- CJ rules that Belgian fairness tax is in breach of EU law under certain circumstances (X)

Transcription

1 RECENT DEVELOPMENTS FOR TAX SPECIALISTS EDITION 167 EU Tax Alert - Agreement on European Council Directive on Dispute Resolution - CJ rules on right to challenge the legality of an information request in the context of an exchange and interpretation of foreseeable relevance (Berlioz) - CJ rules that Belgian fairness tax is in breach of EU law under certain circumstances (X) - CJ rules that French surcharge on dividend distributions is in breach of the Parent-Subsidiary Directive (AFEP) - The Netherlands intends to introduce VAT revision rules for services

2 Highlights in this edition - Agreement on European Council Directive on Dispute Resolution - CJ rules on right to challenge the legality of an information request in the context of an exchange and interpretation of foreseeable relevance (Berlioz) - CJ rules that Belgian fairness tax is in breach of EU law under certain circumstances (X) - CJ rules that French surcharge on dividend distributions is in breach of the Parent-Subsidiary Directive (AFEP) - The Netherlands intends to introduce VAT revision rules for services

3 EU Tax Alert 3 Contents Highlights in this edition VAT Agreement on European Council Directive on Dispute Resolution CJ rules on right to challenge the legality of an information request in the context of an exchange and interpretation of foreseeable relevance (Berlioz) CJ rules that Belgian fairness tax is in breach of EU law under certain circumstances (X) CJ rules that French surcharge on dividend distributions is in breach of the Parent-Subsidiary Directive (AFEP) The Netherlands intends to introduce VAT revision rules for services Direct taxation CJ rules that Greek legislation on inheritance tax is not in line with the free movement of capital (Commission v Greece) CJ rules that French legislation that subject s income from real estate received by an EU official to social contributions is not in line with EU Law (Lobkowicz) AG Kokott opines on Belgian rule that denies the deduction of interest expenses to the amount of exempted dividends regarding companies held for less than one year (Argenta) AG Mengozzi considers that CJ is competent to interpret interest from debt claims within the meaning of the German-Austrian tax treaty (Austria v Germany) Commission asks Belgium to comply with EU law on inheritance tax on immovable property Commission asks France to abolish withholding tax imposed on non-resident companies in deficit Netherlands Supreme Court refers questions to the CJ concerning levies of social contributions CJ rules that it is not contrary to EU law to bring criminal proceedings against a natural person while a tax penalty is imposed on a company for the same act (Orsi and Baldetti) AG Kokott opines that VAT incurred on renovation carried out free of charge for a third party for its own purposes is not deductible (Iberdrola) AG Opines that German rules based on Article 132(1) (f) VAT Directive do not comply with EU VAT Directive (Commission v Germany) Commission publishes working paper on possible VAT implications of Transfer Pricing Council discussed a proposal on VAT rates for electronic publications Council discussed a proposal on generalised but temporary reverse charge Customs Duties, Excises and other Indirect Taxes CJ rules on the definition of smoking tobacco for the levy of excises (Eko-Tabak) AG renders his Opinion on customs value of goods repaired under warranty (X BV) AG renders his Opinion on the customs value of goods removed from customs supervision (LS Customs Services)

4 4 Highlights in this edition Agreement on European Council Directive on Dispute Resolution On Tuesday 23 May 2017, the Council reached an agreement on the future adoption of the Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union (the Directive). Once the European Parliament has given its opinion on the Directive and the Council has given its final vote, the Directive will apply to any complaint submitted from 1 July 2019 onwards with respect to those questions related to a tax year starting on or after 1 January The Directive introduces improvements to the existing mechanisms intended to resolve disputes between Member States on the interpretation of bilateral tax treaties. The Directive makes dispute resolution mechanisms binding and mandatory. Additionally, the Directive introduces time limits and obliges Member States to resolve disputes related to double taxation. The Directive will result in more legal certainty in that it guarantees final and binding decisions for any dispute. The Directive enables any affected company to submit a complaint to the competent authorities of Member States. Such a complaint can lead to a mutual agreement procedure. If mutual agreement is not reached within two years, a mandatory arbitration procedure will be launched. In this procedure an officially appointed advisory commission will issue a binding opinion. We expect the Directive to result in a reduction of time needed to resolve cross border disputes. CJ rules on right to challenge the legality of an information request in the context of an exchange and interpretation of foreseeable relevance (Berlioz) On 16 May 2017, the CJ delivered its judgment in the Berlioz Investment Fund SA v Directeur de l administration des contributions directes case (C-682/15). The case deals with Berlioz Investment Fund SA (Berlioz), a Luxembourg company, was imposed a fine by the Luxembourg direct tax authorities for not providing them with all the information requested in an information order based on an exchange of information request issued by the French tax authorities. Berlioz refused to communicate the requested information on the ground that part of the information was not foreseeably relevant for the audit carried out by the French tax authorities. Berlioz brought the case before the Luxembourg courts. In first instance, the Luxembourg Administrative Tribunal (LAT) decreased the fine from EUR 250,000 to EUR 150,000. In second and last instance, the Luxembourg Administrative Court (LAC) referred preliminary questions to the CJ. The LAC requested the CJ to determine whether the Luxembourg law prohibiting the Luxembourg courts to control the legality of an information order issued by the Luxembourg tax authorities and, therefore, of the information request of the foreign tax authorities, infringes the taxpayer s right to an effective judicial remedy, as guaranteed by Article 47 of the Charter of Fundamental Rights of the EU (the Charter). It questioned, in particular: (i) whether a person which has been imposed a penalty for failure to provide information must be allowed to challenge such decision; (ii) the meaning of foreseeable relevance of the information requested pursuant to Directive 2011/16 on administrative cooperation in the field of taxation, and (iii) the scope of the review which the tax and judicial

5 EU Tax Alert 5 authorities of the requested State must carry out within such content. The CJ started by stating that a person, on whom a pecuniary penalty has been imposed for failure to comply with an administrative decision directing that person to provide information in the context of an exchange between national tax administrations pursuant to Directive 2011/16 is entitiled to challenge the legality of that decision pursuant to Article 47 of the Charter. The CJ then went on to clarify in its judgment the meaning of foreseeable relevance. According to the CJ, it is apparent from the wording of both Article 1 (1) and Article 5 of the Directive, that the words foreseeably relevant describe a necessary characteristic of the requested information. The obligation imposed on the requested authority under Article 5 of the Directive to cooperate with the requesting authority does not extend to the communication of information that is considered not to have that characteristic. Thus, characterization of the requested information as being of foreseeable relevance is a condition of the request relating to that information. This is also reflected in Article 26 of the OECD MTC which provides that Contracting States are not at liberty to engage in fishing expeditions nor to request information that is unlikely to be relevant to the tax affairs of a given taxpayer. On the contrary, there must be a reasonable possibility that the requested information will be relevant. Therefore, the CJ concluded that the foreseeable relevance of the information requested by one Member State from another Member State is a condition which the request for information must satisfy in order for the requested Member State to be required to comply with that request and thus, a condition of the legality of the information order addressed by that Member State to a relevant person and of the penalty imposed on that person for failure to comply with that information order. Subsequently the CJ addressed the fact that the tax authorities in the requested Member State have to make sure that the information requested by the other Member State is foreseeably relevant in light of the given circumstances. The review to be carried out by the requested authority is not limited, therefore, to a brief and formal verification of the regularity of the request for information in the light of those matters, but must also enable that authority to satisfy itself that the information sought is not devoid of any foreseeable relevance having regard to the identity of the taxpayer concerned and that of any third party asked to provide the information, and to the requirements of the tax investigation concerned. Furthermore, and based on Article 47 of the Charter, the courts of the requested Member State should have the possibility to examine the legality of an information request to ensure, notably, that such request is not manifestly devoid of any foreseeable relevance. Finally, the CJ ruled that the courts of the requested Member State should have full access to the information request. While the person to whom the information order is addressed should have access to key information, there is in principle no obligation, according to the CJ, to grant such person full access to the information request as such. However, if the court of the requested Member State considers that that minimum information is not sufficient in that respect, and if it asks the requested authority for additional information, that court is obliged to provide that additional information to the relevant person, while taking due account of the possible confidentiality of some of that information. Pursuant to this judgment of the CJ, the LAC will have to dispose of the case in accordance and Luxembourg will probably have to amend its legislation to align it with the Charter and the right to an effective judicial remedy. CJ rules that Belgian fairness tax is in breach of EU law under certain circumstances (X) On 17 May 2017, the CJ delivered its judgment in case X v Ministerial Council of Belgium (C-68/15). This case deals with the compatibility of the Belgian fairness tax with the freedom of establishment and the Parent-Subsidiary Directive (PSD). Concretely, it concerns an action for the annulment of provisions of national law introducing a tax separate from corporation tax and non-residents tax ( fairness tax ), to which resident and non-resident companies are subject when they distribute dividends not included, owing to the use of certain tax advantages provided for by the national tax system, in their final profits. The purpose of the legislation was to tax income that was distributed without having been subject to the corporate profit tax in reference to companies that were resident in Belgium - or to non-resident companies operating in Belgium. The tax rate was 5% of the dividends distributed. The CJ started by analysing the compatibility of the Belgian fairness tax with the freedom of establishment. In this regard, it started by stating that discriminatory treatment only arises through the application of different rules to comparable situations or the application of the

6 6 same rule to different situations. In the present case, however, the Court remarked that that the contested Belgian regulation did treat companies in the same way as non-resident companies. All those companies are subject to the same fairness taxation when distributing dividends which, because of the use of certain tax advantages provided for by the national tax system, are not included in their final taxable profits. However, as it follows from the file submitted by the referring court that a non-resident company engaging in an economic activity in Belgium through use of a permanent establishment - other than a resident company, of which the worldwide income is subject to corporate taxation - in the Member State only profits are taxable if generated through the permanent establishment, the situation could be different however - and the regulation in question could form an infringement of the freedom of establishment - in the case the means of determining the taxable base of fairness tax implies that a non-resident is treated less favourably than a resident company. In this case, it is up to the referring court, that is exclusively competent to explain national law, to - take into account all elements of the tax regulation in question and the national tax law as such - to review whether the calculation method results in non-resident companies that are active in Belgium through a permanent establishment, in no situation are treated fiscally less favourably than resident companies. If the result of that verification is that such treatment does exist, it would then have to be considered that tax legislation such as that at issue in the main proceedings constitutes an obstacle to freedom of establishment. In that event, the Court recalled that such obstacle may only be permissible if it relates to situations which are not objectively comparable or if it is justified by overriding reasons in the public interest. As regards the comparability, the CJ concluded that the situation of a non-resident company with a permanent establishment in Belgium is comparable to that of a resident company including the resident subsidiary of a non-resident company. In regard to possible justifications, the CJ rejected the arguments brought forward by the Belgian Government. First, the legislation cannot be justified by the objective of guaranteeing the balanced allocation of the powers to tax because it aims at taxing profits falling within Belgian tax jurisdiction, distributed without having been taxed by that Member State, thus in no way does it seek to allocate tax jurisdiction between Belgium and another Member State. Second, it cannot be justified as preventing abusive practice as its effect is to limit the effect of the use of tax advantages. By the second question, the CJ addressed the compatibility of the Belgian fairness tax with Article 5 of the PSD that provides for a withholding tax exemption upon dividend distributions. The CJ recalled that for a tax to be classified as withholding tax under Article 5 of the PSD, three conditions cumulative should be met: (i) the tax should be withheld in a Member State where dividend is distributed, and the chargeable event should consist of the distribution of dividends or of any other profit from securities; (ii) the taxable base of taxation should be the profits arising from the securities; and (iii) the taxpayer should be the holder of the securities. In this case, the CJ considered that the Belgian fairness tax meets the first two demands as the taxable fact is the distribution of profits and the tax base if calculated from the distributed amount. However, the third condition was not fulfilled as it is not the taxable company of the fairness tax that is the holder of the securities, but the distributing company. Therefore, it concluded that the tax at stake would not qualify as withholding taxation in the sense of the PSD. By the third question, the CJ assessed the compatibility of the Belgian rules with Article 4 of the PSD. Paragraph 1 of Article 4 of the PSD obliges Member States either to exempt incoming dividends, or to provide a foreign tax credit for the parent company. Paragraph 3 of Article 4 makes Member States entitled to exempt from profit deduction costs and value-changes that are linked to the subsidiary. However, if the maximum deductible costs are fixed, the fixed amount of costs may not exceed 5% of the total of dividends paid to the parent company. The CJ recalled that the Belgian legislature, when applying the PSD, had chosen for an exemption system. It had also has made use of the possibility provided for in Article 4, paragraph 3 to exempt profits of non-resident subsidiaries of Belgian parent companies to the extent of 95%. Also, it is established that fairness tax, in the case of a nonresident subsidiary which has distributed profits, has as a consequence that the profit for a larger part than the maximum provided for in Article 4 (3) of 5 % is taxed, and would give rise to double taxation of the profit. The question arises whether this double taxation is violating the PSD. Both the French and the Belgian governments took the point of view that distribution of profit by a parent to its shareholders does not fall under the scope of Article 4 (1) (a) of the PSD. This provision would only be applicable if a parent receives profits that are distributed by the subsidiary.

7 EU Tax Alert 7 However, the CJ considered that such explanation does not flow from the wording of the provision, or from the context or its objectives. First, Article 4 (1) (a) that requires a Member State of the parent and Member States of the permanent establishment to abstain from the taxation of that profit, implies a prohibition to tax the profits the subsidiary distributes to the parent, without making a distinction on whether the chargeable event of the tax levied on the parent is actually the receipt of the profit or its distribution. Second, the PSD aims at avoiding double taxation of profit that is distributed by a subsidiary to its parent at the level of the parent company. If the Member State of the parent should tax the profit it distributes at that level and that taxation results in a taxation of that profit for a larger part than 5% (the maximum as established by Article 4, (3)) double taxation takes place at the level of the parent, which is prohibited by the directive. The CJ therefore concluded that Article 4 (1) (a) of the PSD, in conjunction with paragraph 3 of this Article, needs to be explained in that it opposes a national tax rule as in the current procedure, to the extent that in the case a parent only distributes the profits received from the subsidiary only after the year in which they are received, this results in a taxation of those profits higher than the set maximum of 5%. CJ rules that French surcharge on dividend distributions is in breach of the Parent- Subsidiary Directive (AFEP) On 17 May 2017, the CJ delivered its judgement in case Association Française des Entreprises Privées (AFEP) et al. v Minister of Finance and Public Accounts (C-365/16). The case deals with the compatibility of the French tax provision that implies an additional levy of corporate taxation to which a resident parent can be subject when distributing profit - including the profit the parent received from non-resident subsidiaries with the Parent-Subsidiary Directive ( PSD ). Identical to the outcome in the X case previously analysed (C-68/15), the CJ concluded that the French legislation was in breach of the PSD. Article 4, and Article 5 of the PSD. The French Republic has chosen to exempt profits up to a maximum of 95% if arising from a non-resident subsidiary of a resident parent. In addition, the chargeable base can also include profit that arises from subsidiaries of parents that are resident of another Member State to the extent that the charging of that surcharge includes dividends distributed by the parent as a result of which, taxes are levied that are higher than the burden of 5% determined in Article 4, Paragraph 3. The question arose whether the French surcharge is contrary to the PSD. The CJ started its analysis by observing that Article 4 (1) of the PSD leaves room for Member States between two systems, namely exemption or tax credit. However, Article 4 (3) provides for Member State competence to determine whether the deductible expenses that follow from distribution of profit of the subsidiary are deductible from the profit of the parent. If in that case the costs of management relating to the subsidiary are fixed, this fixed amount may not exceed 5% of the profit distributed by the subsidiary. Article 4 aims at avoiding profits of a nonresident company to a resident parent first being taxed at subsidiary level at that place of residence, and additionally at the level of the parent in that State of residence. According to the Belgian and French governments, the profits distributed by a parent to the shareholders do not fall within the scope of Article 4 (1) (a) of the PSD, because that provision is only applicable to profits distributed by a subsidiary to a parent. The CJ disagreed with this interpretation. By making reference to the X case (C-68/15) it clarified that such interpretation does not follow from the wording of the provisions, or from the context or the objectives. In that case, the CJ stated that such provision, by prescribing that a Member State of the parent company and the Member State of permanent residence refrain from taxing the profit, prohibits the Member States from taxing the profits the subsidiary distributes to a parent at parent or permanent establishment level without making any distinction as to whether the chargeable event of the taxes levied on the parent is the receiving of such profits or redistribution. Article 235 of the French General Taxation Code provides for a surcharge of 3% on French or foreign companies or entities that are subject to corporate taxation in France on the dividends that are distributed. The plaintiffs in the French procedure requested the French Conseil d État to declare this provision void by making use of the constitutionality test provided in the French Constitution. They further claimed that this surcharge is contrary to As pointed out in recital 3 of the PSD, this Directive aims at eliminating double taxation of profit distribution by subsidiaries to parent companies. Therefore, the taxation of the redistribution of that profit by a Member State of the parent company at the level of that company, as a result of which the profit would be subject to exceeding the maximum of 5% as determined in Article 4 (3) would lead to double taxation at parent level which is contrary

8 8 to the PSD. In that context, the CJ noted that it is of little importance if the national tax measure is considered as income taxation. In this regard, it is sufficient to note that for application of Article 4 (1) of the PSD there needs to be no specific taxation. On the basis of that provision, the Member State of the parent company needs to refrain from taxing distributed income by the non-resident subsidiary. That provision aims at avoiding that Member States take tax measures that result in double taxation of the profits by a parent company. In view of the foregoing, the CJ concluded that the French legislation providing for the levy of upon dividend distributions in which the basis of assessment of the tax is the amounts of the dividends distributed is in breach of Article 4 (1) (a) of the PSD. Considering the answer to this question, the CJ did not analyse the question of the compatibility of the French provision with Article 5 of the PSD. Answer to second question On the basis of the answer to the first question, the CJ considered that the second question requires no further answering. The Netherlands intends to introduce VAT revision rules for services The Netherlands Ministry of Finance intends to introduce VAT revision rules on services. This will result in additional VAT compliance for real estate investors. Transactions involving real estate will also be impacted by the new rules. This follows from a consultation paper that was published yesterday. The law proposal is not yet final and may change as a result of the public consultation. In the Netherlands, many transactions involving real estate are treated as a transfer of a going concern for VAT purposes, resulting in a transfer of VAT obligations from seller to the purchaser. If the proposal is implemented there will be more situations in which the repayment of VAT that was initially refunded to a seller can become due by a purchaser. VAT due diligence will become more important. The new rules are expected to be applicable as from 1 January For services relating to real estate, the VAT revision period will be ten years according to the proposal. This means that if the VAT use of the service will change during this period this may give rise to repayment of VAT that was earlier refunded or to refunds if initially no refund was granted. Direct Taxation CJ rules that Greek legislation on inheritance tax is not in line with the free movement of capital (Commission v Greece) On 4 May 2017, the CJ delivered its judgment in case Commission v Greece (C-98/16). The case deals with the compatibility of Greek Succession Code provisions with the free movement of capital as codified in Article 63 TFEU. Under Article 25, Paragraph 3 of the Greek Succession Code, a procurement is subject to separable taxation (which is in conformity with Paragraph 5 of Article 29) if the legal entity is non-profit and is situated in Greece. A similar treatment applies in the case the legal entity is not situated in Greece but it pursues goals of national, religious interest or, more broadly, philanthropic, educational, artistic or general interest (under preservation of the right to reciprocity for Greece). Paragraph 5 of Article 29 clarifies that capital that is acquired as a result of inheritance, and that falls within the meaning of paragraph 5 of Article 29, is subject to separate taxation (which is 0.5%) as are the other goods acquired by the entity in question. In 2012, the Commission notified Greece of its findings that Article 25 Paragraph 3 was violating Article 63 TFEU. The Commission considered that legal entities that are non-profit and situated inside the EU but outside Greece, are taxed more heavily than legal entities that are non-profit but situated inside Greece. As a result, there would be a restriction to the free movement of capital. The application of those Greek taxation rules imply that for Greek residents, it is less attractive for a Greek resident to choose a non-profit entity that resides outside Greece but inside the EU as heir, rather than choose a non-profit that resides inside Greece as heir. Greece brought forward arguments why it claims that the contested inheritance rules are in accordance with the free movement of capital. First of all, Greece argued that it is unclear whether the legislation in question would result in inheriting non-residents becoming less attractive than inheriting Greek residents. Member State legislation that favours certain categories of legal entities reveals nothing more than a mere appreciation of those particular legal entities. The more favourable fiscal climate for non-profit entities can, according to Greece, be explained by the particular role that those entities fulfil in Greek society, also taking into account the current state of the Greek economy

9 EU Tax Alert 9 that reduces the revenues for sustaining any social policy. Secondly, Greece argued that resident non-profit entities are incomparable with non-resident entities, since the role that the resident non-profit entities have for Greek society is of much greater importance than the role of non-resident non-profit entities. Member States should be free to base their choice for fiscal advantages on the activities the non-profit entities perform, and the collective interests (of Greece in this case) that are linked to it. Thirdly, if any restriction of the free movement of capital should be found, this would be justified by overriding reasons of general interest, namely to avoid the reduction of tax revenue that would follow the amendment of the provisions in question. In its judgment, the CJ first emphasized the applicability of the free movement of capital in this case. It argued that the legal provisions in question that deal with the taxing of inheritance and apply to situations that arise not only in situations that are purely internal, are linked to the free movement of capital. Regarding the existence of a restriction of the free movement of capital with the current provision, the CJ recalled the Mattner case (C-510/08) which implies that Article 63 TFEU also applies to situations in which the inheritance devalues more for non-resident inheritors than for resident inheritors. Tax measures that make inheritance for non-residents more burdensome than for residents are therefore considered to constitute a restriction of the free movement of capital. The CJ recalled that as a result of the alleged provisions, residents that are non-profit entities only pay 0.5% tax, while non-resident non-profit entities pay 20% to 40%. As a consequence, the value of goods inherited by nonresidents is lower than the value of goods inherited by residents. This makes inheritance in Member States other than Greece less attractive than inheritance in Greece itself. As regards possible justifications, the CJ started by arguing that both resident and non-residents that are non-profit entities that receive an inheritance, receive the same type of capital and are the same type of entities. However, Greek law deals differently with the two, whereas both should be dealt with equally and granted the same benefits under Greek inheritance law. According to the CJ, while it can be accepted that tax benefits can be based on the type of activities the entity employs in order to serve certain goals of general interest, only linking tax benefits to the place of residence cannot be justified. Second, the CJ analysed whether the Greek tax law provisions can be justified by means of an overriding reason of public interest. As is mentioned, Greece argued that the losses that occur as a result of the tax benefits for resident non-profit entities are compensated by the role these entities play for Greek society. Extending the tax reduction to non-resident entities, residing in Member States that do not offer the same benefit to Greek entities, would lower the incoming revenues. Given the feeble economic circumstances the Greek economy is currently in, a lower incoming revenue would be even more burdensome for the Greek economy. The CJ recalled its previous case law according to which the protection of tax revenue is an accepted justification. On the basis of these considerations, the CJ concluded that the Greek provisions are in violation of the free movement of capital as codified in Article 63 TFEU. CJ rules that French legislation that subject s income from real estate received by an EU official to social contributions is not in line with EU Law (Lobkowicz) On 10 May 2017, the CJ delivered his judgment in case Wenceslas de Lobkowicz v Ministère des Finances et des Comptes publics (C-690/15). The case deals with the French legislation which subjects natural persons domiciled for tax purposes in France to social contributions in respect of income from real estate. Under French law, a natural person whose domicile for tax purposes is in France is subject, on the basis of article C of the General Tax Code, to a contribution in respect of income from assets that is based on the net amount adopted for the assessment of income tax in respect of income, inter alia, income from real estate. Furthermore, both a social levy and an additional contribution may also apply. The present case dealt with a French national who worked for the Commission from 1979 to His domicile for tax purposes was in France where he received real estate income. From 2008 to 2011, the income was subject to the social contributions referred to above. Mr de Lobkowicz requested the French tax authorities to exempt him from those contributions and levies. The case ended up being referred to the CJ. The CJ started by stating that if Member States are exercising the right to organize social security schemes, this must take place in observance of EU law. Second, EU officials are not subject to national legislation on social security, as referred to in Article 2(1) of Regulation No 1408/71 and Article 2(1) of Regulation No 883/2004,

10 10 which define the persons covered by those regulations, and cannot be defined as workers within the meaning of those provisions. Nor are they covered by Article 48 TFEU, in accordance with which the Council has adopted Regulations No 1408/71 and 883/2004. Since EU officials are subject to the joint social security scheme of EU institutions, and a scheme of benefits was introduced by the Staff Regulations which set out the rules applicable to EU officials, the legal position of EU officials with regard to their social security obligations comes within the scope of EU law by reason of their employment by the European Union. When exercising the power to organize social security schemes, Member States have to observe EU law, including the rules governing the employment relationship between an EU official and the European Union which are codified in the Protocol and the Staff Regulations. In this context, the CJ established that the Protocol has the same legal validity as the Treaties, meaning that Article 14 which confers power to the EU institutions to establish the social security scheme for their civil servants, limits the Member States from creating such a scheme for those civil servants. Second, the Regulations applicable in this case have all the characteristics as listed in Article 288 TFEU, meaning that they have general application, are binding in their entirety and are directly applicable in all Member States. The Staff Regulations include special levies and contributions by means of insurances against disease or accidents. As a result, only the European Union has competence to establish rules that are applicable to EU officials in respect of their social security obligations. National legislation that subjects the income of an EU official to contributions and social levies specifically allocated for the funding of the social security schemes of the Member State concerned infringes the exclusive competence of the European Union under article 14 of the Protocol and the provisions of the Staff Regulations. AG Kokott opines on Belgian rule that denies the deduction of interest expenses to the amount of exempted dividends regarding companies held for less than one year (Argenta) On 27 April 2017, AG Kokott delivered her Opinion in case Argenta Spaarbank NV v Belgium (C-39/16). The case deals with whether the Parent Subsidiary Directive (90/435/EEC, PSD ) precludes the Belgian rule that denies the deduction of interest payments up to the amount of received exempted dividends from holdings which have been owned by the company for less than a year. The interest paid was not connected with loans for the purchase of the holdings in question. During 2000 and 2001, Argenta Spaarbank received dividends from company shares that had been held by Argenta Spaarbank for less than a year. The tax administration treated the interest expenses as nondeductible, to the amount of dividend income based on Article 198 (10) of the Belgian Income Tax Code of This provision holds that interest up to the level of an amount corresponding to the amount of the exempted dividends received by a company on shares that it has not held for an uninterrupted period of at least one year at the time of their transfer is not to be considered a business expense. Argenta Spaarbank objected to this considering that the interest deductibility can only be precluded when there is a casual relationship between interest and the dividends for which the deduction is being claimed. The case ended up being referred to the CJ asking whether Article 198 (10) of the Belgian Income Tax Code is in line with the PSD. As a preliminary remark, AG Kokott identified that the purpose of the PSD is to ensure that cross-border distributions of profits that fall within the scope of the Directive are tax neutral with the ultimate effect of avoiding double taxation. The Directive achieves this goal by providing that the Member State of the parent company either does not tax the distributed profits received or - if the profits are taxed - permits that the tax paid by the subsidiary too be deducted. AG Kokott then went on to analyse whether the PSD is applicable in this case. In this regard, the AG considered that the second indent Art. 3 (2) of the PSD allows Member States not to apply the Directive in respect of dividends from holdings that have been retained for a period of less than 2 years. In that case the receiving company is not considered as a parent company within the meaning of the PSD. Therefore, and if a Member State can in the case of dividend income from holdings that have been retained for less than 2 years refuse to grant an exemption, then it must also be possible to apply a provision such as Article 198 (10) that grants an income exemption while rejecting the interest expenses up to such amount where these are claimed at the same time. On this basis alone, the AG concluded that the PSD does not preclude a rule such as Article 198 (1) of the Belgian Income Tax Code.

11 EU Tax Alert 11 However, the AG considered that, in the case the CJ does not follow the above arguments, it is necessary to analyse the Belgian provision in light of Article 4(2) and Article 1(2) of the PSD. Concretely, the issue is whether the Belgian rules are allowed under Article 4(2) of the PSD allowing for Member States of the parent company to refuse the deduction of costs which are connected with holdings for which exempted dividends are received. Or under Article 1(2) of the Directive that indicates a Member State may refuse to grant the benefits of the Directive for reasons of preventing tax evasion and tax abuse. The AG recalled that Article 4 (2) represents an exception to the PSD and should therefore be interpreted narrowly. Therefore, a refusal to deduct costs that have no casual connection to a holding is not covered by the aim of the exception of this provision and therefore, is not allowed under the PSD. Thus, and since Article 198 (10) of the Income Tax Code applies without taking into account whether the interest viewed as non-deductible is connected with the holdings for which exempted dividends were received, it is not in line with Article 4 (2) of the PSD. Furthermore, AG Kokott argued that such a provision does not constitute a provision of national law for the prevention of tax evasion and abuses whose application is not precluded under Article 1(2) of the PSD. AG Mengozzi considers that CJ is competent to interpret interest from debt claims within the meaning of the German- Austrian tax treaty (Austria v Germany) This, however, must be to the exclusion of income which varies only in the event of losses incurred by the specific debtor. This exclusion then gives rise to the right to payment in arrears in later years when the debtor finally realizes a positive profit on the profit and losses statement. Austria and Germany both agreed on the definition and categorization of the certificates in the case. They both contended that the certificates fell within the meaning of Article 11 of the tax treaty, and not as dividends, which is Article 10 of the tax treaty between Austria and Germany. Article 11(1) of the treaty provides for taxing rights to be granted to the residence State of the beneficial owner. In this case, the residence State of the beneficial owner was Austria. However, Article 11(2) provides for an exception indicating that income from rights or debt-claims with participation in profits. This means that the interest income could be taxed in the State where the interest income arises in accordance with the rules of the source State. Both EU Member States agreed that the remuneration for the debt-claims depends on profits falling within the scope of the Article 11(2) exception. But they disagreed as regards the level of dependency. Germany argued that the dependency is satisfied when the payment is dependent on whether the debtor has sufficient liquid funds or makes sufficient profit. In turn, Austria argued that that the dependency must, at the very least, take the form of the payment of interest additional to the fixed interest provided for by the terms of issue of the certificate and based on the debtor s profits. On 27 April 2017, AG Mengozzi delivered his Opinion in the case Republic of Austria v Federal Republic of Germany (C-648/15). The case deals with the interpretation of Article 273 of the TFEU. The parties to the case are two EU Member States, Austria and Germany. The case specifically involves the interpretation of the phrase income from rights or debt-claims with participation in profits within the meaning of Article 11(2) within the German-Austrian tax treaty. The facts of the case involve interest derived from Genussscheine - a type of registered certificate -purchased by UniCredit Bank Austria AG - an Austrian company. The certificates gave the holders the right of payment of annual interest at a fixed rate of the nominal value of the certificates. There was a caveat. The payment of such interest could have been stopped temporarily - if the issuer had incurred an accounting loss on the profits and loss statement. AG Mengozzi first examined the issue of jurisdiction. He contended that the CJ has jurisdiction over matters between States that are related to the subject matter of inter-eu treaties, and are submitted to the Court under special agreement between the parties. He analysed that this dispute was indeed a bilateral convention between the parties with the purpose of the avoidance of double taxation and has a clear link to the internal market of the European Union. However, he pointed out at Article 25 of the treaty between Austria and Germany provides that disputes that cannot be resolved by being submitted to the CJ for arbitration under Article 273 TFEU. Thus, Mengozzi agreed that the proceedings were legitimately brought before the CJ and under proper jurisdiction. In any event, the AG observed that Article 273 TFEU cannot be used as a means of settling inter-state disputes which are entirely removed or excessively distant from the subject matter of the treaties. There must be a connection or link between

12 12 the subject matter at stake and the subject matter of the treaties, as was present in this case. Mengozzi argued that Article 11(2) of the tax treaty should be interpreted in an autonomous way separate from any national or domestic legislation. The AG clarified that the reference in Article 11 (2) to the laws of the source State is not to provide a definition of interest that should, as mentioned, be interpreted autonomously but to establish how the powers of taxation are to be allocated between the two Member States. Continuing, Mengozzi looked at various examples of financial instruments involving interest. Mengozzi argued that the income can only be included within the definition for financial instruments which provide the creditor with a part or a share in the debtor s profits. Likewise, the certificates at issue provide a right to be remunerated on the basis of fixed percentage rates. Thus, Mengozzi concluded that these certificates do not fall within the meaning of income from debt claims with participation in profits as provided in Article 11(2) of the double tax convention between Austria and Germany. According to the AG, a broad or extensive interpretation of the phrase participation in profits contained in Article 11(2) would allow the source State to levy, with no ceiling specified in that convention, a tax on the interest paid to a taxable person established in the other State Party, without the rate of that interest even having to vary, if only partially, according to the debtor s profits. Such an interpretation would therefore permit an encroachment on the power of the State of residence of the beneficial owner of the interest, as that power is provided for in Article 11(1) of the treaty. Moreover, in so far as the tax rate which the source State may levy is not capped by Article 11 of the tax treaty but depends solely on the national law of that State, the Member State of residence could find itself, to a large extent, incapable of eliminating double taxation by application of the offsetting method provided for in Article 23(2)(b). Therefore, the AG concluded that in light of its ordinary meaning, the context in which the phrase income from (...) debt-claims with participation in profits is used and the objective pursued by Article 11, that phrase must be interpreted strictly and be restricted to situations in which the remuneration from the debt-claim varies, at least partially, according to the amount of the debtor s profits. In summary, Advocate General Mengozzi concluded that the CJ does have the appropriate jurisdiction to issue a ruling in the case and that the specific phrase from Article 11(2) of the double tax treaty should be interpreted as covering all the income that provides a creditor with a part or a share in the debtor s profits, which does not cover the certificates in the case in question. Commission asks Belgium to comply with EU law on inheritance tax on immovable property On 17 May 2017, the Commission decided to send a letter of formal notice to Belgium formally requesting a change to the rules on inheritance tax in Wallonia. The Inheritance Tax Code applicable to the Walloon Region provides for an exemption from inheritance tax when the deceased individual was residing in Belgium. On the contrary, such exemption is not granted where the deceased person was living in another country within the European Economic Area. The Commission considers that the absence of an exemption for inheritance tax on immovable property located in Belgium and passed on by a deceased person who did not live there is contrary to Articles 45, 49 and 63 TFEU given that such an exemption does indeed exist for a resident of Belgium. Commission asks France to abolish withholding tax imposed on non-resident companies in deficit On 17 Mary 2017, the Commission has requested France to abolish the withholding tax that applies to dividends received in France by companies based in other EU or EEA Member States. According to the Commission, by applying a withholding tax on such dividends, the French authorities are failing to fulfil their obligations regarding free movement of capital pursuant to Articles 63 TFEU and 40 EEA Agreement. The withholding tax leads to immediate taxation, without the possibility of a refund of the dividends paid to an EU and EEA company in the following situations: first, when the company is in structural deficit, even though French companies do not pay this tax in comparable situations; second, when the company is in a temporary lossmaking phase, even though French companies facing the same difficulties are subject to taxation only when the firm regains its surplus. An amendment of the legislation adopted by France at the end of 2015 applies only to nonresident companies facing both deficit and liquidation.

13 EU Tax Alert 13 Pursuant to this Commission action, if the French authorities fail to respond to this reasoned opinion within two months, the case may be referred to the CJ. Netherlands Supreme Court refers questions to the CJ concerning levies of social contributions On 12 May 2017, the Netherlands Supreme Court (Hoge Raad) delivered its judgment in case No. 15/ This case deals with social contributions and the applicability and meaning of the Blanckaert case (C-512/03). The plaintiff in this case had Polish nationality. From 1 January 2013 until June 21, 2013 the plaintiff worked in the Netherlands, after which she returned to Poland and did not work for the rest of For the entire year 2013 the plaintiff, decided to be liable to taxes in the Netherlands. In the year 2013, the plaintiff has earned EUR 9,401.-, of which EUR 1,399.- of payroll tax had been withheld and EUR 2,928 of national insurance contributions. When determining the final tax assessment, EUR 1,254.- of general tax credit and EUR 840 of employed person s tax credit was deducted. From 22 June 2013 onwards, the plaintiff was no longer liable to social insurance taxes. On the basis of Article 2.6a of the Social Insurance Funding Act, the tax inspector reduced the employed person s tax credit in proportion to the period of liability to social insurance taxes. The Netherlands Court of Appeal faced the question whether the plaintiff would be entitled to a full employed person s tax credit for the entire year. The Court answered this question in the negative, indicating that the plaintiff would not be entitled to a full employed person s tax credit for the entire year. The Court of Appeal made reference to Article 45 TFEU, claiming that in the current case, there is no more favourable treatment of a Netherlands national who works for the same amount of time in the Netherlands and then returns to Poland, than of the Polish national who works for the same period of time and returns to Poland. Therefore, there would be no infringement of article 45 TFEU. The plaintiff s reference to the Schumacker case (C-279/93) is regarded as invalid because the employed person s tax credit is an advantage that results from the taking into account of the personal and family related circumstances. The granting of this employed person s tax credit, however, solely links to fact that the plaintiff was insured for Netherlands social security insurance. Article 2.6a of the Social Insurance (Funding) Act could be justified by the objective difference between the situation for those insured for the Netherlands national insurance scheme and those not insured by means of that system. The plaintiff s reliance on the Schumacker case (C-279/93), therefore, was invalid. The fact that the plaintiff earned her income in year 2013 entirely or almost entirely in the Netherlands, together with the fact that her income in Poland is insufficient to become subject to taxation or the national insurance scheme such that Poland could not take into account all her personal and family circumstances, does not make the Schumacker case applicable (C-279/93) to the case. The Court of Appeal justified this by stating that there is an objective difference between the situation of a person insured for the Netherlands social insurance scheme and one who is not insured for that scheme. The plaintiff argued that, contrary to the Court of Appeal findings, an employed person s tax credit needs to be granted, because in the year 2013, the plaintiff earned her entire, or almost entire income in the Netherlands, that the income earned in Poland during the year 2013 was insufficient to be included in the social insurance scheme and that for that reason, Poland could not take into account the circumstances specific to her personal and family life as mentioned in the Schumacker case (C- 279/93). According to the plaintiff, Article 2.6a of the Social Insurance (Funding) Act makes a distinction between residents and non-residents, which would infringe the free movement of workers as pointed out in Article 45 TFEU. The underlying question is whether EU law implies that an employee who no longer resides in the working State but who earns the entirety of her income in a working State has a right to the entire social insurance scheme part of the employed person s tax credit despite the fact that the employee was not insured for the social insurance scheme the entire year, nor was she liable for premiums. The Netherlands Supreme Court introduced its judgment by stating that residents who are not subject to a social insurance scheme, are also not entitled to employed person s tax credit (on a pro rata basis) which is related to the premiums part. The difference in treatment for the applicability of the employed person s tax credit does not relate to the place of residence. Second, the fact that the plaintiff has requested the national tax authorities to be treated equally to resident taxpayers, had only consequences for the levying of income tax but did not have any consequences for the person being insured for the social insurance scheme and premiums. Third, the Netherlands Supreme Court made reference to a previous judgment, the Blankaert case (C-512/03), that dealt with a similar case. In the latter case, a taxpayer residing in