CONFEDERATION FISCALE EUROPEENNE

CONFEDERATION FISCALE EUROPEENNE The Consequences of the Verkooijen Judgement 1 Prepared by the Task force of the Confédération Fiscale Européenne on ECJ Case Law 2 1. INTRODUCTION It is significant that the Commission, in its Communication "Towards an Internal Market without tax obstacles" 3 arguing in favour of "a Community framework for exchanging views of the implications of significant ECJ rulings", refers explicitly to the Verkooijen ruling and the imputation system issue. The discussion that follows deals with the issue of differing foreign tax credits or exemptions for domestic and foreign (i.e. other EU Member States) source dividends received by a resident individual shareholder. It reports on the implementation (or lack of implementation) of the Verkooijen ruling in individual Member States and discusses briefly possible legislative approaches to this issue. 1. This paper is the first in a series of statements of views that will be submitted to the Commission on behalf of the CFE Task Force on European Court of Justice (ECJ) judgments. 2. The task force was set up by the Fiscal Committee of the Confédération Fiscale Européenne in January 2002. It aims to carry on, on a permanent basis, an analysis of the judgments, in direct tax matters, issued by the ECJ. The task force is composed of the following persons: Philip Baker (United Kingdom), Bruno Gangemi (Italy), Daniel Gutmann (France), Luc Hinnekens (Belgium), Stella Raventós -Calvo (Spain) (Chair), Albert Rädler (Germany) and Friedrich Rödler (Austria). 3. COM (2001) 582 final.

2. SUMMARY OF THE DISCUSSION OF THE VERKOOIJEN DECISION The Verkooijen ruling is important and has precedential value, even though some caution is in order as it is difficult to anticipate how far the ECJ will go on its new path. See also the caution of the Commission's wording: "... Verkooijen... may suggest that... may be contrary to the Treaty provisions on the fundamental freedoms". 4 This caution seems, however, to disappear in the extensive Commission Staff Working Paper "Company Taxation in the Internal Market" 5 to which the Communication refers: Such preferential tax arrangements sometimes apply only to domestic shareholdings and not to dividends from foreign shares... As confirmed by the European Court of Justice in its judgement of 6 June 2000 in Case C-35/98 (Staatssecretaris van Financiën v. Verkooijen), these arrangements are not compatible with the free movement of capital. 6 4. Para. 53 of the Commission s Communication. 5. SEC(2001) 1681. 6. Para. 2.2.3., p. 230.

Even so, we believe that the firm wording of the conclusion, the validity of the reasoning in the light of the text of the freedoms (all restrictions) and of the internal market objective guiding the ECJ's interpretation and the restatement of the same conclusion in other decisions (Safir, Saint-Gobain) constitute a sufficiently safe basis for accepting the interpretation that the prohibition of the Treaty covers practically any tax rules that provide a disincentive to cross-border activity or investment. The Opinion of Advocate General Tizzano in C-516/99, Walter Schmid, confirms this view. 7 The ECJ's clarification (Paras. 43 to 45) of the current Art. 56 (or its pre-maastricht version, and Directive 88/361, which is more directly at issue) is noted and accepted: any tax discrimination or restriction on the free movement of capital is prohibited unless it is justified by the objective difference of the situation or by a mandatory reason of public order. It is useful, however, to bear in mind that the wording of the Verkooijen judgment is particularly clear (Para. 62): "Article 1(1) of Directive 88/361 precludes a legislative provision of a Member State which... makes the grant of an exemption from income tax payable on dividends paid to natural persons who are shareholders subject to the condition that those dividends are paid by a company whose seat is in that Member State". Also, it is clearly stated that only an "overriding reason in the general interest" may "objectively" justify a restriction on capital movements (Para. 46). This is all the more interesting as these assertions go together with the ECJ's refusal to consider the observations of a more economic nature submitted by some governments to justify preferential tax treatment of domestic dividends. 8 But, according to the ECJ, this argumentation does not lead anywhere because two separate taxes levied on different taxpayers (Para. 58) are at stake and because a reduction in the tax revenue of a Member State cannot be regarded as an overriding reason in the public interest that may be relied on to justify a measure that is, in principle, contrary to a fundamental freedom (Para. 59). Uncertainty continues to exist, awaiting further case law, as to how far the ECJ will go in its 7. Submitted on 29 January 2002. 8. According to these governments the exemption of dividends is intended to mitigate the effects of double taxation in economic terms -- resulting from the levying on the company of corporation tax in respect of its profit and the taxation of the same profits distributed in the form of dividends borne by natural persons who are shareholders, by way of income tax.

interpretation (of the prohibition of "any tax disincentive"). The interpretation has potential tentacles reaching into the design of many important chapters of Member States' tax systems (cross-border integration of company and shareholder taxation; the choice between exemption and tax imputation systems; the linkage of credit differing corporate tax rates, etc.). This point is illustrated below with respect to the different Member States' systems for the taxation of domestic versus foreign dividends. Nevertheless, the Verkooijen case is of paramount importance for two additional reasons: first, because it displays a spectacular application of the freedom of movement of capital to control the content of domestic legislation in a matter where some controversy could exist as to the applicability of this freedom. In the future, this decision may well affect many fields such as thin capitalization and CFC legislation in Member States; and second, because it seems to be in line with the ECJ's prior case law. It could be said that, in some respects, recent case law reflects a certain revolution with respect to cases such as Bachmann. But it is true, nevertheless, that Verkooijen denies the effective application of the Rule of Reason also under the freedom of movement of capital and under the prohibition of tax rules that involve no direct or indirect discrimination, in continuation of its very restrictive application of the Rule of Reason in the case law in the latter situation. Specifically, in Verkooijen, the ECJ maintains its restrictive views in respect of economic considerations, 9 loss of revenue, 10 existence of other tax advantages, 11 and especially the reference to the direct link and same taxpayer for the application of the exception on the ground of coherence in the tax system (in fact, it has been said that Bachmann is dead). In other words, Verkooijen's orthodox character is the best guarantee for a stable direction in the future. 9. Case C-120/95 Decker. 10. Case C-264/96 ICI. 11. Cases C-307/97, Saint-Gobain and C-294/97, Eurowings.

3. THE JUDGMENT AND THE PRESENT SITUATION IN THE EU COUNTRIES As is well known, the case, which had its origin in the Netherlands, dealt with the discriminatory treatment of dividends received from companies resident in other Member States (hereinafter: EU dividends) as compared with dividends from domestic sources. With respect to such different treatment the ECJ was clear: the measure constituted a restriction on capital movement prohibited by Art. 1 of Directive 88/361. 12 Since June 2000 when the judgment was handed down, some European countries have amended their laws and have taken the opportunity to end the differences in the treatment of foreign dividends as compared to domestic dividends. What is curious is that only one of the countries that has done so Luxembourg -- has done so explicitly by reference to Member States of the European Union. The other -- Germany -- has extended the same treatment to all foreign dividends, regardless of their source. France has also recently changed some rules in order to take the Verkooijen case into account, 13 although with a limited scope, which means that it is still among the countries that do not treat domestic and EU dividends in the same way. It seems that Italy is also considering abolishing the imputation system and introducing a "classical" system. 14 Most of the countries, however, appear to have given no attention whatsoever to the judgment, 12. A legislative provision such as the one at issue has the effect of dissuading nationals of a Member State residing in (a specific country) from investing their capital in companies which have their seat in another Member State. ( ) Such a provision has also a restrictive effect as regards companies established in other Member States: it constitutes an obstacle to the raising of capital in (a specific country), since the dividends which such companies pay to (the specific country) residents receive less favourable tax treatment than dividends distributed by a company established in (that specific country), so that their shares are less attractive to investors residing in (the specific country) than shares in companies which have their seat in that Member State. It follows that to make the grant of a tax advantage, such as the dividend exemption, relating to taxation of income of natural persons who are shareholders subject to the condition that the dividends are paid by companies established within national territory constitutes a restriction on capital movements prohibited by Article 1 of Directive 88/361. (emphasis added) 13. The Financial Law for 2002 (Loi des finances) has indeed extended the possibility for individuals to invest in companies having their seat in the European Union and benefit from a favourable tax treatment, which so far had only been granted to French companies. This is the case where an individual invests in a PEA (Plan d Epargne en Actions) which is a way to make portfolio investments without paying taxes (provided that some requirements are met). It is noteworthy to point out, however, that this change was made upon request by the Commission. 14. The proposal is contained in Bill No. 2144 submitted by the government to the Parliament; it has not yet been finally approved.

perhaps relying on the assumption that, since it referred to facts prior to the amendment of the Treaty, 15 it does not apply to existing provisions. 16 This section examines the current situation in the different Member States to ascertain how many of them have a system that could be considered incompatible with the ECJ judgment. For this purpose a comparison is made with respect to a very simple example of the treatment of a dividend in each country. The comparison differentiates between circumstances where the dividend comes from a company resident in the same country and circumstances where it comes from a company resident in another EU Member State. The following figures are used for the purposes of the comparison: Dividend: 1000 (gross amount) Withholding tax at source: 15% 17 Individual income tax rate applicable to the shareholder in the residence country: 40% 18 For the sake of simplicity we assume that the shareholder has no other income. 3.1. Countries where dividends from other EU Member States receive the same treatment as domestic dividends 3.1.1. Germany 3.1.1.1. Domestic dividend 15. By the Treaty of Amsterdam. 16. The CFE is of the opinion that the amendment of the Treaty does not lead to a different conclusion. 17. The usual limit laid down by tax treaties. 18. Since we are not evaluating the tax burden on dividend income in the various EU Member States but just the treatment they grant to dividends from companies resident in other EU Member States in comparison with the treatment they grant to domestic dividends, the relevant data, such as applicable rates on income, foreign withholdings, etc. have been arbitrarily established to make the comparison easier. We are aware that not all European Member States have a rate as high as 40% and that the foreign withholding may vary under the different applicable tax treaties.

Withholding tax (20%)200 Net dividend 800 Taxable income under the "half income" system: 50% of gross dividend 500 Individual income tax (40%) 200 Credit for the withholding tax 200 Tax due 0 Overall tax on the shareholder 200 Net income for shareholder 800 3.1.1.2. EU dividend Gross dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Net dividend 850 Taxable income under the "half income" system: 50% of gross dividend 500 Individual income tax (40%) 200 Credit for foreign withholding tax 19 -- 150 Tax in Germany 50 Overall tax on the shareholder 200 Net income for shareholder 800 3.1.2. Ireland 3.1.2.1. Domestic dividend Withholding tax (20%) 20 200 Net dividend 800 Taxable income 1,000 Individual income tax (40%) 400 Credit for the withholding tax -- 200 19. The full amount of the credit is taken into account. 20. In Ireland, a dividend withholding tax was introduced in 1999 with the abolition of the imputation system.

Tax due 200 Overall tax on the shareholder 400 Net income for shareholder 600 3.1.2.2. EU dividend Gross dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Net dividend 850 Taxable income 1,000 Individual income tax (40%) 400 Credit for foreign withholding tax -- 150 Tax in Ireland 250 Overall tax on the shareholder 400 Net income for shareholder 600 3.1.3. Luxembourg 3.1.3.1. Domestic dividend Exempt 50% -- 500 Taxable income under the "half income" system: 50% of gross dividend 500 Individual income tax (40%) 21 200 Tax due 200 Overall tax on the shareholder 200 Net income for shareholder 800 3.1.3.2. EU dividend Gross dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Net dividend 850 21. The maximum income tax rate in Luxembourg is 38.95%.

Taxable income under the "half income" system: 22 50% of gross dividend 500 Individual income tax (40%) 200 Credit for foreign withholding tax -- 150 Tax in Luxembourg 50 Final tax due 200 Net income for shareholder 800 3.1.4. Netherlands Since 2001 when the "boxes" system was introduced, income tax has no longer been charged on the actual dividend, but only on a deemed return of 4% on the current value of the investments minus the amount of outstanding debts, based on the average balance during the course of the year. Therefore, the example cannot be applied. The same applies, however, to EU dividends, against which any withholding tax is also creditable. Therefore, one can say that there is no difference in treatment with regard to EU dividends. 3.1.5. Summary To sum up, the following table summarizes the equal treatment of EU dividends as compared to domestic dividends in respect of the above countries: Domestic dividend Tax due / net income EU dividend Tax due / net income Germany 200 800 200 800 Ireland 400 600 400 600 Luxembourg 200 800 200 800 22. As from 1 January 2002, Luxembourg also grants the 50% exemption for dividends received from (i) companies located within the European Union that come within the scope of Art. 2 of Directive 90/435/CEE of 23 July 1990 and (ii) fully taxable companies located in countries that have concluded a tax treaty with Luxembourg.

Netherlands n.a. n.a. n.a. n.a. 3.2. Countries where dividends from other EU countries receive a different treatment as compared to domestic dividends 3.2.1. Austria 3.2.1.1. Domestic dividend Withholding tax (25%) 23 250 Net dividend 750 3.2.1.2. EU dividend Individual income tax (20%) 24 200 Dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Net dividend 850 Taxable income 1,000 Individual income tax (40%) 400 Credit for foreign withholding tax -- 150 Tax in Austria 250 Overall tax on the shareholder 400 Net income for shareholder 600 3.2.2. Belgium 25 23. This 25% flat withholding tax is only applicable to domestic dividends. 24. The 25% flat withholding tax is optional. The taxpayer can accept the 25% withholding tax as a final tax or request to be taxed at half his effective average tax rate as determined from his total income, and claim a refund of the excess withholding tax. The half rate system (which is in effect very similar to the half income system applicable to Germany) is restricted to domestic dividends. The Walter Schmid case (C-516/99), which is presently pending before the ECJ, deals precisely with this difference in treatment. 25. It is debatable whether the Belgian system should be included in category I or category II, depending on whether the focus is only on discrimination resulting from (direct or indirect) taxation on the face of the rule or also includes lack of tax relief measures that recognize the tax difference between the domestic versus the EU situation (tax at source) and the relief that is provided for under traditional international tax law, specifically OECD (in this case, credit for foreign tax). The latter approach is more substantive and fundamental, especially if it is accepted that the latest ECJ decisions take into consideration not only discrimination but also restrictions on movement without distinction based on nationality. For this reason the following features of the Belgian system should be taken into account: (a) The Belgian system is not directly or overtly discriminatory: it grants the resident shareholder the same treatment that applies to Belgian dividends, whether they are from domestic or foreign sources; it applies the same exemption to EU dividends accruing to a Belgian shareholder that applies to domestic dividends, (b) the Belgian domestic (and indirectly also treaty) system, however, denies a foreign tax credit that would take into account the foreign withholding tax with respect to foreign dividends. By not taking such tax measures, it dissuades and restricts both the Belgian shareholder and companies of other Member States wishing to raise capital in Belgium (apart from the fact, not relevant here, that it does

3.2.2.1. Domestic dividend 26 Withholding tax (25%)250 Net dividend 750 Individual income tax remaining for shareholder to pay 0 Total tax 250 Overall tax on shareholder 250 Net income for shareholder 750 3.2.2.2. EU dividend 27 Gross dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Net dividend 850 Belgian withholding tax (25%) on the net dividend 212.50 Individual income tax remaining for the shareholder to pay 0 Foreign tax credit 0 Overall tax on shareholder 362.50 Net income for shareholder 637.50 3.2.3. France 3.2.3.1. Domestic dividend Tax credit or avoir fiscal (50%) 28 500 not comply with its commitment under the existing tax treaties); (c) if the Belgian system of dividend taxation would, on that ground, be considered incompatible with the free movement of capital, such a tax restriction may be difficult to justify. The Belgian system does indeed provide for a foreign tax credit corresponding to the foreign withholding tax on interest and royalty income of Belgian residents. It also used to provide such a foreign credit for individual shareholders before it changed its system in 1992 (into a flat rate final withholding tax system without a foreign tax credit). 26. In Belgium, domestic dividends received by individual residents are subject to a withholding tax at the normal rate of 25%, which becomes the final income tax. If it is not withheld at source and is reported on the shareholder s tax return, a municipal surtax is added at an average rate of 8% depending on his municipality. The shareholder has the option of applying the individual progressive income tax in lieu of the final withholding tax, if the former rate is more favourable. 27. Foreign-source dividends are subject to the 25% withholding tax as a final flat tax in lieu of the progressive income taxation of the resident shareholder. Belgian treaties provide that a resident receiving dividends from the other state is entitled to the foreign tax credit granted under the domestic tax system of Belgium which, however, was abolished (in 1992). 28. As of 1 January 2002, the percentage of the avoir fiscal is, in principle, reduced to 15% where it is attributed to a legal entity. This system allows for two exceptions: -- where the distribution benefits are derived by a parent company (in this case, the percentage is 50%); and -- where the précompte has been paid by the distributing company: in such circumstances, the avoir fiscal is

Grossed-up dividend 1,500 Individual income tax (40% x 1,500) 600 Avoir fiscal credit -- 500 Tax due 100 Net income for shareholder 900 3.2.3.2. EU dividend Dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Net dividend 850 Taxable income 1,000 Individual income tax (40%) 400 Credit for foreign withholding tax -- 150 Tax in France 250 Overall tax due 400 Net income for the shareholder 600 3.2.4. Italy 3.2.4.1. Domestic dividend 29 Tax credit (56.25%) 562 Taxable income 1,562 Individual income tax (40%) 625 Credit for the dividend (1,000 x 56.25%) 562 Tax due 63 Net income for shareholder (1,000 63) 937 3.2.4.2. EU dividend Gross dividend paid by EU company 1,000 grossed up by 70% of the précompte, which brings it back to the percentage of the précompte paid. 29. In Italy, the credit corresponds to 58.73%, that is, 37/63 of the amount of the dividend paid. For dividends relating to fiscal year 2001, the credit corresponds to 56.25%.

Withholding tax at source (15%) 150 Net dividend 850 Taxable income 1,000 Individual withholding tax (40%) 400 Credit for foreign withholding tax -- 150 Tax due in Italy 250 Overall tax on the shareholder 400 Net income for shareholder 600 3.2.5. Portugal 3.2.5.1. Domestic dividend 30 Credit for the dividend (60% x 470) 282 Grossed-up dividend 1,282 Taxable income 1,282 Individual income tax (40%) 512.80 Dividend credit 282 Tax due (512.80 282) 230.80 Overall tax on the shareholder 230.80 Net income for the shareholder 769.20 3.2.5.2. EU dividend Gross dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Net dividend 850 Taxable income 1,000 Individual withholding tax (40%) 400 Credit for foreign withholding tax -- 150 Tax due in Portugal 250 Overall tax due on shareholder 400 Net income for shareholder 600 30. In Portugal, the shareholder is granted a credit of 60% of the corporate income tax that may be offset up to the limit of the amount of IRS to be paid in respect of the dividends after the sum of the amount of that credit. This means 60% of the dividend paid. Corporate income tax is 32%. In this case, the profit of the company must have been 1470, and 470 the tax paid, hence a credit of 282 (60% x 470).

3.2.6. Spain 31 3.2.6.1. Domestic dividend 32 Credit for the dividend400 Grossed-up dividend 1,400 Taxable income of the shareholder (1000 x 140%) 1,400 Individual income tax (40%) 560 Dividend credit (1000 x 40%) -- 400 Tax due 160 Overall tax due on the dividend 160 Net income for shareholder 840 3.2.6.2. EU dividend Gross dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Amount included in the taxable base 1,000 Individual income tax (40%) 400 Credit for the withholding paid on the dividend -- 150 Tax in Spain 250 Overall tax on the shareholder 400 Net income for shareholder 600 3.2.7. United Kingdom 3.2.7.1. Domestic dividend Tax credit 33 111 Taxable income 1,111 31. On 24 April 2002 the Spanish Ministry of Finance made public a draft bill for the reform of the individual income tax. In it no changes are foreseen with respect to the situation explained herein. 32. The imputation system in Spain was devised on the basis that the actual rate paid by most companies is 28.5% (although the nominal rate is 35%). Therefore, the dividend is multiplied by 140% and then a credit of 40% of the dividend is applied to the gross tax liability. 33. Such dividend carries a non-repayable tax credit equal to one ninth of the dividend in the hands of a UK resident shareholder.

Individual income tax (32.5%) 34 361 Tax credit 111 Tax due 250 Overall tax on the shareholder 250 Net income for shareholder (1000 250) 750 3.2.7.2. EU dividend Gross dividend paid by EU company 1,000 Withholding tax at source (15%) 150 Taxable income 1,000 Individual income tax (32.5%) 325 Credit for withholding tax 150 Tax in United Kingdom 175 Overall tax on shareholder 325 Net income for shareholder 675 3.2.8. Summary The different treatment of EU dividends in the above countries can be summarized as follows: Domestic dividend Tax due / net income EU dividend Tax due / net income Austria 200 800 400 600 Belgium 250 750 362.50 637.50 France 100 900 400 600 Italy 63 937 400 600 Portugal 230.80 769.20 400 600 Spain 160 840 400 600 United Kingdom 250 750 325 675 34. Though the highest rate of income tax in the United Kingdom is generally 40%, the top rate of income tax on dividends whether from the United Kingdom or overseas is 32.5%

4. CONCLUSION Two of the three Member States that, since the Verkooijen judgment was handed down, have introduced equal treatment of EU dividends as compared with domestic dividends, 35 have shifted to a (partial) exemption of the dividend income from the income tax of the individual shareholder. In fact, exemption (or partial exemption) seems to be the most practical solution (even if partial exemption may entail a partial economic double taxation of the dividend). It is obvious that, in the case of imputation countries, the main obstacle to compliance with the judgment -- i.e. applying the same treatment to all EU dividends -- is how to apply the imputation mechanism to a corporate tax that is not the one for which the imputation mechanism was originally designed. 36 The simplest way would be to treat the foreign dividend in exactly the same way as the domestic dividend, by applying the same mechanism to all dividends. Of course, this could result in a somewhat inaccurate (or incomplete) prevention of economic double taxation, since in the other 14 Member States, the actual corporate income tax rate is not exactly the tax rate for which the national imputation mechanism was originally designed. In some countries it might be higher and in others it might be lower. Thus, a slight distortion in the economic effect could occur. But, with respect to discriminatory treatment, it would certainly be avoided (even if a distortion of capital markets would appear). Moreover, the nominal tax rates in the 15 Member States have become gradually approximated. A more accurate solution could be for every company in a Member State with shareholders resident in other Member States to communicate to its shareholders the rate that has been applied to the profits out of which the relevant dividend is paid. The state of residence of the shareholder then should apply to the dividend the same mechanism it applies to domestic dividends but adjusted to the rate effectively 35. As explained above, these two countries are Germany and Luxembourg. The Netherlands system of deemed yield is completely different from any other system in the European Union. 36. For example, in the case of Spain, the 140/40 system was constructed on the basis that the average tax rate paid by Spanish companies was 28.75%. The Spanish tax authorities do not know what actual rate has been paid by the EU company out of whose profits the dividend is paid.

borne by the EU company. The greater accuracy of this method, however, may be outweighed by its lack of practicality. In respect of both solutions, which are based on taking into account the nominal rates, an objection can be raised: nominal rates do not reflect the differences in the effective tax burden that falls on a company in the different Member States, because of the differences in the tax base. But again, the lack of harmonization in this regard makes it impossible to know the exact tax burden. A third solution has been suggested to solve the problem at the company's level. It was proposed in the Segré Report, as early as 1966. It consists in giving non-residents a refund of corporation tax equivalent to the tax credit. 37 It is the same solution given by France and the United Kingdom to many of their treaty partners (the granting of ACT or the avoir fiscal to residents of the other contracting states). This suggestion was rejected in the Ruding Report on the grounds that it would have been contrary to the source entitlement principle. Other objections may be formulated: first, that under the Verkooijen case giving the same treatment to other EU dividends is up to the Member State of residence. Second, this tax credit given by the source Member State, while providing at that level the same treatment based on the effective tax paid by the company, can also result in a double relief: that is the case where the source country grants the credit to the shareholder and in the country of residence of the shareholder the applicable method is that of exemption. 38 It would also be unrealistic to expect that the classical capital importing countries within the European Union would agree to this solution. In the Working Paper Company Taxation in the Internal Market, 39 as an action on targeted measures, the Commission undertakes to develop guidance on important rulings by the ECJ to 37. As explained by Antonello Lupo in Reliefs from Economic Double Taxation on EU dividends: Impact of the Baars and Verkooijen Cases, 40 European Taxation 7 (2000), p. 270. 38. The most clear example is given by the fact that the German and French Ministries of Finance have initialled a protocol to the Germany--France income and capital treaty of 21 July 1959. Under this protocol, German shareholders in receipt of French-source dividends will no longer be entitled to the French avoir fiscal. 39. See note 5, p. 317.

facilitate compliance with the Treaty and the application of Community legislation. Discriminatory treatment of dividends distributed by EU companies is certainly one of the provisions that needs to be tackled urgently. In the last part of this study, we have listed possible solutions the Member States could adopt in order to avoid a violation of EC law. The consequences of adopting one or the other of these systems have not been analysed in depth, and this is not the place to do so. However, the CFE urges the European Commission to consider taking action against those Member States that have so far not amended their tax systems to make them compatible with the free movement of capital. The fact that Germany, Luxembourg, France and Italy have adopted -- or will, in the near future, adopt -- systems that will avoid the discrimination between domestic dividends and dividends from companies in other EU Member States should represent an additional inducement for the European Commission to accelerate the process against the discriminatory treatment of dividends. Brussels, 06 June 2002 François Lambrechts President of the C.F.E Friedrich Rödler Chairman of the Fiscal Committee