Here's the story. A couple resident in Belgium, Mr and Mrs Kerckhaert-Morres, received dividends from a French company. In France the gross dividends were taxed at source at 15% by way of tax on income. In their tax return made to the Belgian authorities Mr and Mrs Kerckhaert-Morres applied to take advantage of a tax benefit corresponding to the French tax at source. That application was rejected by the Belgians. Not surprisingly, they didn't like it. They considered that the rejection effectively made dividends originating in France subject to a heavier tax burden than that imposed on dividends from companies established in Belgium. Consequently, Mr and Mrs Kerckhaert-Morres brought an action before a Belgian court to have the refusal of he tax authorities reversed.
That court decided to refer a question to the Court of Justice for a preliminary ruling on whether Article 56(1) EC should be interpreted as prohibiting a restriction resulting from a provision in the income tax legislation of a member State (Belgium) which subjects dividends from resident companies and dividends from companies resident in another member State to the same uniform tax rate, without in the latter case providing for the setting off of tax levied at source in that other member State.
The Court of Justice held that Article 56(1) EC does not preclude legislation of a member State, such as Belgian tax legislation, which, in the context of tax on income, makes dividends from shares in companies established in the territory of that State and dividends from shares in companies established in another Member State subject to the same uniform rate of taxation, without providing for the possibility of setting off tax levied by deduction at source in that other member State.
Consequently, Mr and Mrs Kerckhaert-Morres cannot plead the provisions on the free movement of capital to prevent dividends paid in another member State from being taxed twice.
The Court of Justice pointed out that, according to settled case-law, although direct taxation falls within the competence of the member States, the latter must none the less exercise that competence in a manner consistent with Community law (see Case C-319/02 Manninen). A problem would arise under EC law when the laws of the ember States at issue did not treat in the same way dividend income from companies established in the member State in which the taxpayer is resident and dividend income from companies established in another member State, with the result that recipients of the latter dividends are denied the tax benefits granted to the others.
In the present case, the Court of Justice took the view that the situation was different from that in the other cases it had to deal with because the Belgian tax legislation does not make any distinction between dividends from companies established in Belgium and dividends from companies established in another member State. Both are taxed at an identical rate of 25% by way of income tax.
The double taxation which might arise from the application of an income tax system such as the Belgian system at issue in this case results from the exercise in parallel by two member States of their fiscal sovereignty. EC law does not lay down any general criteria for the attribution of areas of competence between the member States in relation to the elimination of double taxation within the EC. Consequently, it is for the member States to take the measures necessary to prevent such double taxation by applying, for example, the apportionment criteria followed in international tax practice.