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FII Group Litigation case and the taxation of dividends

AUTHOR(S): John Ryan, Mark O’Sullivan
DATE: 30.11.2012

On 13 November 2012, the Court of Justice of the European Union (the “ECJ”) delivered its decision in the Franked Investment Income Group Litigation (the “FII Group Litigation”) case following a second referral from the UK High Court.  In its judgement, the ECJ confirmed that UK legislation providing for UK and foreign dividends to be taxed differently, was contrary to EU law.  The decision is of particular relevance to Irish companies as the Irish rules on taxation of dividends are similar in many respects to the historic UK rules which were the subject of the FII Group Litigation.


The FII Group Litigation concerns a challenge to the basis by which the UK taxed foreign dividends received by UK resident companies.  Prior to 1 July 2009, dividends received by a UK company from another UK company were not liable to corporation tax in the hands of the UK resident company on the basis that such dividends are franked investment income (FII).  However, when a UK resident company received dividends from a non-resident company it was liable to corporation tax on these payments, subject to a credit for foreign taxes suffered on the profits out of which the dividends were paid (the “imputation method”). 

In the initial FII Group Litigation case before the ECJ in December 2006, the ECJ held that the difference in tax treatment between UK and foreign dividends was compatible with EU law provided that the foreign dividends were not subject to a higher rate of tax than that rate charged on domestic dividends.  The ECJ stated that it was for the national court to determine whether the tax rates were indeed the same, and referred this question back to the UK High Court.  The UK courts then made a second reference to the ECJ seeking clarification on some points raised in the original decision including, whether it should have regard to the effective levels of taxation in answering this question.

The ECJ decision 

In its initial decision, the ECJ noted that dividends received by UK resident companies from UK companies were exempt from tax, even though in the majority of cases the effective rate of tax paid on the profits out of which the dividend was made was lower than the nominal rate of tax in the UK.  This was in comparison to foreign dividends where a credit was granted based on the effective rate of underlying corporation tax paid in the other jurisdiction. 

As a result, domestically-sourced dividends gave rise to no tax liability for the resident company receiving them, irrespective of the effective rate of taxation applicable to the profits out of which the dividends had been paid.  In contrast, the imputation method which applied to foreign-sourced dividends gave rise to an additional tax liability on the company receiving them where the effective level of taxation on the profits underlying those dividends fell short of the nominal rate of tax in the UK. 

The ECJ was influenced by expert evidence which demonstrated that the effective level of taxation on the profits of companies resident in the UK was lower, in the majority of cases, than the nominal rate.  This led the ECJ to conclude that the UK legislation did not provide for equivalent treatment of UK and foreign dividends and that this was therefore a restriction on the freedom of establishment and the free movement of capital.

In its initial FII Group Litigation decision, the ECJ stated that it was the responsibility of the domestic legal system of each EU member state to set out rules for claimants seeking remedies for breaches to community law rights.  However, in applying such rules the ECJ stated that member states must ensure that injured parties are entitled to an effective legal remedy to obtain reimbursement of tax unlawfully levied on them.

Consequences for Irish companies  

The current regime in place in Ireland for the taxation of dividends contains provisions which are very similar to the UK regime prior to 1 July 2009.  Under current legislation, dividends received from an Irish company are exempt from tax in the hands of the Irish parent company that receives them.  On the other hand, dividends from a foreign company are subject to tax at a rate of 12.5% or 25% (depending on whether the dividends are paid out of trading profits or not) with a credit for foreign taxes already paid. 

Given the similarities between the Irish and UK (pre-1 July 2009) regimes for taxation of dividends, the decisions in the FII Group Litigation cases have the potential to alter the regime in place for taxation of foreign dividends in Ireland.  Following this judgment it appears likely that the Irish Government will be required to change the regime in place for taxation of dividends. 

We would anticipate that these changes will be positive in nature and would most likely follow the position adopted by the UK, which would bring the taxation of foreign sourced dividends in line with that of domestic dividends.  This could, in effect, exempt foreign sourced dividends received from an EU (and perhaps treaty jurisdiction) from any further liability to Irish tax.

If there are any particular aspects of this decision or the taxation of dividends in Ireland which you would like clarification or advice on, please get in touch with your usual Tax Group contact or any of the contacts listed in this email.

The material is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute, legal or any other advice on any particular matter.

Full details of the Tax Group, together with further updates, articles and briefing notes written by members of the Tax team can be accessed at  

Copyright © Matheson. The information in this document is provided subject to the Legal Terms and Liability Disclaimer contained on the Matheson website.


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