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Taxation of dividends: Commission takes steps against Bulgaria, Spain, Portugal and Romania, and closes case against Luxembourg

The European Commission has sent reasoned opinions (the second step of the infringement procedure of Article 226 of the EC Treaty) to Spain and Portugal about their rules under which dividends paid to foreign pension funds are taxed more heavily than dividends paid to domestic pension funds. It has also sent requests for information in the form of letters of formal notice (the first step of the infringement procedure) to Bulgaria about its rules under which inbound dividends paid to companies may be taxed more heavily than domestic dividends and to Romania and Bulgaria about their rules under which outbound dividends paid to companies may be taxed more heavily than domestic dividends. The four Member States are asked to reply within two months. At the same time the Commission has closed the case against Luxembourg on the higher taxation of outbound dividends paid to companies, as Luxembourg has eliminated the discriminatory taxation.

"I am pleased to note that Luxembourg has changed its discriminatory tax rules on outbound dividends" said EU Taxation and Customs Commissioner László Kovács. "I am confident that eventually all Member States which still have similar discriminatory rules will also amend their legislation accordingly."
Outbound dividends are dividends paid by domestic companies to shareholders resident in other States. Domestic dividends are dividends paid by domestic companies to domestic shareholders. Inbound dividends are dividends paid by companies resident in other States to domestic shareholders.
Outbound dividends to pension funds
Pension funds are usually subject to different tax rules than companies. The tax rules on dividends paid to pension funds and those for dividends paid to companies are therefore assessed separately.
Spain exempts pension funds from tax on their income, and they can claim back any Spanish withholding tax on the dividends that they receive. The domestic dividends that they receive are thus effectively tax free. In contrast, Spain levies a withholding tax of 18% on dividends paid to pension funds established elsewhere in the EU or in the EEA/EFTA countries (Iceland, Norway and Liechtenstein). These result in the higher taxation of dividends paid to foreign pension funds. Bilateral tax treaties may provide for a lower withholding tax rate.
Similarly, Portugal exempts the dividends received by domestic pension funds and levies a withholding tax of 25% on dividends paid to pension funds established elsewhere in the EU or in the EEA/EFTA countries.
The higher tax on dividends paid to foreign pension funds may dissuade these funds from investing in the Member State levying the higher tax. Equally, companies established in that Member States may face difficulties in attracting capital from foreign pension funds. The higher taxation of foreign pension funds thus results in a restriction of the free movement of capital as protected by Article 56 EC and Article 40 EEA. In the case of controlling participation by the foreign pension funds, it may also result in a restriction of the freedom of establishment, protected by Article 43 EC and Article 34 EEA. The Commission is not aware of any justification for such restrictions.
Concerning the higher taxation of dividends paid to foreign pension funds, the Commission has already sent letters of formal notice to the Czech Republic, Denmark, Spain, Lithuania, the Netherlands, Poland, Portugal, Slovenia and Sweden (IP/07/616 of 7 May 2007), to Italy and Finland (IP/07/1152 of 23 July 2007) to Germany and Estonia (IP/08/143 of 31 January 2008) and Austria (on 23 November 2007).
Following up on the complaints it received, the Commission is still examining the situation in other Member States. This may result in the opening of further infringement procedures.
Outbound dividends to companies
The letter of formal notice to Romania concerns the taxation of dividends which are paid to companies, resident elsewhere in the EU or in the EEA/EFTA countries.
Domestic dividends on participations of up to 15% of the shares are subject to a final withholding tax of 10%. On similar outbound dividends, Romania levies a withholding tax of 16%. Bilateral tax treaties may reduce that rate.
Domestic dividends on participations of 15% or more are tax exempt. In contrast, Romania levies a final withholding tax of 10% on dividends paid to companies resident in Norway and of 16% on similar outbound dividends paid to companies resident in the other EEA/EFTA countries.
The first letter of formal notice to Bulgaria also concerns the taxation of dividends paid to companies which are resident elsewhere in the EU or in the EEA/EFTA countries. Bulgaria exempts domestic dividends from withholding tax or corporation tax. However, outbound dividends paid to companies resident in the EU with a shareholding of less than 15% are subject to a withholding tax of 5% (if shareholding is of 15% or more they are exempt from withholding tax.). Outbound dividends paid to companies in the other EEA/EFTA countries are also subject to a withholding tax of 5%, regardless of the size of their shareholding.
Higher taxation of outbound dividends paid to companies may result in a restriction of the free movement of capital as protected by Article 56 EC and Article 40 EEA. Similarly, in the case of controlling participations by the foreign companies, it may result in a restriction of the freedom of establishment, protected by Article 43 EC and Article 34 EEA. The Commission is not aware of any justification for such restrictions.
Concerning the higher taxation of dividends paid to companies the Commission has already decided to refer Belgium, Spain, Italy, the Netherlands and Portugal to the European Court of Justice on 22 January 2007 (IP/07/66). The Commission sent reasoned opinions to Luxembourg (IP/06/1060 of 25 July 2006), Germany and Austria (IP/07/1152 of 23 July 2007) and Lithuania (IP/08/334 of 28 February 2008). The Commission sent a letter of formal notice to the Czech Republic (IP/08/143 of 31 January 2008). The Commission closed the infringement procedure against Latvia (IP/08/143 of 31 January 2008).
The Commission is now closing the case against Luxembourg (which concerned only the three EEA/EFTA countries), since Luxembourg eliminated the discrimination through its law of 27 December 2007.
Inbound dividends to companies
The second letter of formal notice to Bulgaria concerns the taxation of dividends paid by companies, resident elsewhere in the EU or in the EEA/EFTA countries to companies resident in Bulgaria. Domestic dividends received by companies resident in Bulgaria are tax exempt. Inbound dividends on participations of less than 15% in companies of other EU Member States are taxed at 10%, just like all dividends received from companies of the EFTA/EEA countries. The higher taxation of inbound dividends than of domestic dividends is likely to restrict the free movement of capital as protected by Article 56 EC and Article 40 EEA. The Commission is not aware of any justification for such restrictions.
Background
The Commission's Communication of 19 December 2003 (IP/04/25) on the taxation of dividends received by individuals provides an overview of issues related to dividend taxation.
The Commission's cases reference numbers are Bulgaria (2007/4883 for the inbound dividends, 2007/4333 for the outbound dividends), Spain (2006/4106), Portugal (2006/4104), Romania (2008/2048) and Luxembourg (2004/4351).
For the press releases issued on infringement procedures in the taxation or customs area see:
http://ec.europa.eu/taxation_customs/common/infringements/infringement_cases/index_en.htm
For the latest general information on infringement measures against Member States see:
http://ec.europa.eu/community_law/infringements/infringements_en.htm