Individual dividend taxation in context of free movement of capital

The case involved a Finnish tax resident who held shares in a Swedish company and received dividends in that regard.

Under Finnish tax legislation, both Finnish corporations and their Finnish shareholders were subject to income tax on profits when, respectively, acquired by a company or further received by a shareholder in the form of dividends.

To mitigate that double corporate and individual taxation, Finnish laws provided individual shareholders with Finnish tax residence with a specific tax credit. That benefit, however, was only available for domestic dividends. As a result, Finnish residents receiving dividends from companies from other Member States were not allowed to claim the credit at issue, thus being potentially harmed by double taxation.

In the present case, the claimant was refused credit for dividends from a Swedish company. The national court examining his claims decided to refer the issue to the European Court of Justice (the “ECJ”).

The ECJ observed that Finnish tax rules were likely to impede collection of capital by companies from other Member States from Finnish individual investors and discouraged the latter from investments in foreign shareholdings. Therefore, Finnish tax legislation was in breach of the Treaty principle of free movement of capital.

The ECJ further held that such restrictive national measures may not be upheld even if their abolishment was to result in diminution of tax revenues of the Member State granting the tax credit. The ECJ also rejected the argument that the extension of the credit to foreign dividends runs counter to the coherence of the Finish tax system.

Consequently, the ECJ ruled that individual investors should enjoy the benefit of a shareholding tax credit both for domestic and for foreign dividends, received from companies established in other EU Member States.

The judgment of the ECJ follows a series of its recent decisions which seek to abolish fiscal impediments faced by EU citizens making investments in other Member States, based on the free movement of capital contained in the EC Treaty.