Fokus Bank ASA v The Norwegian State: A test case for the single market

The European Single Market was founded on the principle of guaranteeing the “four freedoms” of open economies: free movement of capital, services, goods and labour between member states.

The commitment to a common market with parity between states has clear implications for
member-state tax fiscal policy, and for tax policy in particular.

Free movement of capital is foundational to the agreement. Article 40 of the Agreement on the European Area is clear: within the framework of the agreement “there shall be no restrictions between the Contracting Parties on the movement of capital belonging to persons resident in EC Member States or EFTA States and no discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested.”

In a landmark test case (Fokus Bank v The Norwegian State, 2004), the EFTA Court found differential treatment of resident and non-resident investors constitutes unreasonable discrimination between member state investors and violated Article 40.

Levelling the playing field

As company profits were already subject to corporate tax, shareholders with general tax liability in Norway were protected from double taxation through the form of a tax credit. The court found that dividends were effectively tax free for Norwegian residents with a general tax liability to the Norwegian state. By contrast, non-resident investors received no such tax credit and were subject to withholding tax.

The court found that such a regime risks restricting capital movement between member states by placing an unjustifiable burden on non-resident investors. As the court noted: “[d]enying the benefit of a tax credit to foreign shareholders places them at a disadvantage when pursuing investments in Norwegian joint stock companies as compared to shareholders resident in Norway. Therefore, the legislation at issue constitutes discrimination prohibited by Article 40 EEA”.

Setting a precedent

Speaking on the EFTA Court’s 20th anniversary, the court’s president, Carl Baudenbacher, cited the Fokus Bank case as a milestone, the first instance in which a EEA court ruled on discriminatory dividend taxation.

Looking back at the court’s record over two decades, Baudenbacher boasted of a set of rulings, including the Fokus Bank case, that helped establish a level playing field for business essential for the functioning of the common market, and which fostered competition within the EEA.

For investors, Fokus Bank v The Norwegian State holds particular importance. The case set a precedent specifying that member states cannot tax investors from other member-states at a higher rate without justification.

In the nearly 15 years since the EFTA Court’s ruling, a number of important rulings have been made by EEA courts affecting the way dividend tax rule can be applied across the single market. Investors who wish to get the most effective withholding tax guidance should therefore seek advice from experts with both a detailed understanding of the relevant regional tax codes and a sophisticated and up-to-date knowledge of the guiding principles of the European single market.

Of course, each withholding tax claim needs to be evaluated on its merits. That’s why investors throughout the EEA rely on WTax for expertise that translates into real world results.

Contact WTax now for more information about how current legislation affects your investments or a free quote.

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