PAPER 3.01 EU DIRECT TAX OPTION

Transcription

1 THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION December 2015 PAPER 3.01 EU DIRECT TAX OPTION Suggested Solutions

2 Question 1 The Merger Directive has direct effect. If Member States have failed to implement its provisions, the taxpayers involved can directly rely on the Directives provisions. The deadline for implementation has expired per 1992 (or later in respect of new EU Member States). Therefore, Domus can rely on the tax benefits of the Merger Directive. According to Article 4 Merger Directive, the capital gains on assets transferred may not be taxed. According to Article 4, this benefit is subject to the condition that the assets remain subject to tax in a permanent establishment in the state of the transferring company. This condition is only met in respect of the assets of the factory, not the assets of the sales office which is closed and which are transferred to the new head office abroad. Therefore, the capital gains on the assets of the factory may not be taxed, the assets of the sales office may be taxed. According to Article 5 Merger Directive, the same applies to tax exempt reserves. Reserves may not be taxed subject to the condition that the reserves remain connected to a permanent establishment in the state of the transferring company. Therefore, tax exempt reserves connected to the factory may not be taxed, tax exempt reserves connected to the sales office may be taxed. According to Article 6 Merger Directive, the losses of the transferring company (which is wound up) may be transferred to the remaining permanent establishment in the state of the transferring company, if the state of the transferring company allows such loss transfer in domestic mergers. In our case, this condition is not met. Although there is a remaining permanent establishment (the factory), losses may not be transferred in domestic mergers in Triburtia. Therefore, also in case of cross-border mergers there is no right to transfer losses.

3 Question 2 In several occasions, the Court of Justice has ruled on the deduction of losses of foreign permanent establishments. The Court holds that for the purpose of loss deduction a company with domestic establishments is objectively comparable to a company with foreign establishments. Therefore, in principle, the losses of foreign permanent establishments should be deductible against the profits of the head office in the same way as the losses of domestic establishments. See for example Lidl Belgium. Consequently, national laws in principle hamper the freedom of establishment if a company can deduct the losses of domestic branches whereas it cannot deduct the losses of foreign branches. For example Lidl Belgium. However, according to the Court of Justice, such measures limiting the deduction of losses of foreign permanent establishments may be justified in order to divide the power to tax between Member States and in order to prevent double dips. For example ECJ Lidl Belgium. Therefore, in Lidl Belgium the Court ruled that Germany, which exempted the losses of a foreign permanent establishment, applied a symmetrical approach by exempting also foreign profits. Therefore, the measure at hand was justified. This justification does, however not apply in case of final losses which cannot be set of anymore in the state of the PE. In such case, the state of the head office is obliged to allow the deduction of such losses. For example ECJ Lidl Belgium. In a similar way, the Court also accepts a system in which foreign PE losses are temporarily deducted at the level of the head office, while they are recaptured as soon as the PE makes profits again or the PE is sold. Such system is justified by the need to preserve the coherence of the tax system in case the state of the head office generally exempts the profits of foreign permanent establishments (symmetrical approach). According to the Court, it was irrelevant whether the losses could be deducted in the PE state or not (Krankenheim Ruhesitz). Such recapture is, by contrast, not allowed in a situation in which the state of the head office does not exempt PE profits. If the state of the head office taxes PE profits (providing only a tax credit to avoid double taxation), then the state of the head office must also allow the deduction of PE losses and may not recapture such losses when the PE is disposed of (Nordea Bank). Finally, the Court has also ruled that the state of the head office must allow the deduction of currency exchange losses in respect of a foreign permanent establishment. Since such losses are by nature not deductible in the state of the PE, the state of the head office must allow the deduction of such losses (Deutsche Shell).

4 Question 3 The justification of the need to safeguard the cohesion of the tax system was determined by the Court of Justice in the Bachmann case. The case regarded the question whether a state should allow the deduction by a resident of life insurance contributions paid to a non-resident insurance company, whereas it was clear that the residence state would not be able to levy tax on the future life insurance payments. In that situation, the Court ruled that taxpayers may be denied a tax advantage (deduction of insurance payments) which is directly linked to a tax disadvantage (taxation of the future life insurance payments) by the same state. In later case-law, the Court specified that such measures were only justified if there would not be a less restrictive way to guarantee the cohesion of the tax system. Such cohesion could also be guaranteed by imposing an exit tax (Commission/Denmark, C-150/04; Commission/Belgium, C- 296/12). In later case-law, the Court clarified that this justification only applies in case of a direct link between the tax advantage and the tax disadvantage in the hands of the same taxpayer. In the Bosal Holding case the Court ruled that the deduction of the costs of a holding company (the advantage) must not be dependent on the question whether its subsidiaries are resident and subject to tax in the same state (tax disadvantage). The advantage and disadvantage must both affect the same taxpayer (Bosal Holding). Furthermore, the advantage and disadvantage must regard the same type of tax. A taxpayer cannot be denied a tax exemption in the field of income tax or wealth tax because of the fact that the company in which he holds shares is not subject to corporate income tax in the same state (Baars, Verkooijen). The Court has also clarified that a Member State cannot rely on this ground of justification if the Member State has given up such cohesion under a bilateral tax convention. Under a tax treaty, a Member State would be allowed to tax pension payments irrespective of the fact whether the pension contributions had been tax deducted. In such situation, the state cannot deny the deduction of pension contributions on the ground of the cohesion justification (Wielockx; Danner, etc.) One of the other very few cases in which this ground of justification was recognized by the Court regards the Krankenheim case, Commission/Hungary (C-253/09) or National Grid Indus.

5 Question 4 According to Article 107, paragraph 1 of the TFEU any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market. State aid rules apply regardless of the form the aid is given in, i.e. any kind of tax relief (Italian Textile case, C-173/73) can constitute State aid if the other criteria are fulfilled. A specific kind of tax relief can be a special tax rate for certain companies, an exemption, special deductions, accelerated depreciation, special tax-free reserves, etc. In 1998, the Commission presented a Notice on the application of the State-aid rules to measures relating to direct business taxation, explaining how Article 107 TFEU (State Aid) should be understood in company taxation matters. According to that Notice, Article 107 sets out the following four tests to identify (fiscal) State aid contained in national (tax) measures: 1. Favourable (tax) treatment. Patent boxes are tax regimes applicable to income from patents or similar rights, subjecting such income to a reduced tax rate. The reduced rate constitutes a favourable tax treatment; 2. At the cost of State resources: the advantage must be granted by the State or through State resources (including regional or local public bodies). Patent boxes consist of a reduced tax rate and result in a loss of tax revenues: the aid is therefore granted at the cost of State resources; 3. Affecting competition and trade between Member States. Patent boxes affect competition and trade between Member States because the company s position has improved as a result of the reduced tax rate (case T-152/99 HAMSA); and 4. Selectivity. The measure must be non-general, it must be specific or selective in a way that it favours certain undertakings or the production of certain goods. The question is whether patent boxes are selective. They could be selective if their effects only apply to companies who are active in research & development. Domestic companies with other activities do not receive the same advantage. Patent boxes that only apply to companies that actually obtain patents seem to be selective, because only a selective group of industries aims at creating patents. If by contrast, the patent boxes also apply in case of innovative ways of production or software then, the boxes are not selective, because more industries would benefit from the patent box. General R&D incentives do not constitute state aid. For the selectivity requirement it is not relevant that also other EU member states offer similar benefits to R & D activities (case C-397/92 Banco Exterior de Espana). A further question is whether the form of state aid can be justified. Article 107, Paragraph 3 TFEU allows the Commission to determine discretionary exemptions to the State Aid rules, for example in case of an important project of common European interest or to facilitate certain economic activities. In 2014, the Commission published the Framework R&D&I to this end. The Commission concludes that R&D&I may be exempt from state aid rules. This exemption is subject to the condition that the state aid rules are notified to the Commission. Patent boxes that have not been notified can still be illegal. The patent boxes must need 7 criteria determined by the Commission.

6 Question 5 This question involves both application of the Parent-Subsidiary Directive, and application of the fundamental Treaty Freedoms, in particular the freedom of establishment. The free movement of capital does probably not apply, since the question regards situations of majority shareholdings in which in domestic situations a group taxation/fiscal unity is available. It is unlikely that such regimes apply in case of minority shareholdings (cfr. Baars-criterion). It is settled case-law that in matters of direct taxation, EU Member States have the autonomy to shape their own legislation, but they should observe the fundamental Treaty freedoms, see e.g. Marks & Spencer II. If Member States would apply a 100% participation exemption in domestic situations whereas they would apply only a 95% participation in cross-border situations, this constitutes a tax disadvantage that discourages companies to establish a subsidiary company in another EU Member State. This tax disadvantage hampers the freedom of establishment. Although the Parent Subsidiary Directive allows to apply a participation exemption within a range between 95% and 100% of the dividends received, this does not justify a different treatment of dividends from domestic and foreign subsidiary companies. This can be learnt by analogy from the Bosal Holding case, in which the ECJ ruled that, although the Parent Subsidiary Directive allows Member States to deny the deduction of costs related to subsidiary companies, such as financing costs, this does not allow Member States to distinguish between parent companies with domestic subsidiaries and parent companies with foreign subsidiaries. In Bosal Holding, the ECJ ruled that such distinction infringes the Parent Subsidiary Directive. Also the present case infringes the Parent Subsidiary Directive. The present case is a bit less clear cut, because the 100% participation exemption is a consequence of the group regime/fiscal unity regime which is not available for foreign subsidiary companies. In X Holding, the ECJ ruled that Member States are allowed to deny the possibility to include foreign subsidiary companies in a fiscal unity regime. The reason is that this could result in the deduction of foreign losses of the foreign subsidiary company against the profits of the domestic parent company. Allowing such deduction would result in the risk of double deduction of losses, in disturbing the division of taxing powers between Member States, and the risk of abuse. The present case does not regard the deduction of foreign losses, but the different treatment of dividends received from foreign subsidiary companies. This does not regard the risk of double deduction of losses, nor the division of taxing powers between Member States, nor the risk of abuse. Therefore, there seems to be no justification to deny parent companies with foreign subsidiary companies this particular benefit of the fiscal unity/group regime, i.e. the 100% participation exemption on dividends from foreign subsidiary companies. The different treatment of foreign dividends therefore infringes the freedom of establishment and the Parent Subsidiary Directive.

7 Question 6 The case in question involves the free movement of capital (art. 63 TFEU, e.g. Verkooyen), unless Yves should own a majority shareholding in which case the freedom of establishment would apply (art. 49 TFEU; Baars) (2 points). It is irrelevant whether Yves has the nationality of one of the EU Member States, since also non-eu nationals can rely on this particular Treaty Freedom. Compared to the situation that Yves would invest in a domestic company, he suffers an overall higher tax burden because of the fact that he invests in a foreign company. This might discourage taxpayers to exercise the free movement of capital. The question is, however, whether the tax laws of Arland infringe the free movement of capital. The tax laws of Arland do not discriminate on the basis of nationality of Yves, nor directly nor indirectly. The question is whether these tax laws hamper the exercise of the free movement of capital (even though not discriminating). Article 65, par. 1, a TFEU allows Member States to distinguish on the basis of the location of the investments of taxpayers. Therefore, at first reading, this provision seems to justify any discriminating tax provisions. However, according to Article 65, par. 3 TFEU and under the case law of the ECJ, this does not constitute carte blanche for EU Member States. They are not allowed to introduce arbitrary measures of discrimination or of restriction of the free movement of capital (cfr. a.o. Verkooyen). The tax laws of Arland do not distinguish between foreign and domestic dividends. All dividends are taxed at the same tax rate of 25%. Therefore, prima vista, Arland does not discriminate against foreign dividends. The question rises whether Arland is obliged to grant a tax credit in cross-border situations where in fact it does not grant a tax credit in domestic situations either. According to the case law of the ECJ (a.o. Kerckaert-Morres) the state of residence of a taxpayer is not obliged to grant a tax credit in respect of foreign dividend withholding tax. According to the ECJ, the free movement of capital does not preclude legislation of a Member State, which, in the context of tax on income, makes dividends from shares in companies established in the territory of that State and dividends from shares in companies established in another Member State subject to the same uniform rate of taxation, without providing for the possibility of setting off tax levied by deduction at source in that other Member State. The ECJ (a.o. Kerckaert-Morres) considers the additional tax burden the result of a disparity: a difference in the tax laws of different EU Member States for which not one of the states can be blamed. It is settled case-law of the ECJ, that Member States are not obliged to shape their tax laws taking into account foreign tax laws. Member States are not obliged to guarantee that exercising the fundamental freedoms does not result in an additional tax burden. Therefore, Yves is even lucky because of the fact that Arland allows him to deduct the foreign withholding tax from the amount of taxable dividends.

8 Question 7 In the present case, the free movement of capital applies. Gifts are included in the Annex to former Directive 1988/321 on capital movement which kept its indicative value, see also Persche. The tax laws of Amberla distinguish between donations to resident and non-resident charities. Although this does not constitute a direct or indirect difference on the basis of the nationality of the taxpayers, it may hamper the free movement of capital, see ECJ Persche. With respect to the comparability test, the Court rules in Persche that non-domestic and domestic charitable institutions are in the same situation and therefore comparable, as the legislation is aimed at encouraging charitable activities. If the non-domestic charitable institution fulfills all the material requirements for the deduction (except that of being a resident), there is no reason to deny the deduction. As tax regulations on charitable institutions are not harmonized in the European Union, Member States are not obliged to acknowledge each other charitable institutions, but every Member States may formulate its own substantive criteria, cfr. Persche. Relevant in the respect is also the case concerning Missionswerk Werner Heukelbach ev (C-25/10) concerning the non-applicability for Belgian inheritance tax concerning a foreign charitable institution, the Court ruled: Article 63 TFEU precludes legislation of a Member State which reserves application of succession duties at the reduced rate to non-profit-making bodies which have their centre of operations in that Member State or in the Member State in which, at the time of death, the deceased actually resided or had his place of work, or in which he had previously actually resided or had his place of work. In the present case, Member State Amberla, in principle allows the deduction of donations to foreign charities. Amberla, however, imposes 2 requirements. It is true that the requirement of registration with the tax authorities of Amberla also applies to charities resident in Amberla. However, the question is whether it is disproportionate to impose this formal requirement also to charities established outside Amberla. In fact, in order to encourage foreign donations they would be obliged to register in all 28 EU Member States. Registration can furthermore not be justified because of the need of information in respect of the foreign charity. On the basis of the Mutual Assistance Directives, the tax administration of Amberla can obtain relevant information from the EU Member State where the charity is established. Furthermore, the Amberlese tax authorities put forward requirements. To the extent that these requirements are substantially identical to the requirements applicable to domestic Amberlese charities, this condition is justified. However, if the Amberlese tax authorities put forward different material requirements for foreign charities which are more burdensome, than these infringe the free movement of capital.