FFF-Legal

The Court of Justice of the EU delivered its ruling in joined cases Haribo Lakritzen Hans Riegel BetriebsgmbH v Finanzamt Linz (C-436/08)[1] and Österreichische Salinen AG v Finanzamt Linz (C-437/08)[2] - the court was asked to rule on the Austrian tax treatment of foreign portfolio dividends received in Austria by domestic corporate taxpayers. The CJEU concluded that some rules which differentiate between domestic dividends and inbound foreign sourced dividends were in breach of the free movement of capital. Haribo and Salinen, which were two Austrian resident companies, were denied exemption with regard to inbound portfolio dividends from companies established in other Member States and third countries. During the year in which the exemption was denied, Salinen incurred a loss.

Under Austrian law applicable in the relevant years, domestic portfolio dividends were always exempt in the hands of the corporate shareholders. On the contrary, any relief from double taxation in the case of inbound portfolio dividends was granted subject to certain conditions. Portfolio dividends refer to dividends from shareholdings amounting to less than 10% of the capital of the relevant company. Consequently, the fundamental freedom at issue in both cases was the free movement of capital governed by Article 63(1) of the TFEU. This Article provides that “… all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.”

In these two joined cases, the CJEU decided that:

• Legislation of a Member State which provides for the exemption of portfolio dividends received from EEA countries subject to the existence with the relevant EEA country of a comprehensive agreement for mutual assistance in relation to administrative matters and enforcement of taxes is incompatible with Free Movement of Capital, where only an agreement with regards to administrative matters proves necessary for the attainment of the objectives.
• Legislation of a Member State which adopts the exemption method to eliminate double taxation in respect of domestic dividends, whilst it applies the imputation method in respect of portfolio dividends from other EU Member States and EEA countries is compatible with Free Movement of Capital provided that the administrative burdens imposed on the recipient company in order to qualify for the imputation method are not excessive.
• Legislation of a Member State which does not provide either for an exemption or imputation credit in respect of portfolio dividends received from third countries other than EEA countries, whilst exempting domestic portfolio dividends is incompatible with Free Movement of Capital.
• Legislation of a Member State which does not provide for a carry-forward of the imputation system to the subsequent years, where the company receiving dividends has recorded an operating loss for the year in which it received the foreign-sourced dividends, whilst it allows resident companies to carry forward losses and provides for the exemption method in respect of domestic dividends, is incompatible with Free Movement of Capital.

[1] Case C-436/08 Haribo Lakritzen Hans Riegel BetriebsgmbH v Finanzamt Linz, [2011]

[2] C-437/08 Österreichische Salinen AG v Finanzamt Linz [2011]