Cross-border dividends are a subject frequently analyzed since the taxation of income flows, allocated among related companies resident in different Countries, has a fundamental role to play in the strategic planning of any multinational group.
This matter concerns a legislation that evolves constantly through a continuous updating of national, conventional (resulting from bilateral agreements between States) and European provisions, always in delicate balance between the traditional need to safeguard the full tax rights of national governments and the more contemporary aim to ensure (or, at least, not to hinder) healthy movement of capital.
As many of you know, commonly outbound dividends (i.e. dividends paid to companies resident in a different Country from that of residence of the paying company) are taxed through the application of a definitive tax withholding, typically at a tax rate that may vary depending on the more or less stringent regulations applicable from time to time. In this way, the so-called States of origin ensure the taxation of revenues generated in their territory that, otherwise, would not be recoverable from foreign beneficiaries.
This is the system adopted by Italy (analyzed in detail in our recent paper https://www.4clegal.com/opinioni/dividendi-uscita-presupposto-soggettivita-passiva-dimposta-holding-estera) and also, among others, by French law. Some French provisions have been recently challenged before the ECJ (judgment of 22nd November 2018, C-575/17), in the part where, with regard to dividend taxation, they resulted in a forbidden penalization for the foreign parent companies, as compared with the ones resident in France.
In this case, the resolutions of the European Court are interesting, not only because, pursuant to European law, they are directly effective with respect to possible similar European situations (through the disapplication of contrasting national provisions), but also because they highlight all the difficulties in coordinating the fiscal substantive rules of different source (national, European or conventional).
In extreme summary, in the abovementioned judgement, the Court held that the different treatment between dividends paid, without the application of a tax withholding, by a French company to a French loss-making company and dividends paid to a loss-making Belgic company with application, in this case, of a tax withholding, resulted in an unjustified restriction on the fundamental freedom of free movement of capitals under art. 63 and art. 65 TFUE.
Therefore, in this case, the French regulations have been questioned by the Union judicatures for two different kind of reasons: first, for the cash-flow advantage accrued to the national loss-making beneficiaries, which could only benefit from the deferment in the payment of taxes on received dividends to a tax period following the one of distribution; second, for the advantage, deriving from the definitive de-taxation of these dividends, that could be only enjoyed by the national loss-making beneficiaries that would have ceased activities without returning to profits.
Nevertheless, the implications of this ruling are numerous and go beyond the specific case in question.
First of all, it is expressed the principle according to which the foreign companies, resident in a Member State, that have received dividends subject to tax withholdings in an another Member State, may be entitled to a full refund of the tax withholding applied in the years when they were loss-making.
This hypothesis is also interesting for our legal system since the tax regime in force in Italy is similar to the (French) one censured by the European Court of Justice.
Moreover, it is possible to make an observation of systematic nature that derives from French tax authority’s objections. It had pleaded that the domestic taxation on dividends, at a tax rate of 33%, was usually more burdensome for French percipients than the conventional taxation, at a tax rate of 15%, generally applied through a tax withholding to the percipient resident in Belgium (this argumentation was not considered as sufficient by the Court).
This subject constitutes one of the many expressions of the basic problem faced by any attempt to homogenize and coordinate the international tax law: in other words the natural and insuppressible power of any State to lay down their own specific rules for determining the taxable income, not necessarily uniform, or even only compatible, with the ones of other jurisdictions. This could lead to the consequence that (to give an example consistent with the subject mentioned above), in a financial year, the same economic performance of a company may give rise to deeply different tax results depending on the country of residence. It is easy to understand that the upstream lack of harmonization of the taxable base is likely to generate numerous restrictions on freedom of movement and infringements of the principle of non-discrimination, both protected by the European legislation and, sometimes, also by international conventions.
In such a complex scenario, a careful and experienced weighting, not only of the regulations in force in the various jurisdictions involved, but also of the interpretive and implementing mechanisms that govern, in an integrated manner, the functioning of a system that aims at the harmonization and at facing tax avoidance and tax evasion, makes the difference between a (also) fiscally efficient strategy of international branching and a delocalization, having damaging consequences (in the short term), if not disastrous (in the medium-term).
 The Court stated, contrary to what put forward by the French Government, that this restriction was neither justified by differences in the situation where the taxpayers were (the difference in tax residency), or by purposes of higher tax revenues for the French treasury, or eventual difficulties in collecting taxes.
 According to the Court, the restrictions on free movement of capitals “include those which are such as to discourage non-residents from making investments in a Member State or to discourage that Member State’s residents from doing so in other States” (see the abovementioned judgement ECJ C-575/17).
Author: dott. Paolo Visconti
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