INTERNATIONAL TAX PLAZA - CJEU rules in joined Cases C-10/14, C-14/14 and C-17/14 Miljoen (Free movement of capital — Taxation of dividends from portfolios of shares)

(September 17, 2015)

On September 17, 2015 the Court of Justice of the European Union (CJEU) ruled in the joined Cases C‑10/14 J. B. G. T. Miljoen, C-14/14 X and C-17/14 Société Générale SA versus Staatssecretaris van Financiën (ECLI:EU:C:2015:608).

in Case C‑10/14:

(1) Does the application of Article 63 TFEU require the comparison of a non-resident with a resident, in a case such as the present in which tax on dividends was withheld on a dividend payment by the source State, to be extended to the income tax payable on the dividend income, against which, in the case of residents, the tax on dividends is set off?

(2) If the answer to Question 1 is in the affirmative, in the assessment as to whether the effective tax burden for a non-resident is heavier than the tax burden for a resident, should a comparison be made between the Netherlands tax on dividends, withheld in respect of the non-resident, and the Netherlands income tax payable by a resident, calculated in respect of the notional income which, in the year in which the dividends were received, is attributable to the total holding of investment shares in Netherlands companies, or does EU law require that a different standard of comparison be taken into account?

in Case C‑14/14:

(2) If the answer to Question 1 is in the affirmative, in the assessment as to whether the effective tax burden for a non-resident is heavier than the tax burden for a resident, should a comparison be made between the Netherlands tax on dividends, withheld in respect of the non-resident, and the Netherlands income tax payable by a resident, calculated in respect of the flat-rate income which, in the year in which the dividends were received, is attributable to the total holding of investment shares in Netherlands companies, or does EU law require that a different standard of comparison be taken into account? Must the tax free capital allowance which applies to residents be taken into account when making that comparison, and if so, to what extent (judgment in Welte, C‑181/12, EU:C:2013:662)?

(3) If Question 1 is to be answered in the affirmative, is it sufficient, in the assessment as to whether a potentially discriminatory withholding tax levied at source is effectively neutralised on the basis of a convention for the avoidance of double taxation concluded by the source State, that (i) the double taxation convention concerned makes provision for a tax reduction in the State of residence by offsetting the withholding tax levied at source and that, although that option is not unconditional, (ii) in the case in question the tax reduction granted by the State of residence, by levying tax only on the net dividend received, offsets in full the discriminatory portion of the withholding tax levied at source?

in Case C‑17/14:

(1) Does the application of Article 63 TFEU require the comparison of a non-resident with a resident, in a case in which tax on dividends is withheld on a dividend payment by the source State, to be extended to the corporation tax against which the dividend tax is set off in the case of residents?

(2)

a. If the answer to Question 1 is in the affirmative, should account be taken, in making that comparison, of all the expenses which are economically linked to the shares from which the dividends arise?

b. If the answer to the previous question is in the negative, should account then be taken of any deduction of the dividend included in the purchase price of the shares and any financing charges resulting from ownership of the shares concerned?

(3) If the answer to Question 1 is in the affirmative, is it sufficient, in the assessment as to whether a potentially discriminatory withholding tax levied at source is effectively neutralised on the basis of a convention for the avoidance of double taxation concluded by the source State, that (i) the double taxation convention concerned contains a provision in that regard, and that, although that option is not unconditional, (ii) in the case in question it has the result that the Netherlands tax burden for a non-resident is not heavier than that for a resident? In the case of tatest hat offsetting in the year in which the dividends are distributed, is it relevant for the purposes of the assessment of that neutralising effect that there is a possibility that a deficit may be carried forward and that the set-off may be utilised effectively in subsequent years?

The actions in the main proceedings and the questions referred for a preliminary ruling

Case C‑10/14

· Mr Miljoen, a Netherlands national residing in Belgium, owned shares in three Netherlands listed companies.

· In 2007 dividends in the sum of EUR 4 852 were paid to Mr Miljoen in respect of those shares. That amount was subject to the tax on dividends in the Netherlands at the rate of 15%, in the sum of EUR 729.

· In his tax return relating to income tax for 2007 in the Netherlands, Mr Miljoen declared overall income of EUR 0 and made no mention of the amount of the tax on dividends to be offset against income tax.

· As a result of that tax return, the Netherlands tax authorities issued an income tax demand. Mr Miljoen lodged a complaint with those authorities against that demand and requested reimbursement of the tax on dividends in the sum of EUR 438 on the ground that, as a non-resident taxpayer, he had suffered discriminatory treatment prohibited by Article 63 TFEU. Following that complaint, the tax authorities adopted a decision upholding that tax demand.

· Mr Miljoen brought an action against that decision before the District Court, Breda (Rechtbank te Breda) which related, inter alia, to the question whether the different tax treatment between residents and non-residents which he alleges constitutes a restriction on the free movement of capital for the purposes of Article 63 TFEU. That court held that, in the case before it, there was no restriction, and Mr Miljoen then lodged an appeal on a point of law before the Supreme Court.

Case C‑14/14

· X, a Netherlands national residing in Belgium, owned two of the 95 shares in the capital of A Holding BV, a company established in the Netherlands, corresponding to 2.1% of that capital. In 2007 dividends totalling EUR 107 372 were paid in respect of her shareholding. From that amount, the sum of EUR 16 105.80 was withheld in respect of tax on dividends.

· As a Belgian resident, X was charged personal income tax in Belgium at a rate of 25%, amounting to EUR 22,816.22, on the net amount of the dividends. However, as regards that tax, she was able to obtain a partial deduction of the tax on dividends paid in the Netherlands. It is indicated in the court file that the sum of EUR 4,026 was repaid to her in that respect.

· X lodged a complaint with the Netherlands tax authorities against the withholding of the tax on dividends on the ground that she had suffered discriminatory treatment as a non-resident taxpayer. The tax authorities dismissed that complaint by decision of 29 March 2010.

· X brought actions before the District Court, Breda against that decision. That court held that those actions were in part well-founded. X and the State Secretary for Finance lodged appeals against that court’s decision before the Court of Appeal, Hertogenbosch (Gerechtshof te’s Hertogenbosch), which, in its judgment, partly upheld the lower court’s decision. X and the State Secretary for Finance then lodged appeals on points of law before the referring court.

Case C‑17/14

· Société Générale is a company established in France. Through its investment funds, also established in France, it owned, between the years 2000 and 2008, blocks of shares representing less than 5% of the capital of Netherlands listed companies. Dividends were paid to Société Générale during those years, after the Netherlands tax authorities withheld 15% for tax on dividends.

· For the years 2000 to 2007, Société Générale was allowed to offset the full amount of the tax on dividends withheld in the Netherlands against the corporation tax paid in France.

· When Société Générale suffered losses in 2008, the tax on dividends withheld in the Netherlands that year was not offset against the corporation tax paid in France. Société Générale submits that it must be reimbursed for the full amount of the tax on dividends withheld in the Netherlands, given that companies resident in that Member State have the right to deduct that tax from corporation tax, an option which is not open to non-resident shareholders. Société Générale claims that it therefore suffered discriminatory treatment as a non-resident taxpayer.

· As regards the claim to be allowed to offset or to be reimbursed for the tax on dividends withheld in 2007 and 2008, the District Court, Haarlem (Rechtbank te Haarlem) dismissed the action brought by Société Générale on the ground that, in relation to the financial year 2007, the French tax authorities had offset the full amount of the Netherlands tax on dividends against the full amount of the corporation tax and that, in relation to the financial year 2008, Société Générale had failed to demonstrate that the Netherlands tax levied on the dividends was higher than it would have been in a domestic situation. The Court of Appeal, Amsterdam (Gerechtshof te Amsterdam) also considered that the comparison between the tax situation of a resident taxpayer and that of a non-resident taxpayer had to be limited to the tax on dividends and that it had not been demonstrated that Société Générale’s liability for the tax on dividends differed from that of a resident taxpayer. Société Générale brought an appeal on a point of law against the judgment of the Court of Appeal, Amsterdam.

The questions referred for a preliminary ruling

· In the three cases in the main proceedings, the referring court asks whether national legislation imposes a difference in tax treatment between natural persons or companies who are non-resident shareholders and receive dividends subject to a withholding tax and natural persons or companies who are resident shareholders and whose dividends are also subject to that withholding tax, but who may offset the tax withheld against their income tax or against corporation tax, and whether that legislation constitutes a restriction on the free movement of capital.

· In particular, the referring court explains that the tax on dividends is applied to resident shareholders and to non-resident shareholders at the same flat rate. For non-resident shareholders, it is a final tax, while in the case of resident shareholders the tax on dividends is offset against income tax or corporation tax. The referring court tatest hat, for the purpose of determining whether the situations of residents and non-residents are comparable, the question whether that set-off must be taken into account is of vital importance.

· The referring court also seeks guidance on how to evaluate the taxable base of income tax in the event that that set-off should be taken into account.

· Should the Court decide that it is appropriate to compare the situations of resident shareholders and non-resident shareholders with regard to income tax, the referring court seeks guidance, in the first place, on the relevant reference period for making that comparison. A Netherlands resident is taxed on a flat-rate basis in respect of the tax on dividends, including the years in which he does not receive dividends. Thus, the referring court seeks to establish whether it is appropriate to assess the Netherlands tax burden by taking into account taxes levied on all the dividends from Netherlands shares paid to a non-resident during a reference period of one or more years, or by taking into account separately, for each Netherlands undertaking paying dividends, the taxes levied on dividends paid during that reference period. In the second place, in Case C‑14/14, the referring court asks whether it is appropriate to take into account, for the purposes of that comparison, the capital tax exemption benefitting resident taxpayers provided for in Article 5.5 of the IT Law 2001. In the third place, in Case C‑17/14, the referring court asks whether it is appropriate to take into account, for the same purposes, all expenses which are economically linked to the shares from which the dividends arise or, otherwise, any deduction of the dividend included in the purchase price of the shares and any financing charges resulting from ownership of the shares concerned.

· Furthermore, in Cases C‑14/14 and C‑17/14, the referring court asks whether the discriminatory nature of a withholding tax may effectively be neutralised by a convention for the avoidance of double taxation, such as those at issue in the main proceedings, which either provides for a reduction of the tax in the Member State of residence by offsetting the tax withheld at source against that tax, or provides that the tax payable by a non-resident taxpayer is not higher than the tax which a resident taxpayer must pay.

· In those circumstances, the Supreme Court decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

- in Case C‑10/14:

- in Case C‑14/14:

(2) If the answer to Question 1 is in the affirmative, in the assessment as to whether the effective tax burden for a non-resident is heavier than the tax burden for a resident, should a comparison be made between the Netherlands tax on dividends, withheld in respect of the non-resident, and the Netherlands income tax payable by a resident, calculated in respect of the flat-rate income which, in the year in which the dividends were received, is attributable to the total holding of investment shares in Netherlands companies, or does EU law require that a different standard of comparison be taken into account? Must the tax free capital allowance which applies to residents be taken into account when making that comparison, and if so, to what extent (judgment in Welte, C‑181/12, EU:C:2013:662)?

- in Case C‑17/14:

(2)

(3) If the answer to Question 1 is in the affirmative, is it sufficient, in the assessment as to whether a potentially discriminatory withholding tax levied at source is effectively neutralised on the basis of a convention for the avoidance of double taxation concluded by the source State, that (i) the double taxation convention concerned contains a provision in that regard, and that, although that option is not unconditional, (ii) in the case in question it has the result that the Netherlands tax burden for a non-resident is not heavier than that for a resident? In the case of insufficient offsetting in the year in which the dividends are distributed, is it relevant for the purposes of the assessment of that neutralising effect that there is a possibility that a deficit may be carried forward and that the set-off may be utilised effectively in subsequent years?

· By decisions of the President of the Court of 2 April 2014, Cases C‑10/14, C‑14/14 and C‑17/14 were joined for the purposes of the written and oral procedure and the judgment.

The CJEU ruled as follows:

Articles 63 TFEU and 65 TFEU must be interpreted as precluding legislation of a Member State which imposes a withholding tax on dividends distributed by a resident company both to resident taxpayers and non-resident taxpayers and provides a mechanism for deducting or reimbursing the tax withheld only for resident taxpayers, while for non-resident taxpayers, both natural persons and companies, the tax withheld is a final tax, in so far as the final tax burden relating to those dividends, borne in that Member State by non-resident taxpayers, is greater than that borne by resident taxpayers, which it is for the referring court to determine in the main proceedings. For the purposes of determining those tax burdens, the referring court must take account, in Cases C‑10/14 and C‑14/14, of the taxation of residents in relation to all shares held in Netherlands companies in the calendar year, of capital which is exempt from tax under national legislation, and in Case C‑17/14, of expenses which are directly linked to the actual payment of the dividends.

If the existence of a restriction on the movement of capital is established, it may be justified by the effects of a bilateral convention for the avoidance of double taxation concluded by the Member State of residence and the Member State in which the dividends are paid, provided that the difference in treatment, relating to the taxation of dividends, between taxpayers residing in the latter Member State and those residing in other Member States ceases to exist. In circumstances such as those at issue in Cases C‑14/14 and C‑17/14, and without prejudice to the determinations to be made by the referring court, the restriction on the free movement of capital, if established, cannot be regarded as justified.

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