The European Court of Justice (Grand Chamber) (ruling accordingly) held that under art. 43 EC and art. 56 EC, where a member state had a system for preventing or mitigating the imposition of a series of charges to tax or economic double taxation as regards dividends paid to residents by resident companies, it had to treat dividends paid to residents by non-resident companies in the same way.

Facts

The main proceedings were part of group litigation concerning franked investment income (‘FII’), consisting of a number of claims brought before the Chancery Division by companies resident in the UK which held shares in companies resident in another member state or in a non-member country. The cases selected by the national court as test cases for the purposes of the reference concerned claims brought by companies resident in the UK which formed part of the British American Tobacco group (‘BAT’). The parent company in the group held, directly or indirectly, 100 per cent of the capital of other companies which themselves held 100 per cent of the capital of companies established in a number of EU member states and the European Economic Area (‘EEA’), as well as in non-member countries. The taxpayer companies sought repayment of and/or compensation for losses arising from the application to them of the UK legislation, in particular regarding: corporation tax paid on foreign dividend receipts and for reliefs and tax credits applied against those liabilities which, were it not for the imposition of corporation tax, could have been used or carried forward to be used against other tax liabilities; the advance corporation tax (‘ACT’) paid on distributions to their shareholders of foreign sourced dividends, to the extent to which the ACT remained surplus; in the latter case, the loss of use of the money concerned between the date of payment of the ACT and the date on which ACT was set off against the mainstream corporation tax liability; and, as regards the payment of foreign income dividends (‘FIDs’), the loss of use of the money paid as ACT between the date of payment of the ACT and the date of its repayment and the enhanced payments the claimants had to make to their shareholders to compensate for the lack of any tax credit in their hands.

Issue

Whether the UK legislation, under which dividends received from companies which were not resident in that member state were treated less favourably than those received from UK resident companies, was compatible with Community law.

Decision

The ECJ (Grand Chamber) (ruling accordingly) said that art. 43 EC and art. 56 EC did not preclude legislation of a member state which exempted from corporation tax dividends which a resident company received from another resident company, when that state imposed corporation tax on dividends which a resident company received from a non resident company in which the resident company held at least 10 per cent of the voting rights, while at the same time granting a tax credit in the latter case for the tax actually paid by the company making the distribution in the member state in which it was resident. However, that was conditional upon the rate of tax applied to foreign-sourced dividends being no higher than the rate of tax applied to nationally-sourced dividends and the tax credit being at least equal to the amount paid in the member state of the company making the distribution, up to the limit of the amount of the tax charged in the member state of the company receiving the distribution.

The mere fact that, compared with an exemption system, an imputation system imposed additional administrative burdens on taxpayers, with evidence being required as to the amount of tax actually paid in the state in which the company making the distribution was resident, could not be regarded as a difference in treatment which was contrary to freedom of establishment, since particular administrative burdens imposed on resident companies receiving them sourced dividends were an intrinsic part of the operation of a tax credit system.

Article 56 EC precluded legislation of a member state which exempted from corporation tax dividends which a resident company received from another resident company, where that state levied corporation tax on dividends which a resident company received from a non-resident company in which it held less than 10 per cent of the voting rights, without granting the company receiving the dividends a tax credit for the tax actually paid by the company making the distribution in the state in which the latter was resident.

Articles 43 EC and 56 EC precluded legislation of a member state which allowed a resident company receiving dividends from another resident company to deduct from the amount which the former company was liable to pay by way of ACT the amount of that tax paid by the latter company, where no such deduction was permitted in the case of a resident company receiving dividends from a non resident company as regards the corresponding tax on distributed profits paid by the latter company in the state in which it was resident.

On the other hand, art. 43 and 56 EC did not preclude legislation of a member state which provided that any relief for tax paid abroad made available to a resident company which had received foreign-sourced dividends was to reduce the amount of corporation tax against which that company might offset ACT. Article 43 EC precluded legislation of a member state which allowed a resident company to surrender to resident subsidiaries the ACT paid which could not be offset against the corporation tax liability of that company for the current accounting period or previous or subsequent accounting periods, so that it might be offset against their corporation tax liability; but did not allow a resident company to surrender such an amount to nonresident subsidiaries where the latter were taxable in that member state on the profits which they made there.

Further, art. 43 EC and art. 56 EC precluded legislation of a member state which, while exempting from ACT resident companies paying dividends to their shareholders which had their origin in nationally-sourced dividends received by them, allowed resident companies distributing dividends to their shareholders which had their origin in foreign-sourced dividends received by them to elect to be taxed under a regime which permitted them to recover the ACT paid but, first, obliged those companies to pay that ACT and subsequently to claim repayment, and secondly, did not provide a tax credit for their shareholders, whereas those shareholders would have received such a tax credit in the case of a distribution made by a resident company which had its origin in nationally-sourced dividends.

Under art. 57(1) EC, where, before 31 December 1993, a member state had adopted legislation which contained restrictions on capital movements to or from non-member countries prohibited by art. 56 EC and, after that date, adopted measures which, while also constituting a restriction on such movements, were essentially identical to the previous legislation or did no more than restrict or abolish an obstacle to the exercise of the Community rights and freedoms arising under that previous legislation, art. 56 EC did not preclude the application of those measures to non member countries when they applied to capital movements involving direct investment, including investment in real estate, establishment, the provision of financial services or the admission of securities to capital markets. Holdings in a company which were not acquired with a view to the establishment or maintenance of lasting and direct economic links between the shareholder and that company and did not allow the shareholder to participate effectively in the management of that company or in its control could not, in that connection, be regarded as direct investments.

Finally, in the absence of Community legislation, it was for each member state to designate the courts and tribunals to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derived from Community law, including the classification of claims brought by injured parties before the national courts and tribunals. Those courts and tribunals were, however, obliged to ensure that individuals should have an effective legal remedy to obtain reimbursement of the tax unlawfully levied on them and the amounts paid to that member state or withheld by it directly against that tax. A member state was also under a conditional duty to make reparation for any other loss or damage caused to individuals as a result of a breach of Community law for which it was liable. But that did not preclude the state from being liable under less restrictive conditions, if national law so provided (Brasserie du Pàecheur v Germany (Joined Cases C-46/93 and C-48/93) [1996] ECR I-1029 considered).

European Court of Justice (Grand Chamber).
Judgment delivered 12 December 2006.