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Double Dutch

Ever since Arsenal entered the Champions League – an expected annual event – I have looked with more interest at anything with a European angle.

Of course, as I am sure that many United supporters will be swift to tell me, there is a great deal of difference between entry into the Champions League and actually winning it. Of course, they have a point – a point that was very well made on that epic night at Old Trafford at the end of last season when we gooners in the away section were treated to a chorus of: “Have you ever won the treble? Have you ****.” But as I said to a car full of Stretfordenders who (unprovoked) repeated this jolly ditty to me as I walked back to the car at a service station on the M6: “Yes, but that was then and this is now.” Regardless of the glories that Rio may (stress, may) bring back to Lancashire, it is very enjoyable now.

Anyway, returning to Europe, as Arsenal are next year (hopefully with a little more conviction than in previous years), a recent case caught my attention as worthy of a mention. So here goes.

In the case of Staatssecretaris van Financien •Verkooijen, the European Court of Justice dealt with a review of a judgment referred to it from the Netherlands.

In the Netherlands, under a law in force prior to 1997 (the income tax law), income from assets, including dividends and payments associated with the holding of shares, was subject to income tax. However, dividends distributed by companies established in the Netherlands were subject to deduction of tax at source (the dividend tax).

Under article 47b of the income tax law, dividends from which tax had been deducted at source were exempt from tax in the hands of the taxpayer to the extent of f1,000. In the case of a taxpayer to whom his spouse&#39s income was attributable, the exemption available was f2,000.

The taxpayer, Mr Verkooijen, resided in the Netherlands and worked for a company indirectly controlled by Petrofina, a public limited company established and quoted in Belgium in which he held shares. A dividend was paid after tax of 25 per cent had been deducted at source in Belgium. The tax inspector in the Netherlands took the view that, since the dividend had not been subject to the Netherlands dividend tax, the taxpayer was not entitled to the dividend exemption available to dividends which had been so subject.

The Netherlands government, backed up by observations from many other EU countries, including the UK, argued on a number of points:

•It could rely on EU legislation which grants member states, by way of exception to the prohibition of any restriction of capital movements between member states, the right to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested.

•The exemption of dividends in the Netherlands was intended to mitigate the effects of double taxation – in economic terms – of corporation tax on profits which were distributed as dividends to individuals as shareholders who would otherwise be liable to income tax. In this case (there having been no Netherlands corporation tax payable on the dividend), there was no double taxation.

•To not allow the existing arrangement would lead to a loss of tax revenue for the government as the Netherlands tax authorities would not receive any tax on the profits of companies distributing dividends which were established in other member states. The UK also made this point.

•Restricting exemption of dividends to those distributed by Netherlands companies was justifiable on the grounds that it would encourage investment in Netherlands-resident companies.

•The reduction in the tax revenue that would arise if the non-Netherlands dividends were exempt was an overriding reason in the public interest for allowing the provision to stand.

The court held that, under an EC council directive, a member state was precluded from giving an exemption from income tax on dividends paid to individuals that was conditional on those dividends being paid by a company established in that member state. The subsequent loss of tax revenue to the Netherlands was not relevant.

It is interesting to note that the UK Government seemed to have been enthusiastic supporters of the Dutch government&#39s case. As a gooner who has experienced the sublime skills of a certain Dennis Bergkamp for some years (remember the league game at St James last season?) I can sympathise with this approach.

The Dutch government seems to have placed reasonable reliance on the judgment in the cases of Bachman •Belgium and EC Commission •Belgium. The successful argument in the Bachman case was that the limitation of exemption to home country company dividends was needed to ensure cohesion to the tax system. I will look at this and the other arguments raised next week.


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