PAPER IIIB EUROPEAN UNION OPTION

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1 THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION December 2014 PAPER IIIB EUROPEAN UNION OPTION PRINCIPLES OF CORPORATE AND INTERNATIONAL TAXATION SUGGESTED SOLUTIONS

2 Question 1 In several occasions, the Court of Justice has ruled that national laws hamper the freedom of establishment if a parent company can deduct the losses of domestic subsidiary companies whereas it cannot deduct the losses of foreign subsidiary companies. For example: X Holding, Marks & Spencer. However, according to the Court of Justice, such measures may be justified in order to: divide the power to tax between Member States; prevent the risk of tax avoidance; and prevent the risk of taking losses into account twice. Examples are Marks & Spencer, X Holding referring only to the first ground. Despite of this, a similar measure may not be proportionate in case the losses of the subsidiary company are definitive and cannot be deducted any more in the state of the subsidiary company, nor by the subsidiary company itself or by another group company in that state. Consequently the import of losses may be allowed. The ECJ applied this under the UK Group Regime (Marks & Spencer), and in case of cross-border mergers in which no foreign permanent establishment remains behind (A Oy). The amount of transferred losses should be calculated on the basis of rules of the state of the parent company; at least the rules should not be less favourable than those rules (A Oy). Also in several occasions, the Court of Justice has ruled that national laws hamper the freedom of establishment if a company can deduct in the same way the losses of domestic branches whereas it cannot deduct the losses of foreign branches. For example Lidl Belgium. However, according to the Court of Justice, such measures may be justified in order to divide the power to tax between Member States and in order to prevent double dips. For example ECJ Lidl Belgium. The Court also accepts a system in which PE losses are temporarily deducted at the level of the head office, while they are recaptured as soon as the PE makes profits again or the PE is sold (Krankenheim Ruhesitz). Even if this reinstatement constitutes a discriminatory treatment compared to domestic branches that are sold, according to the Court this can be justified by the need to preserve the coherence of the German (domestic) tax system (state of the head office). According to the Court, it was irrelevant whether the losses could be deducted in Austria (the PE state) or not (therefore it seems to apply even to definitive losses of the Austrian PE).

3 Question 2 The reorganization can be performed by means of a transfer of assets in the sense of article 2(d) Merger Directive. This form of reorganization applies if a company transfers one or more branches of activities (or all its activities) to another company in exchange for shares. The four pizza restaurants in Pania constitute such branches of activities. Furthermore, both companies are resident in the EU, and we may assume that they are subject to profit taxes and are listed on the Annex to the Directive. Article 10, par. 1, fourth sentence of the Merger Directive was introduced in 2006 in order to clarify that the Merger Directive also applies to such reorganizations, even if the branches are located in the same state as the company to which these branches are contributed. Article 10, par. 1, third sentence provides arrangements for the transfer of a foreign permanent establishment. It provides, in practice, that the State of the permanent establishment (Pania) must apply the Articles 4, 5 and 6 to the permanent establishment. Pania cannot tax capital gains on the assets of the PE, provided the receiving company takes over the existing book value (Article 4). Pania cannot tax any tax exempt reserves and provisions of the PE, provided the receiving company takes over these reserves and provisions (Article 5). Pania must allow the receiving company to take over the losses of the four pizza restaurants in Pania which have not yet been compensated, if such transfer of losses is also allowed under the tax laws of Pania in case of a purely domestic transfer of assets (Article 6). Article 6 is therefore only a nondiscrimination provision. If Ocaria exempts profits and losses of foreign permanent establishments, then the transfer of the PE in Pania into a legal entity will have no tax consequences in Ocaria. This may be different if Ocaria applies the credit system to foreign PEs. If in Ocaria the losses of the PE in Pania have been deducted, then Article 10 par. 1, second sentence allows Ocaria to reinstate these losses in Ocaria. Furthermore, under Article 10, par. 2, Ocaria is allowed to tax the hidden reserves of the PE in Pania and is also allowed to wind up reserves formed in respect of this PE. In that case, Ocaria has to grant a credit for the tax that would have been levied in Pania if in Pania the benefits of Articles 4 and 5 would not apply. N.B. This reorganization can also be performed by means of a partial division. In that case the new company in Pania issues shares to the shareholders of OcaPizza. The tax consequences for the transfer of the four restaurants are however identical. In exchange for its PE in Pania, OcaPizza receives shares in the new company in Pania. The tax laws of Pania may provide whether OcaPizza must register these shares at the book value of the PE transferred or at the market of value of the PE. The Merger Directive does not contain any obligation in this respect.

4 Question 3 Under Article 107 TFEU, State Aid is incompatible with the Internal market, unless one of the exceptions of Articles 107 applies or if the Council decides so in exceptional circumstances (Article 109). A measure constitutes State Aid if the following conditions are met (Article 107): i) A State grants certain companies an advantage. ii) The aid is granted by a Member State or provided through State Resources. This also includes the granting of tax advantages (for example Italy vs. Commission, (173/73), Germany vs. Commission (C-156/98). Tax breaks are a typical form of state aid. iii) Selectivity: the measure favours certain undertakings or production of certain goods.. In this case state undertakings. iv) It distorts competition and affects trade between Member States. This seems to be the case, since hospitals especially those close to the borders or with a good reputation - usually also have patients from other EU Member States. In the present case, the exceptions laid down in the Treaty seem not to apply. As a consequence the State must amend its tax laws and provide that also state hospitals are taxed. The private hospitals cannot claim to be exempt from tax in the years that State Aid was granted. State hospitals will be obliged to pay back the illegally obtained tax advantage received plus interest to their State. There can be an exception to the obligation to pay back in two situations: i) Absolute impossibility to recover the State aid (for example company went bankrupt); or ii) Legitimate expectations, based on behavior of the European Commission (for example it did not act after the notification of a specific measure; this seems not the case: the Court acts against tax breaks for state companies, like harbors). In this case there is no ground to assume that the aid must not be refunded.

5 Question 4 From 1 January 2015, the place of supply in respect of supplies of telecommunications, broadcasting and electronic services (e-services) to consumers is the place where the consumer is established, has a permanent address or usually resides. Until 1 January 2015, the place of supply of these services to consumers is the place where the supplier is established. B2B supplies of telecommunications, broadcasting and e-services are taxable where the business customer is established. In the case of intra-community B2B supplies, the supplier does not charge VAT and the business customer accounts for the VAT in the Member State where he or she is established on the reverse charge basis. This does not change under the new system. The new rules mean that VAT on the supply of telecommunications, broadcasting and e-services to consumers will be subject to the VAT rules of the Member State where the consumer resides and the supplier of such services will be obliged to register, charge and account for VAT at the rate applicable in that Member State. To simplify the obligations of these suppliers, 2 new special schemes come into operation on 1 January The 2 schemes, the non-union scheme (for businesses established outside the EU) and the Union scheme (for businesses established in the EU) allow businesses to file and pay the VAT due, in respect of relevant supplies, to all Member States through a web portal of one Member State. Otherwise, the business would be required to register and submit returns in several Member States. This web portal is known as the Mini One Stop Shop (MOSS). A business that opts to use the MOSS registers in one Member State (known as the Member State of identification) and electronically submits quarterly MOSS VAT returns in respect of its supplies of telecommunications, broadcasting and e-services to consumers in other Member States (known as the Member States of consumption), along with the VAT due. The relevant information from the MOSS VAT return and the related VAT paid are transmitted by the Member State of identification to the corresponding Member State of consumption via a secure communications network. The use of the MOSS is optional. A business may instead register for VAT in each Member State in which it makes relevant supplies. Telecommunications services are defined as services relating to the transmission, emission or reception of signals, writing, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception, and the provision of access to global information networks. Broadcasting services includes services consisting of audio and audio-visual content, such as radio or television programmes which are provided to the general public via communications networks by and under the editorial responsibility of a media service provider, for simultaneous listening or viewing, on the basis of a programme schedule. An electronically supplied service or 'e-service' as it is also known, is a service that is delivered over the internet (or an electronic network which is reliant on the internet or similar network for its provision) and is heavily dependent on information technology for its supply - i.e. the service is essentially automated, involves minimal human intervention and in the absence of information technology does not have viability.

6 Question 5 Article 64 TFEU concerning the free movement of capital, is the only treaty freedom enshrined in the TFEU that also relates to third states. It is therefore especially important to establish which freedom applies, as when another freedom applies, a third state does not have excess to the Treaty. A relevant case in the respect is the case of Fidium Finance (ECJ 3 October 2006, C-452/04), concerning a Swiss company that was providing small consumer loans to customers in Germany. The Court ruled that the activities fall under the freedom to provide services, and that given that the restrictive effects of those rules on the free movement of capital are merely an inevitable consequence of the restriction imposed on the provision of services, it is not necessary to consider whether the rules are compatible with Article 56 EC. Fidium Finanz AG therefore did not have access to the EC Treaty (now TFEU). Concerning the holding of shares in another company, the question arises whether this is reigned by the freedom of establishment or the free movement of capital. This is especially important as only the free movement of capital applies to third states. In the Baars-judgment (ECJ 13 April 2000, C-251/98) the ECJ ruled that the freedom of establishment applies where a holding in the capital of a company confers on the shareholder a definite influence over the company s decisions and allows him to determine its activities. This ruling was later somewhat modified by the ECJ in the FII Group Litigation case (ECJ 13 November 2012, C-35/11) in which the Court stated that a case of a majority shareholding in a company in a third state, not only the freedom of establishment applies but also the free movement of capital, in a situation that on an abstract level, the domestic tax rule applies both to minority and majority shareholdings. Article 64 TFEU contains a so-called stand still clause, meaning that domestic tax rules that were in force on 31 December 1993 can be upheld, even if they are of a discriminative or restrictive nature. In relation to tax laws, one can monitor that tax laws are frequently changing. The question there is whether a domestic tax rule that existed on 31 December 1993 and that was changed on a later date, still falls under the applicability of the stand still clause. According the case law of the ECJ this is dependent upon the facts and circumstances of the specific case at hand. In general the ECJ has ruled that not every change in domestic tax law after 31 December 1993 makes it a new tax rule, but only as far is the tax rule in its essential meaning has changed in such a way that it really can be regarded as a new tax rule. Modifications of a domestic tax rule that do not change its nature, normally will lead to a situation that it can still be regarded as a tax rule that already existed on 31 December 1993.

7 Question 6 The procedural principle of effectiveness requires in respect of the infringement of EU law that effective access to court and judicial protection is provided (ECJ Rewe/Comet, see also art. 19 TEU). The procedural possibilities to that end may not be more limited than the possibilities available for individuals relying on national law (principle of equivalence), nor may they be so limited as to render effectuation of WEU rights excessively difficult or virtually impossible (principle of effectiveness). The Court has ruled in various cases that a time limit of one month is sufficient. The time-limits must be clear (for example Pelati). The time-limit for bringing an appeal may not be shorter in case a taxpayer relies on EU law than in case taxpayers rely on national laws. In principle the CJEU regards the national rules of Member States in respect of the moment that an assessment has become final. The CJEU regards the expiration of the time-limit to appeal against such assessments. This is an expression of the principle of legal certainty (for example Recheio Cash & Carry). If from later case law of the CJEU it follows that a prior tax assessment had been incorrect, there is no need to review such assessments after the expiration of the national time limit for appeal. For example Barth case. Therefore, in principle, the tax assessments involved are final. This generally applies to the taxpayers of Lyreus that have not appealed within the time limit. The CJEU makes an exception to this rule in case a person has litigated against the tax assessment up to the highest national level. If, in that case, the national supreme court has rejected the claim of the taxpayer which was based on EU law, and the supreme court has failed to raise preliminary questions to the CJEU, whereas from later case law of the CJEU it follows that the tax assessment at issue was not in line with EU law, then the national tax administration is obliged to review its decision and bring it in line with EU law if also in domestic cases the national tax administration has the power to review final decisions (Kühne & Heitz). This does, however, only apply in case the taxpayer involved has litigated up to the highest national level. Therefore, the tax assessment of Mrs. Johnson in respect of the year 2000 must be reviewed if the national tax administration has the power to review final decisions and provided the taxpayer complains immediately after getting to know the ECJ ruling. This does not apply to the tax assessments of the other residents of Lyreus who have not litigated against their tax assessments up to the highest national level. With regard to the tax assessments imposed after Mrs Johnson has not claimed any tax deduction in respect of her donations, taking into account the ruling of the Supreme Court of Lyreus in Normally, such assessments would have been final. However, under the case law of the ECJ, Mrs. Johnson is not to blame for the fact that she did not claim the tax deduction, as this seemed useless after 2007 taking into account the ruling of the Supreme Court (see for example Metallgesellschaft/Hoechst). Therefore, after the 2012 CJEU ruling, Mrs. Johnson is probably still allowed to claim the tax benefits in respect of her donations over the years after She should do this immediately after the 2012 CJEU decision. Regarding the costs of litigation of Mrs. Johnson. The CJEU has declared that if a state organ imposes a tax assessment which is not in line with EU law, then the State is liable for the damage that a citizen suffers from this mistake provided there is a sufficiently serious breach of EU Law (for example Francovic; Brasserie du Pecheur). Damages must be paid if: EU law grants rights to individuals; it is possible to identify the content of those rights; there is a causal link between infringement of EU law and damages. Whether the breach of EU law is sufficiently serious must be judged taking into account all circumstances, including the clarity and precision of the rule infringed. Mrs. Johnson has suffered the costs of litigation up to the national Supreme Court. These costs should be compensated, the infringement of EU law seems obvious.

8 The State is liable for damages resulting from erroneous court rulings only if these courts made manifest mistakes, see CJEU Köbler. From the 2006 ECJ ruling Centro di Musicologia Walther Stauffer, the national court of Lyreus should have inferred in 2007 that the national law infringes EU law; at least that it would have been obliged to raise preliminary questions to the ECJ. The State seems liable for any damages caused by this ruling to Mrs. Johnson.

9 Question 7 This case deals with the deductibility of losses by in individual for personal income tax, on losses sustained by the selling of a private investment in a foreign real estate. And in essence the case deals with the question whether the Marks & Spencer doctrine on the deductibility of final losses for foreign entrepreneurial activities, also relates to passive investments of a private individual. It should be kept in mind that the personal income tax systems of the Member States within the EU are not harmonized, and that therefore there a different rules on the deductibility of losses on passive investments like real estates. In some Member States a loss incurred on the selling of a real estate, as a passive investment, is deductible, in other states they are not. The question at hand is whether Member State B can be obliged, under EU law, that the loss incurred in Member State A on the selling of a real estate in Member State A, to be taken into consideration. This under the presumption the Mr Xavier does not own any more real estate in Member State and in there can be regarded, in some manner, as a final loss under the Marks & Spencer doctrine. On the other hand, the Court in a number of rulings, has upheld the concept of the disparity approach. Differences in taxation that stem from differences in national direct tax laws do not constitute a discrimination or a restriction and therefore cannot be tackled by invoking EU law. A disparity can only be solved by means of a harmonization measure at the EU level and is therefore out of the scope of the ECJ. An example on the disparity approach is the ruling of the Court in the Schempp-case (ECJ 12 July 2005, C-403/03). This case was ruled by the ECJ in the K-case, ECJ 7 November 2013, C-322/11. In the ruling on the K-case, it was very important for the ECJ that Mr Xavier in the source state being Member State B, had no possibility to deduct the loss on the selling of the real estate on the domestic taxable base in Member State B. In such a case the home state, being Member State A where Mr Xavier is residing, cannot be obliged to take the foreign loss on the selling of a real estate in Member State B into consideration as this is the result of a disparity. The ECJ in the K-case did regard the measure as a restriction, but expected two justifications namely to safeguard the symmetry between the right to tax profits and the right to deduct losses the objective of ensuring a balanced allocation of the power to impose taxes between the Member States. The justification of the prevention of double loss taking was denied by the Court as the loss was not deductible in Member State B, being the source state. The Court also ruled that the tax rules at issue in the main proceedings must be considered not to go beyond what is necessary to attain the objectives which they pursue.

PAPER 3.01 EU DIRECT TAX OPTION

THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION December 2015 PAPER 3.01 EU DIRECT TAX OPTION Suggested Solutions Question 1 The Merger Directive has direct effect. If Member States have failed to implement