C-504/16 and C-613/16 Deister Holding and Juhler Holding
The cases concerned the German Anti-Treaty shopping provision. Both cases concern non-resident holding companies receiving dividends from a German subsidiary and in both cases the holding company received a profit distribution from the German subsidiary, on which dividend WHT was levied. The companies sought a refund of the tax withheld. The German tax authorities denied the request on the basis of the German Anti-Treaty Shopping rules. The holding companies challenged the assessments.
The CJEU firstly concluded that both cases fall within the scope of the Parent-Subsidiary Directive (PSD), which in principle prohibits the levying of WHTs on profit distributions paid to foreign parent companies. According to Article 1(2) of the PSD, Member States are only allowed to deviate from that rule to prevent tax evasion and abuse. The Court stated that only provisions whose specific objective is to prevent artificial structures deviating from economic reality and targeting unjustified tax advantages fall within the scope of the exception in the Directive. The Court concluded that the German rules in question, which generally exclude a special group of taxpayers from the application of the PSD, create a general and irrefutable presumption of abuse and therefore go beyond what is necessary to prevent tax evasion and abuse. In this respect, the Court emphasized that a group’s special shareholding structure does not in itself indicate the existence
of a wholly artificial arrangement. Consequently, the Court ruled that the disputed German provisions are not in line with the PSD.
The CJEU further observed that it is only where a resident subsidiary distributes profits to a non-resident parent company that the WHT exemption is subject to certain conditions and concluded that this difference in treatment is liable to deter a non-resident parent company from exercising an economic activity in Germany and therefore constitutes a restriction to the freedom of establishment, which cannot be justified.
This article appears in the JHA January 2018 Tax Newsletter, which also features:
AG Opinion in Bevola case C-650/16
Twelve years after the judgment in Marks & Spencer, the CJEU is once more called upon to give a decision on a dispute which has arisen in relation to company taxation. In this case, the national court asked the CJEU whether, in conditions equivalent to those in Marks & Spencer, the freedom of establishment precludes a national provision pursuant to which a Danish company may not deduct the losses of a PE situated in another Member State, unless it opts into the ‘international joint taxation’ scheme.
The case involves Bevola, a company registered in Denmark and is a subsidiary and sub-subsidiary of other Danish companies and which held subsidiaries and PEs in a number of Member States, such as Finland. The Finish PE ceased trading and relief could not be claimed in Finland for its losses and Bevola applied to deduct those losses from its taxable income for the purposes of Danish corporation tax. The Danish tax authorities refused on the ground that revenue or expenditure attributable to a PE situated in a foreign country cannot be included in the tax base, unless the company had opted for the international joint taxation scheme. Bevola appealed.
The AG left it to the national courts to assess whether the Finish losses in this case were definitive and concentrated on two other aspects of the case that were not analysed in the judgment in Marks & Spencer. First, the losses which Bevola sought to deduct in Denmark did not come from a subsidiary but from a non-resident PE in Denmark. Second, the Danish tax system did not absolutely preclude the deduction of those losses, and allowed it if a resident company opts for the international joint taxation scheme.
The AG concluded that that legislation was not compatible with the freedom of establishment. The fact that the parent company may opt into an ‘international joint taxation scheme’, which requires it to group together, for the purposes of the same tax, all its subsidiaries and all its PEs situated outside Denmark for a period of 10 years, is not proportionate and is incompatible with EU law.
This article appears in the JHA January 2018 Tax Newsletter, which also features:
C-382/16 Hornbach-Baumarkt
The German tax authorities carried out a tax assessment on Hornbach and found that the free of charge comfort letters the company sent to banks and creditors, containing a guarantee for the benefit of its foreign subsidiaries from which it did not receive any remuneration, had not been granted on arm’s length terms, thereby increasing Hornbach’s business tax. Hornbach challenged the assessment before the referring court, arguing that German legislation providing for the adjustment of taxation of transactions between related companies to reflect arm’s length terms violates the EU Treaty provisions on freedom of establishment. The referring court asked whether the relevant rule under German law is compatible with the EU Treaty provisions on freedom of establishment, but more specifically, whether a Member State can prevent companies from shifting profits out of its jurisdiction by requiring income to be declared on the basis of ‘arm’s length conditions’? And can it impose such a requirement only in relation to cross-border transactions and not domestic ones without falling foul of the Treaty rules on freedom of establishment?
The Advocate General answered yes to both questions and concluded that the German transfer pricing legislation did not violate the EU concept of freedom of establishment, and even if it were a restriction on the freedom of establishment it was justified on the basis of the preservation of the balanced allocation of powers. The Advocate General also considered the discrimination approach and the restriction approach when analysing situations of alleged infringement of freedom of establishment in the area of direct taxation, and invited the CJEU to articulate which approach applies and said that he favours the discrimination approach. If the CJEU adopts the discrimination approach, then the analysis should stop at the stage of comparability.
This article appears in the JHA December 2017 Tax Newsletter, which also features:
Under Belgian interest limitation rules, a deduction of interest payments is disallowed where the taxpayer receives exempt dividends from shares held by the company for less than a year. The question for the CJEU was whether the Belgian rules are compatible with the Parent-Subsidiary Directive (PSD).
In this case, the CJEU departed from the Advocate General’s Opinion and held that the Belgian provision was not compatible with Art 4(2) PSD, which grants Member States the right to deny the deduction of costs relating to holdings in a subsidiary established in another Member States. The CJEU argued that Art 4(2) PSD must be interpreted strictly. Therefore, Art 4(2) PSD must be interpreted as allowing Member States to only prevent a parent company from benefitting from a double tax advantage. CJEU decided that Article 4(2) of the PSD must be interpreted as precluding a provision of domestic law pursuant to which interest paid by a parent company under a loan is not deductible from the taxable profits of that parent company up to an amount equal to that of the dividends, which already benefit from tax deductibility, that are received from the holdings of that parent company in the capital of its subsidiary companies that have been held for a period of less than one year, even if such interest does not relate to the financing of such holdings.
With regard to the second preliminary question referred, relating to former Art 1(2) PSD, which allows Member States to refuse to grant the benefits of the Directive for reasons of preventing tax evasion and abuse, the CJEU points out that the provision reflects the general principle of EU law that any abuse of right is prohibited and that EU law cannot be relied on for abusive or fraudulent ends. But unlike the AG, the CJEU decided that Member States cannot enact anti-abuse measures that go beyond the specific anti-avoidance rule provided for in Art 4(2).
This article appears in the JHA November 2017 Tax Newsletter, which also features:
This was a request for a preliminary ruling from the French Council of State relating to interpretation of Article 8 of the Merger Directive (Directive 90/434/EEC), in particular whether Article 8(2) precludes national legislation which establishes a mechanism to defer taxation of the capital gains arising when shares or securities are exchanged until such shares or securities are subsequently transferred.
The facts of the case concern a decision of the tax authorities to tax the capital gains arising out of an exchange of securities on the subsequent transfer of the securities received. In 1996 Mr Jacobs transferred securities he held in one French company to another. At his request, the taxation on the capital gain arising on the exchange of those securities was deferred pursuant to the French provisions in force. In October 2004, Mr Jacobs moved his residence for tax purposes to Belgium. In 2007 he transferred all of his securities in the second company. Following that transfer, the capital gain that was still subject to deferred taxation was taxed, together with default surcharge and a 10% surcharge. After an initial discharge of the taxes, an appeal by the Minister resulted in them being reinstated. Mr Jacobs then lodged a review with the Council of State, who requested the preliminary ruling.
The AG proposed that the court answer that Article 8(1) and (2) do not preclude a mechanism, which, in the event of an exchange of securities falling within the scope of that directive, defers taxation of the capital gain established on such an exchange until the subsequent transfer of those securities. The AG stated that the freedom of establishment prevents a Member State, in which the taxation of the capital gain on an exchange was deferred until the subsequent transfer of the securities exchanged, from taxing the gain at the time of that transfer without taking account of the capital losses arising after the exchange if such an advantage would be granted to a resident taxpayer. If national law provides a mechanism to defer taxation of a capital gain established on an exchange of securities falling with the scope of the Directive until the subsequent transfer of those securities, and if it provides for account to be taken of the capital losses arising after the exchange of securities for resident taxpayers, the Member State of origin must grant the same advantage to non-resident taxpayers.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
On 16 November the Commission published its preliminary decision, available here, that the group financing exemptions (GFE) within the UK’s CFC provisions (chapter 9 of Taxation (International and Other Provisions) Act 2010) constitute state aid. The Commission sees the reference system as the CFC provisions. In the Commission’s view the objective of the UK system
is to tax income artificially diverted from the UK which, in the case of non-trading financing income, meets the criteria within the chapter 5 gateway. The GFE acts as a derogation in that it exempts certain groups that fall within that gateway. It rejects the UK’s argument that the exemptions in chapter 9 are merely an additional filter forming part and parcel of the reference
system.
The Commission regards the GFE as selective because it is only available to non-trading financing income within the chapter 5 gateway which is derived from qualifying loan relationships, that is essentially loans to related companies that are not UK resident and not attributable to a UK PE. The comparator appears therefore to be a group with financing income where the loans are to the UK or a third party. The Commission does not regard it as consistent with the logic of the system to distinguish income which does not have the effect of creating a UK interest deduction from that which does. The partial exemption is additionally regarded as disproportionate.
No reference is made to Cadbury Schweppes or the principles it established even though that case also concerned financing income and the GFE requires the genuine establishment of the CFC.
The publication of the preliminary decision opens the 30 day period for interested parties to make submissions to the Commission.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
The new legislative announcements in the 2017 budget include:
Double Tax Relief
Regarding double tax relief, from 22 November 2017 the government will introduce a restriction to the relief for foreign tax incurred by an overseas branch of a company, where the company has already received relief overseas for the losses of the branch against profits other than those of the branch. The restriction aims to ensure that double tax relief is not granted for same losses. The Double Tax Relief Targeted Anti-Avoidance Rule will also be amended to remove the requirement for HMRC to issue a counteraction notice, and will extend the scope. Legislation will be introduced in Finance Bill 2017-18 to include a new section 71A in Part 2 of TIOPA 2010 to restrict the amount of credit allowed or deduction given for foreign tax where the company has received relief for losses against non-PE profits in the foreign jurisdiction.
The amount of double taxation relief available will instead be determined by reference to the amount of foreign tax suffered by the overseas PE, less the amount of the reduction in foreign tax which results from the PE’s losses being relieved against non-PE profits in a foreign jurisdiction in the same or earlier periods.
Tax Avoidance
The government also introduced new legislation to counter the effect of tax avoidance arrangements. The new legislation makes amendments to the double taxation relief targeted anti-avoidance rule (DTR TAAR) contained in Part 2 TIOPA 2010. The amendments make two changes to that legislation. The first change removes the requirement for HM Revenue and Customs to give a counteraction notice in order to apply the DTR TAAR and will have effect for returns with a filing date on or after 1 April 2018. The second change will extend the scope of one of the categories of prescribed schemes to which the TAAR applies to include tax payable by any connected persons. The second change will have effect for payments of foreign tax made on or after 22 November 2017.
Further, the government will remove the 6-year time limit within which companies must adjust for transactions that have reduced the value of shares being disposed of in a group company. This change will take effect for disposals of shares or securities in a company made on or after 22 November 2017.
Amendments will be made to the corporate interest restriction rules some of which will be treated as having effect from 1 April 2017 when the Corporate Interest Restriction rules commenced and remainder from 1 January 2018. Large businesses with the charge to CT which incur net interest expense and other financial costs (within the scope of CT) above £2m per annum will be affected.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
The case concerns the immediate taxation of capital gains of a non-resident PE of A Oy, a Finish company, that resulted from the transfer of the PE to a company (X), that was also non-resident in Finland, in the course of a transfer of assets. In return, A Oy received shares in X. A Oy was taxed on the capital gains resulting from that transaction for that tax year and the tax was collected in that tax year as well. A Oy brought proceedings before Finish courts arguing that the legislation at issue was an obstacle to the freedom of establishment, as in an equivalent national situation, taxation would not have taken place until the time of realisation of the capital gain, that is, until the disposal of the assets transferred.
The CJEU held that Article 49 TFEU (freedom of establishment) must be interpreted as precluding national legislation, such as that in these proceedings, which, where a resident company, in the course of a transfer of assets, transfers a non-resident PE to a company that is also non-resident, first, provides for the immediate taxation of the capital gains resulting from the transfer, and, second, does not allow deferred collection of the tax, whereas in an equivalent national situation such capital gains are not taxed until the disposal of the transferred assets, in so far as that legislation does not allow the deferred collection of the tax.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
These are two joined cases, X BV concerning the application of the Dutch interest deduction limitation rule to prevent base erosion, and X NV concerning the non-deductibility of currency losses on a participation in a non-Dutch/EU subsidiary under the Dutch participation exemption.
The facts of the first case are as follows: X BV was part of a Swedish group and received a loan to acquire shares in an Italian company, which it had done by incorporating another Italian company (NewCo) to which it contributed capital. Under the Dutch interest deductibility rule, the interest paid by X BV to a related party, where the debt is connected with a capital contribution in a subsidiary, is non-deductible. However, the tax treatment of the same structure would have been different if the Italian NewCo would have been established in the Netherlands and part of a Dutch fiscal unity (or consolidated tax group), which is reserved for Dutch resident companies. If such a fiscal unity was possible, then the capital contributions would not have been recognized for tax purposes and the deductibility of the interest would have been allowed. The AG argued that such a rule constituted an infringement of the freedom of establishment.
The second case concerned a Dutch company, X NV, which was part of a fiscal unity regime in the Netherlands and which held shares in a UK subsidiary through another Dutch subsidiary. These shares were subsequently contributed to another UK subsidiary. The Dutch company incurred a currency loss on its contributed shares as a result of exchange rate fluctuations. The deduction of the currency loss was denied by the Dutch tax authorities. Such loss would have been deductible if X BV was allowed to form a fiscal unity with its UK subsidiary. The AG argued that the difference in treatment of the currency loss does not constitute an infringement of the freedom of establishment.
The Dutch Government announced several emergency legislation, in the event that the CJEU follows the AG’s Opinion in the first case, and which would have retrospective effect to the time and date of publication of the AG Opinion (25 October 2017).
This article appears in the JHA November 2017 Tax Newsletter, which also features:
The long awaited Judgment of BNM v MGN [2017] EWCA Civ 1767 has finally been handed down.
As we envisaged, the Court of Appeal have held that Master Gorder-Saker was wrong to have adjudged that “when applying the new test of proportionality, the court need not consider the amount of any additional liability separately from the base costs”.
Continue reading on the About Legal Costs blog.
