Constitutional Restraints on Corporate Tax Integration
Double taxation of corporate profits distorts the choice of business form, the debt and equity capitalization of companies, and the character and timing of profits distributions. To avoid these distortions, countries adopt so-called integrated corporate tax regimes. But countries almost always limit such regimes to domestic dividend--those paid by a corporation taxable in the country to a shareholder also taxable in the country. In contrast, countries generally deny double tax relief to cross-border dividends. Failure to extend relief to cross-border dividends distorts locational investment decisions. Although restricting double tax relief to domestic dividends does not violate international tax nondiscrimination rules, more stringent nondiscrimination rules govern member states of the European Union and U.S. states. Member states of those common markets may not constitutionally prefer domestic commerce over cross-border commerce. This constitutional nondiscrimination obligation limits the ability of EU and US states to confine double corporate tax relief to domestic dividends. This symposium paper establishes the basic framework for taxation of cross-border dividends, closely analyzes and compares constitutional challenges to states' failure to extend double tax relief to cross-border dividends in Europe and the United States, and identifies the principal policy considerations emerging from the nascent cross-border dividend jurisprudence in the European Court of Justice.