The judgment in the FII case delivered on Tuesday 12 December creates issues for Ireland.

The European Court of Justice (ECJ) ruled on Tuesday 12 December on the UK dividends case – Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue [C-446/04].

The ECJ ruled on the principles of freedom of establishment and freedom of movement of capital in relation to the UK dividends system. In summary, the Court ruled that the principles of freedom of establishment and the free movement of capital are not contravened in the UK system where UK dividends are exempt and foreign-sourced dividends are subject to UK tax. However, this ruling is subject to two conditions: firstly, the tax rate which applies to foreign-sourced (EU) dividends must not be higher than the rate applied to UK dividends; and, secondly, the tax credit in relation to the foreign (EU) dividends must be at least equal to the amount of tax paid in that EU country, up to the limit of the tax charged in the UK.

The ECJ specifically mentioned that in the UK, the second condition would not be met in the case where a UK company holds fewer than 10% of the voting rights as the tax credit is restricted in those circumstances. The Court ruled that such a restriction is contrary to Community Law.

On foot of this ECJ decision, it will be necessary to examine Irish law to determine if any similar restrictions in the Irish dividend system contravene EU Law. Irish Law must be in line with EU Law and it is likely that any necessary change will be included in the Finance Bill 2007.

A copy of the judgment is available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=Rechercher$ docrequire=alldocs&numaff=C-446/04&datefs=&datefe=&nomusuel=&domaine=&mots=&resmax=100. A full report of the case is available in the ‘Report of Tax Cases’ Section of tax.point.