Liechtenstein registered Companies with participations in EC countries benefiting from European Court of Justice (ECJ) judgements? Is this the end of dividend withholding taxes, even if Liechtenstein does not have any double tax treaty, apart from that one with Austria? Is this the end of double tax treaties at all in order to minimize double taxation for dividend payments?

ECJ Judgement C-170/05 (Denkavit French withholding tax case): Article 43 EC and Article 48 EC preclude national legislation which, in imposing a liability to tax on dividends paid to a non-resident parent company and allowing resident parent companies almost full exemption from such tax, constitutes a discriminatory restriction on freedom of establishment.

Dutch D holds 99.9 % of the share capital of a French subsidiary E. E holds 50 % of the French company F. D holds the other 50 % share at F. The ECJ had to investigate into the question if the application of a withholding tax on dividends for dividend payments from E and F to D did not infringe article 43 of the EC Treaty (freedom of establishment), because the same withholding tax does not exist for dividend payments to D if D is established in France.

The ECJ stated that such difference in the tax treatment of dividends between parent companies, based on the location of their registered office, constitutes a restriction on freedom of establishment, which is prohibited by articles 43 (Community nationals) and 48 (companies or firms formed in accordance with the law of a Member States and having their registered office) of the EC Treaty and incapable of justification.

The ECJ opinion deals with freedom of establishment (participations of larger extent). It is very likely that the ECJ comes to the same result regarding the freedom of movement of capital, which applies to portfolio situations. It is therefore clear that the treatment of resident and non-resident shareholders differently for dividend withholding tax purposes is against the EC Treaty.

This is very important for example for Liechtenstein pension funds which could be subject to a less favourable withholding tax treatment than dividend distributions to domestic pension funds in France. But the judgement is beneficial to any Liechtenstein registered company.

The ECJ established that "in the case of companies, it should be borne in mind that their registered office for the purposes of article 48 EC serves, in the same way as nationality in the case of individuals, as the connecting factor with the legal system of a member state... Freedom of establishment thus seeks to guarantee the benefit of national treatment in the host Member State, by prohibiting any discrimination, even minimal, based on the place in which companies have their seat. ... A different treatment between resident and non-resident taxpayers is possible on the basis of objective reasons (Marks & Spencer; Wielockx), but a different treatment only on the basis of the location of the registered office, constitutes a restriction on freedom of establishment, which is, in principle, prohibited by Article 43 EC and Article 48 EC."

Liechtenstein as a member of the European Economic Area (EEA) but not of the European Union (EU), implements the EU Directives and has implemented nearly all of them into its own law. As Liechtenstein is not fully integrated into the EU, there is no tax harmonization and no tax information agreement. Liechtenstein will probably enter the "Schengen Agreement" with Switzerland in 2008. Liechtenstein uses the Swiss currency as legal tender. Liechtenstein has long standing tradition in its constitution and laws to protect the private concerns of its citizens and all persons who are engaged in Liechtenstein's business life. Liechtenstein stands with this not alone, also other countries like Switzerland, Austria and Luxembourg have anchored the protection of privacy as an important right in their laws. And Liechtenstein as EEA member can surely benefit from such ECJ judgements.

A very cautious investor will bear in mind (see the ECJ judgement on Cadbury Schweppes, Test Claimants, Halifax) that the benefits of freedom of establishment do not extend to mere artificial structures set up to circumvent national tax laws. But any person liable to taxes should have an expressed right to prove that this is not the case, in order the tax liable person can demonstrate that the parent company is not a base company without substance. So the benefits out of this ECJ judgements are important to Liechtenstein, and any sound structure in the country will surely benefit from the ECJ path. Companies will have to prove that they meet with the management test in Liechtenstein (decision taking at the registered office in Liechtenstein) and that they develop an independent economic activity and the local directors are not mere fiduciaries who channel information through to the shareholders. It is up to the ECJ to elaborate on clear factors in order to answer the counteracting measures of (for example) the German tax authorities laid down in the new Par. 50d par. 3 EStG (income tax law).

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