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Taxation of dividends received by individuals

The Commission  issued a Communication in 2004 which aims to provide guidance for EU Member States on how to render their systems for taxing dividends received by private individuals compatible with the EC Treaty. The Communication calls on the Member States to co-operate in order to quickly deal with this matter. It stated that if Member States could not agree on coordinated solutions, the Commission would be obliged to initiate legal action against those Member States whose dividend tax rules do not comply with the Treaty.

Member States operate different systems for taxing dividend income in the hands of individual shareholders. For domestic dividends, most Member States prevent or reduce economic double taxation (which results from the levying of corporation tax and income tax on the same dividend income) by applying either:

  • an imputation system or
  • a schedular system.

Where Member States differentiate between the tax treatment of domestic and inbound or outbound dividends in applying their systems, this may constitute a restriction on cross-border investments and can result in fragmented capital markets in the EU.

In its developing case law, the European Court of Justice (ECJ) has considered this issue on the basis of the provisions for the free movement of capital. It has ruled that a measure which provides for a different tax treatment between domestic and inbound dividends is in principle incompatible with these provisions.
An analysis of case law leads to certain conclusions on the design of dividend taxation systems. Member States cannot levy higher taxes on:

  • inbound EU dividends than on domestic dividends; or
  • outbound EU dividends than on domestic dividends.

The Commission  must, in any event, in line with its responsibility as guardian of the Treaty, take the necessary steps to ensure effective compliance with the Treaty, including bringing the matter before the ECJ on the basis of Article 226 of the EC Treaty. See Infringements section.

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