Issue 2011 nr. 003 March April Contents

Transcription

1 Issue 2011 nr. 003 March April 2011 The EU Tax Newsletter is prepared by members of PwC s EU Direct Tax Group (EUDTG). If you would like to receive future editions of this newsletter, please register online at: Contents ECJ cases Belgium Finland Finland Germany Germany Netherlands Portugal Portugal ECJ referral on (former) tax credit system relating to the use of tangible assets: Waypoint Aviation SA v. État Belge case ECJ referral on exchange of shares in transactions with a company resident in an EEA member state ECJ referral on final tax losses in cross-border mergers ECJ judgment on deductibility of perpetual annuity: Schröder case ECJ referral on tax credit limitation ECJ referral on tax discrimination against foreign charities ECJ judgment on mandatory appointment of tax representative for non-residents ECJ judgment on Portuguese scheme for tax adjustment of financial assets not located within Portugal National developments Finland Central Tax Board advance ruling on withholding tax on dividends from a Finnish company to a Norwegian investment fund Finland Supreme Administrative Court annuls earlier judgement on applicability of CFC legislation in intra-eu situations Germany Federal Fiscal Court decision on taxation of Liechtenstein private foundations Germany Federal Finance Ministry accepts EU/EEA companies with foreign statutory seat but domestic place of management as lower tier members in fiscal unities 1

2 Italy Netherlands Netherlands Netherlands Netherlands Portugal Spain Finance Ministry issues draft implementing decree about the Home State Taxation regime Dutch double inheritance taxation not in breach of EU Law Non-deductibility competition fine not in breach of EU Law Dutch exit tax on pension rights as such not in breach of EU Law Government proposes interim-regime for currency results on participations Taxation of capital gains realized on the sale of shares held on micro and small companies Spanish government publishes Sustainable Economy Act EU developments EU EU EU Germany European Commission issues proposal for a recast of the EU Parentsubsidiary Directive Conclusions European Council Spring summit held on March 2011 European Commission Decisions concerning tax infringement procedures against four EU countries European Commission requests Germany to amend discriminatory law on gift and inheritance tax allowance for non-residents CCCTB EU European Commission proposes directive on the CCCTB State aid Gibraltar AG opinion in the case Commission and Spain v. Gibraltar and the United Kingdom 2

3 ECJ cases Belgium ECJ referral on (former) tax credit system relating to the use of tangible assets: Waypoint Aviation SA v. État Belge (Case C-9/11). Until 1 January 2011 Belgian taxpayers could benefit from a tax credit, i.e. a notional withholding tax, on income from loans granted mainly to coordination centres to the extent that the borrowed funds were used by the centres or other group companies to acquire or to develop new tangible assets, provided that these assets were used in Belgium. Waypoint Aviation SA (hereafter WA ) financed the acquisition of two planes via a finance lease concluded with and for the benefit of a Belgian coordination centre. Through a sequence of transfers the planes were used by a French group company. Therefore, the Belgian tax authorities refused the the tax credit to WA. The taxpayer considers (apart from the fundamental discussion on whether the conditions of the specific tax provisions are complied with) that the provision which does not permit a tax credit when the right of use is conferred to a company resident in a Member State other than Belgium is contrary to the EU s principle of freedom to provide services. On 7 January 2011, the Brussels Court of Appeal referred questions to the ECJ on the compatibility of such a restriction wih Article 49 TFEU. Given the end of the coordination centres regimes, this case could at first sight be considered as only having a theoretical interest. However, the decision in that case could well have a significant impact on the Belgian investment deduction regime (both provisions being drafted quite similarly: i.e. requiring an investment in Belgium). -- Olivier Hermand and Patrice Delacroix, PwC Belgium; olivier.hermand@pwc.be Finland ECJ referral on exchange of shares-transactions with a company resident in an EEA member state On 31 January 2011, the Supreme Administrative Court made a reference to the ECJ for a preliminary ruling on share-for-share transactions with a company resident in an EEA member state in the light of Articles 31 and 40 of the EEA Agreement on, respectively, the freedom of establishment and the free movement of capital (SAC: 2011:10) Finnish Company A owned approx. 20% of the shares in Finnish Company C. The other owner of C with approx. 80% was a Norwegian Company B, whose company form is aksjeselskap. The intension was to effectuate an exchange of shares in a way that A transfers its shares in C shares to B and A receives as a consideration newly issued shares in B. As a result of this transaction B would become 100% owner of C and A would own approx. 6% of the B. Finland has implemented the EU s Merger Directive 90/434/EEC, amended by the directive 2005/19/EY and codified by 2009/133/EC into its domestic tax law (Business Income Tax Act BITA). Relevant BITA provisions apply to domestic transactions as well as to transactions 3

4 with parties from other EU Member States. Parties resident outside of the EU (for example Norway) are not within the scope of the BITA provision enabling tax neutral exchange of shares transaction. Thus, if Company B were a Finnish resident or resident of another EU Member State, the exchange of shares transaction would be tax neutral in Finland. In its preliminary ruling, the Supreme Administrative Court asks whether the exchange of shares transaction in question should be tax neutral in Finland, when taking into account Articles 31 and 40 EEA, in the same way as if the change of shares were to involve domestic companies or companies resident elsewhere in the EU? -- Jarno Laaksonen and Heikki Lajunen, PwC Finland; jarno.laaksonen@fi.pwc.com Finland ECJ referral on final tax losses in cross-border mergers On 7 March 2011, the Supreme Administrative Court of Finland decided to refer a preliminary ruling to the ECJ on the utilization of Swedish tax losses in Finland in the case of a crossborder merger. Prior to the merger the tax losses in question cannot be utilized in Sweden and after the merger the Swedish tax losses would cease to exist. PwC is assisting the Finnish tax payer in this case. Finnish company A owned all of the shares in a Swedish company B. As company B was lossmaking, its operations were shut down. Company B ceased to have activities or employees. As the operations of company B were shut down it could not offset its tax losses by itself. The tax losses could not be utilized by way of Swedish group contribution either as all of the other Swedish group companies were in a loss making position as well. The assets and liabilities of company B were planned to be transferred to company A by way of a cross-border merger. As there were no activities in Sweden, a permanent establishment would not be established in Sweden for company A after the merger. Problems arose as Finnish tax law does not recognize the transfer of losses in cross-border mergers. Therefore, the unutilized tax losses of company B would become final tax losses, as they would cease to exist in Sweden. In the case at hand, company A cannot deduct the tax losses of company B on the basis of domestic tax law as the tax losses of Company B are not computed in accordance with Finnish rules. In a comparable situation, if company B were a Finnish company, the tax losses would be transferred to company A Therefore, in principle, a cross-border merger should receive the same tax treatment as a purely domestic merger. The Supreme Administrative Court referred two questions for a preliminary ruling: Do Article 49 TFEU and Article 54 TFEU provide that a Finnish resident company (receiving company) may offset losses of a merging company resident in another Member State, when these losses are connected with the activities exercised in that other member state in the years preceding the merger, in a situation where a permanent establishment is not established of the receiving company in the state of residence of the merging company and when, according to the national law, the receiving company would be able to offset losses of the merging company if the merging company was domestic or the losses derived from the permanent establishment located in the state of residence of the receiving company? 4

5 If the answer to the first question is positive, do Article 49 TFEU and Article 54 TFEU have an effect on whether the losses should be calculated on the basis of the tax laws of the receiving company s state of residence or should the tax losses be regarded as confirmed in the state of residence of the merging company on the basis of the tax laws of that state? -- Jarno Laaksonen and Heikki Lajunen, PwC Finland; jarno.laaksonen@fi.pwc.com Germany ( C-450/09) ECJ judgment on deductibility of perpetual annuity: Schröder case On 31 March 2011, the ECJ decided that the deductibility of an annuity for an anticipated succession inter vivos (property settlement agreement) should be extended to non-residents. The claimant, a German national who worked and resided in Belgium, was granted a rental house located in Germany by way of anticipated succession from his mother to whom he owed a perpetual annuity in return. In his German tax return he declared the rental income as well as his expenses for the annuity. However, the tax authority denied the deduction of the annuity as this is technically not considered to be an income related expense but a personal related expense, which cannot be offset by non-residents but only by German residents (Sec. 50 para. 1 sentence 3 ITA in connection with Sec. 10 No. 1a ITA). The claimant took action before the Lower Fiscal Court which referred a preliminary question to the ECJ. The ECJ held the different treatment to be in breach of the free movement of capital. The Court rejected the argument brought forward by the German government that the annuity would only form part of family support arrangement with the amount being calculated according to the needs of the mother and the son s economic ability to pay. The ECJ concluded that even if the amount would not reflect the actual value of the asset transferred, the payment is nevertheless inextricably linked to the taxable income deriving from it. Referring to the cases like Gerritse (C-234/01), Centro Equestre (C-345/04) and Conijn (C- 346/04), the ECJ stated that such expenses have to be deductible in the source State (here: Germany). As a consequence, Sec. 50 para. 1 sentence 3 ITA is not applicable anymore and non-residents are entitled to deduct perpetual annuities paid for the transfer of assets generating taxable income. -- Gitta Jorewitz and Juergen Luedicke, Germany; juergen.luedicke@de.pwc.com Germany ECJ referral on tax credit limitation (C-168/11) With its decision of 9 February 2011, the German Federal Fiscal Court (BFH) referred a case to the ECJ asking whether the German limitation of the withholding tax credit of foreign sourced dividends is in line with EU Law. In 2007 a German resident received dividends from companies situated in the EU and Third States. As dividend income of individuals is (partly) taxable, the foreign withholding tax can - in accordance with the underlying double tax treaty and Sec. 34c Income Tax Act - be credited against the respective amount of German income tax. 5

6 However, when assessing the respective amount of tax, special personal expenses without any link to the foreign income will partly be attributed to this income. This attribution reduces the taxable foreign income and thus results in a limitation of the tax credit. The BFH doubts whether this attribution of non-linked expenses to foreign income is in line with the free movement of capital. In the Court s view, special personal deductions should not affect the tax credit, as otherwise a juridical double taxation of dividends will not be avoided and, moreover, personal tax allowances would not come totally into effect. With this referral, the ECJ might get the opportunity to reconcile its findings in the cases of Kerckhaert and Morres (C-513/04) and Haribo (C-436/08), according to which EU law does not preclude a juridical double taxation, with the decision of the EFTA-Court in the case Seabrokers (E-7/07). In the latter case the Court decided that attributing non-linked expenses to foreign income when assessing the tax credit infringes the freedom of establishment. Although the EFTA-Court confirmed that Member States were not obliged to avoid a juridical double taxation, it assessed an infringement by looking at the effectively deducted expenses. If non-linked expenses are partly attributed to the foreign income which subsequently reduces the tax credit, such expenses were in effect only partly deductible in the Home State. When only focusing on the effective deduction of special personal expenses instead of on the juridical double taxation, the infringement of the contested German provision might already be decided by the ECJ in the De Groot case (C-385/00). In this case, the ECJ held that a provision does not comply with the free movement of workers, if a taxpayer loses in part personal tax allowances in the Home State due to his foreign sourced income if this is taxed in the Host State without such a personal relief. From preceding case law it is clear that the Host State is not obliged to provide for such personal tax allowances. -- Gitta Jorewitz and Juergen Luedicke, PwC Germany; juergen.luedicke@de.pwc.com Netherlands ECJ referral on tax discrimination against foreign charities The European Commission has decided to refer The Netherlands to the ECJ because its tax treatment of gifts to charities is discriminatory and in breach of EU rules on the free movement of capital. Dutch tax relief for gifts to charities applies only to donations made to charities registered in The Netherlands and not to donations to foreign charities. Under Dutch tax law, donations to foreign charities cannot qualify for tax relief unless the foreign charity has registered itself in The Netherlands. In practice, this is liable to discourage Dutch taxpayers from making donations to foreign charities which are not registered in The Netherlands. The Commission considers that the requirement for foreign charities to register is disproportionate and incompatible with the EU rules on the free movement of capital guaranteed by Article 63 TFEU and Article 40 of the European Economic Agreement. In a similar case, in Persche (Case C-318/07) the ECJ ruled that "nothing prevents the tax authorities of the Member State of taxation from requiring a taxpayer, wishing to obtain the 6

7 deduction for tax purposes for gifts made for the benefit of bodies established in another Member State, to provide the relevant evidence". The Commission sent a reasoned opinion to The Netherlands on 18 March 2010 (IP/10/300). France is also subject to an infringement case on donations to foreign charities (see IP/09/1764). -- Bob van der Made, PwC Netherlands; bob.van.der.made@nl.pwc.com Portugal ECJ judgment on mandatory appointment of tax representative for non-residents (Commission v. Portugal; C-267/09) On 5 May 2011, the ECJ handed down its decision in Case C-267/09, brought before the court by the European Commission against Portugal regarding the Portuguese rules which require non-resident taxpayers to appoint a tax representative in Portugal. The Portuguese Personal Income Tax Code establishes that non-residents in receipt of income subject to tax and residents who leave the national territory for more than six months are required, for the purposes of taxation, to appoint a natural or legal person, resident or established in Portugal, authorised to represent them in dealings with the Portuguese tax authorities and to ensure their compliance with their obligations as regards taxation. According to the ECJ decision, the provisions in question are discriminatory and constitute a breach of Articles 21 TFEU and 63 TFEU and the corresponding articles of the EEA Agreement. The ECJ concluded that, by obliging the taxpayers in question to appoint a tax representative, the Portuguese legislation requires them to take action and to bear the cost of remunerating that representative. According to the ECJ, such constraints create for those taxpayers a difficulty liable to discourage them from investing capital in Portugal and, therefore, they must be regarded as a restriction on the free movement of capital which is generally prohibited by Article 63 TFEU and Article 40 of the EEA Agreement. Additionally, the ECJ also considered that such restriction could not be regarded as justified in the light of Article 63 TFEU by the overriding requirement of general interest of ensuring the effectiveness of fiscal supervision and the prevention of tax avoidance, since it goes beyond what is necessary to achieve those objectives. Further to this decision, it is expected that Portugal will amend its tax legislation and eliminate the obligation to appoint a tax representative for non-residents. -- Leendert Verschoor en Jorge Figueiredo, Portugal; leendert.verschoor@pt.pwc.com 7

8 Portugal ECJ judgment on Portuguese scheme for tax adjustment of financial assets not located within Portugal: Commission v. Portugal (Case C-20/09) On 7 April 2011, the ECJ handed down its decision in Case C-20/09, brought against Portugal regarding the Portuguese tax regularisation scheme established by Law No 39-A/2005 of 29 July Under this regime, also referred to as RERT I, taxpayers holding undeclared pecuniary items abroad on 31 December 2004 were allowed to disclose and regularise such investments by filing a confidential tax statement until 16 December 2005 and pay a sum corresponding to the application of a rate of 5% on the value of the financial assets listed in such declaration. However, a preferential reduced rate of 2.5% would be applied if the declared financial assets were Portuguese government bonds or if their respective value had been reinvested in Portuguese government bonds by the time when the adjustment declaration was filed. Additionally, taxpayers holding public debt securities issued by the Portuguese State and wishing to benefit from the preferential tax treatment, had to maintain those assets for a period of at least three years from the date of submission of the statement of tax regularisation, failing which those taxpayers were required to pay the difference between the amount corresponding to application of the general regularisation rate and that which they had paid on the basis of the preferential rate, plus the corresponding compensatory interest increased by 5 percentage points. According to the ECJ, the scheme in question, by providing for different treatment according to whether taxpayers held public debt securities issued by the Portuguese State or public debt securities issued by other Member States, was more favourable to the first and dissuaded taxpayers from investing in public debt securities issued by other Member States and from keeping their regularised financial assets in forms other than Portuguese State securities. In conclusion, the regime at hand constitutes a restriction on the free movement of capital, prohibited by Article 63 TFEU. -- Leendert Verschoor en Jorge Figueiredo, Portugal; leendert.verschoor@pt.pwc.com Back to top National developments Finland Central Tax Board advance ruling on withholding tax on dividends from a Finnish company to a Norwegian investment fund The Finnish Central Tax Board gave an advance ruling (KVL 21/2011, issued on 30 March 2011) for years stating that a Norwegian investment fund is not liable to tax in Finland on its Finnish source dividend income because the same dividend to a Finnish investment fund would have been tax exempt in Finland. 8

9 In the case at hand, a Norwegian investment fund A was subject to Norway s Investment Fund Act and an Undertaking for Collective Investments in Transferable Securities ("UCITS") referred to in the Directive 85/611/ECC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS-Directive). The investment fund s assets were managed by a management company which was a Norwegian limited liability company. The investment fund was a separate legal entity in Norway and had an unlimited tax liability. Dividend and capital gain received by the Norwegian investment fund were in most cases tax exempt in Norway on the basis of special tax provisions. As the investment fund A was an UCITS fund referred to in the UCITS-Directive, no objective differences were regarded to exist between the Norwegian investment fund A and a Finnish investment fund. Thus, the Central Tax Board considered that the Norwegian investment fund could be regarded to have similar key characteristics to a Finnish investment fund. Different tax treatment of these two investment funds could not be justified with the need to safeguard cohesion of the tax system or the allocation of taxation rights between the Member States. The provisions of the EC Treaty and EEA Agreement regarding the free movement of capital are regarded to provide the same tax exemption in Finland for a Norwegian investment fund (being an UCITS-fund) that is provided for a Finnish investment fund. Hence, Norwegian investment fund A should not be liable to tax in Finland on its Finnish source dividend under the same Finnish tax provision that grants tax exemption to a Finnish investment fund. This is the first decision in Finland where a comparison has been made between a Finnish investment fund (a contractual arrangement) and a foreign investment fund (a separate legal entity). Despite the obvious differences in the legal forms of the investment funds, the Central Tax Board considered the UCITS-Directive to be the decisive factor for the comparability. The current practice within Finnish Tax Administration has been to compare foreign investment funds that are separate legal entities to Finnish limited liability companies and not to Finnish investment funds. Thus the foreign investment fund receiving Finnish source dividends from publicly quoted companies must itself be quoted on a Stock Exchange (or at least have some of the units in its sub funds quoted) in order to receive the dividends tax exempt. If the Central Tax Board s ruling is maintained, Finnish source dividend should be tax exempt for foreign investment funds regardless of whether the foreign fund is publicly quoted or not. With respect to the requirement of foreign investment fund being an UCITSfund, the issue is more uncertain. Despite the emphasis the Central Tax Board gave to the UCITS-Directive, Finnish investment funds may also be non-ucits, and therefore, it cannot be ruled out that also foreign non-ucits-funds could be comparable to Finnish investment funds. Finally, it is important to note that the Central Tax Board s decision may still be appealed to the Finnish Supreme Administrative Court and referred further to the ECJ. -- Jarno Laaksonen and Heikki Lajunen, PwC Finland; jarno.laaksonen@fi.pwc.com 9

10 Finland Supreme Administrative Court annuls earlier judgement on applicability of CFC legislation in intra-eu situations On 11 April 2011, the Finnish Supreme Administrative Court gave a judgement (SAC 2011:38) where it annulled its own CFC related decision from 2002 (SAC 2002:26). In its judgement in 2002 the Court stated inter alia that in the case at hand the EU s principle of freedom of establishment did not prevent the applicability of Finnish CFC legislation to a group company in Belgium (being a co-ordination centre). At the time, the Court gave the decision without referring the question to the ECJ, which it now admits was a mistake, and it also admits that its judgement in 2002 was not in line with the 2006 Cadbury Schweppes case (C-196/04). In this case, the Finnish company A Oyj owned all the shares in a Belgian company B N.V. which was established as a co-ordination centre and thus benefited from a low corporate income tax rate in Belgium. B N.V. acted as a financing company for the group and also participated in research and development activities. B N.V. employed around 10 to 15 people. According to Finnish CFC legislation at the time, a foreign company could be deemed as a CFC in case the effective level of income taxation of the company was lower than 3/5 of the corresponding level in Finland and certain other conditions were met. After establishing that the requirements to apply Finnish CFC legislation on the basis of Finnish domestic tax law were met, the Supreme Administrative Court stated in 2002 that neither the Double Tax Treaty between Finland and Belgium nor the Articles 43 EC and 48 EC prevented the application of the aforementioned CFC legislation. Thus the profits of B N.V. generated during 1999 and 2000 could be taxed at the hands of A Oyj. The Court held that it was a question of applicability of domestic legislation to a domestic company and thus could not be considered as discrimination from an EU Law perspective. In 2006 the ECJ decision in Cadbury Schweppes was given. ECJ held that Articles 43 EC and 48 EC must be interpreted as precluding the inclusion, in the tax base of a resident company established in a Member State, of profits made by a CFC in another Member State, where those profits are subject in that State to a lower level of taxation than that applicable in the first State, unless such inclusion relates only to wholly artificial arrangements intended to escape the national tax normally payable. Accordingly, such tax measure must not be applied where it is proven, on the basis of objective factors which are ascertainable by third parties, that despite the existence of tax motives, the controlled company is actually established in the host Member State and carries on genuine economic activities there. After the Cadbury Schweppes judgement, company A Oyj applied for the annulment of the Supreme Administrative Court decision given in This time the Court held that the interpretation of the Finnish legislation in force at the time and its relation to EU Law had not been clear enough to not apply Article 234 EC. With regard to the substance of the case, the SAC held in accordance with the reasoning of Cadbury Schweppes that B N.V. was actually established in Belgium and carried out genuine economic activities. The Supreme Administrative Court mentioned that although the decisions of the ECJ can be seen as having a retroactive effect, this does not necessarily result in the annulment of final and already legally binding judgements (e.g. C-453/00 Kühne & Heitz). According to Finnish legislation, a decision can be annulled in case there has been a procedural error which has had 10

11 a substantial effect on the decision or the decision has been based on the application of incorrect law. In addition, the decision cannot be annulled unless it infringes the right of an individual or the public interest demands it. All the relevant aspects should be carefully considered. Taken into consideration the aforementioned breaches of EU Law as well as the financial significance of the decision to the taxpayer and the fact that the application for annulment was filed immediately after ECJ s decision, the Supreme Administrative Court held that the earlier decision of the Supreme Administrative Court was to be annulled and the case was referred to the Tax Authorities for a new tax assessment. -- Jarno Laaksonen and Heikki Lajunen, PwC Finland; jarno.laaksonen@fi.pwc.com Germany Federal Fiscal Court decision on taxation of Liechtenstein private foundations On 22 December 2010, the Federal Fiscal Court decided that the taxation of profits of a Liechtenstein foundation directly in the hands of the beneficiary is in line with the EEA Agreement. In Germany, the income of private foundations is taxed at the level of the foundation. However, according to Sec. 15 Foreign Tax Act 1972 (FTA) the income of foreign foundations and trusts is directly attributed to its beneficiaries. Although the goal of Sec. 15 FTA 1972 is to combat tax evasion, the rule is applicable in any case of foreign foundations and trusts - irrespective of the facts of a particular case. The Federal Fiscal Court has now decided that Sec. 15 FTA 1972 constitutes a breach of the free movement of capital of Art. 40 EEA Agreement, but - in this case - can be justified by the fight against tax evasion and the need to safeguard the effectiveness of fiscal supervision, since Germany had no convention on mutual assistance with Liechtenstein in the relevant tax year. According to the Federal Fiscal Court, the possibility that the taxpayer provides evidence is not sufficient to safeguard fiscal supervision. Sec. 15 FTA was amended in 2009 as a reaction on an infringement procedure of the Commission (IP/07/1151). The income of the foundation is now no longer attributed to its beneficiaries if a mutual assistance convention is applicable and if the taxpayer provides evidence that he has no power to dispose of the assets of the foundation. -- Moritz Glahe and Juergen Luedicke, PwC Germany; juergen.luedicke@de.pwc.com Germany Federal Finance Ministry accepts EU/EEA companies with foreign statutory seat but domestic place of management as lower tier members in fiscal unities On 28 March 2011 the German Federal Ministry of Finance issued a decree in which it overruled a German tax provision that requires the lower tier company in a German corporate income tax and trade tax fiscal unity to have both its seat and place of management in Germany (section 14 para 1 Corporate Income Tax Act). 11

12 According to the circular it is sufficient for companies founded in an EU/EEA Member State to have their place of management in Germany to be able to participate in a fiscal unity as lower tier company. The Ministry published the decree as a consequence of the infringement procedure initiated by the European Commission against Germany on 29 January 2009 (case reference number 2008/4909). The Commission considers the German requirement of domestic seat and place of management to violate the freedom of establishment because companies formed in other Member States which shift their place of management to Germany cannot enjoy the benefits of a fiscal unity (i.e. the inter-company consolidation of profits and losses) although they are fully liable to tax just as purely domestic companies are. The Commission therefore formally requested Germany to end its discriminatory taxation on 30 September 2010 (see EU Tax News Issue no. 006). The practical consequences of the decree are limited, though, because all conditions which the law provides for fiscal unities apart from the domestic seat of the lower tier company must still be fulfilled. This implies the conclusion of a profit and loss pooling agreement by which the lower tier company consents to transfer its future profits to the top tier company whereas the latter consents to assume the future losses of the former. In many cases, it is impossible for companies formed abroad to conclude such an agreement because the company law governing them prevents this. Yet, the question whether this requirement which discriminates against companies originating from other countries is in conformity with the EU fundamental freedoms remains unsolved. -- Björn Bodewaldt and Juergen Luedicke, Germany; juergen.luedicke@de.pwc.com Italy Finance Ministry issues draft implementing decree about the Home State Taxation regime On 6 April 2011, the Italian Finance Ministry issued the draft of the implementing Decree about the new Italian regime on Home State Taxation. Such a regime will give the opportunity to EU companies, setting up a new business activity in Italy, to apply any fiscal system of other EU Member States instead of the Italian fiscal system (for more information please refer to EUDTG Tax News 2010 nr. 005). Scope of the draft issue is to open a public discussion about the new regime before its final implementation. The main points, specified by the draft of the implementing decree, are the following: the new regime can be used by EU companies, resident for at least 24 months in an EU Member State, which decide to transfer their tax residence or constitute a subsidiary/permanent establishment in Italy with the aim to set up a new business activity; a new business activity does not include activities already carried out in Italy (e.g. through a subsidiary/permanent establishment of the EU companies); any EU fiscal system (taxable base and tax rate), not necessarily the same of the State of residence of the EU companies, can be used for a period not exceeding three years; after this period the ordinary Italian fiscal system is applicable; 12

13 the employees in Italy of the EU companies, for the taxation of their salaries, could opt to apply the same EU fiscal system chosen by the EU companies; in order to access the new regime it is necessary to file a tax ruling with the Italian Tax Authorities; the new regime will be actually applicable only after the publication of the final version of the implementing decree. Finally, it should be pointed out that, so far, it seems that the new Italian regime on Home State Taxation has not yet been notified to the European Commission according to the procedure provided for in article 108, paragraph 3, TFEU on State Aid. -- Claudio Valz and Luca la Pietra, Italy; claudio.valz@it.pwc.com Netherlands Dutch double inheritance taxation not in breach of EU Law On 8 April 2011, the Dutch Supreme Court held that inheritance tax imposed by the Netherlands was not in breach of EU Law, even though (i) Belgium had also taxed the same inheritance and (ii) there was consequently double taxation of the inheritance. In 2002, the litigant inherited a stake in a Dutch real estate company from his father. The father, who was a Dutch national, had at the time of his death lived in Belgium since According to Dutch tax law, an inheritance received from a Dutch national is taxable if the testator lived in the Netherlands at some point during the last 10 years of his life. This meant that the inheritance was subject to Dutch inheritance tax. At the same time, Belgium also imposed an inheritance tax because the testator was a Belgian resident in The parallel exercise of fiscal sovereignty by the Netherlands and Belgium resulted in double taxation of the inheritance. This outcome was not prevented either by a tax treaty, or by unilateral policy of either country. The Dutch Supreme Court held that EU Law does not provide any general criteria for the attribution of areas of competence between the Member States in relation to the elimination of double taxation within the EU. Contrary to what the litigant has argued, the Netherlands is therefore under no obligation to allow the deduction of foreign inheritance tax in the present case. -- Marius Girolami, PwC Netherlands; marius.girolami@nl.pwc.com Netherlands Non-deductibility of competition fine not in breach of EU Law On 31 March 2011, the Lower Court of the Hague held that the non-deductibility of a competition fine, imposed by the Dutch Competition Authority ( NMa ), is not in breach of the EU principle of equality and EU competition law. The litigant is a Dutch resident to whom competition fines have been imposed by the Dutch Competition Authority due to a violation of Article 101 TFEU. The Dutch Tax Authorities refused the deduction of these fines from the corporate income tax base. According to Dutch tax law, deduction of administrative fines, such as competition fines imposed by the Dutch authorities or EU institutions, is not permitted. However, competition fines imposed by authorities of other EU Member States are deductible. 13

14 The Lower Court has held that the treaty freedoms and Article 18 TFEU do not preclude discrimination by a Member State against its own residents, as long as the Member State does not hinder the free movement of its residents. This outcome can be understood in light of the fact that this is a purely domestic situation. -- Marius Girolami, PwC Netherlands; marius.girolami@nl.pwc.com Netherlands Dutch exit tax on pension rights as such not in breach of EU Law On 15 April 2011, the Dutch Supreme Court held that the Dutch exit tax on pensions is not as such in breach of EU Law nor contrary to the principle of Good Faith governing the tax treaty between the Netherlands and Belgium, except where decreases in pension entitlements after emigration are not taken into account. The litigant is a resident of the Netherlands who moved to Belgium on 5 March Based on Articles 3.83 and of the Dutch Individual Tax Act, he is taxed on the fair market value of his pension entitlements at the moment of emigration. The Dutch tax authorities issued a so-called conservatory assessment, according to which a suspension of payment for a ten year period is (automatically) granted. After this period, the assessment expires. No security for payment is required. The litigant argues, inter alia, that the conservatory assessment is contrary to the principle of Good Faith governing the tax treaty and in breach of EU Law. The Dutch Supreme Court held that the conservatory assessment has not been issued contrary to good faith with respect to the tax treaty between the Netherlands and Belgium (2001). This is because under Article 18 of the treaty, the Netherlands is in some circumstances entitled to tax pensions paid to a resident of Belgium. This decision is interesting in the light of the Supreme Court s decision of 19 June In a similar case involving the tax treaty between the Netherlands and France (1973), it was held that the Dutch exit tax on pension rights was contrary to the principle of Good Faith. This difference can be explained by the fact that under the treaty with France, the State of residence (after the migration) is under all circumstances entitled to tax the pension income. Furthermore, the Dutch Supreme Court held that the conservatory assessment is not as such in breach of the Treaty on the Functioning of the European Union. Based on the case law of the ECJ (in particular case C-470/04, N) the Supreme Court stated that the tax provisions restrict the exercise of the treaty freedoms. However, as they pursue a legitimate objective in the public interest (preserving a balanced allocation of taxing powers between the Member States, with reference to the OECD commentary on Article 18), are appropriate for ensuring the attainment of that objective and do not go beyond what is necessary, the conservatory assessment was not considered to be contrary to EU Law. The Supreme Court noted that if the conservatory assessment is collected in the future (e.g. in case of surrendering the pension entitlements), whereas the value of the pension entitlements has decreased after migration or tax rates have changed, a higher tax liability may arise compared to the situation in which the litigant did not move to another Member State. This 14

15 disproportionate restriction is only partially neutralised under Dutch law (upon request). In order to comply with the case law of the ECJ, in these circumstances, only the amount of tax due as if the litigant remained a resident of the Netherlands may be collected by the tax collector. -- Muriël Schoenmakers, Niek Schipper, Sjoerd Douma and Anna Gunn, PwC Netherlands; sjoerd.douma@nl.pwc.com Netherlands Government proposes an interim-regime for currency results on participations On 8 April 2011, the Netherlands State Secretary for Finance announced plans to change the tax treatment of currency results on participations in subsidiary companies under the Dutch Corporate Income Tax Act of These plans react to taxpayers who wish to deduct currency losses on those shares on the basis of EU Law. At present, currency results on participations are exempt under the Dutch participation exemption. This means that currency losses are non-deductible for Dutch corporate income tax purposes. In view of the ECJ s decision in the case of Deutsche Shell (C-263/08), this outcome is arguably contrary to EU Law. This has lead a number of Dutch taxpayers to claim a currency loss in their corporate income tax return. The State Secretary holds the view that the Dutch participation exemption does not contravene EU Law. Nevertheless, it has now been announced that measures will be taken anticipating a possible legal victory on the part of the taxpayers in this case. The new measures are set to apply from 8 April 2011 onwards. The crux of the legislative changes is that once a taxpayer chooses to deduct Deutsche Shell losses, future currency gains would also become taxable. In addition to this, anti-abuse measures have been announced aimed at preventing the double use of currency losses, and the circumvention of rules through restructuring within a group. The State Secretary s announcement leaves open a number of issues which need to be clarified in the actual legislative proposal. It is, for example, unclear whether currency gains may become taxable in excess of any deductible currency losses. Also, it is unclear whether the new legislation will cover all participations held by a taxpayer or only the participations with respect to which a currency loss has been taken into account or which have been transferred within the group (thus excluding third party transactions). Another point is the treatment of situations in which a currency loss has been realized through a redemption of shares because, for those, corresponding currency gains will not occur. The EU Law compatibility of the proposed legislation including its retroactive effect will largely depend on the answers to these and similar questions. As currently announced, the aforementioned measures ought not impact taxpayers who have not claimed Deutsche Shell losses. Note, however, that these measures are referred to as an interim-regime, possibly suggesting further changes in the future. -- Sjoerd Douma and Anna Gunn, PwC Netherlands; sjoerd.douma@nl.pwc.com 15

16 Portugal Taxation of capital gains realized on the sale of shares held on micro and small companies Law 15/2010 of 26 July established that capital gains obtained by individuals arising from the sale of shares held in micro or small companies, which are not listed on a stock exchange, or in any regulated market, are exempt from Personal Income Tax (PIT) on 50% of the respective amount (positive balance between capital gains and capital losses). The applicable PIT rate is 20%. The referred amendment of the taxation of capital gains entered into force in These capital gains should be declared in Annex G (Capital Gains) of the Personal Income Tax (PIT) annual return, to be submitted by individual taxpayers. However, Annex G of the PIT return, and respective filing instructions, to be used in 2011 to declare income obtained in 2010 or previous years, is designed in a way that the above mentioned tax benefit can in practice apply only in case of a sale of shares in a Portuguese resident micro or small company, thus excluding foreign companies. In fact, Annex G requires not only that the concept of Micro and small companies is the one defined in the annex of the Decree-Law 327/2007, which follows the EU rules on this matter, but also requires that such status of micro or small company is certified by IAPMEI (Portuguese Agency for SMEs and Innovation). Finally, Annex G requires the individual taxpayer to identify the Portuguese Number of Collective Person / Portuguese Tax Number of the company whose shares are sold, which undoubtfully points towards the intention of applying the regime to domestic situations. The above mentioned regime, as it provides for different treatment according to whether taxpayers hold shares in Portuguese companies or in companies resident in other Member States, being more favourable to the first and dissuading taxpayers from investing in the latter, is arguably incompatible with EU law, more precisely with Article 63 TFEU. -- Leendert Verschoor en Jorge Figueiredo, Portugal; leendert.verschoor@pt.pwc.com Spain Spanish government publishes Sustainable Economy Act Spain On 5 March 2011, the Spanish Sustainable Economy Act was published. With regards to the tax changes contained therein, we would like to highlight the following: Exemption applicable to the distribution of benefits by pension funds resident in the EEA The scope of the exemption covered in the Spanish non-resident income tax Act concerning the distribution of dividends and participation in benefits obtained without the presence of a permanent establishment has been widened and includes pension funds resident in another EU Member State or permanent establishment of the aforementioned institutions based in another EU Member State. 16

17 The exemption shall be applicable to the pension funds which are resident in a country part of the EEA in so far as the latter has a Double Tax Treaty to avoid double taxation with an exchange of information clause, with Spain. Exemption concerning the distribution of benefits by collective investment institutions resident in the EEA The scope of the exemption considered in the Spanish non-resident income tax Act regarding the distribution of dividends and participation in benefits obtained without the presence of a permanent establishment has been widened and includes collective investment institutions covered by Directive 2009/65/CE. The aforementioned exemption cannot give rise to a lower tax obligation from that which would have resulted from the application the standard tax rate established in the Corporate Income Tax to said income for collective investment institutions resident in Spain. The exemption shall be applicable to investment institutions which are resident in an EEA Member State, in so far as the latter has a Double Tax Treaty to avoid double taxation with an exchange of information clause, with Spain. The Act in its provisions, refers to collective investment institutions resident in Spain. -- Miguel Ferre, PwC Spain; miguel.ferre@es.landwellglobal.com Back to top EU developments EU European Commission issues proposal for a recast of the EU Parentsubsidiary Directive (COM(2010) 784 final) On 4 January 2011, the European Commission issued a Communication on 4 January 2011 regarding its proposal for a recast of the Council Directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. The need for this recast is explained in the explanatory memorandum attached to the Commission s Communication: On 1 April 1987 the Commission decided to instruct its staff that all acts should be codified after no more than ten amendments, stressing that this is a minimum requirement and that departments should endeavour to codify at even shorter intervals the texts for which they are responsible, to ensure that their provisions are clear and readily understandable. The codification of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States has been initiated by the Commission, and a relevant proposal has been submitted to 17

18 the legislative authority. The new Directive was to have superseded the various acts incorporated in it. In the course of the legislative procedure, views were expressed by the European Parliament and by the Council that the wording of the second subparagraph of Article 4(3) of Directive 90/435/EEC, as it appeared in Article 4(5) of the proposed codified text, might be understood as establishing a secondary legal basis. In the light of the judgment of the ECJ of 6 May 2008 in Case C-133/06 (European Parliament v. Council) and for the avoidance of any doubt and for the sake of legal certainty, those two institutions requested that the provision in the proposed codified text be redrafted. Since such a redrafting would imply certain substantive changes, and would therefore go beyond straightforward codification, it was considered necessary that point 85 of the Inter-institutional Agreement of 20 December 1994 Accelerated working method for official codification of legislative texts be applied, in the light of the Joint declaration on that point. The amendment to be made to Article 4(5) of the proposed codified text concerns the insertion of words clarifying that the rules referred to in that provision are adopted by the Council acting in accordance with the procedure provided for in the Treaty. It is therefore appropriate to transform the codification of Directive 90/435/EEC into a recast in order to incorporate the necessary amendment. -- Bob van der Made, PwC Netherlands; bob.van.der.made@nl.pwc.com EU Conclusions European Council Spring summit held on March 2011 On 25 March 2011, the Euro-zone Heads of State or Government, joined by Bulgaria, Denmark, Latvia, Lithuania, Poland, Romania, adopted the Euro Plus Pact aimed at strengthening the economic pillar of the monetary union, achieving a new quality of economic policy coordination, improving competitiveness, thereby leading to a higher degree of convergence. The Euro Plus Pact will focus primarily on areas that fall under national competence and are deemed as key for increasing competitiveness and avoiding harmful imbalances. Echoing some of the recommendations in the 2010 Monti Report, the Euro Plus Pact aims to strengthen the economic governance of the EU and ensure the lasting stability of the Euro area as a whole. Robust action at EU level is called for to stimulate growth by strengthening the Single Market, reducing the overall burden of regulation and promoting trade with third countries. The Euro Plus Pact is said to fully respect the integrity of the EU-27 Single Market, yet the implementation of commitments and progress towards the common policy objectives will be monitored politically by the Heads of State or Government of the Euro area and participating countries on a yearly basis, on the basis of a report by the Commission. In addition, Member States commit to consult their partners on each major economic reform having potential spillover effects before its adoption. 18