This ECJ case concerned articles 43 (freedom of establishment) and 56 (free movement of capital) of the EC Treaty.

Shareholders resident in Germany who received a dividend from a German company could offset in full the corporation tax paid by the distributing company against their own tax liability under the ‘full imputation’ taxation system in force in Germany. They could also deduct the amount of the loss in the value of the shares resulting from their distribution. Non-resident shareholders were not liable to German income tax or corporation tax on income from the distribution or profits on sale. However non resident shareholders were also unable to invoke the application of the ‘full imputation’ system.

Germany passed legislation restricting a resident shareholder's right to deduct losses in the value of the shares purchased from a non-resident shareholder who was not entitled to the tax credit. This applied if the reduction in profits was the result of a transaction to distribute or transfer profits in performance of a special control agreement. The Finance Court Munich took the view that this measure applied to shares during a restructure of Glaxo Wellcome Group. The taxpayer appealed the decision of the Finance Court and was successful. The Finance Court Munich then appealed to the Bundesfinanzhof (Federal Finance Court), which referred the matter to the European Court of Justice.

The Court held that articles 43 and 56 of the EC Treaty did not precluded domestic legislation from restricting the right to deduct, where shares were acquired from a non-resident shareholder not entitled to a tax credit, ‘whereas had the shares been acquired from a resident shareholder, such a reduction in value would have reduced the acquirer's basis of assessment’.

The full judgment is available at http://curia.europa.eu