation measure designed to eliminate double taxation had as yet been adopted at Community law level.

Consequently, it was for the member states to take the measures necessary to prevent situations such as the present by applying, in particular, the apportionment criteria followed in international tax practice. The purpose of the France-Belgium Convention was essentially to apportion fiscal sovereignty between France and Belgium in those situations. However that convention was not at issue in this preliminary reference.

European Court of Justice (Grand Chamber).
Judgment delivered 14 November 2006.