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A recent European Court of Justice judgment puts in doubt Ireland’s tax treatment of companies who receive dividends from other EU companies. It also reminds us of the extent of unlawful discrimination against EU resident companies in the Irish tax code.
In 1991 a Netherlands resident gentleman called Mr. Verkooijen received a dividend from a Belgian company. The company from which he received the dividends was based in Belgium and was not liable to tax in the Netherlands. Mr. Verkooijen was taxed in full on the dividend.

Had Mr Verkooijen received his dividend instead from a Netherlands resident company he would have been exempt at least in part from tax on the dividend. Mr Verkooijen claimed that the differing treatment of a dividend from a Netherlands resident company, and one from a company resident elsewhere in the EU, constituted unlawful discrimination, and interference in the right of freedom of establishment of companies. The European Court of Justice agreed with him.

The Court noted that the reason that part of Netherlands dividend was not taxed at the level of an individual shareholder was to avoid taxing twice what from an economic point of view are the same profits. A further purpose was to encourage investment in Netherlands companies.

Double taxation?
The Court held that while it would be legitimate to take steps to ensure that double taxation does not occur, it did not regard double taxation as occurring merely because a company paid corporation tax on its profits, and an individual shareholder later paid income tax on the dividend he received out of those profits. Where there were two different persons involved, and two different taxes involved, the court felt that double taxation of a type which it would be legitimate to avoid, was not occurring.

Irish implications
What has all of this to do with Ireland? Ireland does not exempt dividends from Irish resident companies from tax in the hands of Irish resident individual shareholders. The Irish resident shareholder is taxable alike on his Irish dividends and on his other EU dividends. Where discrimination does come in however is in that Irish resident companies are not liable to tax on most dividends from other Irish resident companies (save for surcharge on undistributed investment income in some cases). In contrast, they are liable to tax on dividends from companies resident elsewhere in the EU.

The Verkooijen case puts a question mark over this discriminatory treatment. The case does not decisively rule it to be illegal. The Verkooijen case involved the taxation of two separate persons (the company and the individual shareholder) and the application of two separate taxes (corporation tax on companies profits and income tax on the individual’s dividends). In the Irish example there are indeed two separate persons involved - the company paying the dividend and the company receiving the dividend. But there is only one tax, corporation tax, applying both to the first company’s profits, and to the second company’s dividend income.

While the case does not decisively determine that the discriminatory treatment in Ireland is illegal, it does call it into question. If the Irish discrimination is illegal, then Irish companies should not be charged Irish tax on dividends from other EU companies.

Other areas of the Irish tax code contain discrimination that would appear to be illegal under EU rules. An example is the denial of business property relief from capital acquisitions tax to shares in a company not registered in Ireland. The relief is also denied or scaled back where a company’s business is conducted in whole or part outside of Ireland.

The rules relating to relief for interest payments to fund investment in companies also contain restrictions that discriminate in favour of Irish companies, and against companies elsewhere in the EU.

The EU Commission is finding that recourse to the European Court of Justice in applying existing rules against discrimination and freedom of movement of companies and capital is achieving faster tax harmonisation than the political process of issuing new directives.

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