1. Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht1 Taxation of cross-border dividends and EC fundamental freedoms Prof. Dr. Joachim Englisch

2. Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht2 Introduction National systems of dividend taxation have been harmonized only to a small extent (Parent-Subsidiary Directive) Crucial question: Must provisions to mitigate or avoid economic double taxation be available for cross-border distribution of profits on an equal footing with purely domestic dividend payments? Other aspects not covered in this presentation: -Juridical (international) double taxation of dividends and fundamental freedoms -Most-favoured-nation treatment -Triangular constellations -Third-country involvement

3. Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht3 Applicable fundamental freedom Cross-border dividend payments may be covered by the substantial scope of Art. 43 EC (31 EEA) and / or Art. 56 EC (Art. 40 EEA) In so far as both freedoms overlap (esp. substantial shareholdings), the ECJ assumes that Art. 43 EC has precedence Due to the convergence of the fundamental freedoms with respect to the concept of forbidden restrictions and permissible justifications, the – questionable – delimination only matters in constellations with third-country involvement

4. Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht4 Home State scenario: Comparability The finding of an unjustified (discriminatory) restriction in the shareholder‘s State of residence presupposes the comparability of foreign-sourced and nationally-sourced dividends -In the context of Art. 56 EC, the issue of comparability will form part of the justification analysis The ECJ resorts to a “legal motive test“ to assess comparability -Decisive criterion: do foreign-sourced dividends suffer from economic double taxation, too? The Court‘s approach is conceptually flawed: -Comparability is a premise for assuming a restriction of Art. 56 -The criteria for assuming comparability should be determined in the light of the internal market objective: are domestic and outbound activities substitutable alternatives?

5. Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht5 Home State scenario: Fiscal cohesion Fiscal cohesion exceptionally permits a compensation of tax disadvantages (denial of shareholder relief) with directly related tax advantages for foreign-sourced dividends The ECJ has made a series of critical assumptions -A direct link between elements of the tax system that address different taxpayers but affect the same taxpayer is now accepted -There must be full compensation for the denial of a sharerholder relief: the latter must exactly reflect the corporation tax burden -It would be disproportionate not to take into account a foreign corporation tax burden (supranational concept of cohesion) The supranational viewpoint adopted by the ECJ neglects the inherent limits to negative integration and provokes distortive results

6. Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht6 Host State Scenario: Comparability The ECJ approach towards assessing comparability of resident and non-resident shareholders depends on a possible PE involvement -Host State PE: standard approach relying on parallels in the overall tax scenario (same rules for determining taxable base) -No host State PE: “Approximation theory”; comparability depends on whether outbound dividends are subject to tax However, the comparability criterion should be reflecting the internal market objective underlying the fundamental freedoms -A competitive relationship with the tax-privileged resident shareholders must be sufficient -Considerations regarding the balanced allocation of taxing rights should be reserved to the justification analysis -The Schumacker-doctrine is irrelevant in this context

7. Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht7 Host State scenario: national vs. supranational view Crucial question for assessing a restriction to the detriment of non- resident shareholders: Can (tax treaty) concessions granted by their State of residence compensate for the denial of shareholder relief? ECJ admits this to a limited – and rather theoretical – extent: -only by way of a bilateral treaty, not unilaterally -only in case of full compensation (full credit for detrimental dividend taxation at source, including eventual reimbursement) In fact, different national methods of avoiding economic double taxation, and dependence of the level of home State taxation on individual circumstances, generally render remedies for juridical double taxation unsuitable for a sufficiently certain compensation -A freedom-proof shift in responsability for shareholder relief requires provisions for both Member States (e.g. like PSD)

8. Prof. Dr. Joachim Englisch Lehrstuhl für Steuerrecht, Finanzrecht und Öffentliches Recht8 Conclusion A shareholder relief is typically based on the legal assumption that corporation tax on distributed profits and taxation of dividends should be – at least partly – integrated to avoid economic double taxation Considering the rationale of the fundamental freedoms – market access and undistorted competition – and their inherent limits in an internal market with disparate tax systems, it must be assumed that, as a general rule, each MS can only be held accountable for avoiding its own double taxation on an equal footing -Home state should be able to claim fiscal cohesion (at least with respect to full imputation systems) -Host state must, in principle, grant shareholder relief A shift of responsibilities is possible, but requires a co-ordinated approach such as embodied in the PSD