Read a November 2012 report [PDF 54 KB] about the CJEU judgment, prepared by KPMG’s EU Tax Centre: CJEU decision in FII Group Litigation case
Read the judgment: C-35/11
A UK resident company receiving UK-sourced dividends was not subject to corporation tax in respect of those dividends (i.e., the exemption method).
By contrast, a UK resident company receiving dividends from a non-resident company was subject to corporation tax on those dividends; however, it could offset against that corporation tax liability the amount of tax that the company making the dividend distribution had already paid in its country of residence on the distributed profits (i.e., the imputation method).
Some companies established in the UK that received dividends from subsidiaries resident in another EU Member State disputed the compatibility of the UK’s tax treatment of foreign-sourced dividends with EU law. They contend that the UK regime resulted in less favorable tax treatment of resident companies with subsidiaries in other EU Member States.
In 2006, the CJEU examined the UK regime at the request of the UK High Court. In the 2006 judgment, the CJEU addressed whether UK provisions violated EU law by exempting dividends received from UK resident companies, but not foreign companies, even when providing a credit for the underlying foreign tax paid. The court held that the UK provision did not breach EU law, as long as the foreign profits were not subject to a higher rate of tax than domestic dividends.
In the present proceeding, the UK court requested the CJEU to clarify its judgment.
Advocate General’s opinion
In July 2012, the Advocate General of the CJEU issued an opinion in this proceeding, finding that when the UK law applies in respect of all shareholdings—regardless of their size—the tax provisions are within the scope of the freedom of movement of capital. See TaxNewsFlash-Europe: United Kingdom - Tax treatment of dividends from foreign subsidiaries
Thus, the Advocate General proposed that the CJEU either find that the different treatment of foreign and domestic dividends is acceptable under EU law, or reverse its original findings that the different tax treatment of such dividends is compatible with EU law because this practice is inevitably discriminatory.
As explained in today’s CJEU release 144/12 [PDF 42 KB], EU law permits an EU Member State to apply the exemption method to nationally sourced dividends and the imputation method to foreign-sourced dividends.
While these two methods may be considered to be equivalent, the CJEU looked to information supplied by the UK High Court to find that the effective level of taxation of the profits of companies resident in the UK is lower in the majority of cases than the nominal rate of tax applicable in that EU Member State.
Thus, the CJEU concluded that application of the imputation method to foreign-sourced dividends under UK law does not provide a tax treatment equivalent to that resulting from application of the exemption method to nationally sourced dividends, and therefore that the UK rules must be regarded as a restriction on freedom of establishment and on capital movements.
The CJEU also found that the objective of the UK rules (i.e., to preserve the cohesion of the national tax system) could have been achieved by less restrictive measures.
The CJEU also addressed whether a company that is resident in a Member State and has a controlling shareholding in a company established in a third country may rely upon the EU Treaty provisions on the free movement of capital in order to call into question the consistency with EU law of the tax treatment that the law of that Member State accords to dividends received from such a subsidiary.