Opinion Statement of the CFE on outbound dividends: Commission v. Italy (C-540/07) Submitted to the European Institutions in April 2010

Transcription

1 Opinion Statement of the CFE on outbound dividends: Commission v Italy (C-540/07) Submitted to the European Institutions in April 2010 Confédération Fiscale Européenne (CFE) - 188A, Av de Tervuren 1150 Bruxelles brusselsoffice@cfe-eutaxorg / wwwcfe-eutaxorg

2 This is an Opinion Statement prepared by the ECJ Task Force 1 of the CFE on outbound dividends on occasion of the Commission v Italy case (C-540/07) Advocate General Juliane Kokott delivered her Opinion on 16 July 2009 and the ECJ decided the case on 19 November 2009 The CFE is the leading European association of 32 national tax advisory organisations representing over 180,000 tax advisers A Compatibility with EU law of dividend taxation - possible categorisation of problems 1 A large proportion of judgements and pending direct tax cases before the ECJ concern the taxation of dividends This may reflect the growing importance of EU cross-border investment in shareholdings However, the judgements are often hard to reconcile, at least at first sight, since they deal with various types of differential treatment, reflecting a range of criteria It may be useful, therefore, to classify the types of case in the manner suggested in the Annex to this statement 2 A first classification may be based on the EU law against which the national provision is tested, that is, Primary Law (Treaty on the Functioning of the European Union - TFEU) or Secondary Law (the Parent Subsidiary Directive 2 ) Several cases have been examined in the light of the directive (see Annex) However, the scope of the directive is limited: it applies only to dividends received by companies holding a certain percentage of the capital of the company distributing the dividend When the requirements set out in the directive are not met (because the dividends are received by an individual or, in the case of corporate shareholders, because the criteria for applying the directive are not met), then the case can be examined only in the light of the fundamental freedoms contained in the TFEU, in particular that of establishment (Art 49) or capital movements (Art 63) 3 The cases relating to the fundamental freedoms are complex; they may be grouped according to different categories of cases and fact patterns 4 In this respect one may distinguish between outbound dividends (taxation of non-resident shareholders by the State of source) and inbound dividends (taxation of shareholders in the State of residence) See again the classification in the Annex 5 A third distinction may be made between cases where the shareholder receiving the dividend is an individual and those where the recipient is a corporate entity In this regard it is important to bear in mind the possible 1 Members of the Task Force are: Axel Cordewener, Kelly Coutinho, Paul Farmer, Daniel Gutmann, Volker Heydt, Michael Lang, Franck Le Mentec, Pasquale Pistone, Albert Raedler, Stella Raventos-Calvo (Chair), Isabelle Richelle, Friedrich Roedler and Servaas Van Thiel The views expressed in this statement do not necessarily represent the views of each individual member of the Task Force or of organisations with which any of the members are associated 2 Directive 90/43/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States Confédération Fiscale Européenne (CFE) - 188A, Av de Tervuren 1150 Bruxelles brusselsoffice@cfe-eutaxorg / wwwcfe-eutaxorg

3 grounds for different taxation of an intermediate shareholder and the final shareholder 6 A fourth criterion, which is the object of considerable controversy, concerns the difference between juridical and economic double taxation Economic double taxation may be unlawful if it reflects a difference in treatment between domestic and cross-border situations International juridical double taxation is not in itself unlawful, even though the result is an accumulation of tax that cannot arise in a purely domestic situation 7 Economic double taxation takes place when the same profits are taxed twice; first at the level of the company paying the dividend and then in the hands of the shareholder 3 It can take place both at the domestic level and at the international level The OECD Model Tax Convention does not deal with such double taxation, only in the commentary it is stated that if the Contracting States wish to solve problems of economic double taxation, they must do so in bilateral negotiations 4 8 International juridical double taxation occurs when the same dividend 5 is taxed twice in the hands of the same shareholder: first in the source State, when the dividend is distributed, and then in the residence State, when it is taxed as a part of the same shareholder s taxable base The OECD Model Tax Convention seeks to reduce this problem by limiting the tax competence of the source State while requiring the State of residence to give a credit for the tax charged 9 The ECJ appears to consider that where a MS relieves or eliminates economic double taxation in a domestic situation it must also do so in a cross border situation, in relation to both inbound (eg Manninen) and outbound dividends (eg Amurta, Denkavit and Fokus Bank 6 ) On the other hand, in the Court s case-law, juridical double taxation seems to be compatible with EU law Nevertheless, the ECJ stated that the State of source is not in the same position as the State of residence when it comes to extending the imputation credit to non-resident shareholders 7 If double taxation was eliminated by the State of source, such a State would in fact abandon its right to tax a profit generated through an economic activity undertaken on its territory Moreover, in the Court s view, the State of residence is best placed to determine the shareholder s ability to pay tax 10 A final differentiation must be made between those cases examined in the light of the freedom of establishment and those analysed under the light of the free of movement of capital, in particular where third countries are involved (See Annex) 3 Paras 1 and 2 of the Commentary on Article 23 of the OECD: The so-called juridical double taxation has to be distinguished especially from the so-called economic double taxation, ie where two different persons are taxable in respect of the same income or capital 4 Para 2 of the Commentary on Article 23 5 Juridical double taxation can take place in respect of income other than dividends: see, eg Truck Center (C-282/07), on taxation of interest 6 Fokus Bank is an EFTA case (E-1/04) 7 Test Claimants in ACT, Para 59 Confédération Fiscale Européenne (CFE) - 188A, Av de Tervuren 1150 Bruxelles brusselsoffice@cfe-eutaxorg / wwwcfe-eutaxorg

4 11 Some of the judgements have been understood and unanimously accepted Others, notably the ones on juridical double taxation 8, have been the object of strong criticism While it is well established that the allocation of tax competence is a matter for the Member States, such allocation must not run counter to the requirements of EU law, for example Saint Gobain In particular, juridical double taxation of cross-border dividends is clearly inconsistent with the idea of a single economic space To begin with, however, and in view of a very recent judgement, we will focus on the case of outbound dividends where the Parent-Subsidiary directive is not applicable and the national rule is therefore examined only in the light of the freedoms stated in Article 43 EC Treaty (now Article 49 TFEU) and Article 56 EC Treaty (now Art 63 TFEU) B A case of outbound dividends: Commission v Italy 12 This paper will focus on an outbound dividends case, specifically Case C- 540/07, Commission v Italian Republic 9 This case originates from an infringement procedure by the European Commission and not from a preliminary ruling It is worth pointing out that the Commission is increasingly active in this respect This has both advantages and shortcomings On the one hand, in the case of infringement procedures, the Court has more freedom to analyse the case without the restraints imposed either by the facts or the terms of the referral by the national court On the other hand, there is a risk that not all arguments which might bear relevance to the decision are put before the Court by the affected parties 13 The case relates to the withholding tax imposed by Italy 10, on dividends distributed to non-resident corporate shareholders (in circumstances where the Parent-Subsidiary Directive is not applicable) On such dividends, a 27% tax rate is applied, although the shareholders are entitled to a refund up to 4/9ths of the tax withheld (the final tax charged by Italy being therefore 15%) Such a final 15% tax was in contrast with the final tax burden (165%) resulting from the 95% exemption on dividends distributed to Italian residents 12 The difference still exists in cases where, by virtue of a double tax treaty being applicable, the 15% Italian final tax is reduced to 10% of the dividend 13 8 Kerckhaert-Morres and Damseaux 9 Related cases are pending before the ECJ: C-487/08, Commission v Spain, and C-284/09, Commission v Germany 10 Article 273 of the Decree 600, of 29 September 1973, Disposizioni comuni in materia di accertamento delle imposte sui redditi, hereinafter DPR 600/73 11 The case refers both to EU shareholders and EEA shareholders 12 Article 892 of the Italian Income Tax Law (Testo unico delle imposte sui redditi) 13 There is also a 5% rate applicable under double tax conventions to controlled shareholdings not falling within the Parent Subsidiary Directive Confédération Fiscale Européenne (CFE) - 188A, Av de Tervuren 1150 Bruxelles brusselsoffice@cfe-eutaxorg / wwwcfe-eutaxorg

5 15 The restriction The ECJ observes that the different treatment is obvious: while dividends distributed to Italian residents are taxed at a 165% rate, those distributed to EU residents are taxed at a rate ranging between 10% and 15% However, to succeed in a challenge it is necessary to ascertain whether such different treatment constitutes indeed a restriction, prohibited in principle by Art 63 TFEU (former Article 56 EC) Italy argued that the different treatment is only cosmetic, since double tax treaties allow the tax withheld at source in Italy to be set off against the tax due in the other Member State 14 The Court dismisses that argument: while it is true that a Member State may ensure compliance with its obligations under the Treaty by concluding a double tax convention with another Member State, it is necessary that the application of such a treaty should always compensate the effect of the difference in treatment of the national legislation In other words, the neutralisation should be complete, so that the final tax burden on the non-resident shareholder is at the same level as that borne by the resident shareholder that is 165% However, such a solution is not ensured by double tax treaties There may be circumstances where no credit is available in the residence State for the withholding tax suffered at source, in particular because the dividends are not taxed there, or not sufficiently taxed In any case, Italy has not concluded a double tax treaty with one EU Member state, Slovenia 16 The ECJ concludes that Italy may not argue that, by reason of the application of a double taxation treaty, dividends distributed to companies established in other Member States are not, in the final analysis, treated differently from dividends distributed to resident companies 17 Last, the ECJ summarily rejects the argument brought forward by the Italian Government that account had to be taken of the Italian taxation system as a whole, and in particular, the impact of taxation on the natural persons who are the final beneficiaries of dividends The Court replies that it is not possible to compare the situation of a company (intermediate shareholder) and the final shareholder, a physical person 18 There is therefore, says the ECJ, a restriction prohibited in principle by Article 56(1) EC (now Article 63 TFEU) 19 The possible justification The restriction on the freedom of capital movement having been established, the possible justifications must be examined, one of them being the provision in Art 65(1)(a) TFEU (former Art 58 (1) EC), which allows Member States to distinguish between resident and non-resident shareholders Such a justification, however, does not allow for an arbitrary discrimination which, according to settled caselaw, could occur whenever a different treatment is accorded to situations which are objectively comparable and cannot be justified by an overriding reason in the public interest It is thus necessary to ascertain whether 14 It is interesting to note that whereas AG Kokott regarded the existence of a double tax treaty as an element to be taken into account at the level of justification, in the judgement it is considered at the level of the restriction itself see para 48 et seq of the Opinion Confédération Fiscale Européenne (CFE) - 188A, Av de Tervuren 1150 Bruxelles brusselsoffice@cfe-eutaxorg / wwwcfe-eutaxorg

6 Italian resident shareholders and EU-resident shareholders are in a comparable position in the light of the purpose of the provision under scrutiny 20 Reiterating established case-law (eg Denkavit France), the ECJ concludes that the source State must ensure that, having regard to its own rules aimed at avoiding economic double taxation, non-resident shareholder companies are subject to the same treatment as resident shareholder companies (para 53) 21 While we may agree with the outcome of the case, and the relevance of economic double taxation, the ECJ (and the AG in her opinion) disregards another important point: the cash-flow disadvantage that the non-resident shareholder will suffer 22 The importance of a cash-flow disadvantage has already been recognised by the ECJ case-law in cases such as Metallgesellschaft 15 and Test Claimants FII In paragraph 84 of the latter decision, the Court said: It must be held that the fact of not having to pay ACT represents a cash-flow advantage, in so far as the company concerned may retain the sums which it would otherwise have had to pay by way of ACT until corporation tax is payable ; in para 96: It should be noted in that regard that resident companies receiving foreign-sourced dividends are treated differently, inasmuch as they suffer a cash-flow disadvantage which is not justified by a relevant difference in their situation and also A company cannot be required to pay in advance a tax to which it will never be liable 16 Perhaps AG Kokott considers that a cash-flow advantage need no longer be considered In her Opinion on Truck Center 17 she said that Whether a possible cash-flow disadvantage ( ) because the withholding tax is payable immediately, is relevant at all appears doubtful in the light of the recent case-law of the Court Thus in its recent judgement in Lidl Belgium the Court did not even mention this issue, although Advocate General Sharpston had reached a different conclusion from the Court s precisely because of the cash-flow disadvantage If cash-flow effects were now no longer relevant, that would however be a rejection of the earlier case-law, to which AG Sharpston had expressly referred The Court seemed to agree with this view, as in the Truck Center judgement it made no reference to the cash-flow disadvantage 18 The CFE however disagrees with this: it still is of the view that the cash-flow disadvantage cannot be disregarded The negative effect of the cash-flow disadvantage becomes even more serious in the case of countries that are consistently late in making repayment of withholding taxes levied on dividends distributed to non-resident shareholders This negative effect would disappear if taxes at source were eliminated altogether 15 C-397/98 and C-410/98 16 Para C-282/07, Advocate General Kokott s Opinion delivered on 18 September The CFE Opinion on this judgement pointed out how unsatisfactory, in general terms, that judgement was See European Taxation volume 49-Number 10- October 2009, page 491 et seq IBFD Confédération Fiscale Européenne (CFE) - 188A, Av de Tervuren 1150 Bruxelles brusselsoffice@cfe-eutaxorg / wwwcfe-eutaxorg

7 23 With regard to EEA countries, the ECJ dismissed the Commission s claim against Italy in so far as it concerned Iceland and Norway on the ground that there was no provision for exchange of information in Italy s DTCs with those countries It is not clear from the Court s judgement why it considered exchange of information to be necessary In any event, Italy s assertion accepted uncritically by the Court is factually incorrect 19 as DTCs with Iceland and Norway do indeed provide for exchange of information (in provisions corresponding to Article 26 OECD Model) Accordingly, even if it were necessary for Italy to have access to information in this respect, there is no justification for the application of a withholding tax on dividends paid to residents of Iceland and Norway 19 See para 71 Confédération Fiscale Européenne (CFE) - 188A, Av de Tervuren 1150 Bruxelles brusselsoffice@cfe-eutaxorg / wwwcfe-eutaxorg

8 Annex to Opinion Statement of the CFE on outbound dividends (April 2010) The direct tax case law of the European Court of Justice on cross border dividends NB The following chart contains all direct tax cases in which the ECJ interpreted on problems of compatibility with EU law raised by the taxation of dividends # Date of judgment Case MS Parties Primary law Secondary law Outbound Inbound Individuals Intercomp Econ DT Jur DT TFEU/PSD Notes /83 F Commission vs France X PE X X 49 [avoir fiscal] C NL Denkavit Internationaal, X X X X PSD 283/94& 291/94, 292/94 VITIC, Voormeer C 379/97 D Saint Gobain X PE X X 49 Triangular case with 3 rd country C 35/98 NL Verkooijen X X X X 63* C 375/98 P Epson Europe X X X X PSD C 294/99 GR Athinaïki Zithopiia X X X X PSD C 516/99 A Schmid X X X X 63 Inadmissible; facts similar to Lenz C 58/01 GB Océ van der Grinten X X X X PSD C315/02 A Lenz X X X X C 319/02 SF Manninen X X X X E 1/04 N Fokus Bank X EEA X X X X 49** Article 31 EEA [EFTA Court] C 253/03 D CLT UFA X X X X C 513/04 B Kerckhaert Morres X X X X C 374/04 GB Test Claimans in ACT X X X X 49, C 446/04 GB Test Claimants in FII X X X X X 49,63,PSD C 170/05 F Denkavit France X X X X C 292/04 D Meilicke I X X X X C 157/05 A Holböck X X X X 63 3 rd country C 379/05 NL Amurta X X X X C 101/05 S A X X X X 63 3 rd country C 27/07 F Banque Féd du Crédit X X X X PSD

9 Annex to Opinion Statement of the CFE on outbound dividends (April 2010) Mutuel C 201/05 GB Test Claimants in CFC X X X 49,63 Order and Dividends C 284/06 D Burda X X X X X X 49, PSD C 48/07 B Vergers du Vieux X X X X PSD Tauves C 138/07 B Cobelfret X X X X PSD C 439/07 B KBC Bank & Beleggen X X X X X 49, 63, Also 3 rd country & 499/07 Risicokapitaal PSD C 521/07 NL Commission vs X EEA X X X 63** Article 40 EEA Netherlands [outbound dividends to EEA] C 128/08 B Damseaux X X X X C 182/08 D Glaxo Wellcome X X X X C 247/08 D Gaz de France X X X X X 49, PSD C 540/07 I Commission vs Italy [outbound dividends] X (also EEA) X X X X 63 & ** Also 40 EEA 32 C 338 and I Ferrero and General X X X X PSD 339/08 Beverage Europe 33 C 436 and A Haribo and X X X X 63 Also 3 rd country 437/08 Österreichische Salinen 34 C 262/09 D Meilicke II X X X X C 284/09 D Commission vs X X X X X 63 Germany 36 C 310/09 F Accor X X X X 49, 63 Key * The case concerned the directive 88/361/EEC on the liberalization of capital movements ** The case is decided under the corresponding provision of the EEA