German Dividend Taxation Infringes EU Fundamental Freedoms


In a landmark-ruling, the ECJ has held that Germany's system of dividend withholding taxation infringes the right to free movement of capital as guaranteed by Art. 56 of the EC Treaty. Germany levies a withholding tax on dividends of 25%. Under Germany's treaty network, the withholding rate can be reduced to between 5 and 15% for foreign shareholders. Where the stake in the German entity paying the dividend has been 10% or more for at least a year, a further exemption from withholding is available under the EU parent-subsidiary directive (90/435/EC). This leaves shareholders with a smaller stake and shareholders who only acceded a company recently with a substantial withholding tax burden. German taxpayers, on the other hand, receive a full credit for their German withholding taxes, while foreign taxpayers do not receive a tax credit for this in Germany. For these shareholders, the German withholding tax settles their German taxes and they do not receive a refund of potentially overpaid German taxes and have no right to claim so in a German tax return. This economic differentiation, it was ruled, violates the Right to Free Movement of Capital under Art. 56 of the Treaty. Germany is now left with two possible ways of tackling the issue. As in any discrimination case, the discrimination can be removed...

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