The European Court of Justice (ECJ) has held that it is discriminatory for a Member State to impose a withholding tax on dividends distributed by a company established in that Member State to a company established in another Member State, while exempting dividends paid to a company subject to corporation tax in the first Member State or that has a permanent establishment in the Member State, which owns shares in the company paying the dividend.

The case concerned Amurta, a company established in Portugal, which held 14% of the shares in Retailbox, a Dutch company. The other shareholders comprised Sonaetelecom BV, another Dutch company, which held 66%, and two other companies also established in Portugal, which held the remaining 20% between them.

When Retailbox paid a dividend, Dutch legislation imposed a withholding tax of 25% on the payment made to Amurta. There was an exemption under Dutch law primarily intended to comply with Council Directive 90/435/EC which exempts dividends paid by a subsidiary to a parent company holding a minimum of 25% of the share capital of the subsidiary from withholding tax. However, the Dutch provisions went further to exempt from the withholding tax companies subject to Dutch corporation tax or which had a permanent establishment in the Netherlands, which held a minimum of 5% of the share capital of the company. As a Portuguese company, Amurta could not take advantage of this exemption.

The ECJ observed that this resulted in less favourable treatment for companies not established in the Netherlands with shareholdings between 5% and 25% compared to their Dutch counterparts. It consequently held that this discriminatory action was a restriction on the free movement of capital and could not be justified, citing its earlier judgement in Denkavit Internationaal BV, Denkavit France SARL v Ministre de l’Économie, des Finances et de l’Industrie.

It has been noted that the ruling, although not directly related to pension schemes, could mean that UK pension schemes which invest in companies registered in other Member States, in particular the Netherlands, may receive a tax windfall.

View the ECJ judgment