This judgment, which was delivered on 14 December, considered Freedom of Establishment principles, and the relationship between Tax Treaties and EU Law.

The European Court of Justice (ECJ) ruled on Thursday 14 December on the French dividends case – Denkavit Internationaal BV, Denkavit France SARL v Ministre de l'Economie, des Finances et de l'Industrie [C-170/05].

It has been recognised by the Court in other similar cases that different treatments of resident and non-resident taxpayers cannot in itself be categorised as discrimination within the meaning of the EC Treaty. However, a difference in treatment between those two categories of taxpayer must be categorised as discrimination within the meaning of the Treaty where there is no objective to justify that difference in treatment.

It was held that French legislation in force at the time of the payment of dividend, which made dividends received by a non-resident parent company liable to withholding tax, while almost fully exempting dividends received by a resident parent company, restricts freedom of establishment.

Effects of Tax Treaty on Freedom of Establishment

In addition, the Court was asked to consider the implications on the freedom of establishment where by virtue of the Franco-Netherlands Tax Treaty, a parent company which is resident in the Netherlands may, in principle, offset tax paid in France against its liability to tax in the Netherlands and, accordingly, the withholding tax is merely a means of apportioning the taxable item between the Member States concerned.

In this particular case, the dividends from France were not taxable in the Netherlands, so the parent company which is resident in the Netherlands was in fact unable to offset that tax paid in France as provided for by the Treaty. Therefore, the Tax Treaty did not overcome the effects of the restriction on freedom of establishment.

In summary, the Court ruled that freedom of establishment precludes such a withholding tax as described in the case, even if a tax convention authorises the non-resident parent company to offset it against the tax due in the State in which it is resident, where that parent company is unable to offset that tax.

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-170/05&datefs=&datefe=&nomusuel=&domaine=&mots=&resmax=100. A full report of the case will be carried in a future edition of tax.point.