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Germany: Tax Credit for Dividends (the Meilicke II Decision)

(July 18, 2011) On June 30, 2011, the European Court of Justice (ECJ) issued a second preliminary ruling for the German referring court in the Meilicke case (Case No. C-262/09, ECJ website (June 30, 2011), search by case no., hereafter Meilicke II). This decision reaffirms the holding of Meilicke I (Case No.C-292/04, ECJ website (Mar. 6, 2004), search by case no.) and provides detailed instructions on its implementation. In Meilicke I, the ECJ ruled that Germany had to grant a retrospective tax credit to German residents for dividends received during the period 1995-1997 from companies residing in other European Union (EU) Member States, on the grounds that the German legislation of that time had violated the freedom of movement specified in articles 56 and 58 of the Treaty Establishing the European Community (now arts. 63 & 65, Treaty of the Functioning of the European Union). (Consolidated Versions of the Treaty on European Union and of the Treaty Establishing the European Community, OFFICIAL JOURNAL OF THE EUROPEAN UNION C 321 E/1 (Dec. 29, 2006), EUR-LEX.EUROPA.EU.)

The case has its origin in the German imputation system of corporate taxation that was in effect in Germany from 1977 through 2000 (see Yariv Brauner, Integration in an Integrating World, 2 NEW YORK UNIVERSITY JOURNAL OF LAW & BUSINESS 51, 68 (2005)). Under this system, Germany granted an imputation credit to domestic taxpayers for dividends received from shareholders of domestic corporations, but not for foreign source dividends. Germany abolished this imputation system in October 2000 (Gesetz, Oct. 23, 2000, BUNDESGESETZBLATT I at 1433) after the ECJ had decided on a similar issue against the Netherlands in the Verkooijen case (Case No. C-35/98 (June 6, 2000), search by case no.).

In Meilicke I, the plaintiffs, German residents, had claimed a tax credit for dividends that they had received from companies residing in several member states of the European Union. The German Government argued before the ECJ that even if the German imputation system might not have been compatible with EU law as interpreted in Verkooijen, the Court should “limit the temporal effects of the judgment” by not applying it retroactively, in view of the grave financial circumstances for Germany if it had to apply that tax credit to all affected taxpayers. The Court rejected this argument.

In Meilicke II, the referring court had asked how to determine the size of the tax credit in view of the fact that foreign documentation might have to be involved. The ECJ ruled that the tax credit should be calculated in accordance with the statutory corporate tax rate in the country where the distributing company resides, but that the tax credit should be no larger than the tax credit that would have been applicable under German law. The ECJ also ruled that the taxpayer claiming the credit would have to prove his entitlement in a reasonable manner that did not insist on formalistic requirements. In addition, the ECJ addressed the issue of time limits for claiming the tax credit: these must be set in German legislation so as to allow taxpayers a reasonable time to prepare their applications.

The Meilicke cases are yet another example of how the ECJ shapes the tax laws of the EU Member States, even though taxation is a subject matter that has remained in the legislative power of the Member States (see Tracy A. Kaye, Tax Discrimination: A Comparative Analysis of U.S. and EU Approaches, 7 FLORIDA TAX REVIEW 47 (2005)).