Comment in response to the public consultation paper issued by the European Commission on 28th January 2011 on taxation problems that arise when dividends are distributed across borders to individual investors and possible solutions

Abstract

The EU Commission identifies two major shortcomings of the cross‐border taxation of dividends received by portfolio shareholders in its consultation paper. Firstly, withholding taxes may be levied and credited in a discriminatory manner which may constitute an infringement of the free movement of capital set out in Articles 63 to 66 of the Treaty on the Functioning of the European Union. Secondly, the imposition of withholding taxes may result in double taxation and as a consequence impede investors from investing in foreign corporations. Hence, the benefits of international risk diversification are not fully exploited which may result in welfare losses.1 The parent‐subsidiary‐directive2 addresses this issue by prohibiting the imposition of dividends paid to substantial shareholdings. A comparable relief is, however, not available for portfolio and individual investors. In turn, withholding taxes on interest have been considerably reduced and even abolished by many member states whereas withholding taxes on dividends are still common and significant.3 This report therefore discusses how the above highlighted issues concerning the cross‐border taxation of dividends received by individuals can be resolved. The taxation of portfolio investments by corporations which is also left out of the scope of the parent‐subsidiary‐directive is not addressed in the following as this issue requires a separate analysis