FII Group Litigation Case And The Taxation Of Dividends

Author:Mr John Ryan

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...

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