Opinion Statement of the CFE on Columbus Container Services (C-298/05 1 ) Submitted to the European Institutions in May 2008
This is an Opinion Statement on the ECJ Tax Case C-298/05 Columbus Container Services BVBA & Co v. Finanzamt Bielefeld Innenstadt' prepared by the ECJ Task Force of the Confédération Fiscale Européenne (CFE). The CFE is the leading European association of 29 national tax advisory organisations representing over 180,000 tax advisers. The Columbus case has already been commented on several times, and rightly so 1. Amongst others, this judgment may have implications in the context of anti-abuse provisions and contains a number of theoretical propositions, which appear for the first time in the ECJ case law. The facts 1. Columbus is a limited partnership governed by Belgian law, which at the time of the facts (1996) had its registered office in Antwerp (Belgium). Its object consists in the coordination of the activities of an international group. Its participations were held, on the one hand, by eight members of the same family residing in Germany, each member having a 10% holding, and, on the other hand, as regards the remaining 20%, by a German partnership, the participations in which are also held by members of that family. At Columbus general meeting, all shareholders are represented by the same person. 2. According to Belgian Law, Columbus is a taxable subject and considered as a coordination centre for the purposes of Royal Decree No 187 by the Belgian tax authority. It therefore enjoys the attractive tax regime applicable to coordination centres. In Germany, however, Columbus is treated as a transparent partnership, which implies that its profits are assigned to its partners, regardless of the fact that the partnership is liable, as such, to corporation tax abroad 2. 3. Under German domestic tax law a foreign partnership is regarded as a permanent establishment of each partner, and international double taxation is relieved by way of the credit method for a permanent establishment. Under its tax treaties, however, Germany usually applies the exemption method, and so does the treaty with Belgium. Yet, as of 1993 Germany, on a unilateral basis under its domestic law, decided to tax foreign permanent establishments with passive investment income in low-tax jurisdictions by applying the credit method (unilateral switchover clause), thus overriding the exemption provided in its tax treaties for these cases. This measure was introduced with a view to 1 See G. Meussen, Columbus Container Services A Victory for the Member States, ET 4/2008, pp.169-173 ; T. O Shea, «German CFC Rules Compatible with EU Law, ECJ states», Tax Notes International, 24 Dec. 2007, pp. 1-5 ; prior to the judgment, also see J. Lüdicke, in M. Lang, J. Schuch, C. Staringer (eds.), ECJ Recent Developments in Direct Taxation, Linde Verlag, 2006, p. 163 et seq.; A. Cordewener, EC Law protection against horizontal tax discrimination on the rise or how to play snooker in an Internal Market, in EC Tax Review, 2007/5 at 210 and ff.; M. Lang, ECJ Case Law on Cross-Border Dividend Taxation Recent Developments, in EC Tax Review 2008/2, at 74 and ff.; P. Pistone, Intertax 2008/4. 2 An interesting problem raised by this case could have been whether Germany should have accepted Belgium's characterization of Columbus as a non-transparent entity, on the basis of non-tax case law (see for instance the cases Überseering and Inspire Art, as well as the pending case Cartesio). The answer would probably have been negative in the state of present EC tax case law. Compare also Opinion Adv. Gen. P. Mengozzi, 29 March 2007, para. 40 et seq 1
countering the possible circumvention of German CFC legislation by setting up foreign partnerships (permanent establishments) in a low-tax jurisdiction 3. 4. In the Columbus case, there was no doubt that the credit method was applicable under domestic German law. This raised two different problems: first, that the tax treaty concluded between Germany and Belgium provided, in a general way, for the exemption method 4, so that Germany actually overrode the treaty by replacing the exemption provided therein by the credit method; second, that this switchover in the method made the tax burden of Columbus partners substantially higher than it would have been if the tax treaty had applied. Issue One Treaty Override The judgement 5. It is one of the most interesting aspects of the judgment that the ECJ did not regard the treaty override problem as falling under its jurisdiction. The judgment holds that the Court may not examine the relationship between a national measure, such as that in issue in the main proceedings, and the provisions of a double taxation convention (...) since that question does not fall within the scope of Community law (para 47). One may accept this as a general statement, since tax treaties are part of international law and therefore any question of the State s failure to fulfil the obligations undertaken under tax treaties are not a matter of Community law, as long as the outcome does not affect the internal market. 6. However, one may argue that although tax treaties are not EC Law instruments, they nevertheless pursue an objective that is relevant for EC Law, namely the elimination of double taxation, mentioned in Article 293 EC Treaty 5. This is to say that the ECJ's position in this respect, understandable as it may be, could be disputed on theoretical grounds. Issue Two The comparison 7. The key question at stake in the Columbus case is however a different one: is there an infringement of the freedom of establishment where a Member State subjects the profits of a foreign partnership to taxation (subject to a foreign tax credit) while those profits would not have been taxed if the partnership had been taxed at a higher rate in another 3 At that time a low-tax jurisdiction was defined as any jurisdiction effectively taxing corporate income at less than 30%. For a more detailed description of the relevant German (and Belgian) provisions and their legislative history, see A. Cordewener, German `Anti-avoidance Measures versus Belgian Coordination Centres: A Long Struggle Without Survivors?, in L. Hinnekens and Ph. Hinnekens (eds.), A Vision of Taxes within and outside European Borders Festschrift in honor of Prof. Dr. Frans Vanistendael, Kluwer Law International 2008, at 203 et seq. 4 To simplify the rather complicated treatment of hybrid entities under the tax treaty between Germany and Belgium, it can be said that, according to that treaty, the exemption method applies to participations in foreign limited partnerships, which are treated as a foreign permanent establishment in the hands of the German partners. Columbus is therefore treated as a foreign permanent establishment of each German partner (on a pro rata basis). 5 Article 293 EC Treaty will disappear with the entry into force of the Treaty of Lisbon of 13 December 2007 (at the earliest 1 January 2009). 2
Member State? The ECJ clearly answers in a negative way. The point of this commentary is to analyse whether the comparison made by the Court in this case is consistent with the way in which the Court drew the comparison in previous similar cases, including especially the Cadbury Schweppes case. The comparison 8. According to the Court, there is no doubt that the provisions on the freedom of establishment apply to the situation at hand. This is an interesting point in itself, as none of Columbus' shareholders actually held a majority in the company. This did not prevent the Court from holding that the freedom of establishment was at stake, as "all shares in Columbus are held, either directly or indirectly, by members of one family. The latter pursue the same interests, take decisions concerning Columbus by agreement through the same representative at the general meeting of Columbus and decide on its activities" (para. 31). This assertion implies that, as long as joint control is exerted by several persons, they may collectively claim the benefit of the freedom of establishment. This position is factually undisputable in the present case. It is to be seen under which conditions a similar joint control could be found in other situations where agreement between the partners is not as apparent as it is here. 9. In any case, the main problem is elsewhere. According to the Court, "the German tax legislation in issue in the main proceedings ( ) does not make any distinction between taxation of income derived from the profits of partnerships established in Germany, and taxation of income derived from the profits of partnerships established in another Member State which subjects the profits made by those partnerships in that State to a rate of tax below 30%. By applying the set-off method to such foreign partnerships, that legislation merely subjects, in Germany, the profits made by such partnerships to the same tax rate as profits made by partnerships established in Germany" (para 39). The Court concludes: "Since partnerships such as Columbus do not suffer any tax disadvantage in comparison with partnerships established in Germany, there is no discrimination resulting from a difference in treatment between those two categories of partnerships" (para 40). 10. A critical standpoint to the Court's decision may be taken by arguing that the German rule at stake, being a rule aimed at preventing the circumvention of an anti-avoidance (namely the CFC) rule (therefore a quasi-cfc rule) 6, should have been examined along the line drawn by the Cadbury Schweppes case of the ECJ 7. This argument may itself lead to two conclusions: first, that the foreign partnership subject to a low-tax regime should have 6 A standard CFC rule deals with a separate legal entity and tackles both diversion of profits into a low tax entity and deferral of the tax on the remittance of those profits. The quasi CFC rule only tackles diversion of profits into a low tax jurisdiction. There was no deferral because from a German (but not Belgian) point of view the partnership was regarded as transparent. 7 ECJ, 12 September 2006, C-196/04. 3
also been compared to a foreign partnership subject to a "normal" tax regime in another Member State 8 ; second, that the foreign partnership should have been compared to a legal entity with tax personality subject to a low-tax regime, wherever located. These two comparisons will be dealt with successively. 11. It is clear from the history that the tax regime applied to Columbus' partners has been introduced in the German system in order to supplement the pre-existing legislation where only foreign entities with tax personality were subject to the CFC provisions. The disputed provision is therefore part of a broader piece of legislation designed to fight against tax avoidance. 12. This being said, in our view it seems natural to refer to the Cadbury Schweppes case in order to check whether the German rule at hand is compatible with the requirements of the freedom of establishment. This case is relevant, not only insofar as it deals with the UK CFC rule, but also as it seems to have admitted that freedom of establishment could be infringed also in cases of horizontal discrimination. More precisely, the ECJ held that the UK CFC rule created a tax disadvantage for the resident company to which the legislation on CFCs was applicable because it taxed a parent company on the profits of its foreign subsidiary subject to a low level of taxation, while that was not the case "for a resident company with a subsidiary taxed in the United Kingdom or a subsidiary established outside that Member State which is not subject to a lower level of taxation" (para. 45). This paragraph was so important as to drive the Advocate General in the Columbus case to state that the German rule should be deemed contrary to the freedom of establishment 9. 13. It is surprising that the ECJ does not address the main argument in favour of this approach, namely the fact that it is the only one in line with the uniformity of the Internal Market. Instead, the Court sticks to the idea that "Member States enjoy a certain autonomy. It follows from that tax competence that the freedom of companies and partnerships to choose, for the purposes of establishment, between different Member States in no way means that the latter are obliged to adapt their own tax systems to the different systems of tax of the other Member States in order to guarantee that a company or partnership that has chosen to establish itself in a given Member State is taxed, at national level, in the same way as a company or partnership that has chosen to establish itself in another Member State" (para. 51). In our view the Court should have taken the occasion to make a more detailed and explanatory statement about the limits to the tax sovereignty of the Member States, instead of making a mere reference to the certain autonomy enjoyed by the Member States. 14. Certainly, the argument drawn from the Cadbury Schweppes case may be challenged. As a matter of fact, there is a difference between a "Cadbury CFC problem", where a resident company is taxed on the profits of its subsidiary, and a "Columbus CFC problem", where a resident member of a partnership is taxed on profits realized through a deemed 8 As the ECJ did in para. 45 of the Cadbury Schweppes decision. 9 Opinion Adv. Gen. P. Mengozzi, 29 March 2007, para. 114 et seq. 4
permanent establishment abroad. While, in the former case, the CFC rule may operate as a deemed distribution of profits to the parent, no such distribution may apply in the latter, where the profits of the partnership are simply attributed to the partners. This technical difference between the two rules is considered by some commentators as relevant enough to justify the different solution chosen by the Court in the Cadbury Schweppes and Columbus cases 10. 15. This argument does find some support in the wording of the Cadbury Schweppes judgment, where it states that "even taking into account, as suggested by the United Kingdom, Danish, German, French, Portuguese, Finnish, and Swedish Governments, the fact referred to by the national court that such a resident company does not pay, on the profits of a CFC within the scope of application of that legislation, more tax than that which would have been payable on those profits if they had been made by a subsidiary established in the United Kingdom, the fact remains that under such legislation the resident company is taxed on profits of another legal person. That is not the case for a resident company with a subsidiary taxed in the United Kingdom or a subsidiary established outside that Member State which is not subject to a lower level of taxation "(para. 45). This wording suggests that the disadvantages created by a CFC rule are greater for a parent company (which is taxed on undistributed profits) than for an entity with a direct activity abroad (because such activity would be taxed anyway). 16. However, this objection to the "Cadbury Schweppes argument" does not seem fully convincing. The fact that the CFC rule applies in different technical ways for foreign subsidiaries and foreign permanent establishments should not be decisive when it comes to assessing the compatibility of the rule with the freedom of establishment. Basically, the mechanism of the CFC rule is exactly the same in both situations, and the difference in its implementation is only a matter of adaptation to the legal nature of the situations. Besides, in the specific case of the German rule at stake in the Columbus case, let us repeat that the normal implementation of the law (inclusive of the tax treaty with Belgium) would have led to exemption. 17. If the Court had chosen the same comparator as in Cadbury Schweppes, the Court should then have enquired about possible justifications, in particular the need to prevent abusive practices. It might even have left the case unsolved, referring the case back to the domestic court, with a view to let it ascertain whether there was in fact a wholly artificial arrangement. The story would have been much longer, but, sometimes, the law deserves long stories. The Statement By reasoning in a different way than in Cadbury Schweppes, the Court has created a discrepancy between the situation of resident taxpayers owning subsidiaries subject to favourable tax regimes in another Member State (where the Cadbury Schweppes reasoning applies) and that of other 10 See footnote n. 3 5
taxpayers operating through an (effective or deemed) permanent establishment in the other Member State. Needless to say, the Court's position in Columbus may prove an incentive to group restructuring. 6