The European Court of Justice has decided, without the need for an opinion from AG Sharpston, that Germany’s method of withholding taxation on company dividends infringes Art 56 EC. The German tax system provides for withholding tax to be levied on dividends. Companies whose parents are resident in Germany can offset the withholding tax against corporation tax, whereas companies resident outside of Germany would not ordinarily be liable to German taxation and therefore can neither relieve the tax burden nor obtain repayment of the withholding tax.

The German government conceded that there was a difference in treatment in the taxation of dividends depending on whether the dividends were distributed to foreign or national companies, but argued that foreign parents and national parents were not in an objectively comparable situation. Even if they could be compared, relief was said to be available under double taxation conventions.  

The Court disagreed, finding that the system was a restriction on the free movement of capital, which was not justified by any public interest considerations, and that Germany had therefore failed to fulfill its obligations under Art 56 (and Art 40 EEC in relation to Norway and Iceland).