EU direct tax news. Major developments. Editorial. A bimonthly review of EU direct tax developments affecting business in Europe

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1 Issue 47 February, March, April 2012 EU direct tax news A bimonthly review of EU direct tax developments affecting business in Europe Editorial Dear Reader, Despite the news headlines at the beginning of the year being dominated by ongoing concerns associated with the euro, day to day EU tax issues remain a key focus. In particular, the discussion on the progress of so called Denkavit claims continues as highlighted in our Focus on section which discusses the important topic of the potential restriction of a retroactive effect of a Denkavit decision. To provide a broader context, our Major development article contains a summary of issues associated with tax policy under a common currency. Dr. Klaus von Brocke Major developments Tax policy under a common currency On 21 March 2012, the European Parliament s Economic and Monetary Affairs Committee voted on a report by Marianne Thyssen, of the Belgian European People s Party (EPP), in favor of the European Commission s (EC) suggestion that a common consolidated corporate tax base (CCCTB) should be introduced in the EU. The report explains the advantages of the CCCTB such as: Reducing paper work and procedures for companies by introducing a single tax return for all business throughout the EU Cutting costs and avoiding double and over taxation by providing the option of consolidating profit and loss of all subsidiaries in the EU Making corporate tax more transparent Discouraging tax evasion and forum shopping The members of parliament are in favor of introducing the new system by means of enhanced cooperation and, furthermore, after a five year transition period would like the system to be compulsory for all companies, other than small and medium sized enterprises. Needless to say, there is a lot of activity going on at the moment in the field of EU taxation. The Brussels Tax Forum 2012 entitled Tax policy under a common currency organized by the EC and held on 5 6 March 2012 conveyed a key message that the economic and financial crisis has changed the political landscape for the EU and, as a consequence, has reshaped the approach of Member States toward EU tax policy. In his opening speech, the EU Taxation Commissioner, Algirdas Šemeta, highlighted the need for closer tax coordination between EU Member States to make tax systems more effective, particularly in the areas of labor and capital taxation, in order to improve fiscal imbalances. The EC has also indicated that it hopes to boost growth by encouraging Member States to refrain from taxing items that need to be supported, such as income and savings, and instead to tax items where fewer distortions would be created or which are undesirable, such as waste and pollution. Commissioner Šemeta told the Forum that more action will need to be taken to tackle harmful tax competition in order to ensure fair tax assignment among Member States. Fiscal devaluation achieved by reducing the cost of exports by shifting tax away from income based taxes (such as labor) toward indirect taxes and environmental taxes will also need to be considered.

2 EU direct tax news Commissioner for Employment, Social Affairs and Inclusion, László Andor, emphasized that, in order to encourage job rich recovery, there is scope to consider shifting the tax burden from labor to other sources of revenue, such as through indirect and environmental taxes, provided that tax policy is coordinated more closely at EU level. Chairperson of the European Parliament Economic and Monetary Affairs Committee Sharon Bowles called for closer attention to be paid to tax exemptions and tax breaks noting that the value of these exemptions in terms of foregone tax revenue exceeds 11% of the EU s total GDP. Mrs. Bowles welcomed the Commission s proposals for a CCCTB, financial transaction tax (FTT) and VAT stating that they go in the right direction in ensuring better coordination and in shifting away from harmful taxation on growth sectors. She also voiced support for the Commission s initiatives in the area of improving good governance in taxation, in particular tackling tax havens and aggressive tax planning. What does this mean for companies operating in the EU? In this current political climate, it is almost inevitable that Member States will be pressured to act more closely together. The French German green paper on business taxation is a clear example of this where both countries have agreed to work together to converge their tax systems in the field of business taxation. The German Federal Ministry has stated that this green paper aims to set the direction for greater tax convergence in the EU and to support the EC proposal on the CCCTB. With regard to the FTT proposal, nine euro Member States in favor of an EU wide FTT (France, Germany, Austria, Belgium, Finland, Greece, Spain, Portugal and Italy) have called on the Danish Presidency of the Council of the EU for work to be accelerated in this area, suggesting that in the event of deadlock among all Member States, an FTT could be introduced among these nine Member States through enhanced cooperation. The EC has also recently launched a public consultation on double non taxation in order to tackle harmful practices and allow Member States to secure additional tax revenues. Proposals have also been put forward by the EC on energy taxation. Work and discussions on these proposals have been supported by the Heads of State or Government at the EU Summit of 1 2 March This group has also invited the Commission and finance ministers to develop ways to improve the fight against tax fraud and tax evasion and has urged Member States to review their tax systems with the aim of making them more effective particularly as regards tax collection and harmful tax competition. Commissioner Šemeta was clear in stating that the euro crisis has changed the approach to taxation within the EU. In his words, Member States can no longer implement tax policies in isolation without a thought to what their neighbors are doing, particularly in a monetary union. Member States will, therefore, be expected to cede some degree of tax sovereignty in order to overcome the economic and financial difficulties within the Euro zone. One participant argued that this was particularly important in so far as it was only Germany that ceded sovereignty when it joined the monetary union because it was the only euro zone Member State that effectively had monetary sovereignty. Furthermore, at the EU Summit of 1 2 March 2012, Member States recognized that tax policy will need to be a key aspect of budget consolidation and growth in the EU and, in this context, some Member States will be willing to use all tools available (including enhanced cooperation) in order to achieve these objectives. The EC will also encourage both euro zone and non euro zone countries to engage in tax coordination initiatives so as to avoid the creation of a two tier European Union. Therefore, tensions among Member States over tax harmonization and tax policy coordination are only likely to increase. Organizations should be alert to the potential for changes in the area of tax policy and be aware that issues previously disregarded as not in my lifetime now should be more actively considered. 2 EU direct tax news Issue 47 February, March, April 2012

3 EU direct tax news EC launches consultation on double non taxation On 29 February 2012, the EC launched a fact finding public consultation in order to establish evidence concerning double non taxation, both within the EU and in relation to non EU countries. The Commission encourages members of the public to provide factual examples of cases of double non taxation on cross border activities that they have encountered or have knowledge of. In order to encourage participation by those who may have insight into real life exploitation of double non taxation by companies, anonymous contributions will be accepted. According to the related press release, the consultation is the first step in combating the problem of double non taxation, which deprives Member States of significant revenues and creates unfair competition between businesses in the single market. It occurs when cross border companies escape paying taxes as a result of mismatches between national tax systems. The aim of the consultation is to gauge the full scale of double non taxation, gather evidence and determine where the main weaknesses lie in order to subsequently develop the appropriate policy response. Background The consultation follows the Commission s Communication on Double Taxation in the Single Market dated 11 November 2011 discussed in the previous issue of this column. In that Communication, the Commission described both double taxation and double non taxation as absolutely unacceptable. In a period when Member States are looking for secure and additional tax revenues, it is important for their credibility towards their taxpayers that they take the necessary measures to remove double taxation and double non taxation, according to the Commission. As Commissioner Šemeta stated in the press release accompanying the 29 February launch of the consultation: Fairness must be at the heart of our tax policies. Double non taxation undermines fair burden sharing in taxation and allows an unjust competitive advantage to companies that seek to exploit it. Tackling double non taxation will not only deliver important revenues to Member States, but it will also ensure a stronger, fairer Single Market for all EU businesses. Shortly after the Commission s announcement, the OECD published a report entitled Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues that deals with double non taxation or long term deferral of taxation resulting from the use of hybrid instruments, hybrid entities and transfers between two or more countries. The OECD recommends the introduction or revision of specific and targeted anti avoidance rules, disclosure initiatives and administrative assistance on deterrence, detection and response strategies. Even though the OECD report is not directly linked to the Commission consultation, most EU Member States are members of the OECD and 9 of the 27 EU Member States contributed to the preparation of the OECD report. Consultation paper In the consultation paper released on 29 February 2012 ( the Paper ) the Commission defines the scope of the consultation, identifies a number of cases where double non taxation could occur, and sets out the next steps. Scope Double non taxation cases are defined as cases where the tax rules of two countries combined (whether due to divergent national rules and/or inadequate national tax measures) lead to no, or extremely low, taxation of certain activities. Outside the scope are cases where: A company is not taxed because the activity is effectively taxed elsewhere, e.g., the exemption of dividends paid to parent companies where there is taxation of the activities in the subsidiary EU direct tax news Issue 47 February, March, April

4 EU direct tax news There is no or low taxation in one tax year because of losses carried forward from previous years The non taxation in one jurisdiction is matched by corresponding (effective) taxation in another jurisdiction The consultation concerns direct taxes such as corporate income taxes, non resident income taxes, capital gains taxes and withholding taxes (WHT), as well as inheritance taxes and gift taxes paid by companies or other entities. The scope of the consultation does not extend to decisions in a single Member State on how to tax certain types of income received by its residents, since such decisions do not fall within the competence of the EU but the individual Member States. Issues Identified Input is requested from all interested parties including tax professionals in practice and in business, as well as academia. A number of non exhaustive cases of double non taxation are identified in the Paper, based on various sources including international tax literature, articles and lectures: Mismatches of entities (i.e., transparent in one jurisdiction and non transparent in another) Mismatches of financial instruments (i.e., debt in one jurisdiction and equity in another) Application of double tax treaties leading to double non taxation (for example, cases where the state of residence, unlike the source state, believes there is a permanent establishment) Transfer pricing and unilateral advance pricing arrangements (APAs) (for example, the Member State in which the associated enterprise is situated is not aware of an APA issued in the other Member State and different transfer pricing methods are applied to the same transaction) Transactions with associated enterprises in countries with no or extremely low taxation (if Member States do not have appropriate rules in place to deal with transactions with associated enterprises in these countries). According to the Paper, there could also be a risk of double non taxation if dividend exemption applies to untaxed profits. Similarly there could be a risk of double non taxation if interest and royalty payments are exempted from withholding taxes in cases where the company that is the beneficial owner is not effectively taxed Debt financing of tax exempt income (i.e., interest deductions are allowed on debt that finances income that is not effectively taxed in any country) Different treatment of passive and active income (as a result of special tax regimes applied by some Member States for passive income such as interest and royalties, or if the Member State applies the principle of territoriality and therefore exempts income from activities abroad) Double tax treaties with non EU (third) countries (for example, misuse of tax sparing clauses in cases that do not promote genuine economic activities, or double tax treaties with countries that have no or very low taxation) 4 EU direct tax news Issue 47 February, March, April 2012

5 EU direct tax news When evaluating Member States tax systems against this list, a number of questions will likely be raised. These questions include whether a deduction for notional interest on equity, as operated by Belgium, could be considered as resulting in double non taxation if an exemption for dividends from a Belgian company is available at the level of the recipient (which, in most cases, will be required under the EU Parent Subsidiary Directive). However, at the same time, it could be argued that Belgium s approach of eliminating tax advantages of debt funding may be more appropriate and should not be countered by EU measures. Similar questions arise with respect to other items on the list. Possible policy response The Paper lists a number of ways to tackle cases of double non taxation: Legislative approaches (i.e., closing loopholes and stopping mismatches), which could be implemented at different levels (unilateral legislation in the individual Member States, bilaterally between the Member States or on EU level through directives) Increased information exchange and disclosure Good governance rules, e.g., soft law agreements between Member States or exchange of best practices Why is this issue important? As explicitly stated in the Paper, the document does not necessarily reflect the view of the Commission and should not be interpreted as a commitment by the Commission to any official initiative in this area. Still, in light of the various initiatives in relation to double taxation and avoidance of harmful practices, either legislative proposals or the proposed European Directive(s) or both might result from the consultation. Any such legislative proposals would be likely to stimulate interest not only in purely intra EU situations but also with respect to transactions between EU Member States and third countries. Since direct taxation generally falls within the remit of Member States, it remains to be seen whether Member States will be willing to accept and endorse the Commission s initiatives in this field. Moreover, at present, proposals by the Commission on tax matters require unanimous approval of all Member States and, considering the diverging national interests of the different Member States, not all Member States may be in favor of the policy response that the Commission may develop. It is therefore not likely that any Directives to deal with potential issues raised in the Paper will be enacted in the near future. It cannot be excluded from possibility, however, that the Paper itself may have an impact on administrative practices applied by the tax authorities in various Member States. Considering the example of the French German green paper on tax convergence (see above) certain individual Member States might choose to implement legislation as a reaction to the findings of the consultation. Status The consultation runs until 30 May At the end of the consultation process the Commission will publish a report summarizing the outcome. The Commission will also analyze the information provided in order to identify and develop the appropriate policy response before the end of The results will be used as input to the Communication on strengthening good governance in the tax area ( tax havens, uncooperative jurisdictions and aggressive tax planning ) planned for Q However, in light of the upcoming rotation of the presidency of the Council of the EU to countries that are understood to be less favorable towards increased harmonization in this area, no EU wide legislative changes are expected in the short or medium term. EU direct tax news Issue 47 February, March, April

6 Focus on Focus on temporal limitations on the Court of Justice s decisions Contents Belgium Finland France Germany Netherlands Spain Sweden Switzerland United Kingdom Introduction The huge impact that the case law of the Court of Justice of the European Union (CJEU) has on the corporate tax systems of Member States is well known. As a result of a wide range of decisions by the CJEU, Member States have been compelled to change their corporate tax legislation in the past repeatedly, for example in the field of withholding taxes (WHT), Control Foreign Corporation (CFC) legislation and exit taxes. Nevertheless, the case law of the CJEU is still developing and taxpayers continue to contest the compatibility of national corporate tax law provisions with EU law. A notable example in this regard is the compatibility with the free movement of capital under Article 63 Treaty on the Functioning of the European Union (TFEU) of discriminatory WHT that Member States may impose on EU and non EU investment funds, particularly since Article 63 TFEU (free movement of capital) not only applies between Member States, but also between Member States and third countries. This issue is currently pending before the CJEU in the French Santander (C 339/11) and joined cases. In this case the CJEU is asked whether the tax treatment of the unit holders in the investment funds should be taken into account in assessing the compatibility and, if so, to which extent the WHT levied on portfolio dividends may be considered as contrary to the free movement of capital. During the oral hearing of this case, the French Government has asked the CJEU to restrict the temporal effects of a possible taxpayer friendly decision. A decision by the CJEU in this case is expected on 10 May This article looks at the arguments the CJEU may consider in deciding whether to restrict the temporal effects of a possible taxpayer friendly decision in this case. The basic rule: Court s decisions have retroactive effect The basic principle is that the temporal effects of a decision by the CJEU cannot be limited. In other words, CJEU judgments have retroactive effect. However, from CJEU case law, it follows that the retroactive effect of the CJEU s judgments can be limited where two specific conditions are cumulatively met. These conditions are discussed below. Firstly, there must be a risk of serious economic repercussions for the Member State. It follows from, for example, the FII and Test Claimants in the Thin Cap GLO cases C 446/04 and C 524/04 that the CJEU applies very strict standards in this regard. In these cases, the CJEU required a rather detailed analysis from the Member States concerned based on the final outcome before the national court. In contrast, in other cases, such as the Defrenne II case C 43/75, the CJEU simply accepted the argument of a risk of serious economic repercussions, without requiring a detailed analysis. The outcome of the application of this condition is therefore somewhat unpredictable. Up until now, the CJEU has never accepted the argument of economic repercussions in the field of corporate taxation Secondly, it follows from the CJEU s case law that there must be an objective, significant uncertainty regarding the implications of EU law provisions, to which the conduct of other Member States or the Commission may even have contributed. The CJEU s case law does not, to date, provide clear guidance as to when this is the case as far as restrictive corporate tax measures are concerned. Nevertheless it can reasonably be assumed that a possible incompatibility with EU law is not sufficient. The uncertainty regarding the implications of a given provision of Union law must be more significant. Again, the CJEU has, to date, not provided any further guidance in this regard EU direct tax news Issue 47 February, March, April

7 Focus on Focus on temporal limitations on the Court of Justice s decisions Request by Member State to limit temporal effects must not be belated In addition to the above two conditions which together may justify limiting the retroactivity of a CJEU judgment in the field of corporate taxation, a further important procedural requirement applies. There is no room to limit the temporal effects of a judgment of the CJEU if the CJEU has already interpreted the relevant EU law provision (here: Article 63 TFEU) in earlier decisions without limiting the temporal effect of that judgment. In such a case, any claim to limit the temporal effects put forward in a subsequent case must be regarded as belated. Temporal limitation of EU WHT refund claims in France? In order to limit the temporal effects of a possible taxpayer friendly decision by the CJEU, France has to demonstrate that such decision would have serious economic repercussions for France and that there is an objective, significant uncertainty regarding the application of Article 63 TFEU with respect to WHT levied on portfolio dividends paid to EU and non EU investment funds. With regard to the first test, a decision in favor of the investment funds could have serious economic repercussions in France considering that the WHT already claimed amount to more than 5 billion Euros. Besides, under French procedural rules, a favorable decision rendered in 2012 would allow foreign investment funds to request the refund of WHT levied from 2009 onwards. With regard to the second test, one could argue that the CJEU already decided in 2006, in general terms, that withholding taxes may infringe the free movement of capital in the cases Bouanich (C 265/04) and Denkavit (C 170/05). In addition, the CJEU more specifically clarified in 2009 in the Aberdeen Property case (C 303/07) the question as to whether or not situation of the shareholders should be taken into account together with that of investment funds. Furthermore, the CJEU apparently applied Article 20 5 of its statute which provides that where it considers that the case raises no new point of law, the Court may decide, after hearing the Advocate General, that the case shall be determined without a submission from the Advocate General. If the case raises no new point of law, could the CJEU still consider that there was an objective, significant uncertainty and grant a temporal limitation? One could legitimately question whether the second requirement is actually met. If not, there should insofar be no room for any temporal limitation of the Court s final decision. Temporal limitation limited to third country WHT refund claims in France? It is noted that up until now the CJEU has not decided whether withholding taxes may infringe the free movement of capital in third country situations. Could the CJEU therefore decide to limit the retroactive effect of its decision to third country situations on the grounds that there was an objective, significant uncertainty regarding the application of Article 63 TFEU to WHT impose on third country investment funds? In this respect, one could argue that the CJEU clarified the scope of Article 63 TFEU in the Orange European Smallcap Fund case (C 194/06) in 2008 and in the Haribo case (C 436/08) in From these cases one can infer that Article 63 TFEU does cover the taxation of income from third country portfolio investments. Hence, one could legitimately question whether the second requirement is actually met. If not, there should insofar be no room for any temporal limitation of the Court s final decision. In addition, one could even wonder whether the CJEU will actually address the third country aspect in the pending Santander case. This is because the preliminary questions referred to the CJEU only relate to the situation of unit holders, and do not distinguish between EU and non EU investment funds. Indeed, before referring the case to the CJEU, the Montreuil administrative court first asked the French administrative supreme court which held that, on the basis of 7 EU direct tax news Issue 47 February, March, April 2012

8 Focus on Focus on temporal limitations on the Court of Justice s decisions CJEU case law, the solution applicable to EU investment funds should also apply to non EU investment funds providing some requirements are met. Hence, limiting the retroactive effect of its decision to claims filed by third country investment funds would mean that the CJEU may distinguish between EU, EEA and third country situations where the referring court does not distinguish. Impact on WHT refund claims in other Member States The pending Santander case is also crucial for other Member States that levy discriminatory WHT in EU, EEA and third country situations. The approach followed by the CJEU in the Meilicke case C 292/04 requires that each Member State will have to file a request to limit the temporal effects the first time that the impact of Article 63 on WHT levied on portfolio dividends paid to EU and non EU investment funds is brought to the CJEU s attention. Insofar the Santander case must be regarded as the first time the compatibility with EU law of the taxation of outbound dividends paid to EU and/or non EU investment funds, has been brought to the CJEU s attention, Member States will need to consider whether there is a risk of serious economic repercussions of a possible infringement of EU law with respect to their own legislation. If they fail to do so, any future claim by that Member State to limit the temporal effects put forward in a subsequent case might be regarded as belated. To what extent should the temporal effects be limited? If the CJEU were to uphold a request to limit the temporal effects, it would subsequently have to determine the extent to which the temporal effects should be limited. To date, there is no CJEU case law in the field of corporate taxation that could provide further guidance in this regard. Different solutions are conceivable: The judgment could take effect at a future date the judgment could take immediate effect as from the date on which it was ruled by the CJEU a date prior to the judgment at issue could be set The third approach was suggested by Advocate General (AG) Tizzano in his Opinion in the Meilicke case. In this case, the AG suggested limiting the retroactive effects of the CJEU s decision to 6 June 2000, the date on which the Verkooijen case C 35/98 was decided by the CJEU. As concerns the third approach, it must be stressed that the Meilicke case concerned the discriminatory taxation of inbound dividends in an intra EU context. Insofar the outcome in Santander will concern the discriminatory taxation of outbound dividends within the EU, the Verkooijen case may, therefore, not be the relevant benchmark case. One should probably select a relevant withholding tax case. Perhaps, the Bouanich case (decided on 19 January 2006), the Denkavit case (decided on 14 December 2006) or the Aberdeen Property case (decided on 18 June 2009) must be selected. This would mean that WHT refund claims submitted before the benchmark date would possibly not be protected. Insofar the outcome in the Santander case will also affect third country investors, one should probably select a third country case. Perhaps the Orange European Smallcap Fund case (decided on 20 May 2008) or the Haribo case (decided on 10 February 2011) should be selected (possibly resulting in a more severe limitation of the temporal effects of a CJEU decision as far as third country investors would be concerned). 8 EU direct tax news Issue 47 February, March, April 2012

9 Focus on Focus on temporal limitations on the Court of Justice s decisions Probably no limitation of temporal effects for diligent claimants The above third approach favored by A G Tizzano would mean that WHT refund requests for periods prior to the chosen benchmark date would not be protected. The AG proposed, however, an exception to this rule for diligent claimants. These are taxpayers who took action before the judgment in the above benchmark case and also for those who showed due diligence at a later date. Such diligent claimants should not suffer from any temporal limitation of a possible taxpayer friendly decision. However, in order to avoid further serious economic repercussions, A G Tizzano advised in Meilicke that this exception is limited to those taxpayers who took action before the reference to the CJEU in the Meilicke case was published in the Official Journal (on 11 September 2004). This is because it can reasonably be supposed that this is the date on which the possibility of a refund first received adequate publicity and attracted the attention even of the less diligent claimants. By analogy to this approach, the date on which the Santander case was published in the Official Journal (10 September 2011) might serve as a benchmark date. Other approaches are, however, conceivable as well. For example, the date on which the Santander case is expected to be decided by the CJEU (10 May 2012) might also serve as a benchmark date. In both cases, refund claims submitted after the benchmark date could be subject to a limitation of the temporal effects of a possible taxpayer friendly decision in Santander. Since there is no clear case law of the CJEU in this matter, it is very hard to predict which approach the CJEU will follow. Final remarks To conclude, one can say that there is a risk that the CJEU may limit its temporal effects in the Santander case if the outcome would be favorable for the taxpayer. The threshold is, however, quite high; Member States have to prove that i) there is a risk of serious economic repercussions and ii) that there is an objective, significant uncertainty regarding the compatibility with Article 63 TFEU of WHT levied on portfolio dividends paid to EU, EEA and third country investment funds. It is questionable whether these requirements are met. Even if the CJEU were to limit the temporal effects of its decision in Santander, it is very hard to predict the date until which the temporal effects would be limited, especially since there is no case law of the CJEU in this regard in the field of corporate taxation. In addition, diligent claimants should still be protected. In other words, any limitation should probably not apply to diligent claimants. From this perspective, the decision for an investor to contest a discriminatory WHT levied by any Member State should be taken without delay. EU direct tax news Issue 47 February, March, April

10 Belgium European Commission (EC) requests Belgium to review its discriminatory venture capital tax incentive (IP/12/176) On 27 February 2012, the EC officially requested Belgium to review its venture capital tax incentive for the Flemish Region. Under the current regime, the Flemish Region grants a personal income tax credit to individuals investing in shares and units of the ARKimedes funds (the first ARKimedes funds were incorporated on 8 June 2005, the second ARKimedes funds were incorporated on 4 June 2010). The ARKimedes funds tax credit was introduced by the Flemish Government in order to encourage investments and to promote entrepreneurship in the Flemish Region through providing venture capital to small and medium sized enterprises (SMEs). However, this personal income tax credit is only granted to investors residing in the Flemish Region part of Belgium. The incentive cannot, therefore, be granted to residents of Member States other than Belgium even if they are fully taxable in Belgium because they derive all or most of their personal income in Belgium. The Commission considers that the above mentioned venture capital tax incentive constitutes an obstacle to the free movement of workers and self employed persons which is guaranteed by EU rules (articles 45 and 49 Treaty on the Functioning of the European Union (TFEU) and 23 and 31 EEA Agreement). In addition, the Commission takes the view that the Belgian regime is not in line with previous case law of the Court of Justice (CJ) which held that non residents who derive all or most of their personal income in a Member State are in a comparable situation to residents of that Member State and should, therefore receive, in that Member State the same treatment as residents of that Member State. Consequently, discrimination will arise if they are not entitled to the same deductions of personal and family allowances as residents of that Member State (see case C 279/93 Schumacker). The request takes the form of a reasoned opinion (the second stage of the infringement procedure). If the regime in question is not brought into compliance with the reasoned opinion within two months, the Commission may refer the case to the CJ. The Flemish minister of finance has in this respect during a parliamentary question declared that he will not comply with the reasoned opinion of the Commission as the current regime is, in his view, not discriminatory. The European Commission requests Belgium to amend its property transfer tax in the Brussels Capital Region (IP/12/178) On 27 February 2012 the EC officially requested Belgium to reconsider its property transfer tax in the Brussels Capital Region. Under the current regime, the Brussels Capital Region allows for a reduction in the property transfer tax base for purchases of a primary residence located in the Brussels Capital Region. The reduction is, however, only granted if, among other conditions, the purchaser remains a resident of the Brussels Capital Region for a minimum period of five years. If the purchaser leaves the Brussels Capital Region within that period, the tax advantage needs to be repaid. The EC considers that the above mentioned regime is incompatible with the TFEU, as it discourages the free movement of persons, workers and self employed persons (guaranteed by Articles 21, 45, 49 TFEU and Articles 28 and 31 of the EEA Agreement). According to the EC, taxpayers that benefited from the tax reduction are dissuaded from leaving the Brussels Capital Region for the following five years, as otherwise they would be required to repay the tax advantage retroactively with interest. The request of the EC takes the form of a reasoned opinion (the second stage of an infringement procedure). If the above regime is not amended within two months, the EC may refer the matter to the CJ. 10 EU direct tax news Issue 47 February, March, April 2012 Back

11 Belgium Request for preliminary ruling on unrelieved double taxation in respect of dividends received by a Belgian resident individual On 25 October 2011, the Brussels Court of First Instance requested the CJ to give a preliminary ruling in case C 540/11, Daniel Levy and Carine Sebbag v Belgium. The case concerns a Belgian resident individual receiving dividends from a company established in another Member State. The dividends were subject to a withholding tax in the source state and to income tax in Belgium. However, Belgium did not grant relief for double taxation. The question arose whether this refusal gives rise to an infringement of the free movement of capital. The Brussels Court of First Instance therefore referred the following question to the CJ: Is a Member State acting in compliance with Community law, and specifically in compliance with Article 56 EC, read in conjunction with Articles 10 EC, 57[2] EC and 293 EC, if it undertakes, in a double taxation convention with another Member State, to eliminate the double taxation of dividends resulting from the division of the power of taxation laid down in that convention but subsequently amends its national law in such a way that such double taxation is no longer relieved? Given the earlier decision of the CJ in C 513/04, Kerckhaert Morres, it is unlikely that the taxpayer will succeed as, in that case, the CJ held the Belgian regime at issue in this case to be compatible with the free movement of capital. The Kerckhaert Morres case concerned a Belgian resident individual receiving dividends from a French company. Under Belgian domestic law, dividends were taxable as a separate category of income at a rate of 25%. For dividends that had been subject to tax in another country, the Belgian tax was reduced by a fixed percentage of that foreign tax ( quotité forfaitaire d impôt étranger ). However, that reduction was abolished in 1988 with respect to individuals not acting in the course of their business. Consequently, resident individuals receiving dividends from a foreign company were no longer entitled to the tax credit, with the result that such income was subject to tax both at source and in Belgium, without relief for double taxation being granted. Even though Belgium did not distinguish between residents receiving inbound dividends and residents receiving domestic dividends, the former category of residents ultimately suffered a disadvantage because tax had already been withheld at source. Nevertheless, the CJ held that the Belgian regime at issue in Kerckhaert Morres did not infringe the free movement of capital because the adverse consequences suffered by the Belgian resident taxpayer resulted from the exercise in parallel by two Member States of their fiscal sovereignty. Since disadvantages caused by the mere co existence of disparate national tax rules cannot be said to infringe fundamental freedoms, the Belgian regime was considered not to fall foul of the free movement of capital. Given the factual and legal similarities, it seems likely that the CJ would take the same approach in the pending case C 540/11, Daniel Levy and Carine Sebbag. European Commission requests Belgium to amend its notional interest deduction regime (IP/12/61) On 26 January 2012, the EC sent Belgium a reasoned opinion (the second stage of the infringement procedure) with the request to amend its notional interest deduction regime (NID). The NID allows for a (notional) deduction calculated on the aggregate amount of the equity, including retained earnings as at the last year end date. There are, however, certain items that need to be excluded from the above equity. Among those items are assets attributable to foreign permanent establishments and real estate located abroad. Note that no correction to equity is required in respect of domestic permanent establishments or Belgian real estate. Back EU direct tax news Issue 47 February, March, April

12 Belgium The Commission is, therefore, of the opinion that the current Belgian NID regime is incompatible with the freedom of establishment (Article 49 and 54 of the TFEU) and the free movement of capital (Article 63 of the TFEU). If Belgium does not comply with the reasoned opinion within two months, the Commission may refer Belgium to the CJ. In this respect, it should be noted that the Antwerp Court of First Instance had already requested a preliminary ruling from the CJ on 24 June 2011 on whether or not the exclusion of assets attributable to foreign permanent establishments from the NID base is compatible with the freedom of establishment (C 350/11, Argenta Spaarbank NV vs. Belgische Staat). Finland Finnish special authorization procedure for utilization of carried forward tax losses in the case of changes of ownership referred to the CJ On 30 December 2011, the Finnish Supreme Administrative Court referred to the CJ a question on whether or not the Finnish special authorisation procedure for the utilization of established carried forward tax losses in the case of changes of ownership constitutes incompatible State aid in the case C 6/12, P Oy (please see EU Direct Tax News Issue 46 for more details). The Finnish tax authorities stated, on 23 January 2012, that they will continue to apply the special permission procedure even though the case is pending before the CJ. France French dividends paid to Belgian residents: side effects of the Damseaux case On 13 December 2011, the Paris Administrative Court of Appeal (nr. 10PA03193, Pascal A) decided that the French WHT suffered by a Belgian resident was contrary to the free movement of capital where: Despite the France Belgium tax treaty that provides for the elimination of double taxation, the French WHT was not effectively eliminated in Belgium due to domestic regulations The French WHT suffered exceeded the income tax that would have been due by a French tax resident individual This case might be regarded as the mirror of the Damseaux case (CJ, 16 July 2009, C 128/08). In Damseaux, the Belgian individual argued that the fact that Belgium does not effectively allow for the elimination of the French dividend WHT granted by the France Belgium tax treaty was contrary to EU law. Whereas Article 19 A of the treaty provides that the French WHT is credited against Belgian tax due on the dividends, the Belgian legislation was amended so that, in practice, there was no possibility of crediting the French WHT. Nevertheless, the CJ decided that EU law does not contain any obligation for Belgium to eliminate the French dividend WHT. One consequence of such a decision is that, if the WHT is not eliminated in the state of residence of the beneficiary, the relevant tax treaty cannot be taken into account when determining if there is a discriminatory treatment in the source state. Indeed, in Denkavit (C 170/05) and Amurta (C 379/05), the CJ held that tax treaty provisions are part of the internal legislation of the Member States and should thus be taken into account when determining whether WHT is discriminatory compared to taxation borne by resident taxpayers. However, it is not sufficient for the tax treaty to contain rules providing for the elimination of the WHT, which must be effectively eliminated in the state of residence (e.g., in the Denkavit case, the Dutch parent company which benefited from the Dutch participation exemption could not effectively offset the French dividend WHT against Dutch taxes). 12 EU direct tax news Issue 47 February, March, April 2012 Back

13 France These principles are applied by the Paris Administrative Court of Appeal. The court first stated that, where a tax treaty concluded between two Member States provides for a tax credit mechanism which may eliminate discrimination, the source state cannot be regarded as complying with EU law where the beneficiary is not in a position to benefit from the tax credit mechanism. In this respect, it is irrelevant whether the impossibility of benefiting from the tax credit mechanism results from the state of residence not complying with its tax treaty obligations. Having compared the amount of WHT levied and the amount of tax that would have been paid on such dividends by a French taxpayer in the same situation (i.e., in concreto analysis), the court decided that the WHT was contrary to the free movement of capital and ordered its reimbursement. Germany Germany and France release green paper on convergence of their tax systems On 6 February 2012 the Ministries of Finance of Germany and France published a joint Green Paper on the German and French Cooperation on Convergence Points in Corporate Taxation ( the Green Paper ). The Green Paper follows an announcement made by German Chancellor Angela Merkel and French President Nicolas Sarkozy in August 2011 on a CCCTB and a common tax rate and is the first step toward a closer cooperation in corporate tax matters between the two countries. In the opinion of the Ministries, closer coordination of economic and fiscal policies is indispensable for a prosperous future of the EU and the euro. The two Governments believe that this initiative will lead to more economic integration in the EU and will provide an impetus to growth by reducing compliance costs for corporations and increasing transparency. The two Ministries had set up a Working Group almost a year before the August 2011 announcement. The Working Group examined and provided suggestions for convergence measures concerning six core subjects. The Green Paper summarizes the preliminary conclusions of the Working Group that are now intended to serve as a basis for discussion with the public and the national parliaments of the two countries as well as corporations. Shortly after the publication of the Green Paper, the parties currently in government in Germany issued a Paper entitled Twelve Points Concerning the Continuing Modernization and Simplification of Business Taxation that picks up some of the suggestions of the Green Paper. The Working Group sees possibilities for harmonization in the following fields: Group taxation Tax treatment of dividends and deductibility of business expenses Deductibility of local income taxes Utilization of tax losses Depreciation and amortization Partnership taxation Tax rates The most significant amendments suggested by the Working Group would be required from France. At the same time, the Working Group recognizes that some amendments would have such a significant impact on French taxpayers and the French budget that they require careful evaluation and could only be introduced as part of a general tax reform resulting in an expansion of the tax base combined with a reduction in the tax rate. Back EU direct tax news Issue 47 February, March, April

14 Germany Why is the Green Book important? The German and French Ministries of Finance seem to be determined to achieve more convergence of the French and German tax systems. Even though it is unclear whether the convergence process is going to continue at the same pace after the French presidential elections in April or May 2012, corporations with operations in these countries should nevertheless expect substantial changes in these two tax systems. In addition, this project may not only lead to more convergence of the French and German systems, but France and Germany may seek to achieve more convergence of tax systems in the EU generally. According to the Green Book, the two Ministries of Finance hope the initiative will pave the way for the European Commission s proposal on the CCCTB. This seems contradictory to previous statements made by the German Government in which it sharply opposed the Commission s CCCTB proposal. However, both countries are in favor of more coordination and harmonization in the field of corporate taxes generally and it can be expected that they continue this or similar initiatives in the future. Current status The Green Paper again refers to the 2013 implementation deadline that Ms Merkel and Mr Sarkozy had put forward in their August 2011 press statement. It is unclear whether this ambitious timetable can be maintained after the upcoming French presidential elections. The German 12 Point Plan also still needs to be translated into draft legislation. Any such legislation could be enacted prior to year end. German Federal Tax Court final decision (Az: I R 30/08) in the Scheuten Solar Technology Case (C 397/09) regarding the add back of interest provisions in the German municipal trade tax On 7 December 2011, the Federal Tax Court gave its final ruling in the Scheuten Solar Technology (SST) case (C 397/09), which concerned the add back of 50 % of the interest on long term liabilities for German trade tax purposes pursuant to Section 8 No. 1 of the German Trade Tax Act ( Gewerbesteuergesetz ). Following the decision of the CJ, the court ruled that Section 8 No. 1 of the German Trade Tax Act does not contravene the Interests and Royalties Directive (IRD). Further, the court ruled that the add back of 50 % of the interest on long term liabilities for German trade tax purposes does not violate the freedom of establishment (Art. 49, 54 TFEU) and Art. 24 (non discrimination) of the tax treaty between Germany and the Netherlands. Background SST was a limited liability company established in Germany. The company was wholly owned by a Dutch BV. In the years 2003 and 2004, SST took loans from the Dutch BV. In 2004, SST paid interest to the Dutch BV. Pursuant to Sec. 8 No. 1 of the German Trade Tax Act, the German tax office added half of the sum of the total interest paid back on the basis of assessment of the business tax payable by SST. In the objection proceedings before the German tax office, SST argued that the add back of interest payments contravenes Art. 1 para 1 of the IRD. In the opinion of SST, the add back of interest payments effectively constituted an imposition of tax that led to an economic double taxation of the interest that is not compatible with the IRD. Further, SST argued that the add back of interest payments contravenes the freedom of establishment (Art. 49, 54 TFEU) and Art. 24 (non discrimination) of the Germany Netherlands tax treaty. 14 EU direct tax news Issue 47 February, March, April 2012 Back