The taxation of dividends received by private individuals from investing in securities remains largely a competence of EU countries. However, where such dividends are received on a cross-border basis in the internal market, countries must ensure they respect the free movement of capital when exercising their taxation powers to avoid fragmenting capital markets in the EU.
Avoiding double taxation
EU countries operate different systems for taxing the dividend income of individual shareholders. For domestic dividends, most EU countries prevent or reduce economic double taxation (which results from the levying of corporation tax and income tax on the same dividend income) by applying either:
- an imputation system; or
- a schedular system.
EU countries may not discriminate between domestic dividend tax and in- or outbound dividend tax. For example, an EU country cannot levy withholding taxes on outbound dividends and exempt domestic dividends, since this would cause outbound dividends to be taxed at a higher rate.
Double taxation restricts cross-border investment in the internal market. The design of national taxation systems for dividends is thus strongly limited by the vested case law of the Court of Justice of the EU, which aims to eliminate tax barriers. EU countries cannot levy higher taxes on:
- inbound EU dividends compared to domestic dividends; or
- outbound EU dividends compared to domestic dividends.
The Commission, in its capacity as guardian of the Treaties, monitors the proper application of the free movement of capital, including in the field of dividend taxation.
Faster and safer tax relief of excess withholding taxes
In 2024, the EU adopted harmonised rules for withholding tax procedures to make them more efficient and secure for investors (including individuals), financial intermediaries and national tax administrations.
Currently, in the case of cross-border investments, many EU countries levy withholding taxes on dividends on equity holdings and on the interest on bond holdings paid to investors who live abroad. However, investors also have to pay tax on the same income in their country of residence.
The new withholding tax framework will grant investors access to fast-track procedures, ensuring the tax rights they are entitled to and avoiding double taxation while fighting tax abuse.
Find out more about the Faster Initiative
Relevant links
- COM(2003)810 on Dividend Taxation of Individuals in the Internal Market
- Treaty provisions on capital movements