The European Court of Justice (First Chamber) ruled that art. 43 and 48 EC precluded national legislation which, by imposing tax on dividends paid to a non resident parent company and allowing resident parent companies almost full exemption from such tax, constituted a discriminatory restriction on freedom of establishment. Moreover, national legislation was precluded which imposed, only on non-resident parent companies, a withholding tax on dividends paid by resident subsidiaries, even if a tax convention between the member state in question and another member state, authorising that withholding tax, provided for the tax due in that other state to be set off against the tax charged in accordance with the disputed system, whereas a parent company was unable to set off tax in that other member state, in the manner provided for by that convention.

Facts

The French court made a reference to the European Court of Justice (‘ECJ’) for a preliminary ruling on the interpretation of art. 43 EC, in relation to the provisions of French tax legislation which, at the relevant time, imposed a withholding tax on the payment of dividends by a resident subsidiary to a non-resident parent company, whereas dividends paid by a resident subsidiary to a resident parent company were almost fully exempt from corporation tax. The question arose in proceedings concerning the taxation of dividends paid by the taxpayer companies, both of which were established in France, to their parent company, Denkavit Internationaal (‘DI’), which was established in the Netherlands.

DI owned 50 per cent of the capital of the first taxpayer (‘DF’) and 99.9 per cent of the second taxpayer (‘AF’), which itself owned 50 per cent of the capital of DF. Between 1987 and 1989, DF and AF, which subsequently merged, paid dividends to DI. In accordance with the combined provisions of French law and the Franco-Netherlands Convention, a withholding tax of 5 per cent of the amount of those dividends was levied. Following an action before the administrative court, DI was repaid the amount of the withholding tax. However, the appeal court set aside that judgment and reinstated the liability of DI to pay the tax charged. DI and DF appealed, arguing that the French tax legislation at issue contravened art. 43 EC. The withholding tax under the French legislation did not affect resident companies which paid dividends, but non-resident parent companies which were the beneficiaries of those dividends, whereas resident parent companies might be entitled to almost full exemption from corporation tax on dividends paid by their subsidiaries.

Issue

Whether, in the light of the difference in tax treatment, a resident parent company and a non resident parent company were in an objectively comparable situation as regards the operation of the withholding tax on dividends; and what effect might the Franco Netherlands Convention have on the assessment of the compatibility of the withholding tax with freedom of establishment.

Decision

The ECJ (First Chamber) (ruling accordingly) said that art. 43 EC would be deprived of all meaning if the member state in which a resident subsidiary was established might freely apply different treatment merely by reason of the fact that the registered office of the parent company was situated in another member state. Freedom of establishment sought to guarantee the benefit of national treatment in the host member state, by prohibiting any discrimination, even minimal, based on the place in which companies had their seat. In tax law, the taxpayers’ residence might constitute a factor justifying national rules involving different treatment for resident and non-resident taxpayers, so that different treatment of resident and non-resident taxpayers could not in itself be categorised as discrimination within the meaning of the EC Treaty. However, a difference in treatment had to be categorised as discrimination where there was no objective difference such as to justify that difference in treatment.

In the present case, dividends paid to non-resident parent companies, unlike those paid to resident parent companies, were subject to a series of charges to tax under French tax legislation, in that those dividends were subject to tax, first, in the form of corporation tax levied on the resident subsidiary making the distribution and, second, in the form of the withholding tax levied on the non-resident parent company receiving the dividends. Such a difference in the tax treatment of dividends between parent companies, based on the location of their registered office, constituted a restriction on freedom of establishment, which was, in principle, prohibited by art. 43 EC and art. 48 EC.

The tax measure complained of made it less attractive for companies established in other member states to exercise freedom of establishment and, consequently, they might refrain from acquiring, creating or maintaining a subsidiary in the state which adopted that measure. In the context of measures laid down by a member state in order to prevent or mitigate the imposition of a series of charges to tax on, or the double taxation of, profits distributed by a resident company, resident shareholders receiving dividends were not necessarily in a situation which was comparable to that of shareholders receiving dividends who were resident in another member state. However, as soon as a member state, either unilaterally or by way of a convention, imposed a charge to tax on the income, not only of resident shareholders, but also of non-resident shareholders, from dividends which they received from a resident company, the situation of those non resident shareholders became comparable to that of resident shareholders. By refusing to extend to non-resident parent companies the more advantageous national tax treatment accorded to resident parent companies, the national legislation amounted to a discriminatory measure which was incompatible with the Treaty, in that it imposes a heavier tax burden on dividends paid by resident subsidiaries to Netherlands parent companies than that imposed on dividends paid to French parent companies.

Franco Netherlands Convention

Furthermore, since the tax regime arising under the Franco Netherlands Convention formed part of the legal framework applying to the main proceedings and had been presented as such by the national court, the ECJ had to take it into account in order to provide an interpretation of Community law that was relevant to the national court. Under that convention, a non-resident company, such as DI, was, in principle, authorised to offset the withholding tax of five per cent on French-sourced dividends against its tax liability in the Netherlands. The amount offset could not, however, exceed the amount of Netherlands tax otherwise payable on those dividends. The combined application of the Franco Netherlands Convention and the national legislation did not overcome the effects of the restriction on freedom of establishment. Irrespective of its extent, the difference in tax treatment constituted discrimination against parent companies on the basis of their registered office, which was incompatible with the freedom of establishment guaranteed by the Treaty.

European Court of Justice (First Chamber).
Judgment delivered 14 December 2006.