Luxembourg, 09/03/2007 (Agence Europe) - According to the judgment delivered by the Court of Justice on Tuesday 6 March, part of the taxes raised by the German states are incompatible with Community law (Case C-292/04). German tax authorities make a difference between German and foreign dividends, which constitutes an unjustified restriction on the free movement of capital. The judgment came as no surprise to anyone, but it was not expected to be retrospective, and could cost the state dear.
There is a mechanism in the German tax system which allows persons fully taxable for income tax purposes to deduct 3/7 of the dividends paid to them by German companies. But this mechanism does not apply to dividends from foreign companies. This discrimination, says Tuesday's judgment, is a restriction on the free movement of capital, and, therefore, infringes Article 56 and 58 of the EC Treaty.
Between 1995 and 1997, Mr Meilicke, a German citizen residing in Germany, received dividends in respect of shares he held in Dutch and Danish companies. In 2000, the heirs of Mr Meilicke, who had died in the meantime, unsuccessfully applied to the Finanzamt Bonn-Innenstadt (the Bonn tax office) for the tax credit on those dividends. Mr Meilicke's heirs then brought proceedings before the Finanzgericht Koln (Cologne financial court), which sought a preliminary ruling from the Court of Justice of the European Communities as to whether the Community provisions on the free movement of capital allow a tax system such as the German one.
The Court had no difficulty in deciding clearly and swiftly. The legislation in question, the German income tax law (Einkommensteuergesetz) of 1990 (amended in 1993), Article 36, paragraph 2, point 3, establishing a tax difference between dividends from German companies and from companies whose headquarters are in another member state, restricts the free movement of capital, and does not comply with the Commission priority of avoiding double taxation. Last but not least, it is not appropriate to limit the temporal effects of the judgment.
The Court is, then, making its judgment retrospective, so that its effect will go back over several years, something that happens only rarely in Community law and hitherto has never happened in German law. The federal and regional governments will now have to repay the taxes received as a result of this mechanism. Some observers see this as a further reprimand to the German state for infringing Community law with full knowledge of the facts. “It was clear right from the start, that this law did not comply with European law,” a lawyer close to the case told EUROPE. “Everyone said (to the German government) that they would not be able to apply this law with impunity. They knew all about it. This judgment is a kind of slap on the face for the federal state”.
Surprised or not, Berlin is unhappy, and claims that the two reasons for limiting the temporal effects are linked: firstly, there are the serious economic consequences of this retroactivity, and, secondly, it says that it was possible to believe that, when it was instituted, the law was compatible with Community law.
The Court, however, going against the opinion of the Advocate General, felt that legal precedents shed sufficient light on the matter at the time of the facts, and that the second point put forward by the German state was, therefore, inadmissible. A similar judgment was delivered in an comparable case in 2000 (the Verkooijen case). Not only did this judgment provide an unambiguous interpretation for those looking for information, its temporal effects, moreover, were not limited. Given the clarity that there has been on this matter for at least seven years, and in the interests of legal continuity, the Court decided that the temporal effects of Tuesday's judgment should not be limited.
What are the financial implications of this judgment for the German state? While the German press is speaking of having to repay up to €5 billion, some consider this figure to be “political” and a way of trying to mobilise, or at least encourage, resistance to the judgment. In fact, as the head of the DAV (Deutscher Anwaltverein), German lawyers' association, Mr Jens Wagener points out, it is far from certain that these taxes will be recovered, especially by individuals. “It is mainly large companies that will have kept the necessary documents, and given the necessary statements within the deadlines provided for,” he said. What about less hard-nosed, private investors, then? “Too bad for them.” Without wishing to put forward a sum of money, Mr Wagener believes the amount ultimately paid out will be far less than the alarmist estimates being bandied about. (cd)