Legal Alert – ECJ Found Taxation of Inbound Dividends Discriminatory – Finnish Dividend Taxation May Also Be Incompatible with EU Law
On 24 November 2016, the European Court of Justice (the “ECJ”) issued a preliminary ruling (C 464/14) regarding the tax treatment of dividends distributed to a company established in Portugal by two companies established in Tunisia and Lebanon respectively. The company declared its dividends in Portugal, where no mechanism to eliminate or mitigate economic double taxation was applied.
According to the preliminary ruling, this tax treatment was in principle prohibited by the free movement of capital secured by Article 63 of the TFEU. In accordance with the Portuguese legislation, a company resident in a Member State may deduct, in full or in part, dividends from its taxable amount when the dividends are distributed by a company resident in the same Member State. However, such a deduction cannot be made where the distributing company is resident in a non-member state. The ECJ held that such legislation constitutes a restriction on the movement of capital between Member States and non-member States. This difference in tax treatment discourages companies resident in Portugal from investing their capital in companies established in non-member States.
However, the refusal to grant a full or partial deduction from the taxable amount in respect of the dividends received could have been justified by overriding reasons in the public interest. In practice, this means that the restriction could have been justified if the local tax authorities lacked the means to obtain information from the non-member state distributing the dividends.
Implications for Finland
In light of the ECJ ruling the Finnish dividend taxation may also be incompatible with EU law, as the dividends received by a Finnish company from a company resident in a Member State are often tax-exempt while the dividends received from a company resident in a non-member state may be taxable. For example, dividends received by a Finnish public limited company from portfolio investments in a company resident in a non-member state are usually taxable in Finland while dividends from similar investments within the EU are tax exempt. Such tax treatment of dividends received from a non-member state is discriminatory, and pursuant to Article 63 of the TFEU, this tax treatment can be interpreted as a restriction on the free movement of capital.
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