Final Withholding Taxation of Portfolio Dividends in the Internal Market

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Title: Final Withholding Taxation of Portfolio Dividends in the Internal Market
Author: Puntala, Anttoni
Other contributor: Helsingin yliopisto, Oikeustieteellinen tiedekunta
University of Helsinki, Faculty of Law
Helsingfors universitet, Juridiska fakulteten
Publisher: Helsingin yliopisto
Date: 2019
Language: eng
Thesis level: master's thesis
Discipline: Finanssioikeus
Fiscal law
Abstract: Tax withholding refers to a procedure for charging taxes, where the payer of the income (withholding agent) charges the tax from the income payable to the income recipient and transfers the charged amount to the tax authorities on behalf of the income recipient. Final withholding tax refers to a tax, where the tax charged by the withholding agent is the taxpayer’s final tax burden in the source State. Consequently, the procedure involves no regular subsequent steps to withholding. Final withholding tax is charged simultaneously with the payment of the income. The tax is levied on gross income. Final withholding taxes are widely used in taxation of portfolio dividends in the source State, when the dividend recipient is not a resident of that State. Most of the Member States of the European Union apply final withholding also in intra-EU settings, where both the source State of the portfolio dividends and the State of residence of the taxpayer are EU States. The popularity of final withholding taxes is explained with their effectiveness in ensuring that the source State can collect taxes on dividends received by nonresident taxpayers, who may have no other connection with the source State. Furthermore, final withholding taxes are easily administrable. States do not commonly use final withholding taxes for taxation of portfolio dividends in domestic settings, where the dividend recipient is resident in the source State of the dividends, because final withholding taxes are not compatible with taxation of net income. Consequently, States apply different tax systems on resident and nonresident dividend recipients. This may violate the fundamental freedoms, if the source State subjects nonresident taxpayers to less beneficial treatment than comparable resident taxpayers. The Court of Justice of the European Union has held final withholding taxes admissible in principle, but Member States have been compelled to extend many beneficial tax rules to apply also, if a nonresident taxpayer receives the dividends. What follows from the case law of the Court of Justice of the European Union is, firstly, that the differences in the taxation of resident and nonresident taxpayers in the source State are reduced. Secondly, the nonresident taxpayer is often required to resort to the refund procedure before it receives as beneficial a treatment as it should under the fundamental freedoms. The refund procedure eliminates most of the benefits of final withholding taxes: it is a lengthy and expensive procedure, and the nonresident taxpayer is most likely required to resort to external assistance. Application of relief at source and streamlining the refund procedure would alleviate the problems that currently plague the refund procedure.

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