This case concerns the Austrian system which exempted domestic portfolio dividend income from tax whilst granting a tax credit on dividends from an EU source or non-EU source if the relevant DTT contained exchange of information provisions. The credit for the underlying tax was calculated by reference to the local nominal rate.
The Court has confirmed that in principle it is possible to have an exemption system for domestic dividends and a credit system for non-resident income existing side by side, provided that the method for assessing the credit is not excessively difficult. The Austrian method of taking the nominal rate and assuming that the distributed profits were taxed at that rate did not pose an excessive difficulty.
Of course, under the UK system no credit for underlying tax was available where the holding was less than 10% and over that level the credit for underlying tax reflected the actual effective rate of tax paid. In this regard we commented in our November newsletter that the AG’s interpretation of the FII judgment supported our arguments that in those circumstances the UK system breached community law. The approach adopted in the judgment however, perhaps makes it less relevant than the AG’s opinion to the arguments regarding the lawfulness of the DV tax charge.