5 - Tax Obstacles to Cross-Border Portfolio Investment

Summary

In Chapter 5, the treatment of portfolio investment was examined. For inbound dividends, the general principle is that shareholders (corporate or non-corporate) receiving foreign-sourced dividends should be treated the same way as shareholders receiving domestic dividends if they are in an objectively comparable situation, unless different treatment is justified. If the country of residence of the shareholder (the home State) chooses to provide reliefs for domestic dividends, then it must provide the same reliefs at least for EU-sourced dividends. The fact that economic double taxation is suffered because another State has imposed corporation tax on the underlying profits generating the dividends is not a relevant consideration. It has been found that a home State is not obliged to give to shareholders a credit for foreign withholding taxes, irrespective of whether it gives such credit for domestic withholding taxes. Recent cases were reviewed, some of which explored the equivalence of the credit and exemption methods in this context. Case law on the taxation of outbound dividends was very similar but with some subtle differences. This chapter also examined the payment of interest.