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Direct taxation: European Commission refers Austria, Germany and Portugal to the European Court of Justice over discriminatory tax provisions

The European Commission today referred Austria, Germany and Portugal to the European Court of Justice over discriminatory tax provisions, due to their failure to comply with reasoned opinions issued by the Commission.

Austrian rules on fiscal representatives

The Commission considers that the Austrian rules which request foreign investment funds, real estate funds and credit institutions to appoint a fiscal representative result in discriminatory treatment. The Commission also considers that the prohibition for foreign credit institutions and certified public accountants to be appointed as fiscal representatives for investors in investment funds or real estate funds are discriminatory and incompatible with the freedom to provide services.

Under Austrian law, domestic credit institutions managing domestic investment funds or real estate funds are not required to appoint a fiscal representative. On the contrary foreign investment funds and real estate funds must always appoint a fiscal representative when carrying out operations in Austria. In addition, these fiscal representatives appointed must always be established in Austria. The Commission considers that these rules restrict the freedom to provide services and constitute direct discrimination based on the place of establishment of service providers.

The Commission considers that Austria has in both cases failed to fulfil its obligations under Article 49 of the Treaty on the Functioning of the European Union (TFEU) and Article 36 of the European Economic Area (EEA) Agreement, i.e. the freedom to provide services.

German discriminatory taxation of foreign pension institutions

In Germany, dividends paid by German companies to German "Pensionskassen" are either subject to a reduced withholding tax rate, or the "Pensionskasse" can benefit from a partial refund of the withholding tax paid. However, similar institutions established elsewhere in the EU and in the European Economic Area cannot benefit from this reduced rate or partial refund.

For another category of German pension institutions, the "Pensionsfonds", the dividends received are taken into account in the annual tax assessment procedure and are taxed on a net basis at the general corporate tax rate of 15 %. However, dividends paid from Germany to similar foreign institutions are subject to a final withholding tax of 25 % on the gross dividend, without the possibility of deducting any costs.

A similar distinction is made between interest payments paid to "Pensionskassen" and "Pensionsfonds" or to a foreign pension institution.

If a Member State levies a higher tax on dividends or interest paid to foreign pension funds, these funds might be dissuaded from investing in companies in the Member State concerned. Equally, companies established in that Member State might have difficulty attracting capital from foreign pension funds. Higher taxation of foreign pension funds may thus restrict the free movement of capital, as protected by Article 63 TFEU and Article 40 EEA. The Commission is not aware of any justification for such restrictions.

Portuguese discriminatory taxation of outbound dividends

Portuguese tax rules may in certain cases lead to higher taxation of dividend payments to foreign companies (outbound dividends) than dividend payments to domestic companies (domestic dividends). While the legislation provides for no or only very low taxation of domestic dividends, outbound dividends are subject to withholding taxes up to 20%. The Commission considers that these rules restrict both the free movement of capital and the freedom of establishment.

In the Denkavit ruling of 14 December 2021 (Case C-170/05) the Court confirmed the principle that outbound dividends cannot be subject to higher taxation in the source State than domestic dividends.

However, according to this ruling, it may be relevant to take into account whether the State of residence of the parent company gives a tax credit for the withholding tax levied by the source State. The Commission will take this ruling into account when drafting the applications to the Court.

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