Consultation on the taxation problems that arise when dividends are distributed across borders to portfolio and individual investors and possible solutions
DSW's response to the EU Commission's Consultation on the taxation problems that arise when dividends are distributed across borders to portfolio and individual investors and possible solutions
DSW highly welcomes this consultation on possible solutions for taxation problems that arise when dividends are distributed across border. Juridical and economic double taxation of cross-border dividends continues to be a reality for EU individuals. Such situations are unfair and increasingly detrimental to individual investors not only but also in a context of more frequent cross-border corporate mergers. In some EU Member States it can be so deterring that especially small investors refrain from investing in shares in these countries.
DSW believes that Option 1 (Abolition of withholding taxes on cross-border dividend payments to portfolio/individual investors) is the simplest, fairest and most efficient approach to remove the double taxation of cross-border dividends received by individual investors. We believe that this procedure should be coupled with an improved information exchange framework across Member States to avoid tax evasion.
We regret however that this consultation is limited to dividend income, as there is also widespread discrimination of EU private investors regarding other types of cross-border investment income. We also regret that individual investors and savers are not more closely consulted and involved throughout the policy-making process and included in expert groups on taxation of savings and investments as they represent major stakeholder interests.
I. General identification
Name: Deutsche Schutzvereinigung für Wertpapierbesitz e.V. (DSW)
State of residence: Germany
Contact details: Christiane Hölz
DSW is Germany’s largest investor association with more than 25,000 members. As such, we represent members whenever their rights as investors are concerned. The following remarks and statements – if not marked otherwise – reflect the problems encountered by our German-based members with regard to withholding taxes on dividends on a cross-border level.
Other (please specify)
II. Problems encountered
1) Which problems, if any, have you encountered due to the EU cross-border levying and refunding of withholding taxes on dividends?
X Double taxation
X Discrimination (please provide details):
In 2009, the European Court of Justice ruled against a Belgian shareholder with a shareholding in a French group (Damseaux case, European Court of Justice, 16 July 2009, C-128/08). The Court argued that Community Law currently does not provide general criteria for the sharing of powers between Member States regarding the abolition of double taxation. As a consequence, Belgian shareholders are taxed at a higher rate on their foreign than on domestic dividends. Based on European Court of Justice (ECJ)’s case Law, Member States must not treat outbound dividends less favourably than dividends that are paid out to a domestic shareholder. In the same fashion, inbound dividends must not, in principle, be treated less favourably than dividends received from a domestic company. However, the ECJ cannot commit the Member States to avoid a de facto double taxation.
Only in 2006, the ECJ’s Kerkhaert-Morres ruling confirmed that the existence of double taxation is completely legal under Community law. The Member States continue to have sovereign power to decide on the distribution of fiscal rights, including double taxation, regardless of whether it is in their national law (Kerkhaert-Morres) or in their double taxation conventions (see also Damseaux case in 2009).
2) What was the source of the problem?
X Denial of credit for foreign withholding tax
X Higher taxation of foreign dividends than in purely domestic situations
X Difficulties in obtaining a refund of foreign withholding taxes – the procedures were (please specify): too complex, costly, time-consuming
The classical refund procedure for foreign source tax is too complex, time consuming and costly. The procedure in general is as follows:
Investors first have to obtain the respective refund form from the foreign tax administration which already poses a problem as there is no central register for the forms but investors have to search them via various websites. Then investors need to fill out the form, get it stamped by the bank and afterwards by the resident tax office. Then the investor can file the form (either directly or sometimes only via his bank) with the competent tax office of the foreign state.
The following problems regarding the refunding procedure have been reported to us by our members:
Procedures too complex:
First of all the individual investor needs to become active if he wants to avoid double-tax on dividends and from the investors point of view the different preconditions for the assertion of claims within Member States already makes the procedure too complex:
For individual investors different forms for the refund of cross-border withholding tax exist in each country. This means that investors cannot rely on a standardised format but have to get used to the various forms even for very small amounts of withholding tax. Some countries, e.g. Spain, do not even provide forms in English, which means that the investor furthermore has to (let) translate the refund form in order to initiate the refund procedure.
The deadlines for the assertion of claims for a refund of withholding tax differ from Member State to Member State (e.g. Portugal 2 years, Italy 4 years) which makes a monitoring for the investors even more complicated.
The addressees for the refund also differ, sometimes even within one Member State: e.g. in Spain, investors in large companies (for example Telefónica) have to submit the form to the Spanish Central Tax Agency while investors in smaller Spanish companies have to send the form to the respective companies’ Tax Offices. Austrian forms do not even include information on where to send the refund reclaim.
The various Member States require different documentation for the refunding procedure. For example Spanish tax authorities require investors to hold an account in Spain and to provide them with a Spanish tax number (NIE). For private investors this produces a significant hurdle which leads to a de facto double taxation.
All this contradicts the EU Commission’s statement that “it is undesirable in the EU Internal Market that a taxpayer is disadvantaged solely by reason of cross-border investment activity”.
Procedures too costly:
In France, for example, the relevant tax authorities only accept claims for refunds if they are processed to them via the banking chain. German banks, however, according to an inquiry of the German magazine “Börse Online” (see III.2 for details) charge up to EUR 145 per dividend payment or EUR 23.80 per security for which a refund is requested. Especially private investors holding only a small number of shares are therefore factually excluded from enforcing their claims at least in (regular) cases where the refund amount is equal to or lower than the banking fees.
Procedures too time consuming:
The aforementioned difficulties investors face when applying for refunding of withholding tax force investors to dedicate a huge effort into the various refunding forms. Specifically in Italy, the payment of the refund amounts can take several years. We have learned from some of our members that the repayment took more than 10 years!
Additionally we have been notified by a German-based professional investor about the following problems:
Italian tax authorities require the management board members of the German investment company to apply for a personal tax number to get Italian withholding tax of their investment company refunded. Furthermore, the tax authorities request among others a copy of the management board members identity card and a copy of the list of authorised signatures of the applicants.
Repayment took place only after 8 years however it was lower than the refund amount requested by the investor. An explanation of the deviation, however, had not been provided.
And from our experience the delay in repayment by Italian tax authorities is not restricted to individual cases. We received more than 100 enquiries to support our members in accelerating the refunding procedure with the Italian tax authority.
DSW therefore started negotiations with SOLVIT by asking whether they will be able to assist German investors. They finally did, for a few of our members and reached a prompt payment by the Italian tax authority. Unfortunately, at some time SOLVIT stopped the support and declared itself not competent as it considered delayed repayment not being due to bad application of EU law by public authorities within the EU Member States because it is based on Double Tax Conventions.
We believe that the current situation investors face creates significant practical hurdles to cross-border movement of capital and individual pan-European share ownership as well as discrimination between larger individual portfolios and smaller ones (based on the costs of recoup).
III. Additional costs
1) Have you suffered any additional costs due to the cross-border investment in dividends?
Yes, see below for details.
2) What is the amount of these additional costs?
According to the German magazine Börse Online (as of February 10, 2010) the following banks charge the following fees for withholding tax reclaims:
|DAB Bank:||10 EUR per claim plus “charges from abroad”|
|Comdirect/Commerzbank:||23,80 EUR per security on the claim form|
|Cortal Consors:||19,95 EUR per security on the claim form plus up to 35 EUR third party fees|
|ING-Diba:||50 EUR for a proof of the claim form (including attestation:|
|145 EUR for forwarding the claim form to the tax authority|
Third party fees, i.e. mainly fees of the intermediaries and depositary banks in the Source State amount to up to EUR 100 per claim.
3) Have these additional costs dissuaded you from investing cross-border?
Many of our members have informed us that they decided to sell their shares especially in French, Italian and Spanish companies due to the difficulties in the refund procedures described above. Others told us that they in future will refrain from investing in shares from abroad. It is clear that the extra tax burden created by double taxation situations is a disincentive to investments in other Member States and therefore represents an obstacle to the smooth operation of the Internal Market.
4) Which was the Member State of source of the dividend (please indicate for each separate case in which you have suffered additional costs)
5) Which is/ was your Member State of residence
IV. Possible solutions
1) Which (combination) of the above outlined solutions do you consider most appropriate to tackle any taxation problems that arise when dividends are paid across border to individual investors or to companies that are portfolio investors? Why do you prefer that option?
Within the Member States the same investor investing in cross border companies is often enough imposed with comparable taxes in two states in respect of the same income. Fairness dictates that any income received by a single person should only be taxed once. By the currently pursued parallel exercise of fiscal sovereignty of two Member States (see also Annex) especially private investors with a small dividend income are faced with a de facto double taxation. The ECJ in its Kerckaert-Morres decision ruled that it is up to the Member States to take the measures necessary to prevent such situations by following international tax practice in the allocation of tax rights. However, from our experience and as the above described problems show we argue that this objective is not pursued by all Member States which remain virtually unconstraint in how they tax corporate profits on the investor level. Juridical double taxation of dividends still is reality in the EU, at least for private investors and for companies that cannot rely on the Parent-Subsidiary Directive.
Juridical double taxation leads to inefficient distortions of investment flows and decisions. The existence of several thousand bilateral Tax Treaties which all aim at eliminating or at least reducing a juridical double taxation bear witness to the consensus that juridical double taxation should be avoided.
The issue of juridical and economical double taxation is not new, although its impact has increased during recent years as cross border participations in companies are becoming more and more frequent in the EU because of the progressive market harmonisation. Therefore investors/taxpayers need clear and accurate rules governing these operations, in order to avoid double taxation.
DSW therefore believes that Option 1 (Abolition of withholding taxes on cross-border dividend payments to portfolio/individual investors) is the simplest, fairest and most efficient approach to remove the double taxation issue at individual investors’ level.
We however believe that this should be coupled with an improved information exchange framework across Member States to avoid tax evasion.
a) From our point of view the approach in option 1 would overall not lead to a loss of taxable income for the Member States and rather should facilitate the allocation of profits to the Member States afterwards via an apportionment formula.
b) Discrimination and juridical double taxation will not only be reduced by this opinion but eliminated.
c) As regards the mentioned costs related to the introduction of automatic exchange of information, i.e. standardised forms, formats and channels of communication, we point to the Savings Tax Directive which already provides for a system of information exchange whereby the source state submits to the state of residence the appropriate data regarding the beneficiary’s identity and the interest payment. This is intended to enable the Residence State to tax foreign interest income of its residents effectively. The Source State levies no withholding tax whatsoever.
d) Article 293 of the Treaty establishing the European Community did stipulate that Member States shall so far as it is necessary “enter into negotiations with each other with a view to securing for the benefit of their nationals … the abolition of double taxation within the Community”. This article has not been reproduced in the Treaty of Lisbon. However the general provisions of Article 4 (3) TEU prescribe that the Member States shall facilitate the achievement of the Union's tasks and refrain from any measure that could jeopardise the attainment of the Union's objectives.
e) Despite this, Member States - intending to exercise their fiscal sovereignty - have not considered it necessary to proactively conduct negotiations with each other to abolish juridical double taxation. Double taxation conventions often cater for a reduced withholding tax rate in the source country but do not remove the double taxation issue. We refer for an example to the German/Spanish situation described in the Annex.
Juridical double taxation of dividends still is a reality across the EU for individual investors (and companies) that cannot resort to the Parent-Subsidiary Directive
f) Cross-border activities are increasing on all fronts. European firms are more and more operating on a cross-border / transnational basis as the European markets are getting harmonised and companies compete for growth and acquire other firms. Individual investors will be increasingly faced with double taxation issues in absence of harmonised framework based on secondary EU Law. As evidenced by the growth of EU citizens enquiries mentioned in COM (2010)769, tax complaints account for 3%-4% of the total annual complaints and are bound to grow if no further progress is made.
g) The limitations of the ECJ’s case law are becoming increasingly obvious. The ECJ – as the Kerckaert-Morres decision has proven - can only take action if a Member State is treating cross border dividends less beneficially than domestic dividends but is powerless if the double taxation is simply the result of two Member States exercising, without discrimination, their respective fiscal power.
h) Exchange of (tax) information is progressing
Further, we believe that the most appropriate way to harmonise the taxation of dividends for individual investors in the Member States may be by way of secondary EU legislation (eg. Directive) given the limitations of the ECJ’s Case Law. A report
by the European Parliament’ Committee on Economic and Monetary Affairsalso favours EU secondary Law as the best approach: “As the Commission has shown in recent communications, better coordination could improve both the Member States’ and the taxpayers’ situations. Coordination can be achieved either by coordinated unilateral or bilateral measures (double taxation conventions) taken by Member States, by multilateral instruments of international law (multilateral tax convention) or by secondary legislation based on article 94 EC486... However, an instrument of secondary legislation would better fit into the institutional framework of the Internal Market.”
The Savings Directive provides an interesting framework of reference to show that such an option is possible. Until the 1980s, interests were subject to double taxation: specifically withholding tax in the Source State and tax in the beneficiary’s Residence State. The Savings Directive provides for a system of information exchange whereby the Source State submits to the Residence State the appropriate data regarding the beneficiary’s identity and the interest payment. This is intended to enable the Residence State to tax the foreign interest income of its residents effectively. The Source State levies no withholding tax at all.
2) Would you prefer a completely different solution and if so what solution do you suggest?
No, the removal of the withholding tax regime (Option 1) is the option we support. It is the simplest, fairest and less complex to operate one. The Savings Directive can be a benchmark for the implementation of this option (see before).
3) What, if anything, else do you think could be done at EU level to overcome any difficulties that exist in the area of cross-border withholding taxes on dividends paid to individual and portfolio investors?
Notwithstanding the removal of the withholding tax as stated in Option 1, we believe that more progress should be made in terms of information exchange across EU Member States in order to facilitate acceptance of this option by Member States.
We also believe that the Commission should develop some sort of harmonisation framework to spread the practice whereby the reduced withholding tax rate from the source country (as stated in the Double Taxation Convention) would be retained directly at source thus avoiding the complex tax reclaim procedure. Should this not be feasible, at a minimum, standardisation of tax reporting forms and processes for non-resident individual investors should be sought in order to facilitate the tax reclaim processes. A single EU register where these forms would be available would help. We also believe in this case that some sort of framework should be established to enable access to a cheaper tax reclaim service by banks and financial intermediaries. It is also worth mentioning that a number of countries like e.g. the United States, Canada and Japan rely on the tax payer’s declaration of residence which is confirmed by the deposit bank to which the dividend payments flow. For example, a German investor in a US corporation from the beginning is only charged a reduced withholding tax rate of 15 % instead of being charged the full US-tax rate of 30 % when he receives dividends in his German bank account only because the deposit bank provides the IRS with the “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding” (W-8 BEN form). However, such a procedure should only be considered as “second-best” solution.
4) Are you aware of any statistics or legal or economic studies which could further contribute to the analysis of the costs and benefits of implementing any of the above solutions?
According to a report of the GOAL Group which specialises in withholding tax reclamation, 8.5bn EUR were wasted by investors in 2005 because withholding tax on dividends and income has not been properly reclaimed. This represents around a quarter of withheld tax on foreign securities. GOAL Group in its report has further estimated that the global market for withholding tax reclamation services by custodian banks is worth 698m EUR.
We are not aware of any other – especially EU-wide – statistics.
In order to monitor precisely the increase in individual enquiries related to double taxation issues, we would suggest that the various relevant EU agencies (for instance Your Europe Advice, SOLVIT and the Europe Direct Contact Centres) start collating more granular data specifically about this type of enquiries.
5) Do you have any other comment or thoughts to share as regards cross-border taxation of dividends paid to portfolio and individual investors?
Annex: Example Spain source dividends for German investors
In mid-2010, German deposit banks changed their handling with regard to Spanish withholding taxes on dividends. The reason was that the German Ministry of Taxes (Bundeszentralamt für Steuern) had discovered that dividends an investor receives from Spanish companies are exempted from withholding taxes up to an amount of EUR 1.500 p.a. and per investor. German deposit banks therefore have amended all dividend statements and since 2010 no longer deduct Spanish withholding tax on dividends from the German withholding tax on capital income as they used to do before. The reason behind this procedure is that – from the German tax authorities point of view – German shareholders are able to get their withholding tax for an amount of up to 1,500 EUR fully refunded in Spain (above this amount a refunding of 4% is possible). To prevent investors from getting a “double refund”, the possibility to set-off the tax paid in Spain against the German withholding tax has been abolished.
The problem is that – as mentioned before – shareholders have to request a Spanish tax number and have to open an account in Spain to get a refund of the dividends. These preconditions factually prevent private investors to request a refund in Spain. But despite these severe obstacles, investors cannot get a refund from the German tax authorities, as a proof of the non-enforcement of their claim in Spain is rather impossible.
 EU Directive 50/435/EEC dated 23 July 1990.
 See for instance the recent communication by ECOFIN (press release 6554/11) announcing a new Directive to replace the "Mutual Assistance" Directive (Council Directive 77/799/EEC of 19 December 1977, as amended by Directive 2004/56/EC) and aiming at ensuring that the OECD standard for the exchange of information on request is implemented in the EU. See also Directive on recovery of tax claims (Council Directive 2008/55/EC of 26 May 2008) establishing a regime whereby one Member State may request assistance from another in the recovery of claims relating to taxes, duties and levies and the Savings Taxation Directive (Council Directive 2003/48/EC of 3 June 2003) enabling tax administrations to exchange information automatically, although it applies only to the interest income from savings of individuals and three Member States have been authorised to apply a withholding tax on a transitional basis.
 European Parliament's Committee on Economic and Monetary Affairs, The impact of the rulings of the European Court of Justice in the area of direct taxation, IP/A/ECON/ST/2007-27, pp 79-81.