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Shareholders resident in Germany who received a dividend from a German company could deduct a tax credit from their taxable income.
They could also deduct the amount of the loss in the value of the shares resulting from their distribution. Non-resident taxpayers were also able, through a series of manoeuvres, to obtain tax credits, although they were not entitled to them.
Germany therefore passed legislation limiting a resident shareholder’s right to deduct losses in the value of the shares from a non-resident shareholder who was not entitled to the tax credit.
This measure applied to shares during a restructure of Glaxo Wellcome.
Glaxo Wellcome appealed to the Bundesfinanzhof, which referred the matter to the European Court of Justice.
The court ruled that articles 43 (freedom of establishment) and 56(1) (free movement of capital) of the EC Treaty did not preclude domestic legislation from restricting the right to deduct where shares were acquired from a non-resident shareholder not entitled to a tax credit, ‘whereas had the shares been acquired from a resident shareholder, such a reduction in value would have reduced the acquirer’s basis of assessment’.
This was with the proviso that the legislation did not exceed the action necessary to deter tax avoidance.
Glaxo Wellcome GmbH & Co KG v Finanzamt München II (Case C-182/08), European Court of Justice, 17 September 2009
