Mr Verkooijen resided in the Netherlands. He was employed there by a subsidiary of the Belgian company Petrofina NV. Under an employees' savings plan he acquired shares in that company.
The Netherlands legislation on the taxation of dividends provided for a system of exemption, subject to certain limits, from the tax chargeable on dividends and income from shares: dividends were, as regards a specified amount (up to NLG 2000 for married persons), exempted from income tax for persons subject to that tax provided that the dividends were paid by undertakings which were established in the Netherlands and, as such, were already subject to tax on their dividends.
The Hoge Raad der Nederlanden, hearing at last instance proceedings between Mr Verkooijen and the tax authorities, sought a ruling from the Court of Justice as to the compatibility of the Netherlands legislation with Community law: was the grant of an exemption from income tax in respect of dividends paid to natural persons - an exemption that was conditional upon such dividends being paid by a company whose seat was in the Member State levying the tax - contrary to the principle of free movement of capital?
The Court observed, firstly, that Community law allowed the application of tax provisions which drew certain distinctions between taxpayers based, among other factors, on their place of residence, provided that they applied to situations which were not objectively comparable or could be justified by overriding reasons in the general interest. Such overriding reasons in the general interest included cohesion of the tax system.
The Court has held that such differences of treatment should not in any circumstances constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital.
The Court therefore considered whether or not the difference of tax treatment at issue was justified.
Promotion of the country's economy, a reason put forward by the United Kingdom (the exemption granted in respect only of dividends paid by undertakings established in the Netherlands being designed, in particular, to enable national undertakings to attract more equity funding) was not accepted by the Court: the Court pointed out that aims of a purely economic nature could not constitute an overriding reason in the general interest justifying a restriction of a fundamental freedom guaranteed by Community law.
The argument as to the need to preserve the cohesion of the Netherlands tax system was not accepted by the Court: no direct link existed between the grant to shareholders residing in the Netherlands of an income tax exemption in respect of dividends and the taxation of the profits of undertakings whose seat was in another Member State. The two taxes were entirely separate and were levied on different taxpayers.
Finally, the Court held that the decrease in tax revenue could not be relied on as an overriding reason in the general interest to justify a measure contrary to the principle of free movement of capital.
The Court stated that the position was not changed by the fact that the dividends concerned were received under an employees' savings plan.
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