Germany's dividend income tax is illegal, the European Union's highest court ruled in a case that could force the government to repay as much as €5 bln ($6.6 bln).
The European Court of Justice in Luxembourg today said Germany's method of taxing dividends from 1977 to 2001, which only allowed income-tax deductions on domestic investments, was an „unjustified restriction on the free movement of capital.” The court also refused Germany's request to limit the effect of its ruling, clearing the way for tax payers to claim back money for the entire period. The German Finance Ministry had argued that unlimited refunds posed a „real danger” for EU governments. „It is good news for tax payers, and not such good news for governments,” said Jonathan Bridges, an EU tax specialist at KPMG in London. Still, a „flood of claims” will be unlikely because people are running out of time to ask for refunds, he said. A 13-judge panel at the European Court of Justice said it can only limit potential refunds in exceptional cases and said the German government should have been aware, from earlier rulings, that the tax would be deemed illegal. „It is therefore not appropriate to limit the temporal effects of today's judgment,” the court said in a statement.
Several cases are pending at the EU tribunal where governments have asked for limitations, even though the law has already been decided by rulings relating to other countries, Bridges said. „It is now very unlikely the court will cap their exposure,” he said. Germany's Finance Ministry said in an e-mailed statement today that it was „surprised” the court didn't set time limits. The ministry reiterated it may have to refund as much as €5 billion, though „this will depend on the number of claims made.” Marc Welby, a director at tax advisers Chiltern Plc said there was a „real question mark” over the amount. „The German government hasn't provided any information about how many people really have lodged claims to get their money,” said Welby.
The heirs of Heinz Meilicke, who collected about 17,000 deutsche marks ($11,400) in dividends from two overseas holdings, argued Germany's old tax system restricted the free movement of capital in the EU by only granting tax credits to taxpayers receiving dividends from domestic companies. Wienand Meilicke, the son of the late Heinz Meilicke, in 2000 claimed tax credits on the dividends, arguing that an EU court ruling that year meant the government had to extend the credits to overseas dividends. The finance department refused, arguing that the EU ruling only applied to a Dutch tax policy. A German court in 2004 referred the case to the EU tribunal. EU countries can no longer follow a policy „by which they breach EU rules as long as possible in the hope that the serious economic effects of a particularly stubborn law infringement” will be softened by a limited ruling, Meilicke, who works for law firm Meilicke Hoffmann & Partner, said in an e-mail today.
Germany, with the support of France, Greece and Hungary, argued in an earlier court hearing the expected shortfall in tax income would lead to severe economic repercussions. Christine Stix-Hackl, a court advocate general said last year in an advisory opinion that Germany had failed to provide „sufficient evidence of the risk of serious economic repercussions.” A first advisory opinion by an advocate general to the court in 2005 said the tax policy was illegal, suggesting the court should limit the damaging effects this ruling could have for Germany. The latter point led the court to hold a second hearing. The case is Case C-292/04 Wienand Meilicke, Heidi Christa Weyde, Marina Stöffler v Finanzamt Bonn-Innenstadt. (Bloomberg)