EU Tax Alert. Commission formally requests Belgium to amend its rules on notional interest deduction

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1 EU Tax Alert Edition 102 February 2012 Commission formally requests Belgium to amend its rules on notional interest deduction On 26 January 2012, the Commission issued a reasoned opinion against Belgium requesting it to amend its legislation on the notional interest deduction. Developments in the Netherlands: Decree on deferral of payment upon emigration of an enterprise further to the CJ s National Grid Indus judgment On 14 December 2011, the Netherlands State Secretary of Finance issued a Decree giving guidance on how to to bring the current administrative practice relating to the tax levied on the emigration of enterprises in line with the CJ s judgment in the National Grid Indus case (C-371/10) even before the relevant legislation is amended to that effect. IN THIS EDITION: Top News State Aid / WTO Direct taxation VAT Customs Duties, Excises and other Indirect Taxes Capital Duty Developments in the Netherlands: Supreme Court refers preliminary question to CJ on whether dividend tax withheld on distributions to Netherlands Antilles is in breach of the free movement of capital with third countries On 23 December 2011, the Supreme Court referred a question to the CJ for a preliminary ruling on whether dividend tax withheld on dividends distributed to Netherlands Antilles is in breach of the free movement of capital with third countries set out in Article 63 TFEU. Please click here to unsubscribe from this mailing. The EU Tax Alert is an newsletter to inform you of recent developments in the EU that are of interest for tax professionals. It includes recent case law of the European Court of Justice, (proposed) direct tax and VAT legislation, customs, state aid, developments in the Netherlands, Belgium and Luxembourg and more. To subscribe (free of charge) see:

2 EU Tax Alert Edition 102 February Contents Top News Commission formally requests Belgium to amend its rules on notional interest deduction Developments in the Netherlands: Decree on deferral of payment upon emigration of an enterprise further to the CJ s National Grid Indus judgment Developments in the Netherlands: Supreme Court refers preliminary question to CJ on whether dividend tax withheld on distributions to Netherlands Antilles is in breach of the free movement of capital with third countries State Aid / WTO New Code of Conduct Work Package approved New rules on services of general economic interest CJ upholds tax recovery orders in ACEA and France Télécom cases Direct taxation German court refers preliminary question to the CJ regarding exemption of foreign-earned employment income (Petersen and Petersen) Commission refers the United Kingdom to the CJ for abolishing the remedy for repayment of taxes paid in mistake of law Tax Policy Group discusses FATCA, VAT and national tax reforms Developments in the Netherlands: Supreme Court rules that standstill clause regarding the free movement of capital applies in case of a majority interest VAT CJ rules that French concession derogating from the reverse charge scheme is not in line with EU VAT law (Commission v France) CJ rules that non-customs warehouse-keeper may not unconditionally be held jointly and severally liable for VAT due by warehouse user (Vlaamse Oliemaatschappij NV) CJ rules that Member State may in principle require suppliers to obtain an acknowledgement of receipt of issued correcting invoices (Kraft Foods Polska SA) CJ rules that supply of self-employed lorry drivers qualifies as the supply of staff (ADV Allround Vermittlungs AG) Advocate General opines on method of calculating interest in respect of VAT levied in breach of EU law (Littlewoods Retail Ltd and Others) Advocate General opines on scope and direct effect of provisions for determining the taxable amount on the open market value (ADSITS Balkan and Sea Properties and OOD Provadiinvest) Presidency progress report regarding VAT treatment of insurance and financial services Commission adopts proposal in respect of mini One Stop Shop regime Commission requests Luxembourg to modify its VAT rules applicable to independent groups of persons Customs Duties, Excises and other Indirect Taxes Commission requests Ireland to modify its taxation of motor vehicles less than three months old Authorised Economic Operator Programme and Customs-Trade Partnership Against Terrorism Program of the US Proposal Capital Duty Advocate General opines on compatibility of annual contribution to Chamber of Commerce with Capital Duty Directive (Grillo Star Srl Fallimento)

3 EU Tax Alert Edition 102 February Top News Commission formally requests Belgium to amend its rules on notional interest deduction On 26 January 2012, the Commission issued a reasoned opinion against Belgium requesting it to amend its legislation on the notional interest deduction. This constitutes the second stage of the infringement procedure under Article 258 of the Treaty on the Functioning of the European Union ( TFEU ). The Belgian rules at issue provide for a notional interest deduction on own assets (taking into account the risk of investing own assets in a business activity). Notional interest deduction is granted for Belgian real estate and permanent establishments, whereas no deduction is granted for foreign real estate and permanent establishments. The Commission is of the opinion that these rules are contrary to the freedom of establishment (Articles 49 and 54 TFEU) and the free movement of capital (Article 63 TFEU). Belgium has two months to comply with the request. If the rules are not brought into compliance with EU law within two months, the Commission may refer the matter to the Court of Justice ( CJ ). It is noteworthy that a Belgian court has already referred a question for preliminary ruling to the CJ on the same issue in the Argenta Spaarbank case (C-350/11) (see EU Tax Alert edition no. 96, September 2011). Developments in the Netherlands: Decree on deferral of payment upon emigration of an enterprise further to the CJ s National Grid Indus judgment On 14 December 2011, the Netherlands State Secretary of Finance issued a Decree (nr. BLKB 2011/2477M, Stcrt. 2011, 23186) giving guidance on how to to bring the current administrative practice relating to the tax levied on the emigration of enterprises in line with the CJ s judgment in the National Grid Indus case (C-371/10) even before the relevant legislation is amended to that effect. The CJ decided, on 29 November 2011, in the National Grid Indus case that a tax charge on unrealized capital gains upon transfer of the place of effective management of a company is not precluded by the freedom of establishment (see EU Tax Alert edition no. 99, December 2011). No deduction has to be allowed for any decrease in value of assets after the date of emigration. However, the company transferring its place of effective management should be provided with the choice between immediate payment of the tax due and deferral of payment until the capital gains are actually realized. The CJ limited the practical effect of its judgment by stating expressly that Member States may charge interest on deferred payment of exit charges and may request the emigrating taxpayer to provide security for the deferred tax payment. The question whether the infringement of EU law caused by the immediate collection of tax from National Grid Indus can simply be mended by deeming the amounts paid on the tax assessment as security, or whether the actual tax assessment will be cancelled given that currently the law does not provide for such a system as suggested by the CJ has remained open. The Decree of the State Secretary of Finance gives guidance on this matter. The Decree only applies to EU and EEA States, and to enterprises with and without legal personality. The Decree states that in all pending cases/objections regarding emigration of an enterprise, the tax charge and assessment can be upheld. The possibility of deferral of payment must be mentioned and applied by the tax inspector upon the request of the taxpayer under the following conditions: Deferral is only possible to the extent that assets and liabilities have not yet been realized. The taxpayer will have to provide an overview of all assets and liabilities in order to enable the tax inspector to determine whether this is the case.

4 EU Tax Alert Edition 102 February The tax inspector will request security in the amount of at least the deferred tax payment. The tax inspector will charge collection interest on the deferred tax payment. The deferral of payment is not limited in time. However, in order to continue the deferral, the taxpayer must provide the aforementioned overview on an annual basis. Should the taxpayer not meet this obligation, the deferral of payment is cancelled and the tax becomes due immediately. It is possible to enter into an agreement with the tax inspector in respect of the foregoing. The Decree applies with retroactive effect as from 29 November Developments in the Netherlands: Supreme Court refers preliminary question to CJ on whether dividend tax withheld on distributions to Netherlands Antilles is in breach of the free movement of capital with third countries On 23 December 2011, the Supreme Court referred a question to the CJ for a preliminary ruling on whether dividend tax withheld on dividends distributed to Netherlands Antilles is in breach of the free movement of capital with third countries set out in Article 63 TFEU. The case (in fact, two joined cases) involved Netherlands BVs that had distributed dividend to their Antillean parent companies (majority situations). In a domestic situation, an exemption from dividend tax would have applied, whereas in the cross-border situation, 8.3% of dividend tax is to be withheld based on the special tax agreement between the Antilles and the Netherlands ( BRK ). This rate was fixed in 2002; prior to 2002 it was lower. The (former) Netherlands Antilles qualify as Overseas Territory under EU law. According to the Supreme Court, doubts arose in a number of respects in this case, therefore a reference to the CJ for a preliminary ruling was considered necessary. The Supreme Court noted that in the Prunus case (C-384/09), the free movement of capital with third countries was applied with regard to an Overseas Territory, but the case involved the relation between an Overseas Territory of an EU Member State and another Member State. Previously, the Supreme Court has taken the position that an Overseas Territory is a third country in relation to the Member State of which it is an Overseas Territory. Conversely, Advocate General Wattel of the Supreme Court has opined in the past that in such a case, a strict internal situation (not protected by the EU Treaty) is present. All in all, there were sufficient reasons for requesting a preliminary ruling. In addition, this case is also related to the pending follow-up FII case (C-35/11), where the question whether or not the free movement of capital can apply in majority situations, awaits an answer from the CJ. Regarding the standstill clause under Article 64(1) TFEU, the Supreme Court raises the question whether the change in the BRK in 2002 (which involved an increase of the tax rate) is sufficient to claim that the contested provision is not protected by the standstill clause, or whether also the treatment at the level of the Antilles should be taken into account (leading to the conclusion that the overall tax burden has not increased). In light of the above, the Supreme Court referred the following questions to the CJ (unofficially translated and abbreviated): 1. Can an own Overseas Territory be regarded as a third State for the application of the free movement of capital, which means that capital movements between the Member State and its Overseas Territory are protected by the free movement of capital with third countries? 2a. If the answer to the first question is in the affirmative, for the purposes of the standstill clause does the increase by the Netherlands of the withholding tax rate from 7.5% to 8.3% have to be taken into account solely or is also the treatment by the Netherlands Antilles (a decrease in taxation) to be considered?

5 EU Tax Alert Edition 102 February b. If the decrease of the taxation in the Netherlands Antilles also has to be taken into account, does also the Netherlands Antillean ruling practice of the past have to be taken into account, as a result of which prior to 1 January 2002 and also as far back as 1993, the actual tax due on dividends received from a Netherlands subsidiary was substantially lower than 8.3%? State Aid/WTO New Code of Conduct Work Package approved On 16 December 2011, the Council approved the new Work Package for the Code of Conduct Group, which has to report back on its progress by mid The Package contains a shortlist of priorities addressing harmful tax competition. The Group will continue to direct its work at mismatches and guidance notes. The monitoring of administrative practices, such as advance tax rulings and pricing agreements, will continue and is considered an open issue. Also efforts to promote the Code of Conduct in neighbouring third countries, in particular Liechtenstein and Switzerland, will continue. The Group points out that as for Switzerland, it will follow an alternative approach should satisfactory progress not be achieved. The possibility of unilateral assessment of Swiss regimes against Code of Conduct criteria is explicitly mentioned, even though no hint is given as to any consequence of such action. In regard to Liechtenstein, particular attention will be given to its full exemption for dividends and capital gains, its exemption of capital gains combined with a tax deductible write down for devaluing participations and its special regime for private asset structures. Also on the list is an examination of policy responses to address potential harmful tax planning practices by multinationals via investment fund regimes. It is for Member States to (confidentially) provide relevant cases for such examination. No mention is (yet) being made in respect of potential parallel State aid investigations by the Commission in respect of these investment fund regimes. New rules on services of general economic interest With the publication of a revised decision on the application of Article 106(2) of the TFEU, the Commission decided to exempt Member States from the obligation to notifiy any compensation for social services, including health and long term care, childcare, reintegration services and social housing (up to 2012: hospitals and social housing only). For other services of general economic interest ( SGEI ), notification will only be necessary for amounts as from EUR 15 million a year per recipient (up to 2012: EUR 30 million or a turnover of EUR 100 million or more). A public service contract would be required for any such service (i.e. a contractual obligation to make certain costs eligible for compensation). The costs eligible for compensation will primarily be determined by comparing the net costs of a company executing a public service contract and the net costs of a comparable company without such obligation. Existing compensation schemes will have to be adapted to these new rules by the end of January Even though compensation could theoretically be granted through the tax system, it should be pointed out, however, that the need for ex-ante determination of the relevant amounts makes it nearly impossible to successfully bring most kinds of tax benefits within the scope of these decisions. To the extent State aid would be granted to SGEI, such as in case of overcompensation or other cases of non-compliance with the aforementioned decision, a further proposal will be published this spring. According to the released draft regulation, amounts up to EUR 500,000 per three years will be deemed de minimis aid, which in the Commission s reasoning has a negligible effect on competition and trade. (For non-sgei, the level of de minimis aid will remain at EUR 200,000.)

6 EU Tax Alert Edition 102 February CJ upholds tax recovery orders in ACEA and France Télécom cases In a series of judgements, the CJ upheld a 2009 Judgement of the Court of First Instance ( CFI ) (now the General Court) in respect of a 2002 Commission decision ordering the recovery of fiscal aid (see, primarily, C-319/09 P of 21 December 2011, ACEA). This aid resulted from a three-year tax exemption for certain Italian public utility companies. The CJ also upheld a 2009 Judgement of the CFI regarding a 2004 Commission recovery order in respect of tax benefits provided to France Télécom (C-81/10 P of 8 December 2011.) Following the change in legal form necessary due to the liberalisation of the telecom market, from 1991 to 1993 this company was entitled to a transitional exemption of corporation tax and local business tax and it paid an alternative levy instead. The latter resulted in a higher tax burden compared to the normal regime. In contrast, from 1994 to 2002, the company profited from a special national tax rate for the purpose of levying (local) business taxes, based on an weighted average of local rates from the preceding year. This special rate resulted in a lower tax burden compared to the normal application of a system of local rates for business tax purposes. In this case, the amount of recoverable aid from 1994 to 2002 was to be set between EUR 798 and 1140 million, plus interest. The CJ agreed with the Commission not to allow the set-off of the additional tax burden from with the benefit received from Direct Taxation German court refers preliminary question to the CJ regarding exemption of foreign-earned employment income (Petersen and Petersen) On 24 October 2011, reference was made to the CJ by the Financial Court of Rheinland-Pfalz for a preliminary ruling in the case Petersen and Petersen (C-544/11). The Financial Court of Rheinland-Pfalz asked the CJ the following question: Is a legal provision compatible with Article 49 of the Treaty establishing the European Community (in the version of the Nice Treaty signed on 26 February 2001; now Article 56 of the Treaty on the Functioning of the European Union) if it makes a tax exemption for income of an employee who is taxable in Germany dependent on the employer being established in Germany, but does not provide for such exemption if the employer is established in another EU Member State? Commission refers the United Kingdom to the CJ for abolishing the remedy for repayment of taxes paid in mistake of law On 26 January 2012, the Commission decided, further to its reasoned opinion of 30 September 2010 (see EU Tax Alert edition no. 85, November 2010), to refer the United Kingdom to the CJ for having abolished the remedy for repayment of taxes paid in mistake of law without proper transitional rules. The UK retroactively abolished one of the remedies used by taxpayers seeking reimbursement of taxes paid in breach of EU law. No proper transitional rules are provided for (except in certain limited circumstances). As a result, it is practically impossible in certain cases to exercise the rights conferred by EU law. This goes against EU rules as this measure exceeded the limits of national procedural autonomy (derived from Article 4(3) of the Treaty on the European Union). A reimbursement should not be made impossible or excessively difficult. In this respect, a retroactive limitation of the rights of taxpayers without proper transitional rules goes against this principle. Tax Policy Group discusses FATCA, VAT and national tax reforms On 6 February 2012, the Tax Policy Group ( TPG ) held its fifth meeting since its re-launch in October The TPG, which brings together high level representatives

7 EU Tax Alert Edition 102 February of EU Finance Ministers, is chaired by Commissioner Šemeta. This meeting of the TPG focused on measures which could improve and accelerate tax coordination in key areas that can contribute to economic stability and growth. The Group was updated on the Commission s progress to find a pro-business approach with the USA in the application of the FATCA (Foreign Account Tax Compliance Act) legislation in the EU (see EU Tax Alert edition no. 92, May 2011). The future of VAT was also discussed, including tackling VAT fraud and evasion, on the basis of the Commission s Communication on the future of VAT issued in December 2011 (see EU Tax Alert edition no. 101, January 2012). The TPG also exchanged views on the tax policy elements of national reform programmes and considered how to strengthen tax coordination in the context of the European Semester, an exercise aimed at strengthening economic governance within the EU. Developments in the Netherlands: Supreme Court rules that standstill clause regarding the free movement of capital applies in case of a majority interest The Netherlands Supreme Court delivered a judgment on 16 December 2011, in which it ruled that the standstill clause under Article 64(1) TFEU - laying down that certain legislation enacted before 1 December 1993 which restricts the free movement of capital in relation to third countries can be maintained - applied in a case of a majority interest, irrespective of the fact that the presence of a direct investment was challenged. The case is an appeal against the judgment of the Court of Appeal in Amsterdam of 7 October 2010, in which it decided that the free movement of capital vis-á-vis third countries cannot apply in case of a majority interest. The case involved a Canadian company that held 100% of the shares in a Netherlands BV. This BV had distributed dividends on which Netherlands dividend withholding tax was withheld. The BV objected and appealed against this withholding on the grounds that the levy was in breach of the free movement of capital with third countries, given that in a domestic situation, an exemption from dividend withholding tax would have applied. BV argued that the free movement of capital with third countries applies (or at least that doubt is present) due to decisions of various courts in Germany and the UK. These courts decided that the free movement of capital can apply in majority situations. In addition, a preliminary ruling has been requested in the follow-up FII case (C-35/11), where this matter will be decided by the CJ. The Netherlands Supreme Court noted that as the question whether the free movement of capital can or cannot apply in case of a majority interest is under review by the CJ, for purposes of the case at hand, it would assume the application of the free movement of capital with third countries. However, thereafter, the Supreme Court noted that the 100% shareholding in the BV was a direct investment. BV had argued that the investment itself was a passive portfolio investment and that the parent company did not actively involve itself in decisions at BV level and that, therefore, no direct investment was involved within the meaning of the standstill clause. According to the Supreme Court, this reasoning did not suffice. Within a international group, the Court deems it impossible that an intermediate holding company can be considered not having a direct investment in the subsidiary. Therefore, the standstill clause applied to the effect that the restriction on the free movement of capital from a third country was not precluded. Apparently, the Supreme Court was of the view that an acte clair or éclare was present, and dismissed the appeal of BV. VAT CJ rules that French concession derogating from the reverse charge scheme is not in line with EU VAT law (Commission v France) On 15 December 2011, the CJ delivered its judgment in infringement proceedings initiated by the Commission (C-624/10), and declared that France has failed to fulfill its obligations under the EU VAT Directive by applying an

8 EU Tax Alert Edition 102 February administrative concession that derogated from the reverse charge scheme. On the basis of the concession, France obliged a seller or provider established outside France to designate a tax representative, to register itself for VAT purposes in France, and to offset deductible VAT that it paid against that which it has collected in the name and on behalf of its customers. CJ rules that non-customs warehousekeeper may not unconditionally be held jointly and severally liable for VAT due by warehouse user (Vlaamse Oliemaatschappij NV) On 21 December 2011, the CJ delivered its judgment in the Vlaamse Oliemaatschappij NV case (C-499/10). Vlaamse Oliemaatschappij NV (VOM) rendered services to its customers consisting of the unloading, storing in warehouses and transferring of petroleum products for its customers. The products were stored in the warehouses until they were sold to the final customer. Pursuant to an authorization, VAT suspension arrangements applied with respect to the goods deposited in the warehouse. Therefore, VAT became chargeable on the goods when they were removed from the warehouse provided that either no other customs warehousing arrangements applied or that they were supplied for valuable consideration. One of its customers, Ghebra NV (Ghebra), stored petroleum products in VOM s warehouse. During an audit, the tax authorities established that Ghebra had supplied goods for valuable consideration, and that those goods were released from VOM s warehouse. As a result, VAT was due by Ghebra to the tax authorities. However in the meantime, Ghebra had been declared insolvent. Based on a national provision, the Belgian tax authorities, therefore, issued an order for recovery against VOM for the amount of the VAT owed by Ghebra. VOM contested this decision on the grounds that it would be contrary to the principles of legal certainty and proportionality to hold the warehousekeeper jointly and severally liable for VAT owed by the warehouse user if the warehouse-keeper acted in good faith. Eventually, preliminary questions were referred to the CJ. The CJ ruled that Article 21(3) of the Sixth EU VAT Directive did not authorize a Member State to hold a warehousekeeper other than a customs warehouse-keeper jointly and severally liable for the VAT owed on a supply of goods made for valuable consideration, and released from the warehouse by the owner of the goods who was liable for the tax on those goods, in the circumstances where the warehouse-keeper acted in good faith or where no fault or negligence could be imputed to him. CJ rules that Member State may in principle require suppliers to obtain an acknowledgement of receipt of issued correcting invoices (Kraft Foods Polska SA) On 26 January 2012, the CJ delivered its judgment in the Kraft Foods Polska SA case (C-588/10). Kraft Foods Polska SA (KFP), a producer and distributor of foodstuffs, issued a significant number of invoices and correcting invoices in the course of its business. The correcting invoices were issued in respect of discounts, goods returned or identified errors. KFP often received acknowledgments of receipt of correcting invoices with some delay or did not receive any acknowledgements of receipt at all. In this regard, KFP submitted a request to the Polish tax authorities to obtain confirmation that it could take the correcting invoices into account in its VAT returns relating to the period during which the correcting invoices were issued, even when it had not received acknowledgement of receipt of the correcting invoices. The Polish tax authorities indicated, however, that it was required on the basis of national provisions that an acknowledgement of receipt was received and that any practical difficulties that KFP might experience in obtaining such acknowledgements were irrelevant.

9 EU Tax Alert Edition 102 February In the following proceedings, the Administrative Court of Warsaw ruled that, unlike the national law, Articles 73 and 92 of the VAT Directive did not lay down any requirement to be in possession of an acknowledgement of receipt, and that the introduction of such a requirement was contrary to the principles of VAT neutrality and proportionality. Subsequently, the Polish Minister of Finance lodged an appeal in cassation before the Administrative Court of Naczelny, which decided to refer preliminary questions to the CJ. The CJ indicated that Member States have a margin of discretion based on the provisions of Article 90(1) and Article 273 of the EU VAT Directive to lay down rules in order to ensure that, where the price is reduced after the supply has taken place, the taxable amount is reduced accordingly. On the basis of Article 90(1) of the EU VAT Directive, Member States may, according to the CJ, require suppliers to be in possession of acknowledgement of receipt of a correcting invoice in order for them to be entitled to reduce the taxable amount as set out in the initial invoice. Moreover, the CJ ruled that the principles of VAT neutrality and proportionality in principle do not preclude such a requirement. However, where it is impossible or excessively difficult for the supplier to obtain acknowledgement of receipt within a reasonable period of time, the CJ ruled that the supplier should be allowed to establish by other means that he has taken all the steps necessary in the circumstances of the case to satisfy himself that the purchaser of the goods or services is in possession of the correcting invoice, that he is aware of it and that the transaction in question was in fact carried out in accordance with the conditions set out in the correcting invoice. CJ rules that supply of self-employed lorry drivers qualifies as the supply of staff (ADV Allround Vermittlungs AG) On 26 January 2012, the CJ delivered its judgment in the ADV Allround Vermittlungs AG case (C-218/10). ADV Allround Vermittlungs AG (ADV) is a German company whose business consisted of the supply of self-employed lorry drivers to haulage contractors in Germany and Italy. For the work carried out, the drivers invoiced ADV which, in its turn, invoiced the haulage contractors with a mark up of between 8% and 20%. Initially, ADV did not charge VAT when invoicing Italian customers. However, the tax office Hamburg-Bergedorf ruled that that the services rendered by ADV did not qualify as the supply of staff. In compliance with the view of the tax office, ADV started charging 16% German VAT to its Italian customers. When the Italian customers applied for a refund of the German VAT at the Federal Central Tax Office, this tax office indicated that the services rendered by ADV qualified as the supply of staff and that the services were, therefore, not taxable in Germany. As a result, the tax office refused to refund the German VAT to the Italian customers. Subsequently, the Italian customers refused to keep paying ADV the German VAT on the invoices. As a result, ADV had to bear the 16% non-refundable VAT. With its margin being between 8% and 20%, ADV eventually had to cease its activities. In the following proceedings, the Finance Court of Hamburg decided to refer preliminary questions to the CJ. According to the CJ, the supply of staff as referred to in the provision of Article 9(2)(e) of the Sixth EU VAT Directive also includes the supply of self-employed persons not in the employment of the trader providing the service. Moreover, in view of the fact that both the service provider and the recipient of the services have the possibility to defend their rights, not only before the administrative authorities but also before the national courts, the CJ ruled that Member States are not required on the basis of Articles 17(1), 17(2)(a), 17(3)(a) and 18(1)(a) of the Sixth EU VAT Directive to amend their domestic procedural rules in such a way as to ensure that the taxability and liability to VAT of a service are assessed in a consistent way in relation to the provider and in relation to the recipient of that service, even though they fall within the jurisdiction of different tax authorities.

10 EU Tax Alert Edition 102 February Those provisions, according to the CJ, do require Member States to adopt measures that are necessary to ensure that VAT is collected accurately and that the principle of fiscal neutrality is respected. Advocate General opines on method of calculating interest in respect of VAT levied in breach of EU law (Littlewoods Retail Ltd and Others) On 12 January 2012, Advocate General Trstenjak presented her Opinion in the Littlewoods Retail Ltd and Others case (C-591/10). The case concerns Littlewoods Retail Ltd and Others (the applicants) that had, due to a misclassification, overpaid VAT during the period from 1973 through October In this regard, Her Majesty s Commissioners for Revenue & Customs repaid the overpaid VAT increased with simple interest to the applicants. However, the applications claimed further sums (aggregating to an amount of GBP 1 billion) on the grounds that the UK received that sum as a benefit through the use of the principal amounts of VAT overpaid. Essentially, the case revolved around the question whether simple interest, compound interest, or some other interest had to be calculated on the refund of the principal sum overpaid. According to the Advocate General, the Member States are, in principle, entitled to determine the detailed rules relating to the payment of interest as long as the principles of effectiveness and equivalence are taken into account. In this regard, the Advocate General opined that the principle of effectiveness was clearly complied with in the case at hand, because the interest payment, exceeding the principle sum by more than 25%, was not so low that it largely deprived the interest claim stemming from EU law of substance. Whether or not the refund of simple interest complied with the principle of equivalence had, according to the Advocate General, to be determined by the referring court by examining whether the rules corresponded to the detailed rules governing similar domestic interest claims. If the referring court should identify several similar domestic interest claims in respect of different rules that had been laid down, the Member State would not be required to apply the most favourable rules. Finally, if the rules on payment of interest on VAT collected in breach of EU law should be less favourable than the detailed rules governing similar domestic interest claims, because the taxable person could determine the limitation period and other characteristics of the similar domestic interest claims through the choice of claim, whereas that was not the case for interest on VAT collected in breach of EU law, the Advocate General opined that in such a situation, the Member States would be required to apply the more favourable rules. Advocate General opines on scope and direct effect of provisions for determining the taxable amount on the open market value (ADSITS Balkan and Sea Properties and OOD Provadiinvest) On 26 January 2012, Advocate General Sharpston presented her Opinion in the joined cases ADSITS Balkan and Sea Properties (C-621/10) and OOD Provadiinvest (C-129/11). In these cases, the Administrative Court of Varna (Bulgaria) referred preliminary questions to the CJ regarding the option under Article 80(1) of the EU VAT Directive on the basis of which Member States may in certain circumstances take the open market value of a supply into account to determine the taxable amount for VAT purposes. The referring Court was in doubt as to whether the Bulgarian legislation exercising that option was compatible with EU VAT law, and if not whether Article 80(1) of the EU VAT Directive has direct effect and may be applied directly by a national court.

11 EU Tax Alert Edition 102 February The ADSITS Balkan and Sea Properties case concerned a real estate investment trust that had purchased various properties from a connected party for an amount of BGN 21,318,852. ADSITS Balkan and Sea Properties sought to deduct the input VAT incurred on the purchased properties. The tax authorities established, however, that the open market value of the transactions was BGN 21,216,300 and that the input VAT incurred on the difference was charged unlawfully and, therefore, could not be deducted. In the second case, OOD Provadiinvest sold three plots of agricultural land together with greenhouse structures, all improvements and permanent crops. Two of the plots were sold to its shareholder and the other plot to its representative officer for an amount of BGN 25,000. No VAT was indicated on the invoices. The open market value of the three plots was established at BGN 392,700. Therefore, the tax authorities took the view that the transactions comprised both exempt supplies (plots of land) and taxable supplies (accessories, improvements, and crops). On the basis of the open market value, the tax authorities assessed that VAT was due on the taxable supplies. The Advocate General emphasized that Article 80(1) of the EU VAT Directive comprises an exhaustive list of the circumstances in which a Member State may levy VAT on the basis of the open market value. In this regard, the Advocate General indicated that Article 80(1) of the EU VAT Directive does not authorize a Member State to take into account the open market value where the relevant supplier or customer has a full right to deduct input VAT. Should the national provisions nevertheless take the open market value into account in such situation, then those provisions should, according to the Advocate General, be disapplied by the national court because they are not in conformity with EU law. Moreover, the Advocate General indicated that the issue of whether or not Article 80(1) of the EU VAT Directive has direct effect, becomes irrelevant in that case. In the situation where the national provisions were in line with Article 80(1) of the EU VAT Directive, but where the open market value is nevertheless applied to transactions where the relevant supplier or customer has a full right to deduct input VAT, the Advocate General opined that the question whether or not Article 80(1) of the EU VAT Directive has direct effect should be answered as follows. In the case a taxpayer should contest a decision of the tax authorities, the taxpayer would need to rely on the direct effect of Article 73 of the EU VAT Directive (general rule for determining the VAT taxable amount) and not on Article 80(1) of the EU VAT Directive. Moreover, if a Member State has not validly exercised the option available under Article 80(1) of the EU VAT Directive, the Advocate General indicated that the Member State would not be able to invoke the direct effect of that article against a taxable person in order to tax a transaction on the basis of its open market value. Finally, the Advocate General made some additional remarks about the cases at hand outside the scope of the order for reference. The Advocate General indicated that it might be necessary for the referring court to establish whether the price concerned in the ADSITS Balkan and Sea Properties case can truly be said to be higher than the open market value (the price exceeded the assessment of the valuer by less than 0,5%). Moreover, the Advocate General indicated with respect to the OOD Provadiinvest case that the referring court should examine whether it did indeed concern, as claimed by the tax authorities, VAT taxable and VAT exempt supplies. In this regard, the Advocate General indicated that, based on the factual circumstances, it could possibly concern one supply that is either fully taxable or fully VAT exempt.

12 EU Tax Alert Edition 102 February Presidency progress report regarding VAT treatment of insurance and financial services On 14 December 2011, the Working Party on Tax Questions (Indirect Taxation) discussed the draft Presidency progress report on the proposals for a Council Directive and a Regulation as regards the VAT treatment of insurance and financial services. The aim of the proposals is to clarify and update definitions of the exempt insurance and financial services in order to ensure consistent interpretation throughout the EU, to broaden the existing option for taxation by transferring the right to opt from the Member States to the financial and insurance institutions, and to introduce a cost-sharing group which allows financial and insurance institutions to cooperate without incurring additional non-recoverable VAT. Commission adopts proposal in respect of mini One Stop Shop regime On 13 January 2012, the Commission adopted a proposal for a Council Regulation regarding the special scheme for non-established taxable persons supplying telecommunication services, broadcasting services or electronic services to non-taxable persons (the so-called mini One Stop Shop ) that is to enter into force as of Under the mini One Stop Shop, the supplier uses a web portal in the Member State in which it is registered for VAT purposes to account for the VAT due in other Member States on supplies of such services to private consumers. A scheme is already in operation for non-eu businesses supplying electronic services. The proposal, which intends to amend the implementing Regulation 282/2011, establishes binding rules on the application of the respective provisions of the VAT Directive in order to ensure legal certainty. Commission requests Luxembourg to modify its VAT rules applicable to independent groups of persons On 26 January 2012, the Commission sent a reasoned opinion (second step of an infringement procedure under Article 258 TFEU) to Luxembourg in which it requested Luxemburg to modify its VAT rules on independent groups of persons. Under Luxemburg law, the services provided by an independent group to its members are completely free of VAT, provided that the members taxed activities do not exceed 30% of their annual turnover (or 45% under certain conditions). Group members are also allowed to deduct the VAT charged to the group on its purchases of goods and services. Lastly, operations by a member in its own name but on behalf of the group are regarded as non-taxable. The Commission considers these arrangements not in line with EU law because in order to be exempt from VAT, the services provided by an independent group to its members must be directly required for their non-taxable or exempt activities. According to the Commission, the Luxembourg rule providing for a ceiling for taxed operations does not, therefore, fulfill this condition. The Commission indicates that the group s exempt activities must be linked exclusively to the exempt activities of group members. Moreover, group members should, according to the Commission, not be allowed to deduct VAT charged to the group. Finally, the Commission considers that the Luxembourg arrangements do not take account of VAT rules in EU law applicable to operations by intermediaries. The Commission may refer Luxembourg to the CJ if the rules are not brought into compliance with EU law within two months.

13 EU Tax Alert Edition 102 February Customs Duties, Excises and other Indirect Taxes Commission requests Ireland to modify its taxation of motor vehicles less than three months old On 26 January 2012, the Commission formally requested Ireland to modify how motor vehicles less than three months old are taxed. Authorised Economic Operator Programme and Customs-Trade Partnership Against Terrorism Program of the US Proposal A proposal for a Council Decision on a Union position within the EU-US Joint Customs Cooperation Committee regarding mutual recognition of the Authorised Economic Operator Programme of the European Union and the Customs-Trade Partnership Against Terrorism Program of the United States has been published. The context of the proposal is set out below. CONTEXT OF THE PROPOSAL EU case law has established that a vehicle starts to lose its value as soon as it is bought or brought into use. Concerning taxes which are levied in the Member State just once with the first registration of the vehicle, the Court has considered that a part of such a tax remains incorporated in the value of second-hand vehicles already registered on the national market. The residual value of the tax diminishes proportionately with the depreciation of the vehicle. Consequently, EU rules are breached (Article 110 TFEU) if the amount of tax levied on an imported second-hand vehicle is higher than the residual tax incorporated in the value of similar second-hand vehicles already registered on national territory. Under Irish legislation, vehicles which are less than three months old or cars which have travelled less than 3,000 km. bear the same tax burden as new vehicles. This is a discrimination against the owners of these vehicles which are proportionally taxed more than owners of new vehicles which were purchased in the country. EU legislation on the Authorised Economic Operator (AEO) was introduced by an amendment to the European Union s Community Customs Code (Regulation 648/2005 adopted in April 2005). The objective of trade partnership programmes such as the AEO is to provide facilitation to traders which demonstrate compliant efforts to secure their part of the international supply chain. The AEO legislation came into force in January By October 2011, more than 4,300 EU companies had been certified for security. Mutual recognition of trade partnership programmes enhances end-to-end supply chain security and facilitates trade. It consolidates internationally the approach agreed in the World Customs Organization (WCO) Framework of Standards to Secure and Facilitate Trade ( SAFE Framework ). It also addresses the concerns of the business community to avoid proliferation of requirements and to standardise customs security procedures. Ireland has two months to comply with the request. If the rules are not brought into compliance with EU law within two months, the Commission may refer the matter to the CJ. EU-US relations in the area of customs are based on the Agreement on Customs Cooperation and Mutual Assistance in Customs Matters ( CMAA ), signed on 28 May According to the CMAA, the respective customs authorities undertake to develop customs cooperation covering all matters relating to the application of customs legislation.

14 EU Tax Alert Edition 102 February Customs cooperation under the CMAA was expanded by the Agreement on intensifying and broadening the CMAA to include cooperation on container security and related matters, signed on 28 April Two expert working groups were then formed to focus on furthering joint efforts in security standards and comparing trade partnership programmes respectively. In 2006, the EU and US agreed to assess the feasibility of establishing mutual recognition of their respective trade partnership programs. In 2007, an in-depth comparison of both the US and EU trade partnership programmes, namely the EU AEO and the US Customs-Trade Partnership Against Terrorism (C-TPAT) programmes, was completed. A pilot program was launched in which the US Customs and Border Protection (CBP) observed security components of the EU s AEO audit process. Following the in-depth comparison of the EU and US trade partnership programmes, a Roadmap towards mutual recognition was adopted in March 2008, setting key performance-based stages required to reach mutual recognition. In January 2009, an abridged version of the Roadmap was made public. On 25 June 2010, the Commission s DG Taxation and Customs Union ( DG TAXUD ) and the U.S. CBP agreed on the Final Steps Towards the Implementation of Mutual Recognition Between the United States and the European Union, setting down the steps necessary and the timetable for completing mutual recognition. A work programme was established in September 2010, and amended in September 2011, covering the process of joint validation and data exchange. A total of twenty-seven joint validation visits in the EU and four joint validation visits in the US were completed by 4 November Mutual recognition of the EU and US trade partnership programmes has been highlighted as a key cooperation project by the Transatlantic Economic Council; at its meeting of 29 November 2011, the Transatlantic Economic Council welcomed that the EU and the US have completed the preparatory work on mutual recognition of their trade partnership programmes. Capital Duty Advocate General opines on compatibility of annual contribution to Chamber of Commerce with Capital Duty Directive (Grillo Star Srl Fallimento) On 12 January 2012, Advocate General Kokott presented her Opinion in the Grillo Star Srl Fallimento case (C-443/09). This case concerns the annual contribution to the Italian Chambers of Commerce. This contribution is due by all enterprises which are registered in the trade register that is kept by the Chambers of Commerce. The question referred to the CJ, in brief, is whether this contribution is compatible with Directive 2008/7/EC (the Capital Duty Directive ). The Capital Duty Directive prohibits EU Member States from subjecting capital companies to any form of indirect tax in respect of, inter alia, the registration or any other formality required before the commencement of business to which a capital company may be subject by reason of its legal form. According to the Advocate General, the annual contribution at issue would not qualify as such a (prohibited) indirect tax if it is not a condition for the continuation of the activities of a capital company. Since this is not entirely clear, the Advocate General suggests referring this issue for examination to the national court. However, even if the annual contribution should be a prerequisite for the continuation of the activities of the

15 EU Tax Alert Edition 102 February company, then it would only be prohibited, according to the Advocate General, if the tax is imposed as a result of the legal form of a capital company. In the Advocate General s view, this should not be the case, since the contribution is due by enterprises regardless of their legal form (e.g. also by individuals who carry on an enterprise). In conclusion, the Advocate General is of the opinion that the annual contribution at issue is not, in principle, prohibited by the Capital Duty Directive. In this case, the additional question was referred to the CJ whether it was relevant that the company in question, Grillo Star, had never become an active company (the activities of the company were limited to preparations for starting up its intended business. The business, however, was never started and the company is currently in liquidation). According to the Advocate General, the annual contribution at issue is acceptable also if a company s only activities consist of the preparation of the start of its actual business activities.