Committee Reports > List of Committees > Joint > 1979 > Committee on the Secondary Legislation of the European Communities > Report No. 43 - Application to Collective Investment Institutions of proposed Harmonisation of Systems of Company Taxation and of Withholding Taxes on Dividends

REPORT

Proposal Examined

1. The Joint Committee has examined the proposal by the Commission for a Council Directive on the application to collective investment institutions (CII) of the proposed Council Directive concerning the harmonisation of systems of company taxation and of withholding taxes on dividends [R/2082/78 (FIN 598)].

2. The Joint Committee understands that the proposal will be examined shortly by a Council Working Group in conjunction with a resumed examination of the proposed Company Taxation Directive to which the new proposal is an adjunct. The proposed Company Taxation Directive was the subject of the twenty-sixth report (Prl. 5341) of 24th March, 1976 of the former Joint Committee.

Proposed Company Taxation Directive

3. The proposed Company Taxation Directive aims at harmonising the national systems of tax on the profits of corporations on the basis of a partial imputation system in order to remove a constraint on the free movement of capital and to eliminate a distortion of competition. The partial imputation system seeks to alleviate the impact of economic double taxation (firstly, corporation tax on the profits distributed and, secondly, tax on dividends received by the shareholder) by giving back to the shareholder part of this corporation tax in the form of a tax credit which is set off against his personal tax, any excess being repaid to him. The main objective of the new proposal is to ensure that a similar tax credit is given to participants in CIIs.

Irish Institutions Affected

4. CIIs according to the draft Directive mean the institutions referred to in the Annex thereto provided their purpose is the collective investment of capital raised by means of offers to the public and their operations are based on the principle of spreading the investment. The draft Directive enables the Council, acting by a qualified majority on a proposal from the Commission, to amend the Annex. It also provides that “Member States may agree among themselves that the provisions of this Directive shall apply to CIIs whose capital is not raised by means of offers to the public”.

5. The Annex to the draft Directive refers to the following institutions in the case of Ireland:—

(i)Unit Trusts within the meaning of the Unit Trusts Act, 1972. For income tax purposes these are trusts, not companies, and the unitholder is regarded as beneficially entitled to his share of the income of the trust on the same basis as if he had invested directly. It is understood that there are at present two Irish Unit Trusts with units on offer to the public only one of which is broadly based and as the draft Directive stands it is the only one to be affected. There are, however, other specialist Unit Trusts, e.g. one dealing solely in income receivable gross (National Loan etc. interest) and others which are restricted to tax exempt unitholders, such as pension funds and charities. Unit trusts are operated by some insurance companies in conjunction with their life assurance business.

(ii)Investment Trust Companies.

These are joint stock companies governed by the Companies Acts. They distribute their income as ordinary dividends and the shareholders are treated in the same way as shareholders in other Irish companies. There is no such company in Ireland which has offered its shares to the public.

Provisions Proposed

5. Under the proposed Directive dividends received by a CII, which are treated as income of the unitholders by the national law, are to be deemed to have been redistributed by the CII whether or not an actual distribution has been made. Such redistributed dividends are to confer a tax credit on the participants. The tax credit may be at either (a) the rate of the source State or (b) the rate of the State of CII in which case a compensatory tax equal to the credit is to be levied on the CII against which the credit attached to the dividend is to be set off.

6. If the dividend has suffered a withholding tax the participant would be allowed to set off such tax up to 25 per cent of the dividend and any excess would be repaid by the State charging the main corporation tax against which the withholding tax is to be set off. A Member State would be allowed also to charge a withholding tax up to 25 per cent on distributions made by CII and up to 25 per cent withholding tax paid on the distribution to the CII could be offset against the latter charge. If the original dividends were not subject to a withholding tax the CII must be charged a withholding tax of 25 per cent unless (a) the name and address of the participant and the amount redistributed to him are communicated to the revenue authorities or (b) securities representing interests in the CII are registered in the names of the holders.

7. As an alternative to the set-off arrangements Member States may adopt a system whereby tax credits and input withholding tax may be repaid to the CII in full and the compensatory tax or withholding tax is levied in full on the CII. The repayment to the CII would have to be cancelled, however, if the dividends are not redistributed by the CII during the year in which the repayment takes place or during the following year.

Views of the Joint Committee

8. The Joint Committee favours the proposed Directive insofar as it seeks to enable an Irish Unit Trust either to reclaim or to get credit for corporation tax levied by other Member States on dividends received from those States. The Committee must, however, express a concern that the extreme complexity of the arrangements proposed may lead to an increase in the administrative costs of unit trusts thereby imperiling their attractiveness for the small investor.

9. Insofar as the proposed imposition of a withholding tax on company dividends is concerned the Joint Committee wishes to endorse the views expressed by its predecessor in its twenty-sixth report (Prl. 5341) of 24th March, 1976. As far as unit trusts are concerned the Committee notes that the amount of withholding tax which unitholders would be allowed to set-off or have repaid is to be calculated by reference to the amount of dividends redistributed by the unit trust or, in other words, after management expenses have been deducted. In the Committee’s view this would produce an inequitable disparity between the effective income received by the unitholder compared with the ordinary shareholder. The Committee considers that the difference between their effective income should not be more than the management fee grossed up at the rate of tax (or tax credit) applicable to the unit trust dividend. It recommends that Article 9 of the proposed Directive be amended accordingly.

10. As far as investment trusts companies are concerned their shareholders are treated in Ireland in the same way as shareholders in other companies and the Joint Committee accepts that as far as EEC Directives are concerned the same principles should apply to them as to other companies.

Acknowledgement

11. The Joint Committee wishes to acknowledge its indebtedness and expresses its thanks to the First General Unit Managers Ltd., whose Director/Manager, Mr. T. C. F. Whitton, gave it invaluable assistance in considering the Commission’s proposal.

Chairman of the Joint Committee.

7th March, 1979.