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Terra & Wattel - European Tax Law (summary)
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Chapter 3 General EC Law Concepts and Tax Law ............................................................................................................... 43.1 Introduction ........................................................................................................................................................... 4
3.1.1 A Common Market ................................................................................................................................................ 4
3.1.2 Interaction Between Positive and Negative Integration; ..................................................................................... 4
Direct and Indirect Taxes; ..................................................................................................................................... 4
Limits to the ECJ’s Possibilities ............................................................................................................................. 4
3.1.3 Access to the Treaty Freedoms; ........................................................................................................................... 4
Standing; ............................................................................................................................................................... 4
Abuse of the Freedoms; ....................................................................................................................................... 4
3.1.3.1 The Capacity Required for Reliance on EC Treaty Freedoms ........................................................................... 5
3.1.3.2 Case Law Before and After Entry into Force of the Right of Residence ........................................................... 5
3.1.3.3 Treaty Access in Direct Tax Cases: Asscher, Gilly, Pusa and N. v Inspecteur ................................................... 5
3.1.3.4 Abuse does not Cancel Treaty Access but may Justify a Restriction................................................................ 5
3.1.4 Observation of the Law;........................................................................................................................................ 5
General Principles of Community Law; ................................................................................................................ 5
3.2 The Four Freedoms ................................................................................................................................................ 6
3.2.1 Non-discrimination Approach and Non-Obstacle Approach; .............................................................................. 6
Market Access and Market Equality; .................................................................................................................... 6
The Rule of Reason ............................................................................................................................................... 6
3.2.1.1 Discrimination and Obstacles ........................................................................................................................... 6
3.2.2.2 Permissible Obstacles to Free Trade: The Rule of Reason ................................................................................ 6
3.2.2 Accepted Justification for (Fiscal) Market Obstacles ........................................................................................... 6
3.2.3 Free Circulation of Goods and Direct Taxes; ........................................................................................................ 7
The French Newspapers and Krantz Cases........................................................................................................... 7
3.2.4 The Freedom to Provide Services ......................................................................................................................... 7
3.2.5 Free Movement of Persons and the Right of Residence...................................................................................... 7
3.2.6 Freedom of Capital and Payments ....................................................................................................................... 7
3.2.6.1 General .............................................................................................................................................................. 7
3.2.6.2 Third State Capital Movement.......................................................................................................................... 8
3.2.7 Direct and Indirect Discrimination, Restrictions, Disparities and Dislocations;................................................... 8
Convergence of Fundamental Freedoms ............................................................................................................. 8
3.3 Normal Conditions of Competition (a ‘Level Playing Field’) ................................................................................. 9
3.4 Community Loyalty ................................................................................................................................................ 9
3.5 Effectiveness of EC Law: Direct Effect, Primacy, Consistent Interpretation; ....................................................... 9
State Liability; ......................................................................................................................................................... 9
National Time Limits; ............................................................................................................................................. 9
The Procedural Rule of Reason .............................................................................................................................. 9
3.5.1 Direct Effect and Primacy of EC Law; ................................................................................................................. 10
Horizontal Effect; ................................................................................................................................................ 10
Consistent Interpretation ................................................................................................................................... 10
3.5.2 Enforcement of EC Law: The Principles of Effectiveness and Equivalence; ...................................................... 10
The Procedural Rule of Reason; ......................................................................................................................... 10
3.5.2.1 National Procedural Autonomy and its limitations ........................................................................................ 10
3.5.2.2 Restriction on Restitution of Overpaid Tax; .................................................................................................... 10
The Procedural Rule of Reason; ..................................................................................................................... 10
3.5.2.2 Costs of Legal Counsel .................................................................................................................................... 10
3.5.2.3 Application of EC Law Ex Officio? ................................................................................................................... 10
Effective Access to Legal Remedy .................................................................................................................. 10
3.5.3 Nation Time Limits .............................................................................................................................................. 11
3.5.3.1 Introduction; ................................................................................................................................................... 11
Equivalence and Effectiveness........................................................................................................................ 11
3.5.3.2 Forum-Shopping; ............................................................................................................................................ 11
Is Filing a Tax Return which will not be accepted ‘Excessively Difficult’? ...................................................... 11
Metallgesellschaft and Thin Cap GLO ............................................................................................................ 11
3.5.3.3 Revision of Final Administrative Decision; ...................................................................................................... 11
Kühne & Heitz; ................................................................................................................................................ 11
Page 1 of 38
, 3.5.3.4 The Length of the National Time Limit ........................................................................................................... 11
3.5.4 Member State Liability for ‘Serious’ Breaches of EC Law .................................................................................. 11
3.5.4.1 Introduction; Conditions of Liability ............................................................................................................... 11
3.5.4.2 Sufficiently Serious Breach of EC Law ............................................................................................................. 11
3.5.4.3 Interaction with Direct Effect; ........................................................................................................................ 12
Incidental Damages ........................................................................................................................................ 12
3.5.4.4 State Liability for Wrongful Supreme Court Judgements ............................................................................... 12
Chapter 4 European Tax Harmonization Policy .................................................................................................................. 13
4.2. Direct Taxes .............................................................................................................................................................. 13
4.2.1 Introduction ................................................................................................................................................................ 13
4.2.1.1 Direct Taxation Differences as an Obstacle to the Common Market ............................................................. 13
4.2.1.2 Goals and Means of EC Direct-tax Policy; ...................................................................................................... 13
From Positive to Negative Integration and From Hard Law to Soft Law ....................................................... 13
4.2.1.3 Progress and results;....................................................................................................................................... 13
Negative Integration Wins by a Mile; ............................................................................................................ 13
4.2.2 Capital Import Neutrality (CIN; Exemption) and Capital Export Neutrality (CEN; Credit) ................................. 13
4.2.3 Taxation of Distributed Company Profits ........................................................................................................... 14
4.2.4 The Ruding Committee Report ........................................................................................................................... 15
4.2.5 The Soft Law Approach ....................................................................................................................................... 15
4.2.6 Tax Competition and State Aid ........................................................................................................................... 16
4.2.6.1 Introduction .................................................................................................................................................... 16
4.2.6.2 The Code of Conduct for Business Taxation and the Primarolo Exercise ....................................................... 16
4.2.6.3 The State Aid Prohibition Approach ............................................................................................................... 17
4.2.6.4 Conclusion ....................................................................................................................................................... 17
4.2.7 Single Base Taxation; .......................................................................................................................................... 17
CCCTB and HST;................................................................................................................................................... 17
4.2.7.1 Introduction .................................................................................................................................................... 17
4.2.7.2 CCCTB .............................................................................................................................................................. 17
4.2.7.3 Home State Taxation (HST)............................................................................................................................. 18
Chapter 9 The Parent-Subsidiary Directive ........................................................................................................................ 19
9.1 Introduction ......................................................................................................................................................... 19
9.2 Main Features ...................................................................................................................................................... 19
9.3 Qualifying Companies .......................................................................................................................................... 19
9.3.1 ‘Company of a Member State’ and ‘Permanent Establishment’ ....................................................................... 19
9.3.2 Parent and Subsidiary Status (Art. 3) .................................................................................................................. 20
9.3.3 No Other Requirement ....................................................................................................................................... 20
9.4 Inbound Dividends: Exemption or Indirect Credit (Art. 4) .................................................................................. 20
9.4.1 The General Rule: Choice of Exemption or Indirect Credit; Even Asymmetrical? ............................................. 20
9.4.2 (No) Credit for Remaining Withholding Tax ....................................................................................................... 20
9.4.3 Respecting Both CIN and CEN ............................................................................................................................. 20
9.4.6 (Non-) deductibility of Charges Related to the Holding (Art. 4(2)); the Bosal Case .......................................... 20
9.5 ‘Distributions of Profits’; Constructive Dividends; Hybrid (Transparent) Entities .............................................. 21
9.5.1 Distribution of Profits (Art. 1) ............................................................................................................................. 21
9.5.2 Hybrid Entities (Art. 4(1a)) .................................................................................................................................. 21
9.6 Outbound Dividends: Abolition of Withholding Tax (Art. 5) ............................................................................... 22
9.6.1 The General Rule ................................................................................................................................................. 22
9.6.2 Transitional and Deleted Derogations ................................................................................................................ 22
9.6.3 Withholding Tax’; the Epson Europe, Athinaïki Zythopiia, Océ van der Grinten and FII GLO Cases ................. 22
9.6.4 Article 6; (No) Précompte Mobilier .................................................................................................................... 22
9.6.5 Imputation Systems; Imputation Taxes; Cross-border Payment of Imputation Credit (art. 7) ......................... 22
9.7 No Temporal Compartmentalization of Dividends; (No) Write-down of the Holding Subsequent to
Distribution .......................................................................................................................................................... 22
9.8 Anti-abuse Reservation (Art. 1(2)) ....................................................................................................................... 22
9.9 Implementation; Direct Effect; Private Enforcement ......................................................................................... 23
9.10 Consequences ...................................................................................................................................................... 23
Chapter 13 The Interest and Royalty Directive .................................................................................................................... 24
13.1 Introduction; Background and History ................................................................................................................ 24
Page 2 of 38
, 13.2 The Exemption from Source State Tax ................................................................................................................ 24
13.2.1 Main Rules; Definitions; Beneficial Ownership (Art.1) ....................................................................................... 24
13.2.2 Exclusion of Dividend-like and Not at Arm’s Length Payments ......................................................................... 24
13.2.3 Procedural Requirements (Art. 1(11)-(14)) ........................................................................................................ 24
13.2.4 Repayment Claim if Exemption Failed (Art. 1(15)-(16)) ..................................................................................... 24
13.3 Transitional Derogations for Some Member States; Ordinary Credit for Residual Source Tax (Art. 6) ............. 25
13.4 Qualifying Companies (Art. 3); ‘Associated Company’ and ‘Permanent Establishment’ ................................... 25
13.4.1 ‘Company of a Member State’............................................................................................................................ 25
13.4.2 ‘Associated Company’ ......................................................................................................................................... 25
13.4.3 Minimum Association Period (Art. 1(10)) ........................................................................................................... 25
13.4.4 Permanent Establishment .................................................................................................................................. 25
13.5 Definitions of ‘Interest and Royalties’ ................................................................................................................. 25
13.6 Anti-avoidance Provisions.................................................................................................................................... 25
13.7 Some Comments .................................................................................................................................................. 25
Chapter 17 Negative Integration of Direct taxes; the ECJ Case Law on Taxation and Free movement .............................. 27
17.1 Source and Residence Taxation; Inbound and Outbound Flows of Income; The Basic Clash between
International Tax Law and Community Law ........................................................................................................ 27
17.2 Territoriality Principle or EU-wide Taxation ........................................................................................................ 28
17.3 Basic Assumptions, Principles, Trends and General Issues in the Court’s Direct Tax Jurisprudence ................ 28
17.3.1 The Balancing Act; “Second generation” Case Law ........................................................................................... 28
17.3.2 The Internal Market Compatibility Standard: To Subject or not to Subject; the Relevant “Tax Market” for
Comparison Purposes; Assertion and Exercise of Taxing Power ....................................................................... 29
17.3.3 Departures from the Subject-to-Tax Approach: “Always Somewhere” (On-Market), Mutual Recognition,
Follow-the-Directive, and Neutralization in the other Jurisdiction ................................................................... 29
17.3.4 The Developing ECJ Views on Prevention of Abuse of Rights in Tax Matters and its Relation to Fiscal
Coherence/Balanced Allocation ......................................................................................................................... 30
17.3.5 Allowing General Tax Base Protection: Fiscal Cohesion, Fiscal Territoriality, and Preservation of a Balanced
Allocation of Taxing Power; Source Country Entitlement.................................................................................. 31
17.4 General Technical Tax Issues in the Case Law ..................................................................................................... 32
17.4.2 Exit taxes ............................................................................................................................................................. 33
17.4.2.2 Emigration of individuals ............................................................................................................................ 33
17.4.2.3 Emigration of Companies ........................................................................................................................... 33
17.5 Individual Income Taxation .................................................................................................................................. 34
17.5.1 Tax Scales and Correction of Withholding tax by Assessment on Year Basis .................................................... 34
17.5.2 Income-related Deductions ................................................................................................................................ 34
17.5.3 Person- and Family-Related Tax Allowances ...................................................................................................... 34
17.5.3.1 Home State Responsibility; No National treatment in the Source State ................................................... 34
17.5.3.2 But Residents and Nonresidents are Not in a Different Position ............................................................... 35
17.5.3.3 Exacerbating Disparities ............................................................................................................................. 35
17.5.3.4 The Mechanics of Prevention of Double Taxation ..................................................................................... 35
17.5.3.5 Progression in Cross-border Situations; Two Inconsistencies of International Tax Law ........................... 35
17.5.3.6 Trying to Get it Right .................................................................................................................................. 35
17.5.3.7 The De Groot Case: A Chance Missed ........................................................................................................ 36
17.5.4 Pensions and Annuities ....................................................................................................................................... 36
17.5.5 National Treatment of Foreign-source Portfolio Investment Income ............................................................... 36
17.5.5.1 National Treatment of foreign dividends: Exit Imputation Systems .......................................................... 36
17.5.5.2 Ordinary Credit for Foreign Withholding Taxes; But: the Kerckheart Morres Escape ............................... 37
17.5.6 Private Investment Incentives also for Cross-border Investments .................................................................... 37
17.6 Corporate Income Taxation ................................................................................................................................. 37
17.6.1 Host State: Equal Treatment of Branches (Nonresidents) and Subsidiaries (Residents) .................................. 37
17.6.2 Origin State: Equal Treatment of Parents of Foreign Subsidiaries and Parents of Domestic Subsidiaries? ..... 37
17.6.3 Group Taxation Schemes .................................................................................................................................... 38
17.6.4 Transfer Pricing and Thin Capitalization ............................................................................................................. 38
17.6.5 Cross-border loss relief ....................................................................................................................................... 38
17.6.6 CFC Legislation .................................................................................................................................................... 38
Page 3 of 38
,3.1 Introduction
3.1.1 A Common Market
entails according to the ECJ:
“the elimination of all obstacles to intra-Community trade in order to merge the national markets into a single market bringing about
conditions as close as possible to those of a genuine internal market”
reference in EC Treaty:
- art. 3(1)(c): internal market, characterized by the abolition of obstacles to the free movement of goods, persons, capital and
services (4 freedoms)
- art. 3(1)(b): approximation of the laws of the Member States
3.1.2 Interaction Between Positive and Negative Integration;
Direct and Indirect Taxes;
Limits to the ECJ’s Possibilities
As long as there is no positive integration (EC legislation), such as direct taxes, Member States remain in principle free to regulate
that field as they consider appropriate.
National sovereignty is restricted by negative integration (EC Treaty prohibitions), esp. the free movement rules (art. 23-31 and 39-
60) and the competition rules (arts. 87-89).
Direct tax cases brought before the ECJ mostly concern the clash between the ECJ Treaty freedoms and principles, and
unharmonized national tax laws.
à need for negative integration
Increased complexity of negative integration due to a third set of rules: bilateral treaty network based on the OECD Model
Convention
Limits of the ECJ:
- Rule of Reason = A restrictive national measure may be unavoidable to protect an overriding reason of public interest
enumerated in the EC Treaty or developed by the Court. The Court must test, in the absence of EC legislation, whether the
national measure, although restricting Treaty Freedoms, serve as a legitimate purpose of overriding public interest and if so,
whether the national measure restricts the Treaty Freedoms no more than strictly necessary to serve that purpose
(proportionality).
- The Court should not, e.g. allocate or divide taxing power, nor prescribe which of two concurring jurisdictions should take away
any double taxation, let alone in which detailed matter, where none of them is discriminating but still double taxation persists.
à the Court can only tackle problems caused by the unilateral behaviour of one jurisdiction.
- The Court cannot harmonize disparities between national law, nor can it undo the negative tax effects of an exposure to more
than one jurisdiction leading to exercise in parallel of two taxing powers
Interaction between positive and negative integration:
- The Court often turns to available positive integration in order to be inspired on how to approach a negative integration
problem.
e.g. Case Test Claimants in the FII Group Litigation (C-446/04), in which the Court allowed the UK to apply the credit method
for the prevention of double taxation of foreign group dividends, although domestic group dividends were exempted,
apparently because Art. 4 of the EC Parent-Subsidiary Directive leaves the Member States a choice between these two problems
- The Court also takes leads from settled international tax law, as represented by the OECD Model Convention and the Official
Commentary. Thus, the Court accepted that residents and non-residents are not comparable for income taxation purposes
(Case Schumacker, C-279/93), in order to allow source taxation for non-residents and worldwide taxation for residents. In Case
Gilly (C-336/96), it held that, in the allocation of fiscal jurisdiction, it is not unreasonable for the Member States to base their
agreements on international practice, i.e. the OECD Model Convention.
3.1.3 Access to the Treaty Freedoms;
Standing;
Abuse of the Freedoms;
Page 4 of 38
, 3.1.3.1 The Capacity Required for Reliance on EC Treaty Freedoms
Two tests must be passed for Treaty Standing:
1. capacity (worker, undertaking, service provider etc.)
Art. 12 (nationality) applies only to situations which are within the ambit of the Treaty, but for which the Treaty lays down
no specific prohibition on discrimination (e.g. the four freedoms)
The economic factor (employment ship, entrepreneurship etc.) is not always necessary any more for standing since the
right of residence has become an autonomous Treaty entrance for non-economic operators.
2. cross-border element
3.1.3.2 Case Law Before and After Entry into Force of the Right of Residence
The Treaty establishing the European Union (TEU) gave more scope to art. 12 by introducing the Citizenship of the Union, and most
importantly: the freedom to move and to reside (arts. 17-22 EC), conferring on every EU national the right to move to and reside
freely in any other Member State.
3.1.3.3 Treaty Access in Direct Tax Cases: Asscher, Gilly, Pusa and N. v Inspecteur
The Asscher Case (C-107/94) concerned a director/single shareholder of a Netherlands BV. He had Dutch nationality but was also
director/sole single shareholder of a Belgian company, and worked part-time in Belgium. He moved his home to Belgium, without
changing any of his economic activities in either State. The tax issue was whether the NL first-bracket income tax rate for non-
residents, which was higher than for residents, was acceptable under the freedom of establishment, but the first question was
whether Mr Asscher had Treaty standing in the first place, as he had moved only his personal dwelling. The Court observed that Mr
Asscher already had economic activities in Belgium, and apparently that was enough for access to Art. 43 EC. Asscher made it clear
that having economic activity on both sides of an intra-EC border suffices for Treaty access, irrespective of nationality, and
irrespective of whether the migration has any causal link with that economic activity or is purely for personal reasons.
The Gilly Case (C-336/96) concerned a German national teaching and living in Germany all her life until she married a French
national, Mr. Gilly with whom she decided to live in France. All of her economic activities remained in Germany. Mrs Gilly was
granted Treaty access. The Court pointed out that Mrs Gilly had acquired French nationality by her marriage and worked in Germany
whilst residing in France, and that she therefore must be considered in France as a worker exercising her right to freedom of
establishment
à Gilly and Asscher combined show that both holding two nationalities of the States involved and having economic activity on
either side of the border is sufficient for EC Freedoms access.
The Pusa Case (C-224/02) puts beyond doubt that the combination of Union citizenship and the right of residence also avails the
economically inactive of a right to national treatment in the State of destination and to a right of non-restriction in the State of
origin.
3.1.3.4 Abuse does not Cancel Treaty Access but may Justify a Restriction
If a Community national takes up a job, starts a commercial activity, or uses a legal form incorporated in another Member State, it
is irrelevant for the applicability of the Treaty Freedoms whether he does do to make a better living, to avoid arrest for swindle, to
be close to his kids or to avoid taxation.
However, Member States may still restrict Treaty freedoms where they have a very good reason in the general interest to do so,
e.g. prevention of tax avoidance, and do not restrict that freedom any further than strictly necessary to protect that interest (rule
of reason). The Court in general only allows restrictions with a view to prevention of abuse if the national measure at issue is
specifically targeted at ‘wholly artificial arrangements’, lacking ‘economic reality’.
In Cadbury Schweppes (C-196/04) the Court observed that establishment within the meaning of Art. 43 EC required ‘the actual
pursuit of an economic activity through a fixed establishment in that State for an indefinite period’. A ‘wholly artificial arrangement’
not ‘reflecting economic reality’, such as a ‘letterbox’ or ‘front’ subsidiary or a ‘fictitious establishment’ does not constitute the
actual pursuit of an economic activity.
3.1.4 Observation of the Law;
General Principles of Community Law;
Art. 220 established the rule of law in the Community:
‘The Court of Justice shall ensure that in the interpretation and application of the Treaty the law is observed.’
à legal basis for the Court to develop general principles of Community law:
- principles of effectiveness of EC law
- abuse of rights doctrine
- principles of proportionality
- legal certainty
- protection of legitimate protection
- prevention of unjust enrichment
- protection of human rights
Page 5 of 38
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