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Published online by Cambridge University Press: 27 October 2017
It is safe to say that any description of tax as ‘exciting’ tends to be greeted with at least mild scepticism by non-tax specialists. Yet the ECJ’s role applying the Treaty free movement rules in the direct tax sphere is one of the most exciting, controversial and seemingly intractable areas of ECJ competence at present. This paper seeks to demonstrate why no Community lawyer should miss out on the drama unfolding in Luxembourg.
1 See Fig 10.2 below.
2 See Commissioner Kovács, ‘The Future of Taxation’, Speech of 8 Dec 2007, London, available at http://ec.europa.eu/commission_barroso/kovacs/speeches/51201TDI.pdf: ‘[s]everal Member States feel that the Court does not have sufficient regard in its decisions to specific national policies and particularly to the financial consequences of its judgements … I am not happy with the fact that EU tax policy is increasingly being made as a result of Court decisions rather than as a result of coordinated policy actions of Member States. I am convinced that the recent developments in this area could lead to a situation where it will become almost impossible for Member States to protect their tax bases at national level.’ For a small sample see Graetz, M and Warren, A ‘Income Tax Discrimination and the Political and Economic Integration of Europe’ (2006) 115 Yale LJ 1186 CrossRefGoogle Scholar; de Hosson, F ‘On the Controversial Role of the European Court in Corporate Tax Cases’ (2006) 34 Intertax 294 Google Scholar; Hinnekens, L ‘European Court Goes for Robust Tax Principles for Treaty Freedoms. What about Reasonable Exceptions and Balances?’ (2004) 13 EC Tax Review 65 Google Scholar; Wattel, P ‘Red Herrings in Direct Tax Cases before the ECJ’ (2004) 31 LIEI 81 Google Scholar. The area formed one of the three topics for debate in the 22nd FIDE Congress. The Community and General Rapporteurs’ reports on the topic are available at http://www.fide2006.org.
3 See, eg, Giles, C ‘UK seeks to curb European tax rules’, Financial Times, 20 June 2005.
4 It will not deal with other areas of Community internal market law of relevance to Member State direct taxation rules, eg, the state aid provisions of the EC Treaty.
5 Case C–475/03, Banca popolare di Cremona Soc. coop. arl v Agenzia Entrate Ufficio Cremona, Opinion of 14 Mar 2006, para 54.
6 Examples of existing legislation include Directive 2003/45 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, OJ 2003 L 157/49; Directive 90/434 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States, OJ 1990 L 225/1, as amended; and Directive 90/435 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ 1990 L 225/6.
7 Taken from ‘Structures of the Taxation Systems of the European Union: 1995–2004’, Doc. TAXUD/E4/2006/DOC/3201, an updated version of which is available at http://www.ec.europa.eu/ taxation_customs/taxation/gen_info/economic_analysis/tax_structures/index_en.htm, at 28.
8 Ibid., at 31.
9 Source: KPMG’s ‘Global Corporate Tax Rate Survey—An International Analysis of Tax Rates from 1993 to 2006’, available at http://www.kpmg.com.
10 See the ‘third era’ cases discussed below and, prior to this, Case C–234/01, Gerritse [2003] ECR I–5933, para 45; Case C–385/00, De Groot [2000] ECR I–11819, para 93; Case C–307/97, Saint Gobain [1999] ECR I–6161; Case C–250/95, Futura [1997] ECR I–2471, paras 20 and 21.
11 This type of double taxation is termed ‘juridical’—that is to say, the same (natural or legal) person is subject to tax on both occasions. This is to be contrasted with ‘economic’ double taxation—where the same income is taxed twice, but in the hands of different persons (eg, income subject first to corporation tax in the hands of a company, and secondly to dividend tax upon distribution in the hands of the shareholder).
12 See, eg, Art 293 EC and Case C–513/04, Kerckhaert and Morres [2006] ECR I–10967, discussed below.
13 It is interesting to contrast the considerable positive harmonisation in the indirect taxation field, given that (as can be seen from Fig 10.2) indirect taxation accounts for a substantial proportion of overall tax revenue for most Member States.
14 See, eg, Case C–524/04, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, judgment of 13 Mar 2007, para 25, and cases cited therein.
15 Art 43(2) EC: ‘Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected …’.
16 Art 43(1) EC: ‘Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State’.
17 Art 48 EC.
18 An example for self-employed persons is the directly discriminatory Belgian rule at issue in Reyners which prevented a qualified Dutch lawyer from practising as a lawyer in Belgium: Case 2/74, Reyners [1974] ECR 631.
19 Although the Court’s approach to these justifications—particularly that of coherence of the tax system—has sometimes left much to be desired, due to limits of space this will not be dealt with in this paper.
20 Case C–204/90, Hanns-Martin Bachmann v. Belgium [1992] ECR I–249.
21 Above n 10.
22 Case C–324/00, Lankhorst-Hohorst GmbH v. Finanzamt Steifurt [2002] ECR I–11779.
23 Case C–196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd [2007] 1 CMLR 2, judgment of 12 Sept 2006.
24 Above n 14.
25 Case 120/78, Rewe Zentrale v Bundesmonopolverwaltung für Branntwein [1979] ECR 649.
26 Case C–415/93, Union royale belge des sociétés de football association ASBL v Jean-Marc Bosman, Royal club liégeois SA v Jean-Marc Bosman and others and Union des associations européennes de football (UEFA) v Jean-Marc Bosman [1995] ECR I–4921.
27 Eg, Case C–76/90, Säger v Dennemeyer & Co. Ltd. [1991] ECR I–4221; Case C–384/93, Alpine Investments v Minister van Financiën [1995] ECR I–1141; Case C–275/92, Her Majesty’s Customs and Excise v Gerhart Schindler and Jörg Schindler [1994] ECR I–1039.
28 Case C–55/94, Reinhard Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano [1995] ECR I–4165.
29 Case C–309/99, JCJ Wouters, JW Savelbergh and Price Waterhouse Belastingadviseurs BV v Algemene Raad van de Nederlandse Orde van Advocaten [2002] ECR I–1577.
30 Gebhard, above n 28, para 37.
31 Note, however, that the distinction between ‘direct’ and ‘indirect’ discrimination tends to blur in the case of corporate taxation. This is due to the fact that a company’s ‘nationality’ is very difficult to distinguish from its ‘residence’. On this see Barnard, C The Substantive Law of the EU (Oxford, Oxford University Press, 2004) 326–8Google Scholar.
32 Directive 88/361 for the implementation of Article 67 of the Treaty, OJ 1998 L 178/5.
33 Case 203/80, Casati [1981] ECR 2595.
34 Eg, Case C–302/97, Konle [1999] ECR I–3099, para 23 (Austrian rule exempting Austrian nationals only from the requirement to obtain authorisation before acquiring a plot of land).
35 Eg, Case C–463/00, Commission v Spain [2003] ECR I–4581 and the other ‘Golden Share’ cases.
36 The ECJ relies heavily on the Annex to Directive 88/361, above n 32, for guidance on the meaning of capital.
37 See, eg, Case C–446/04, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue [2007] 1 CMLR 35, paras 36–38.
38 See Thin Cap Test Claimants, n 14 above, para 171.
39 Case 270/83, Commission v. France [1986] ECR 273.
40 A tax credit in this sense means an amount which can be set off against a taxpayer’s taxable income, thus reducing its overall tax bill.
41 Avoir Fiscal, above n 39, paras 19–20.
42 Above n 20.
43 Avoir Fiscal, above n 39, para 21.
44 Case C–279/93, Finanzamt Köln-Altstadt v. Schumacker [1995] ECR I–225.
45 Case C–80/94, GHEJ Wielockx v. Inspecteur der directe belastingen [1995] ECR I–2493.
46 Case C–311/97, Royal Bank of Scotland v. Elliniko Dimosio [1999] ECR I–2651.
47 Case C–35/98, Staatssecretaris van Financien v. BGM Verkooijen [2000] ECR I–4071.
48 Above n 10.
49 Above n 10.
50 Case C–168/01, Bosal Holding BV v. Staatssecretaris van Financiën [2003] ECR I–9409.
51 Above n 10. For an Art 56 EC example see Verkooijen, n 47 above, which concerned Dutch rules which granted an exemption for domestic-source dividends from individual income tax, but not for foreign-source dividends. While the Court, as we have seen, spoke of a ‘restriction’ to free movement of capital, this may also be viewed as discrimination based on whether the individual had chosen to exercise his or her right to invest abroad.
52 Contrast paras 19 and 23 of Futura Participations, above n 10.
53 Ibid, para 21.
54 By way of indication, according to Commission figures there were 19 ECJ judgments handed down in the field of direct taxation from the Avoir Fiscal case, above n 39, to the end of 1996, as against 135 handed down from the beginning of 1997 to the end of March 2007. See the useful table at http://ec.europa.eu/taxation_customs/resources/documents/ taxation/gen_info/tax_law/legal_proceedings/court_cases_direct_taxation_en.pdf. (These figures also include those—relatively few—direct tax cases which did not concern the free movement provisions of the Treaty, such as those concerning the Treaty state aid provisions).
55 An analogy can be drawn with social security, as a field also based on what are essentially discrete national systems (although these systems are, to a certain extent, linked by Regulation 1408/71 on the application of social security schemes to employed persons and their families moving within the Community, OJ Spec Ed I, Ch 1971(II) 416, as amended).
56 Case C–319/02, Petri Manninen [2004] ECR I–7498. Other examples include Case C–315/02, Anneliese Lenz v Finanzlandesdirektion für Tirol [2004] ECR I–7063 (option for income tax treatment available for domestic dividends was not granted to foreign-source divi dends); Cases C–397 and 410/98, Metallgesellschaft Ltd and others, Hoechst AG, Hoechst UK Ltd. v. Commissioners of Inland Revenue, HM Attorney General [2001] ECR I–1727 (group income relief from the obligation to pay ‘Advance Corporation Tax’ available to domestic subsidiaries distributing profits to domestic parents was not granted to domestic subsidiaries distributing profits to foreign parents); Lankhorst-Hohorst, above n 22 (‘thin capitalisation’ rules applied to outgoing interest repayments on loans to a resident subsidiary from a controlling non-resident shareholder, but not to purely domestic interest repayments).
57 Manninen, above n 56, paras 20–21 and (on comparability) paras 29–39.
58 Bosal, n 50 above, para 27.
59 The Court also rejected the Dutch government’s discrimination-based argument that a Dutch parent with a subsidiary liable to Dutch tax and a Dutch parent with a subsidiary not liable to Dutch tax were not ‘comparable’ as the latter subsidiary did not fall under Dutch tax jurisdiction.
60 See http://www.minfin.nl/nl/actueel/toespraken,wijn/2003/11/Nieuwspoort-Fortislezing-6november-2003.html, ‘De Bosal zaak—Budgettaire gevolgen’.
61 See, eg, Weber, D ‘The Bosal Holding Case: Analysis and Critique’ (2003) 12 EC Tax Review 220 Google Scholar.
62 See, eg, the 2004 study of PricewaterhouseCoopers showing that, if the Court’s broad approach were to be followed, all 25 Member States’ tax systems breached EU law: see http://www. ukmediacentre.pwc.com/content/detail.asp?ReleaseID=1026&NewsAreaID=2.
63 Above n 2, 1188. Graetz and Warren characterise the ECJ’s approach as discriminationbased, and argue that the elimination of discrimination based on the origin and destination of economic activity is ‘an impossible quest’ (at 1253).
64 See, eg, Wattel, P, n 2 above, 81–2.
65 See, eg, the Commission’s Proposal for a ‘Common Consolidated Corporate Tax Base’ announced for 2008, details available at http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm. See also the Speech of Commissioner Kovács at the European Tax Summit, 12–14 Feb 2007, Montreux, available at http://ec.europa.eu/commission_barroso/kovacs/speeches/Montreux_12022007.pdf.
66 With apologies to historians: it seems the Court skipped the Renaissance.
67 Case C–376/03, D. v Inspecteur van de Belastingdienst/Particulieren/Ondernemingen buitenland te Heerlen [2005] ECR I–5821.
68 Dutch law also granted the allowance to non-residents holding 90% or more of their wealth in the Netherlands. This limitation was approved by the Court using reasoning based on the Schumacker judgment (n 38 above) and is not of interest to us here.
69 D, above n 67, para 52. The Court cited Saint-Gobain (n 10 above) and Case C–336/96, Mr and Mrs Robert Gilly v Directeur des services fiscaux du Bas-Rhin [1998] ECR I–2793.
70 D, above n 67, paras 61–62.
71 Above nn 10 and 69.
72 Case C–446/03, Marks & Spencer plc v. David Halsey (Her Majesty’s Inspector of Taxes) [2005] ECR I–10837.
73 These losses could alternatively be ‘surrendered’ to another group member or ‘carried forward’ to future UK accounting periods.
74 See, eg, Meussen, G ‘The Marks & Spencer Case: Reaching the Boundaries of the EC Treaty’ (2003) 12 EC Tax Review 144 Google Scholar.
75 Opinion in Marks & Spencer, above n 72, para 35.
76 Ibid, para 34.
77 Ibid, para 84.
78 Ibid, para 39.
79 Ibid, paras 45–46.
80 Ibid, paras 47–48.
81 Ibid, paras 49–50.
82 Ibid, para 59.
83 Ibid, paras 55–56, 59.
84 Case C–374/04, Test Claimants in Class IV of the ACT Group Litigation [2007] 1 CMLR 36.
85 Above n 37.
86 The Court’s judgment in Case C–265/04, Bouanich [2006] ECR I–923 in the interim is also noteworthy as a step in the trend towards ‘reconciliation’ of free movement and direct tax law (the Court recognised that the effect of DTCs must be taken into account in assessing discrimination).
87 The system was abolished in 1999.
88 On the distinction between economic and juridical double taxation see n 11 above.
89 Relying by analogy on the Court’s judgment in Case C–403/03, Schempp [2005] ECR I–6421.
90 ACT Test Claimants, above n 84, para 50.
91 Ibid, para 54.
92 Ibid, para 94. On the distinction between economic and juridical double taxation see n 11 above.
93 Thus, it was in principle acceptable for the UK to use an ‘exemption’ system to avoid economic double taxation for domestic groups, but a ‘credit’ system to avoid economic double taxation for incoming dividends from foreign subsidiaries, as long as both resulted in the same avoidance of economic double taxation (FII Test Claimants, above n 37, para 57).
94 This can be compared with the Court’s use of a discrimination-based approach in recent years for taxes other than corporation tax: see, eg, Case C–387/01, Harald Weigel and Ingrid Weigel v Finanzlandesdirektion für Vorarlberg [2004] ECR I–4981 and Joined Cases C–544 and 545/03, Mobistar SA v Commune de Fléron and Belgacom Mobile SA v Commune de Schaerbeek [2005] ECR I–7723.
95 Case C–170/05, Denkavit Internationaal [2007] 1CMLR 40.
96 Above n 12.
97 Above n 14.
98 On the distinction between economic and juridical double taxation see above n 11.
99 Denkavit, above n 95, paras 35, 37.
100 Ibid, para 39.
101 Ibid, para 54.
102 Kerckhaert-Morres, above n 12, para 20.
103 Ibid, para 22.
104 Above n 14. These are rules whereby loan interest paid by a resident subsidiary to a non-resident parent (which is deductible by the subsidiary as business expenses) may sometimes be re-characterised as dividend payments (which are taxable in the hands of the subsidiary as profits).
105 Above n 22. Despite seemingly forceful potential anti-avoidance justifications for such rules, the Court in its judgment in Lankhorst-Hohorst, above n 22, had condemned German thin cap rules in such absolute terms that the Germans had felt no option but to apply the same rules to purely domestic intra-group payments, although it was universally accepted that it made no sense at all to do so and only resulted in extra administration for domestic German groups. The approach had thus also cast other Member States’ thin cap rules into doubt, resulting in the Thin Cap Test Claimants reference from the UK.
106 Thin Cap Test Claimants, above n 14, paras 80–87.
107 Ibid, paras 88–91.
108 Although, sadly, Bosal still lives on (and presumably will continue to survive unless and until the Grand Chamber decides to re-examine the issue): see Case C–347/04, Rewe Zentralfinanz, judgment of 29 Mar 2007, not yet reported.