Recent EU Tax Problems

Transcription

1 EJTN ADMINISTRATIVE LAW PROJECT JUDICIAL TRAINING ON EU DIRECT TAXATION Recent EU Tax Problems Dr. Katerina Perrou, Tax Lawyer Assistant Lecturer University of Athens Law School Thessaloniki, 21 April 2016

2 Outline 1. Obstacles: How to get rid of them the Greek experience 2. Discrimination or restriction? The Hervis Sport case 3. A case of discrimination: Foreign branches in Greece 4. About Legal Certainty: The ITELCAR case 5. The Ne bis in idem principle 2

3 Obstacles: How to get rid of them the Greek experience 3

4 What constitutes an obstacle? Sea-Land Service (NL), C-430 and 431/99: None the less the VTS system at issue in the main proceedings, in that it requires the payment of a tariff by sea-going vessels longer than 41 meters is liable to impede or render less attractive the provisions of those services to which the levy applies and therefore constitutes a restriction on their free circulation. This means that ANY and EVERY tax is an obstacle? 4

5 What constitutes an obstacle? The first point to be made is that, although direct taxation falls within their competence, the Member States must none the less exercise that competence consistently with Community law and avoid any discrimination on grounds of nationality (Case C- 279/93 Schumacher [1995] E C R 1-225, paragraphs 21 and 26; Case C-80/94 Wielockx [1995] ECR I-2493, paragraph 16; Case C-107/94 Asscher [1996] ECR I- 3089, paragraph 36; and Case C-250/95 Futura Participations and Singer [1997] ECR I-2471, paragraph 19). - RBS, 19: 5

6 What constitutes an obstacle? Discrimination: directly based on nationality - The application of different rules to comparable situations and - The application of the same rule to different situations - e.g. Futura, C-250/95: Luxembourg rules of evidence that applied indiscriminately to both residents and non-residents 6

7 What constitutes an obstacle? Distinction: Measures that result in covert or indirect discrimination (criterion is not nationality): a Luxembourg rule that made the refund of excess tax withheld on income conditional on permanent residency within a MS constitutes a covert form of discrimination contrary to the free movement of workers (Biehl, C-175/88) 7

8 What constitutes an obstacle? Measures without distinction that make free movement less attractive: legislation containing a number of elements liable to dissuade individuals from taking out and insurance companies from offering insurance is contrary to the freedom to provide services (Jessica Safir, C- 118/96) in this case the Swedish measure was designed to take away discrimination, yet 8

9 What constitutes an obstacle? Disparities are not obstacles! If unequal treatment is due to differences of the tax systems between the MS, it results from a disparity for which EC law is not concerned - Schempp (D), C-403/03 Adverse consequences of the application of the same tax rule to both domestic and cross-border situations that result from the parallel exercise by two MS of their fiscal sovereignty (Kerckhaert- Morres (B), C- 513/04) 9

10 How to get rid of Obstacles A. Automatic i. Positive integration limited in direct taxation ii. Member States initiatives B. Forced Two available mechanisms: i. Preliminary rulings - National courts role ii. Infringement procedures - Action of the Commission on its own initiative or after a complaint 10

11 How to get rid of Obstacles Forced (cont.) Three stages of Infringement Procedure: - Letter of Formal Notice (first written warning) - Reasoned Opinion (final written warning) - Case referred to the ECJ 11

12 The Greek Experience A. Preliminary rulings 2 cases i. Royal bank of Scotland plc; C 311/97 i. The incompatible rule: Banks that had their seat in Greece were taxed at 35% whereas branches of foreign Banks established in Greece were taxed at 40% ii. The Court s decision ( ): this rule constitutes a discrimination incompatible with the freedom of establishment iii. Compliance (law 2836/2000): ITC was amended all SAs taxed at 35%; effect:

13 The Greek Experience Royal bank of Scotland plc; C 311/97 13: Article 105 of the Code defines the method by which the gross income and net income of legal persons are determined. It does not distinguish between Greek companies and foreign companies 22: Under that provision, freedom of establishment for nationals of one Member State on the territory of another Member State includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings under the conditions laid down for its own nationals by the law of the country where such establishment is effected. The abolition of restrictions on freedom of establishment also applies to restrictions on the setting up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of another Member State (Case 270/83 Commission ν France [1986] ECR 273, paragraph 13). 13

14 The Greek Experience Royal bank of Scotland plc; C 311/97 26: In order to determine whether a difference in tax treatment such as that resulting from Article 109 of the Code is discriminatory, it is necessary to ascertain whether, for the purposes of the taxation of profits earned in Greece, a company having its seat in Greece and a branch established in Greece of a company having its seat in another Member State are in an objectively comparable situation. 14

15 The Greek Experience Royal bank of Scotland plc; C 311/97 27: in the case of a tax advantage denied to nonresidents, a difference in treat- ment between the two categories of taxpayer might constitute discrimination within the meaning of the Treaty where there is no objective difference such as to justify different treatment on this point as between the two categories of taxpayers 15

16 The Greek Experience Royal bank of Scotland plc; C 311/97 28: As far as the method of determining the taxable base is concerned, the Greek tax legislation does not establish, as between companies having their seat in Greece and companies which, whilst having their seat in another Member State, have a permanent establishment in Greece, any distinction such as to justify a difference of treatment between the two categories of companies. 16

17 The Greek Experience Royal bank of Scotland plc; C 311/97 32: it is necessary to examine whether discrimination such as that in question in the main proceeding may be justified. According to settled case-law, only an express derogating provision, such as Article 56 of the EC Treaty, could render such discrimination compatible with Community law 17

18 The Greek Experience 2 Athinaiki Zythopoiia; C- 294/99 i. The incompatible rule: When distributing taxfree income, the Greek subsidiary suffered a withholding tax that did not apply in cases the profits were retained by the sub. ii. The Court s decision ( ): Such withholding was deemed contrary to the PSD 90/435/EC. iii. Compliance: The domestic provisions have NOT been amended. Wrong decision? 18

19 The Greek Experience 2 Athinaiki Zythopoiia; C- 294/99 27: it is settled case-law that the nature of a tax, duty or charge must be determined by the Court, under Community law, according to the objective characteristics by which it is levied, irrespective of its classification under national law 32: where the derogation in Article 7(2) of the Directive is not applicable, the rights conferred on economic operators by Article 5(1) of the Directive are unconditional and a Member State cannot make their observance subject to an agreement concluded with another Member State (see, to that effect, Case 270/83 Commission v France [1986] ECR 273, paragraph 26) 19

20 The Greek Experience Athinaiki Zythopoiia; C- 294/99 Temporal effects of the judgment 34: It is settled case-law that the interpretation which, in the exercise of the jurisdiction conferred upon it by Article 234 EC, the Court of Justice gives to a rule of Community law clarifies and defines where necessary the meaning and scope of that rule as it must be or ought to have been understood and applied from the time of its entry into force. It follows that the rule as thus interpreted may, and must, be applied by the courts even to legal relationships arising and established before the judgment ruling on the request for interpretation, provided that in other respects the conditions enabling an action relating to the application of that rule to be brought before the courts having jurisdiction are satisfied No limitation accepted 20

21 The Greek Experience Athinaiki Zythopoiia; C- 294/99 Temporal effects of the judgment 39: The financial consequences which might ensue for a government owing to the unlawfulness of a tax or charge have never in themselves justified limiting the effects of a judgment of the Court. After all, if it were otherwise, the most serious infringements would receive more lenient treatment in so far as it is those infringements that are likely to have the most significant financial implications for Member States 21

22 The Greek Experience B. Infringement procedures 3 cases B. 1 Capital duty (Dir 69/335/EEC); C-178/05 i. The Incompatible rules: Greece levied capital duty in cases of transfer of the real seat of a company in another MS; it also granted a tax exemption to ii. shipping companies. The Court s decision ( ): the Greek rules are incompatible with the Capital duty Directive iii. Compliance: Greece failed to comply with C- 178/05 and a second infringement was opened in January It finally complied in May 2009 (law 3763/2009). 22

23 The Greek Experience B.2a. Taxation of Inbound Dividends; C-406/07 i. The incompatible rule: Domestic dividends are tax exempt whereas inbound dividends received by individuals are taxed according to the individual progressive tax rates ii. The Courts decision ( ): Less favorable treatment of inbound dividends makes it less attractive for Greek residents to invest in foreign companies. iii. Compliance (law 3697/2008): as from all dividends were taxed at 10%. 23

24 The Greek Experience B.2b Taxation of Foreign Partnerships; C-406/07 i. The incompatible rule: Greek partnerships are taxed at a rate of 20% whereas foreign partnerships established in Greece are taxed at 25% ii. The Court s decision ( ): The higher tax rate that applies to branches of foreign partnerships constitutes less favorable treatment liable to dissuade partnerships established in other MS from pursuing economic activities in Greece through a branch 24

25 The Greek Experience iii. Compliance (law 3763/2009): As from branches of foreign partnerships that are established in Greece are taxed in the same way as Greek partnerships, under the condition that the foreign partnership s nature is substantially similar to the nature of Greek partnerships. 25

26 The Greek Experience B.3 C-155/09: Comm. v. Greece Tax provisions for the acquisition of primary residence in Greece The problem: Greece grants an exemption from tax for the acquisition of one property that serves as primary residence, only to residents. Decision ( ): Breach of Freedom of establishment and freedom to move and reside freely within the EU Compliance: law 3842/2010, law 3943/2011 and law 4072/

27 The Greek Experience 45. "the Court has consistently held that the rules regarding equal treatment forbid not only overt discrimination by reason of nationality but also all covert forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result." 46. That is true, in particular, of a measure under which a distinction is drawn on the basis of residence or ordinary residence, 27

28 46. (Cont.). The Greek Experience inasmuch as that requirement is liable to operate mainly to the detriment of nationals of other Member States, since persons who are not resident or ordinarily resident on the national territory are in the majority of cases foreigners. 28

29 Pending cases The Greek Experience Case C-244/15: Exemption from inheritance tax for the primary residence for EU nationals who reside permanently in Greece --> penalises beneficiaries who inherit a property in Greece but live outside of the country, and who normally are non-greek nationals or Greek nationals who have exercised their fundamental freedoms by working, studying or living abroad. Infringement of Free movement of capital 29

30 Pending cases The Greek Experience Case C-98/16: Greece taxes legacies more heavily where the beneficiary is a comparable non-profit entity established in another EU/EEA State that does not grant reciprocity; effect: reduces the value of the property bequeathed to these foreign non-profit entities --> restriction on the free movement of capital which cannot be justified and is contrary to Article 63 TFEU and Article 40 EEA Agreement. 30

31 Discrimination or Restriction? The Hervis Sport case

32 Hervis Sport, C-385/12 Facts of the case Court's analysis Some thoughts Conclusions 32

33 Hervis Sport, C-385/12 Hervis Sport: Hungarian taxpayer, member of the Austrian SPAR Group 2010: Hungary imposed a special tax on store retail trade in certain economic sectors Taxable amount: the net turnover Tax rate: up to HUF 500M 0%, increasing in three stages: 0,1% to 0,4% and finally to 2,5% for turnover in excess of HUF M 33

34 Hervis Sport, C-385/12 In case of related undertakings (= inter alia: taxable persons where one exercises a controlling influence over the other) the tax liability is first applied to the total turnover of all taxable persons and then divided proportionally to each individual taxable person Hervis is liable to pay tax not on its own turnover but a share of the tax calculated on the aggregate turnover of the SPAR group in Hungary 2,5% 34

35 Hervis Sport, C-385/12 Hervis complained that the higher rate of the special tax applies mainly to subsidiaries of non-resident companies as resident companies are organized under the franchising system The application of the special tax results in a higher taxation of companies linked with nonresident companies, making higher aggregate turnover in Hungary Infringement of articles 18, 49 to 55, 65 and 110 TFEU 35

36 Hervis Sport, C-385/12 Court s analysis 1/ Which freedom applies? The PURPOSE of the legislation concerned must be taken into consideration the tax applies to taxable persons classified as linked undertakings direct or indirect majority influence Freedom of establishment 2/ Is there a discrimination? The criterion used in the law (linked companies) is neutral BUT has a disadvantaging effect 36

37 Hervis Sport, C-385/12 2/ Is there a discrimination? The disadvantage is a result of two characteristics the steep progressivity of the tax rate and the fact that it applies to the aggregate turnover of all linked companies De jure objective criteria; de facto disadvantage the subsidiaries of non-resident parent companies (generally organized in the form of subs and not franchise) this depends on the actual circumstances in the Hungarian retail market 37

38 Hervis Sport, C-385/12 It must be established by the national court that the tax has that effect that it actually results in creating a disadvantage for companies belonging to a non-resident group If this is established: although the legislation does not make a formal distinction according to the registered office of the companies it entails indirect discrimination on the basis of the registered office of the companies 38

39 Hervis Sport, C-385/12 Direct discrimination disparate treatment discrimination; Indirect discrimination disparate impact discrimination 3/ Can it be justified? Discrimination can only be justified by overriding reasons in the public interest and subject to proportionality Possible justifications (not invoked by Hungary): protection of the economy of the country or restoration of budgetary balance by increasing fiscal receipts NOT VALID 39

40 Hervis Sport, C-385/12 Some thoughts Indirect discrimination v restriction - Para 42: according to settled case law such a restriction is permissible only if its justified by overriding reasons in the public interest - Reference to restriction by mistake? Or is there a convergence of the concepts of indirect discrimination and restriction? - Many similarities: they both look at the effect; justifications and proportionality test 40

41 Hervis Sport, C-385/12 Some thoughts - No discussion on proportionality as no justification was put forward 41

42 Hervis Sport, C-385/12 Conclusion - The decision is correct - It sets the criteria for determining whether there is indirect discrimination/restriction - The decisive factor reliance on the current factual circumstances the distinguishing criterion chosen in the national rules is connected in the vast majority of cases with the seat of company abroad. 42

43 Hervis Sport, C-385/12 Conclusion one reservation - IF Hungary would prove that the tax did not affect members of a group of a non-resident there would be no indirect discrimination - Would the rule still constitute a restriction? Probably yes! The restrictive effect exists 43

44 A case of discrimination: Foreign branches in Greece

45 A case of discrimination: Foreign branches in Greece Domestic legislation - 1: - Article 62(1) ITC: payments that are subject to withholding, including payments for the provision of technical services, payments of management fees, fees for professional services and payments for other similar services. - Article 64(1)(c) ITC: WHT rate 20% 45

46 A case of discrimination: Foreign branches in Greece Domestic legislation - 2: - Article 62(2) ITC: payments to Greek tax resident entities NO WHT - Article 62(3) ITC: payments to non-resident entities subject to 20% WHT AND: option to be treated as resident. 46

47 A case of discrimination: Foreign branches in Greece Domestic legislation - 3: - Clarifications by Circular 1120/2014: - Payments to non-resident entities* with no PE in Greece NO WHT - Payments to Greek PEs of non-resident entities 20% WHT - Option to be treated as resident: no scope of application *Except: entities established in states with a preferential tax regime and in non-cooperative jurisdictions. 47

48 A case of discrimination: Foreign branches in Greece Effect of Domestic legislation: Discrimination. EXAMPLES A Greek entity receives advisory services from and makes a payment to - Another Greek entity no WHT - Another EU entity no WHT - The branch of a Greek entity No WHT - The Greek PE of an EU entity 20% WHT 48

49 A case of discrimination: Foreign branches in Greece Freedom of Establishment: Branch or Subsidiary? Avoir Fiscal: The second sentence of the first paragraph of [Article 49 TFEU] expressly leaves traders free to choose the appropriate legal form in which to pursue their activities in another Member State and that freedom of choice must not be limited by discriminatory tax provisions." 49

50 A case of discrimination: Foreign branches in Greece Freedom of Establishment: Branch or subsidiary? Comparability. Avoir Fiscal: by treating the two forms of establishment in the same way for the purposes of taxing their profits, the French legislature has in fact admitted that there is no objective difference between their positions. 50

51 A case of discrimination: Foreign branches in Greece Cash flow disadvantage: a restriction on the Freedom of Establishment: The WHT is not final taxation; it is credited against total tax liability of the PE. No double taxation suffered in the cross-border situation. BUT: [the Court] has repeatedly held that the exclusion of a cash-flow advantage in a crossborder situation where it is available in an equivalent domestic situation is a restriction on the freedom of establishment (Opinion of Advocate General Sharpston, 14 Feb. 2008, Case C-414/06, Lidl Belgium, para. 29) 51

52 A case of discrimination: Foreign branches in Greece - The option to be taxed as a resident: Neutralization of a restriction on a fundamental freedom? - Avoir Fiscal: the argument that a nonresident taxable person can rectify discriminatory treatment by becoming a resident was unacceptable to the Court regarding a legal person in Avoir Fiscal and a natural person in Gielen. The discriminatory treatment (or the discriminatory effect of the Dutch rules) that is contrary to freedom of establishment is not neutralized in such circumstances. (TOShea, 2010, WTD, 60-5) 52

53 A case of discrimination: Foreign branches in Greece Concluding remarks: - The Greek rule is incompatible with the freedom of establishment. - There is no justification provided in the legislation - Possible justifications (?): - Countering tax avoidance no such risk - Ensure collection of taxes not acceptable 53

54 About Legal Certainty The ITELCAR case

55 ITELCAR, C-282/12 Facts of the case Court's analysis Which freedom applies Proportionality Some thoughts Conclusions 55

56 ITELCAR, C-282/12 ITELCAR: Portuguese taxpayer hiring out light motor vehicles : Itelcar Portugal capital held by GE Intl (BENELUX) BV (BE), 10% of which held by GE Capital (USA) GE Capital Loans to Itelcar (GE Capital held 0,02%) Interest deduction restricted due to PT thin cap rules 56

57 ITELCAR, C-282/12 PT thin cap rules apply to special relations unclear definition Level of credit of Itelcar could not have been obtained from an independent entity on the same terms EURIBOR +0.5% 122M-272M Restriction of free movement of capital? (Art. 63 TFEU) 57

58 ITELCAR, C-282/12 Financial loans and credits movements of capital Heading VIII of the nomenclature set out in Annex I to Council Directive 88/361/EEC of 24 June 1988 (now repealed) [see also: Fidium Finanz, C-452/04] BUT: Thin cap rules apply to special relations control (?) Freedom of Establishment not applicable to third countries (USA) 58

59 ITELCAR, C-282/12 Which freedom applies? AIM of national legislation (C-35/11, FII, 96-97) special relations in PT thin cap rules not only situations of shareholdings of definite influence control ( FoE), therefore, FMoC No risk of interpretation being used in cases of market access to third countries nationals (the rule is not designed to regulate market access) Case examined exclusively under Free Movement of Capital 59

60 ITELCAR, C-282/12 Although direct taxation falls within the competence of MS, they must nonetheless exercise that competence in accordance with EU Law (p.26) Deduction of excess interest allowed only within EU disadvantage for third countries restriction of Free Movement of Capital Is it justified? Combat tax evasion, yes 60

61 ITELCAR, C-282/12 Is it proportionate? In general, Yes, if it specifically targets wholly artificial arrangements [C-524/04, Thin Cap,p. 72, 74] BUT: The Portuguese thin cap rules go beyond what is necessary in order to attain their objective for TWO reasons: (a) All loans from non-shareholders excessive interst non-deductible 61

62 ITELCAR, C-282/12 (b) Another issue: paras : The rules in question do not make it possible at the outset to determine their scope with sufficient precision The rules in question DO NOT MEET THE REQUIREMENTS OF LEGAL CERTAINTY the rules are not proportionate to the aims pursued [SIAT, C-318/10, p ] 62

63 ITELCAR, C-282/12 Some thoughts Looks like a change in the Court's approach regarding the application of free movement of capital to thin cap rules and expanding protection to non-eu cases However: In general: very particular rules, judgment not suitable for general conclusions and application 63

64 ITELCAR, C-282/12 Some thoughts: 1. What if the ratio of debt/equity was defined differently, eg overall debt/total equity? The rule would still be under FMC but it would be proportionate 2. When a company holds a large portion of another company s debt, is this allowing the first one to have definite control on the second one? Could be 3. Can this form of control be used instead of control through a (direct) participation in the equity? Risk of getting indirect FoE status 64

65 ITELCAR, C-282/12 Results: Change in the rules Deductibility of interest expense: only up to a certain amount Conclusions In general: a correct judgment in the particular case but with some weak points the criterion of market access : not really appropriate as no thin cap rule regulates market access; different from the criterion of scope of application of the national rule (thin cap rules apply to controlling holdings) 65

66 ITELCAR, C-282/12 Conclusions -Legal certainty: lack of it disproportionate rule; is it a stand-alone criterion to test proportionality? Para. 45 : yes -Wholly artificial arrangements high threshold; would a lower threshold ( main purpose ) be more suitable? -No discussion of the different legal environment that exists in the relations with third countries, as a criterion for assessing the proportionality of the national measure 66

67 ITELCAR In general: a deviation from the Court's case law on thin cap rules, that is not very well founded It shouldn t be seen as a change 67

68 Ne bis in idem Judgment of the Court (Grand Chamber) of 26 February 2013, Åklagaren v Hans Åkerberg Fransson, C-617/10 Article 50 of the Charter of Fundamental Rights of the European Union: Right not to be tried or punished twice in criminal proceedings for the same criminal offence, VAT penalties for false information in the tax returns 68

69 Ne bis in idem Hans Åkerberg Fransson, C-617/10 The ne bis in idem principle laid down in Article 50 of the Charter of Fundamental Rights of the European Union does not preclude a Member State from imposing successively, for the same acts of non-compliance with declaration obligations in the field of value added tax, a tax penalty and a criminal penalty in so far as the first penalty is not criminal in nature, a matter which is for the national court to determine 69

70 Ne bis in idem Hans Åkerberg Fransson, C-617/10 EU law precludes a judicial practice which makes the obligation for a national court to disapply any provision contrary to a fundamental right guaranteed by the Charter conditional upon that infringement being clear from the text of the Charter or the case-law relating to it, since it withholds from the national court the power to assess fully whether that provision is compatible with the Charter. 70

71 Ne bis in idem Hans Åkerberg Fransson, C-617/10 V Greek Conseil d Etat, 1741/2015 Need for a change in the case law of the Greek supreme administrative court? 71

72 THANK YOU 72