Transcript The EU Tax Regulatory Framework

The EU Regulatory Framework for Tax
Tom O’Shea MA LLM (Tax)
Centre for Commercial Law Studies,
Queen Mary, University of London
Email: t.o’[email protected]
The EU Regulatory Framework
for Tax
ECHR
Community
Law
ECT
Regulations
Directives
Decisions
International
Agreements
(EEA)
“Soft Law”
Double Tax
Conventions
(A) MS-MS
(B) MS-TC
(C) Prior
International
Law
National Tax Laws of
the EU Member States
Origin State rules
Host State rules
Purely domestic rules
(ECT not engaged)
Competence
Compliance
DTC
Discrimination
Restriction
Comparability
Justification
Proportionality
Host
Origin
Third Country
The EU Tax Regulatory Framework


Direct taxation is regulated at three different
levels:
 National level
 DTC/International law level
 Community level
For EU Member States the overarching rule is
that national tax rules and DTC rules must
comply with Community Law
The EU Tax Regulatory Framework

when giving effect to commitments assumed under
international agreements, be it an agreement
between Member States or an agreement
between a Member State and one or more nonmember countries, Member States are required,
subject to the provisions of Article 307 EC, to comply
with the obligations that Community law imposes on
them. The fact that non-member countries, for their
part, are not obliged to comply with any Communitylaw obligation is of no relevance in this respect.
C-55/00 Gottardo paragraph 33.
Cross Border Loss Relief
Marks and Spencer
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Marks and Spencer plc decided to open
establishments in France, Germany and
Belgium
They chose to establish subsidiaries
rather than branches
These subsidiaries incurred losses – so
operations were terminated (in France,
the subsidiary was sold to a third party)
UK Group relief
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Had Marks and Spencer plc established
foreign branches – they would have qualified
for group relief –
Equally if they had established UK
subsidiaries with branches abroad, they
would have qualified for group relief
Even if they established foreign subs with UK
branches – they would have qualified for a
certain amount of group relief
No taxation of profits….

But ….because M+S established
subsidiaries – residents of other States
– no group relief was available under
UK rules because - as the UK argued the UK did not tax the profits of the
subsidiaries therefore it should not have
to give relief for the losses of the
subsidiaries.
Two basic arguments….
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Whether a branch and a subsidiary have
to be treated in the same way – if you
give group relief to the branch do you
have to give group relief to the
subsidiary also?
Avoir Fiscal and host States?
What about Origin States?
UK-UK and
UK- cross-border
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If you give group relief in a UK – UK
situation – do you have to give it n a
UK- cross-border situation – when, for
example, a sub is established in France,
or Germany
Is that a restriction on the freedom of
establishment of M+S?
Are there any justifications?
The ECJ

Group relief such as that at issue in the
main proceedings constitutes a tax
advantage for the companies
concerned. By speeding up the relief of
the losses of the loss-making companies
by allowing them to be set off
immediately against the profits of other
group companies, such relief confers a
cash advantage on the group.
The ECJ

Such a restriction is permissible only if it
pursues a legitimate objective
compatible with the Treaty and is
justified by imperative reasons in the
public interest. It is further necessary,
in such a case, that its application be
appropriate to ensuring the attainment
of the objective thus pursued and not
go beyond what is necessary to attain it
The ECJ

residence is not always a proper factor
for distinction. In effect, acceptance of
the proposition that the Member State
in which a company seeks to establish
itself may freely apply to it a different
treatment solely by reason of the fact
that its registered office is situated in
another Member State would deprive
Article 43 EC of all meaning [citing Avoir
Fiscal]
The ECJ

In order to ascertain whether such a
restriction is justified, it is necessary to
consider what the consequences would
be if an advantage such as that at issue
in the main proceedings were to be
extended unconditionally.
Justification 1:
Balanced allocation
of the power to tax
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profits and losses are two sides of the same coin and
must be treated symmetrically in the same tax
system in order to protect a balanced allocation of
the power to impose taxes between the different
Member States
ECJ: to give companies the option to
have their losses taken into account in
the Member State in which they are
established or in another Member State
would significantly jeopardise a
balanced allocation of the power to
impose taxes between Member States
Justification 2:
“Double-dipping”

relating to the danger that losses would
be used twice, it must be accepted that
Member States must be able to prevent
that from occurring.
Justification 3: Tax Avoidance
through Loss Tax Planning

relating to the risk of tax avoidance, it must
be accepted that the possibility of transferring
the losses incurred by a non-resident
company to a resident company entails the
risk that within a group of companies losses
will be transferred to companies established
in the Member States which apply the highest
rates of taxation and in which the tax value of
the losses is therefore the highest.
Court finds justification

restrictive provisions such as those at
issue in the main proceedings pursue
legitimate objectives which are
compatible with the Treaty and
constitute overriding reasons in the
public interest and that they are apt to
ensure the attainment of those
objectives.
Proportionality?
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measures less restrictive than a general exclusion
from group relief might be envisaged.
the possibility of making relief conditional upon the
foreign subsidiary’s having taken full advantage of
the possibilities available in its Member State of
residence of having the losses taken into account.
possibility that group relief might be made conditional
on the subsequent profits of the non-resident
subsidiary being incorporated in the taxable profits of
the company which benefited from group relief up to
an amount equal to the losses previously set off.
Court finds breach if….
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the restrictive measure at issue in the main
proceedings goes beyond what is necessary to attain
the essential part of the objectives pursued where:
–
the non-resident subsidiary has exhausted the
possibilities available in its State of residence of
having the losses taken into account for the
accounting period concerned by the claim for relief
and also for previous accounting periods, if necessary
by transferring those losses to a third party or by
offsetting the losses against the profits made by the
subsidiary in previous periods, and
And if ……

there is no possibility for the foreign
subsidiary’s losses to be taken into
account in its State of residence for
future periods either by the subsidiary
itself or by a third party, in particular
where the subsidiary has been sold to
that third party.
The ECJ

Where, in one Member State, the
resident parent company demonstrates
to the tax authorities that those
conditions are fulfilled, it is contrary to
Articles 43 EC and 48 EC to preclude
the possibility for the parent company
to deduct from its taxable profits in that
Member State the losses incurred by its
non-resident subsidiary
The ECJ –
concluding remark

Member States are free to adopt or to
maintain in force rules having the
specific purpose of precluding from a
tax benefit wholly artificial
arrangements whose purpose is to
circumvent or escape national tax law
M+S win?

it is contrary to Articles 43 EC and 48 EC to prevent
the resident parent company from [deducting losses
of its subs resident in other Member States] where
the non-resident subsidiary has exhausted the
possibilities available in its State of residence of
having the losses taken into account for the
accounting period concerned by the claim for relief
and also for previous accounting periods and where
there are no possibilities for those losses to be taken
into account in its State of residence for future
periods either by the subsidiary itself or by a third
party, in particular where the subsidiary has been
sold to that third party.
M+S Outcome – New Rules
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Measures to deny loss relief where there are
“arrangements” which either
result in losses becoming unrelievable outside
the UK that were otherwise relievable
Give rise to unrelievable losses which would
not have arisen but for the availability of the
relief in the UK
If the purpose or one of the main purposes of
those arrangements is to obtain UK relief
Migrant – Non-Migrant Test :
Origin & Host State
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De Groot (Workers) C-385/00
Eurowings (Services) C-294/97
Manninen (Capital) C-319/02
Marks and Spencer (Establishment)
De Groot C-385/00

due to the application of the proportionality
factor, a portion of the personal tax relief to
which Mr de Groot was entitled did not give
rise to an actual tax reduction in the
Netherlands. He therefore suffered a real
disadvantage as a result of the application of
the proportionality factor since he derived
from his maintenance payments and from the
tax-free allowance a lesser tax advantage
than he would have received had he received
his entire income for 1994 in the Netherlands.
(para 83)
De Groot

That disadvantage caused by the
application by the Member State of
residence of its rules on the avoidance
of double taxation is liable to
discourage a national of that State from
leaving it in order to take up paid
employment, within the meaning of the
Treaty, in the territory of another
Member State. (para 84)
Eurowings C-294/97

The national court (…) notes that
lessees receive more favourable
treatment for tax purposes if they lease
goods from a lessor established in
Germany than if they lease from a
lessor established in another Member
State (para 19)
Eurowings
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Any legislation of a Member State which (…)
reserves a fiscal advantage to the majority of
undertakings which lease goods from lessors
established in that State whilst depriving
those leasing from lessors established in
another Member State of such an advantage
gives rise to a difference of treatment based
on the place of establishment of the provider
of the services, which is prohibited by Article
59 of the Treaty. (para 40).
Eurowings

Contrary to what was argued (…) that
difference in treatment can also not be
justified by the fact that the lessor
established in another Member State is
there subject to lower taxation (para
43)
Eurowings

Any tax advantage resulting for
providers of services from the low
taxation to which they are subject in
the Member State in which they are
established cannot be used by another
Member State to justify less favourable
treatment in tax matters given to
recipients of services established in the
latter Member State (para 44)
Manninen C-319/02

the tax credit under Finnish tax legislation is designed
to prevent the double taxation of company profits
distributed to shareholders by setting off the
corporation tax due from the company distributing
dividends against the tax due from the shareholder
by way of income tax on revenue from capital. The
end result of such a system is that dividends are no
longer taxed in the hands of the shareholder. Since
the tax credit applies solely in favour of dividends
paid by companies established in Finland, that
legislation disadvantages fully taxable persons in
Finland who receive dividends from companies
established in other Member States, who, for their
part, are taxed at the rate of 29% by way of income
tax on revenue from capital. (para 20)
Manninen
Company pays
Finland CT
Dividend +tax credit
FINLAND
Company pays
Swedish CT
Dividend but no tax credit
Is granted in Finland
Manninen
Taxation
Taxation
Dividend
Dividend
No taxation
FINLAND
SWEDEN
Look at the “purpose” of the Finland rule
Manninen

Having regard to the objective pursued by the Finnish tax
legislation, the cohesion of that tax system is assured as long as
the correlation between the tax advantage granted in favour of
the shareholder and the tax due by way of corporation tax is
maintained. Therefore, in a case such as that at issue in the
main proceedings, the granting to a shareholder who is fully
taxable in Finland and who holds shares in a company
established in Sweden of a tax credit calculated by reference to
the corporation tax owed by that company in Sweden would not
threaten the cohesion of the Finnish tax system and would
constitute a measure less restrictive of the free movement of
capital than that laid down by the Finnish tax legislation.
(para 46)
Manninen

the calculation of a tax credit granted to a
shareholder fully taxable in Finland, who has
received dividends from a company
established in Sweden, must take account of
the tax actually paid by the company
established in that other Member State, as
such tax arises from the general rules on
calculating the basis of assessment and from
the rate of corporation tax in that latter
Member State. (para 54)
Manninen

It is true that, in relation to such legislation, the
situation of persons fully taxable in Finland might
differ according to the place where they invested
their capital. That would be the case in particular
where the tax legislation of the Member State
in which the investments were made already
eliminated the risk of double taxation of
company profits distributed in the form of
dividends, by, for example, subjecting to
corporation tax only such profits by the company
concerned as were not distributed. (para 34)
Manninen & M+S
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Thus, the Finnish tax credit does not have to be granted crossborder always
Similarly, the UK Group relief advantages do not have to be
granted across border always
But each time a Member State has a particular tax rule which
reserves a tax advantage for its own residents who operate in
that Member State
A similar resident operating cross-border / exercising
Community freedoms must have the tax treatment in the
establishment State taken into consideration also in the light of
the objectives of the Origin State’s tax rule
Cross-border Mergers
SEVIC
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involved a merger between a German
company and a Luxembourg company.
German law provided for the registration of
mergers between German resident companies
only: cross-border mergers were not
recognised.
The Court found that such rules were
contrary to the freedom of establishment
provisions contained in the Treaty.
SEVIC
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Freedom of Establishment includes
“the formation and management of
those companies under the conditions
defined by the legislation of the State of
establishment for its own companies”
SEVIC
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This covers all measures
“which permit or even merely facilitate access
to another Member State and the pursuit of
an economic activity in that State by allowing
the persons concerned to participate in the
economic life of the country effectively and
under the same conditions as national
operators”.
SEVIC

The Court sees a cross-border merger as a one way
of exercising the freedom of establishment: the
merger operation allows a company without
dissolution to transform itself, thus providing a way,
within a single operation, to pursue an activity in a
new company format without interruption; saving
time, costs, and the complications associated with a
dissolution or liquidation and a new company
formation.
SEVIC

as the German rules treated internal
German mergers more favourably than
cross-border mergers this constituted a
restriction of the freedom of
establishment which required
justification.
SEVIC
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German justifications – protection of
employees, shareholders, creditors, and
effectiveness of fiscal supervision
refusing to register all cross-border mergers
even in situations where these interests were
not threatened would go beyond what was
necessary to protect those interests.
C-376/03 D case : “MFN issue”
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NETHERLANDS
BELGIUM
DTC
DTC
The Netherlands-Belgium
DTC is more favourable
than the GermanyNetherlands DTC
GERMANY
D case paragraph 61
(Two non-residents in a different situation
depending on the DTC)
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“The fact that those reciprocal rights and
obligations apply only to persons resident in
one of the two Contracting Member States is
an inherent consequence of bilateral double
taxation conventions.
It follows that a taxable person resident in
Belgium is not in the same situation as a
taxable person resident outside Belgium so
far as concerns wealth tax on real property
situated in the Netherlands.”
C-374/04 ACT IV LoB Issue
(Two Dutch companies in a different
situation depending on DTC)
NL
Dividend + tax
Credit under DTC
but taxed at 5%
GER
NL
UK tax jurisdiction extends
to the non-resident Dutch
Company with Dutch parent
NL
UK
Dividend exempted
under DTC –
no tax credit + no
economic DT + no
extension of UK tax
system
UK company paying
a dividend
ACT IV GLO
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Similar treatment of domestic and foreign dividends
in the recipient’s Member State where the foreign
dividends are taxed in the recipient’s Member State
=> comparability of the dividend streams
Inbound and outbound dividends can be
treated differently – because in one situation the
UK is acting as a residence State and in the other the
UK is acting as a source State only – limited and
unlimited tax liability
ACT IV GLO paragraph 70

“If the Member State of residence of the company
making distributable profits decides to exercise its
taxing powers not only in relation to profits made in
that State but also in relation to income arising in
that State and paid to non-resident companies
receiving dividends, it is solely because of the
exercise by that State of its taxing powers that,
irrespective of any taxation in another Member State,
a risk of a series of charges to tax may arise.”
C-170/05 Denkavit Internationaal
WHT 25%
NL
Fr
Dividend paid to Dutch parent
Dividend paid to a
French parent
Fr
95%
exempt
FRANCE
French
Tax
jurisdiction
extended
EXEMPTION MUST BE
EXTENDED CROSS-BORDER
FR
Netherlands
Denkavit Internationaal paragraph 37
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“the exemption in respect of dividends received by
resident parent companies is designed to avoid the
imposition of a series of charges to tax on the profits
of subsidiaries which are distributed by way of
dividend to the parent companies of those
subsidiaries…
since the French Republic has chosen to relieve its
residents of such a liability to tax, it must extend that
relief to non-residents to the extent to which an
imposition of that kind on those non-residents results
from the exercise of its tax jurisdiction over them”
C-379/05 Amurta
Retailbox
Dividend +
25% WHT
NL
Dividend
NO WHT
5%
s/holding
PT
AMURTA
Portuguese
Resident s/h
NL
Dutch resident s/h
C-379/05 Amurta – DTC Issue
Retailbox
Dividend +
25% WHT
PT
AMURTA
NL
DTC provided for a credit
but Portugal exempted
the dividend income
Dividend
NO WHT
NL
C-265/04 Bouanich
SWEDEN
French resident s/h
FRANCE
Swedish
Resident s/h
Swedish
company
Bouanich : Different Tax Treatment of
Resident and Non-resident Shareholders
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Company repurchasing its own shares
Resident taxpayers – treated as a capital
gain and the s/h is allowed to deduct the
costs of acquisition
Non-residents – treated as a dividend
distribution with no right to deduct the cost of
shares under domestic rules and taxed at
30%
Bouanich : Comparability
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There is a restriction on the free movement
of capital only if the non-resident
shareholders are treated less favourably than
the resident shareholders – that is a matter
for the national court to determine
“the cost of acquisition is directly linked
to the payment made on the occasion of
a share repurchase so that, in this
regard, residents and non-residents are
in a comparable situation”.
(Comparability)
C-101/05 Skatteverket v A (“A Case”)
(Different treatment depending on a provision in
a DTC)
Third Country A
(resident receives a
tax advantage)
DTC with an exchange of information provision
EU
Member
State
Third Country B
(resident denied a tax
advantage)
DTC with no exchange of information
provision
The “A case”

Swedish tax rules provided for an exemption
from income tax in respect of dividends
distributed in the form of shares in a
subsidiary when the distributing company
was established in an EEA State or in a State
with which Sweden had concluded a double
taxation convention (DTC) containing an
exchange of information provision.
The “A case”:
Need to ensure effectiveness of fiscal supervision

although the taxpayer could provide the
relevant information “the onus still remains
on the tax authorities to assess the value of
the evidence provided, which would be
impossible if those authorities did not have
the power to seek cooperation from the
competent authorities of the State of
establishment of the distributing company”.
The “A case”:
Need to ensure effectiveness of fiscal supervision
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Different legal context
The Court noted that mutual assistance within the
Community operated on the basis of a different legal
framework from third country situations.
Directive 77/799/EEC
Community legislation relating to company accounts
allowed taxpayers “to produce reliable and verifiable
evidence on the structure or activities of a company
established in another Member State” but not in
relation to third countries which were not “required
to apply those Community measures”.
The “A case”:
The Court’s conclusion


where taxpayer compliance can be verified
only by obtaining information from the
competent authority of a third country “it is,
in principle, legitimate for that Member State
to refuse to grant that advantage if, in
particular, because that third country is not
under any contractual obligation to provide
information, it proves impossible to obtain
such information from that country”.
This was a matter for the Swedish referring
court to verify.
The “A case”
DTCs with different provisions
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
The significance of DTCs should not go
unnoticed.
If a DTC is in place between a Member State
and a third country in circumstances like the
A case, with an exchange of information
provision on the lines of the OECD Model,
then a resident of that Member State may be
treated differently under that State’s tax
system than a similar resident with an
investment in a third country where no such
DTC is in place with such an exchange of
information provision.
National level (Portugal) - ECJ
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Cases involving Portuguese tax rules where
the rules are challenged (benefit EU persons
exercising freedoms in Portugal)
Hollmann C-443/06
Commission v Portugal C-345/05
Cases involving rules of other Member States
which are challenged (benefit Portuguese
nationals / residents exercising freedoms)
Amurta C-379/05
Centro Equestre C-345/04
Host v Origin Rules
A
B
ORIGIN
STATE RULE
HOST
STATE
RULE
C
D
Exercising a fundamental freedom => entitled to
“NOT LESS FAVOURABLE TREATMENT” if comparable
C-385/00 De Groot paragraph 94
“National Treatment” Test


“as far as the exercise of the power of
taxation so allocated is concerned, the
Member States must comply with the
Community rules and, more particularly,
respect the principle of national treatment of
nationals of other Member States and of
their own nationals who exercise the
freedoms guaranteed by the Treaty.”
 “Migrant/Non-migrant test”
C-443/06 Hollmann
Hollmann taxed on 100%
of the gain at flat 25%
Residents taxed on 50%
of the gain at progressive
rates up to 42%
Hollmann
resident in Germany
sells immovable
property
in Portugal
C-443/06 Hollmann
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Assume a gain of €10,000
Resident is taxed on €5,000
42% maximum rate = €2,100
Non-resident on the same gain pays tax of 25% of
€10,000 = €2,500
Non-resident always pays more tax on a similar
capital gain under the Portuguese capital gains tax
regime
Less favourable treatment of non-resident who is in a
comparable situation
C-443/06 Hollmann paragraph 37


the basis of assessment for capital gains
realised is not the same for residents and
non-residents.
Thus, for the sale of the same immovable
property situated in Portugal non-residents
are, in relation to the realisation of capital
gains, subject to a tax which is higher than
that applied to residents and are
consequently in a less favourable position
than the latter.
C-443/06 Hollmann paragraph 39

the effect of national legislation such as that
in dispute in the case in the main proceedings
is to make the transfer of capital less
attractive for non-residents by deterring them
from making investments in immovable
property in Portugal and, and a result, from
carrying out transactions related to those
investments such as selling immovable
property.
C-443/06 Hollmann paragraph 51

the taking into account of only half of the
basis of capital gains realised by a resident,
together with the fact that the tax levied on
that resident’s income is subject to a
progressive rate, the highest step of which is
42%, results, in the same taxable
circumstances for a non-resident, in heavier
taxation of the latter.
C-443/06 Hollmann paragraph 53


objectively speaking, there is no difference in
situation capable of justifying the unequal tax
treatment in respect of the taxation of capital
gains between two categories of taxable
persons.
Consequently, Mrs Hollmann’s situation is
comparable to that of a resident.
C-345/05 Commission v Portugal
Sale of residence – exemption from
CGT provided new residence was
situated in Portuguese territory
No exemption if new
residence was situated abroad
C-345/05 Commission v Portugal paragraph 20


Even if Article 10(5) of the CIRS does not
prevent a person liable to income tax in
Portugal from pursuing employment in
another Member State or generally exercising
his right of establishment,
that provision is none the less likely to
restrict the exercise of those rights by
having, at the very least, a deterrent effect
on taxable persons wishing to sell their real
property in order to settle in a Member State
other than the Portuguese Republic.
C-345/05 Commission v Portugal paragraph 21

a taxable person who decides to sell property
that he owns in Portugal and uses as his own
residence in order to transfer his residence to
another Member State and to purchase a new
property there for the purposes of his
accommodation is, in the context of the
exercise of the rights conferred by Articles 39
EC and 43 EC, subject to more unfavourable
tax treatment than that enjoyed by a person
who maintains his residence in Portugal.
C-345/04 Centro Equestre
Centro Equestre
Resident in Portugal
German WHT +
deduction of
related expenses
limited for
non-residents
Centro Equestre provided equestrian
services in Germany
Thanks very much everyone !
OBRIGADO