The European Court of Justice, in Kronos International Inc. released Sept 11, has ruled that a US registered company resident in Germany may assert that German tax rules violate free movement of capital, but the company may not claim freedom of establishment rights. The ECJ went on to reject the company’s contention that Germany’s tax rules, which permitted a set off for tax on domestic but not foreign dividends, restrict free movement of capital.
Kronos, a US holding company resident in Germany, received dividends from foreign subsidiaries which were exempt from German tax during tax years 1991 though 2001 pursuant to double tax conventions.
Under the German tax scheme in effect at the time, the tax paid by a company making a dividend distribution was fully or partly refunded to the recipient of the dividend in cases where the dividend was recorded as taxable income to the recipient. As a result, tax paid by a resident company making a dividend distribution would be refundable whereas tax paid abroad by a foreign subsidiary would not be refunded in cases where the foreign dividend was exempt from tax pursuant to a double taxation convention.
Kronos argued it should be entitled to deduct the tax paid by its foreign subsidiaries, claiming that the German law violated freedom of establishment principles of Articles 49 and 54 TFEU and free movement of capital principles of Articles 63 and 65 TFEU. Kronos claimed that a refund of tax made investments in resident companies more advantageous than investments in a non-resident companies in situations where the company receiving the dividends has losses.
The ECJ held that a Kronos cannot assert freedom of establishment rights because it was not formed in accordance with the law of an EU member state. As an EU member state resident, however, the company may challenge the legality of the German rules under free movement of capital principals, the court said.
The court then rejected Chronos’ contention that Germany’s differing treatment of foreign and domestic dividends violate free movement of capital. The court noted that the foreign dividends were not taxed in Germany, and concluded that “the lack of a refund is counterbalanced by not taking the dividends into account when determining the basis of assessment.” Kronos International Inc. v Finanzamt Leverkusen
