GREECE - The Greek government has announced plans to impose a 10% tax on dividends and a similar capital gains tax (CGT) from the start of 2009, but it's a move which will also catch both local and foreign domiciled pension funds.

Dividends will be taxed at the company source before distribution on profits generated in 2009 and CGT is likely to be collected at the Athens Stock Exchange clearing house, irrespective of the length of the holding, and will apply to all stock purchased from the start of next year.

On the brighter side, the current 0.15% sales tax on stock-selling transactions will be abolished from 1 January 1, 2009 and local analysts also say the tax on dividends may be counterbalanced by the reduction of the local corporate tax to 20% by 2014 from the present 25%.

Some companies may increasingly choose capital returns, share buybacks and stock dividends in addition to normal cash dividends in a bid to protect shareholders but Greek companies are legally required to distribute at least 35% of parent group net profits as cash dividends.

The move has been unveiled by the government in an effort to bolster budget revenues, widen the tax base and keep under Maastricht budget deficit caps.

The bill is now in front of Parliament and finance ministry sources say some amendments may be imposed on the wafer-thin government majority to preserve its smooth passage.

One much-speculated measure may be a reduction or elimination of CGT on equity transaction for long-term investors.

But the knock-on effect could be to encourage more cross-border trading, as Manousos Stahoudakis, head of research at Alpha Finance, suggested: "The new tax regime provides an extra motive for trading, clearing and settlement of Greek stocks abroad".

The exact impact is still unclear but it is thought this tax shift may not affect some of the Western European pension funds, as a senior legal drafter of the new tax law, Katerina Savaidou, told IPE: "Greece has bilateral agreements with many countries to avoid double taxation, so some investors will be able to get tax rebates".

The Double Taxation Treaties (DTTs) override the newly-proposed tax legislation, and Greece has treaties with 44 countries including the UK, US, Germany and France - but not everyone, so "some foreign pension funds may pay much less or none of the new taxes, depending on where they are headquartered", according to Savaidou.

Pension funds contemplating share purchases in Greek-listed companies next year are therefore being advised to seek guidance on relevant tax arrangements or perhaps opt for alternative platforms to the Athens Stock Exchange because OTC derivatives transactions will not be exempt either.

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