1. DIRECT TAXATION AND EUROPEAN LAW (the recent case law of the ECJ)
Melchior WATHELET
Professor of European Law at the Universities of Louvain-La-Neuve and Liège
Guest Professor at the Universities of Luxembourg and Lyon
Honorary Judge at the ECJ
Of Counsel CMS - Bureau Francis Lefebvre (Paris)

2. DIRECT TAXATION FALLS WITHIN THE COMPETENCE OF THE MEMBER STATES
BUT
THE MEMBER STATES MUST EXERCISE THAT COMPETENCE CONSISTENTLY WITH COMMUNITY LAW

3. DIRECT TAXATION FALLS WITHIN THE COMPETENCE OF THE MEMBER STATES
Tax scales, taxation methods, taxable incomes are to be decided by the Member States

4. THE MEMBER STATES MUST EXERCISE THAT COMPETENCE CONSISTENTLY WITH COMMUNITY LAW

5. The ECJ (GILLY 1998) has distinguished : the exercise of the taxing power (coupled with the obligation to be consistent with EU Law) and the allocation of the taxing power among the Member States (which has to be decided before exercising this power)

6. « If the Member States are free to define the criteria for allocation their powers of taxation as between themselves, » (by double taxation conventions) GILLY (1998)
the simple existence of a double taxation convention does not exempt them from complying with EC law (single market + primacy) SAINT GOBAIN (1999) DE GROOT (2002)

7. With consistency, the ECJ case-law has defined :
the obligation to exercise the fiscal competence consistently with EC-Law as the prohibition
in the fields of free movement of - persons (workers or citizens) - services - capital freedom of establishment of ANY DISCRIMINATION OR RESTRICTION (BARRIER) except if they are justified.

8. Pending cases more than 60
Cases decided :
more than 55
________
over 80
(90 % of which declare the national tax system inconsistent with EC-law)
and only 5 infringement procedures
Pending cases more than 60

9. Germany 19
Netherlands 11
Belgium 9
Great Britain 9
Sweden 7
Finland 6
France 5
Luxembourg 5
Denmark 2
Greece 2
Portugal 1
Austria 1
Italy 0
Ireland 0
Spain 0

10. Some pending (or pending again or recent) cases
Most favoured nation clause
Refusal for some non-residents of tax advantages granted to residents and some other non-residents (in application of a double tax convention)
CFC rules
Taxation in the head of a resident parent company of profits realized (even not distributed) by a subsidiary resident in a country with a lower tax rate NL UK
D (2005)
Bujara (2005)
ACT Group Litigation (2006)
Cadbury Schweppes (2006)

11. Thin capitalization rulesUK DE
Thin Cap Group Litigation (2007)
Lankhorst-Hohorst (2002)

12. Single market restrictions
Different tax treatment according to whether an insurance contract is signed with (or capital is invested in or transferred to) (or dividends are paid to) a resident or non-resident company or shareholder. SE BE ES DK
Safir (1998)
Skandia (2003)
Bachmann (1992)
Comm vs Spain (pending)
Comm vs Belgium (2006)
Comm vs Danemark (2007) [“new BACHMANN”]

13. Withholding taxes for foreign artists
on payment to foreign service providers
on pension income of non- residents
on outbound dividends DE BE
Fin FR
Scorpio (2006) (cfr Gerritse 2003)
Comm vs Belgium (2006)
Turpeinen (2006)
Denkavit (2006)(cfr Fokus Bank – EFTA Court)

14. Free movement of capital with third States
A vs SKATTEVERKET :
Is it consistent with EC law that dividends paid to A be taxed because they are paid by a company not established in a Member State (or a State having with Sweden an agreement of exchange of information) ?
A-B vs SKATTEVERKET :
Same question when the tax treatment of the dividends is less favourable because the subsidiary of the company paying them, has an activity in Russia and not in Sweden.
Article III, 157 of the Constitutional Treaty
FIDIUM FINANZ (2006) : if the freedom of establishment is essentially at stake, the free movement of capital is not taken into consideration.
FII GROUP LITIGATION (2006) : to check whether tax has been paid abroad can be more difficult in the third countries.

15. To date, ECJ case law has
found a high level of breaches in terms of discrimination or obstacles
been very strict in accepting reasons put forward to justify these breaches

16. High level of breaches found
Residents and non residents are in theory in comparable situations and accordingly cannot be discriminated against where the applicable tax rule is not in any way related to residence

17. Rules of fiscal procedure : BIEHL (1990), SCHUMACKER (1995)
Rule of progressive scales : ASSCHER (1996)
Tax advantages deriving from a double taxation convention : ST GOBAIN (1999)
Deductibility of business expenses – Tax Scales GERRITSE (2003)
Tax credit on inbound dividends LENZ (2004) – MANNINEN (2004)

18. A double taxation convention may help to establish the comparability of the situations
“[in the DTC between Greece and the UK],… a branch in Greece of a Bank having its seat in the United Kingdom constitutes in Greece a permanent establishment treated for tax purposes as a resident company, so that, in that respect, it is accepted in a formal convention that it is in a situation objectively comparable to that of a Greek company”
Royal Bank of Scotland (1999)

19. SCHUMACKER (1995)
If it is logical that according a DTC, the State of residence has to take into account the personal and family situation of a taxpayer, this DTC becomes inconsistent with EU Law if the taxpayer does not have any income in his State of residence, with the consequence that his personal and family situation is no where taken into fiscal consideration.

20. New cases : APPLICATION
RITTER COULAIS (2006):
German national, resident in France; all incomes in Germany
Negative incomes in France not taken into account in Germany because not located in Germany
Advocate General (01/03/2005)
Discrimination because residents and non-residents are in comparable situations (as the State of residence cannot take these negative incomes into account in the absence of any income)
ECJ (21/02/2006)
Infringement of 48 EC because less favourable treatment of non-resident workers.

21. BLANCKAERT (2005): Non resident in the NL
Refusal of the NL to grant him some tax deductions
Court
No infringement : not comparable situations
This tax deduction only granted when social security contributions are not sufficient to offset social security deductions
Therefore, this tax deduction is limited to people affiliated to the NL social security (not the case of Mr BLANCKAERT)

22. CONIJN (2006): Non resident in Germany, incomes in Germany
Refusal by Germany law to grant him deduction of tax consultation expenses (granted to residents)
Advocate General
Infringement of 43 EC : indirect discrimination based on nationality.
ECJ (06/07/2006)
Infringement of 43 EC : comparable situations and restriction (not justified).

23. CLT-UFA (2006) :
Company, resident in the Grand Duchy of Luxembourg, has a branch in Germany.
The tax rate on the profits of the branch is higher than if the same profits had been distributed by a subsidiary in Germany.
Advocate General (14/04/2005)
“this violation of EC law stems from the fact that the Member State treats the non-resident company as a national company to establish the tax basis and then excludes it from the advantages linked with this taxation” (§ 68)
ECJ (23/02/2006)
§ 30 : “German subsidiaries and branches of companies having their seat in Luxembourg are in a situation in which they can be compared objectively”.

24. KELLER HOLDING (2006) :
In German Law, financing costs incurred by a parent company and relating to shareholdings are
not deductible if they relate to dividends paid by an indirect subsidiary established in Austria
deductible if they relate to dividends paid by an indirect subsidiary established in Germany.
ECJ
“in both cases, the dividends received … are … exempt from tax. Accordingly, a restriction on the deductibility of a parent company’s financing costs – as a corollary of the non-taxation of dividends – which affects solely dividends from abroad does not reflect a difference in the situation of parent companies according to whether the indirect subsidiary owned by the latter has its registered office in Germany or in another Member State”. (§ 37)

25. FII GROUP LITIGATION (2006) (“Inbound” dividends) :
Advocate General
“Insofar as it chooses to relieve economic double taxation on its residents’ dividends, a home State must provide the same relief for incoming foreign-source dividends as for domestic dividends and must take foreign corporation tax paid into account for this purpose”. (§ 75)
ECJ
“… where a Member State has a system for preventing or mitigating the imposition of a series of charges to tax or economic double taxation as regards dividends paid to residents by resident companies, it must treat dividends paid to residents by non-resident companies in the same way” (§ 72).

26. DENKAVIT (2006) (“Outbound” dividends) :
To impose “a heavier tax burden on dividends paid by resident subsidiaries to Netherlands parent companies than that imposed on dividends paid to French parent companies” … “amounts to a discriminatory measure which is incompatible with the Treaty” (§ 39),
even under the only form of a witholding tax
even if a double taxation convention with another member State, provides for an imputation hich appears to be impossible.

27. REWE (2007) :
In German law, losses stemming from write-downs to the book value of subsidiaries are deductible without conditions by parent companies only for their domestic subsidiaries
The situations are comparable as the profits of subsidiaries (even German) are never taxable in the head of the parent company.

28. NEW CASES : EVOLUTION ?
Comparable situation for residents and non residents

29. D (1) (judgment of July 5th, 2005):
Dutch wealth tax. Deduction only for residents
D is German resident and has immovable property in the NL
Advocate General (26/10/2004)
Residents and non residents are in comparable situations
Same tax base
100 % of D’s tax base is also liable for wealth tax in the Netherlands
Germany is unable to grant deduction as wealth tax does not exist in Germany
Court (05/07/2005)
Residents and non residents are NOT in comparable situations
Only a small portion of D’s income is taxable in the Netherlands
Germany was unable to grant D a tax benefit
not because there was no taxable income in Germany (as Mr Schumacker in Belgium)
but because wealth tax does not exist in Germany

30. Most favoured nation clause

31. D (2) :
• Dutch wealth tax. Tax deduction only applies to some non-residents (double tax treaty with Belgium)
• Equal treatment of non-residents and residents ?
• Advocate General (26/10/2004)
YES (but it is not necessary to reply to this question).
• ECJ (5/07/2005)
NO : German and Belgian non-residents are not in the same situation
The general balance of the double tax treaty must be observed (in spite of the same tax base, the same proportion of income in the Netherlands and the non-existence of wealth tax in Belgium and Germany)

32. ACT GROUP LITIGATION (2006) :
in UK law
partial tax credit on dividends paid to Companies resident in a country only when it is so provided for in the DTC signed by the UK and this country. AG : “ each DTC contains a specific allocation of tax jurisdiction and priority of taxation between the Contracting States” (§ 95).
partial tax credit denied to Netherlands-resident Companies if controlled by a resident of a Member State, when no provision for this tax credit in the DTC signed by the UK and this Member State AG : “ the distinction in a DTC between non- residents on the basis of the country of residence (and thus applicable DTC) of their controlling shareholder, forms a part of the equilibrium of jurisdiction and priority reached by the Contracting States” (§ 101).

33. ECJ “… the grant of a tax credit to a non-resident company … as provided for under a number of DTCs concluded by the UK, cannot be regarded as a benefit separable from the remainder of those DTCs, but is an integral part of them and contributes to their overall balance” (§ 88). Thus, “a company resident in a Member State which has concluded a DTC with the UK which does not provide for such a tax credit is not in the same situation as a company resident in a Member State which has concluded a DTC which does provide for one” (§ 91).

34. Does the judgement “D” question the Saint Gobain (double taxation convention) or Gottardo case law (social security convention) ?
In Saint Gobain, the branch of the French company asked in Germany to be considered as a German company
In Gottardo, a French asked to be considered in Italy as an Italian citizen.
In “D”, a German resident asked to the Netherlands, to be treated as a Belgian.

35. Any restriction to trans-national operations is in principle inconsistent with the Treaty.

36. A.
different taxation of dividends or interests coming from abroad (Verkooijen (1999) – Lenz (2004) – Manninen (2004) – Comm./France (2004) – FII Group Litigation (2006))
different taxation of insurance contracts according to whether they are signed with resident or non resident companies (Safir (1998) – Skandia (2003))
different taxation of a subsidiary or a parent Company according to whether the parent company or the subsidiary is established abroad or not (ICI (1998), Metallgesellschaft (2001), St Gobain (1999))

37. thin capitalization rules different according to whether the lending shareholder of the subsidiary is established abroad or not…(Lankhorst – Hohorst (2002))
withholding tax (withheld by the customer of a non-resident artist (SCORPIO – 2006), or of a non-resident service provider (Comm. v. Belgium – 2006)
deductibility of losses from write-downs to the book value of subsidiaries less favourable if the subsidiary is established abroad.(REWE 2007)
deferral of taxation on capital gains arising from the sale of a residence conditioned on the purchase of a new residence on Swedish territory (Comm. v. Sweden (2007))

38. Illustration
Exit tax to be paid in case of transfer of domicile is illegal (HUGHES DE LASTEYRIE DU SAILLANT 2004) BUT NOT IF
tax is assessed on profits from a shareholding when residence is moved to another Member State
if the tax is differed until the shares are disposed of without any further conditions (for ex. : security)
If the tax finally levied is not higher than the tax which would have been levied on disposal within the territory (N – 07/09/2006).

39. MARKS & SPENCER (transfer of losses)
Advocate General
General rule : “prevent Member States from creating or maintaining in force measures promoting internal trade to the detriment of intra-Community trade” (§ 39)
In this case : “the refusal at issue in the present case constitutes an “exit restriction” which is characterised by unfavourable treatment of companies wishing to establish subsidiaries in other Member States”.

40. Judgement of 13/12/2005
« It (the exclusion of group relief) thus constitutes a restriction on freedom of establishment within the meaning of articles 43 EC and 48 EC, in that it applies different treatment for tax purposes to losses incurred by a resident subsidiary and losses incurred by a non resident subsidiary » (§ 34)

41. TEST CLAIMANTS THIN CAP GROUP (2007)
Thin capitalisation rules create an obstacle as resident subsidiaries are disadvantaged when their parent company is not resident (it is less attractive to create or acquire a subsidiary in this country).

42. EVOLUTION ?

43. Presumption of residence

44. Can national law decide that an individual is still resident despite having moved ?
VAN HILTEN (2006):
Mrs. VAN HILTEN, a Dutch citizen, left the Netherlands in 1988 and dies abroad in 1997
According to Dutch law, she is presumed to have maintained tax residency in the Netherlands (10 years);
Advocate General (July 2005)
No breach of EU law
ECJ (23/02/2006)
Transfer of residence does not involve financial transactions or transfers of property : therefore, nothing to restrict

45. Preliminary question
before deciding whether the exercise of the fiscal competence restricts transnational operations,
is there a fiscal competence at all ?
does the different or even disadvantageous treatment result from the application of a given national tax system or simply from disparities or allocation of the taxing power between different national tax systems ?

46. ACT GROUP LITIGATION (2006)
Should, on dividends paid by UK subsidiaries, individual shareholders of a non-UK-resident parent company be entitled to the same tax credit as the individual shareholders of a UK-resident parent company ?
NO as on outgoing dividends, no UK income is levied. There is therefore no UK income tax liability to extinguish with an imputation credit.
YES if for example under a DTC (or even unilaterally), the UK has or has kept the right to subject these dividends to UK income tax.

47. “Insofar as a Member State does not exercise tax jurisdiction over a non-resident tax payer, then it does not have to give loss relief.”
How to reconcile this with :
Marks & Spencer ?
Bosal Holding ?
REWE ?

48. KERCKHAERT-MORRES (2006)
Belgium law applies 25 % tax rate to all dividends received by Belgian residents, whatever their source but refuses to take into account the 15 % withholding tax levied on dividends in the Source State, France.
Advocate General : no restriction or indirect discrimination
because the effect of the combination of the avoir fiscal and the withholding tax in France is that Belgian resident shareholders finally keep more of a French-source dividend than from a dividend paid by a Belgian company
BUT ANYWAY

49. SO PLAIN DOUBLE TAXATION WOULD BE LEGAL !
even if it was not the case the disadvantage would not result from any breach of EC law by Belgium which does not “oblige home States to relieve juridical double taxation resulting from the dislocation of tax base between two Member-States” (§ 30)
SO PLAIN DOUBLE TAXATION WOULD BE LEGAL !

50. ECJ (November 2006)
Belgian law is perfectly consistent with Community law when it applies the same tax rate to all the dividends received by Belgian residents, whatever is their origin.
Belgian law is not due to take into consideration the prior foreign taxations; the juridical double taxation is then legal in Community law.
The Court did not even take into account that, in this particular case, the taxpayer had been granted a tax credit in France.
“… the adverse consequences… result from the exercise in parallel by two Member States of their fiscal sovereignty” (§ 20)

51. Double taxation convention
To decide whether there is a discrimination or a restriction, national law has to be considered as a whole, i.e. including the application by the Member State in question of a double taxation convention. (BOUANICH (2006))
In this case, Mrs. BOUANICH was disadvantaged by the Swedish legislation because she was a French shareholder of a Swedish company, but according to the DTC between Sweden and France, the tax regime provided for by Swedish law was giving another deduction possibility which could place Mrs. BOUANICH in the same tax situation as a Swedish resident, possibility to be checked by the national judge.

52. Very strict in accepting justifications
Member States have put forward 6 justifications :
Loss of income : unacceptable
Territoriality of tax : acceptable in theory and accepted in only one case
Non-residents are entitled to tax benefits elsewhere : unacceptable
Need to improve efficiency of tax audits : acceptable in theory and accepted in only two cases
Need to fight tax evasion or fraud : acceptable in theory and accepted once.
Tax coherence : acceptable in theory and accepted in only one case.

53. One 7th justification, even taken “together with others” appears in some recent cases : “the balanced allocation of the power to impose taxes between Member States”.

54. Loss of tax revenue (or « aim of avoiding an erosion of the tax base going beyond…mere diminution of tax revenue ») NEVER ! ICI (1998) ST GOBAIN (1999) DANNER (2002) SKANDIA (2003) BOSAL (2003) HUGHES de LASTEYRIE du SAILLANT (2004) ANNELIESE LENZ (2004) MANNINEN (2004)
But politically ?

55. Territoriality
The ECJ has closed in BOSAL (2003) and MANNINEN (2004) the door that had been slightly opened in FUTURA PARTICIPATIONS (1997).
MARKS & SPENCER (13/12/2005) “… the fact that it does not tax the profits of the non-resident subsidiaries of a parent company established on its territory does not in itself justify restricting group relief to losses incurred by resident companies.” (§ 40).

56. Anyway, non-residents have other advantages elsewhere. NO
Anyway, non-residents have other advantages elsewhere. NO ANNELIESE LENZ (2004) CADBURY SCHWEPPES (2006)

57. Increasing the effectiveness of fiscal supervision In principle YES

58. but never accepted (with two exceptions) because « Directive 77/799 concerning mutual assistance in the field of direct taxation provides adequate means… » or because a DTC enables a State to make all necessary checks (for example to avoid double deduction) SCHUMACKER (1995) BAXTER (1999) VESTERGAARD (1999) COMMISSION-FRANCE (2004)
CENTRO EQUESTRE (2007)

59. Exceptions
FUTURA PARTICIPATIONS (1997) for the obligation to keep the books of a branch according to the rules of the State of establishment of the branch.
SCORPIO (2006) for a withholding tax on foreign artists (but because Directive 2001/44 or a DTC did not organise mutual assistance in the field of income tax recovery).
FII GROUP LITIGATION (2006) perhaps for the free movement of capital with the third countries.

60. Preventing the risk of tax avoidance In principle YES

61. but only when the national legislation has the specific purpose of preventing wholly artificial arrangements to circumvent national tax legislation, “… a general presumption of tax avoidance or fraud is not sufficient to justify a fiscal measure which compromises the objectives of the Treaty…” COMM-FRANCE (2004) pt 27

62. what cannot be presumed for :
the establishment of a subsidiary abroad ICI (1998)
any situation in which a mother company, for any reason, has its seat abroad LANKHORST - HOHORST (2002)

63. the establishment of the mother company or of a subsidiary abroad
the establishment of the mother company or of a subsidiary abroad. XY (2002)
the transfer of a physical person’s tax residence outside the territory of a Member State Hughes de LASTEYRIE du SAILLANT (2004)
the fact that a foreign service provider is not registered COMM V. BELGIUM (2006)

64. MARKS & SPENCER
“It can be justified” [to prevent] such practices which may be inspired by the realisation that the rates of taxation applied in the various Member States vary significantly” (§ 50)

65. Compare
CENTROS (1999) “the fact that the company was formed in a particular Member State for the sole purpose of enjoying the benefit of more favourable legislation does not constitute abuse even if that company conducts its activities entirely or mainly in that second State”.
BARBIER (2003) “a Community national cannot be deprived of the right to rely on the provisions of the Treaty on the grounds that he is profiting from tax advantages which are legally provided by the rules in force in a Member State other than his state of residence”.

66. 2006-2007 CADBURY SCHWEPPES (ECJ) (British CFC rules)
THIN CAP GROUP LITIGATION (ECJ) (British thin capitalization rules)
COLOMBUS (AG) (German rule substituting the “imputation” to the “exemption” for incomes coming from countries with lower tax)

67. To look for the most advantageous tax system is a legitimate objective
43 EC protects any establishment provided the operations have a true economic substance (no mail box or screen companies)
no irrebuttable presumption of abusive practice
“artificial arrangements” “which do not reflect economic reality” can only be established on basis of OBJECTIVE elements (personnel, premises, equipment)
taxpayer cannot be forced to a negative or subjective evidence. He “must be given an opportunity, without … undue administrative constraints, to provide evidence of any commercial justification”

68. CADBURY SCHWEPPES UK CFC rules to be reviewed as
Applications
CADBURY SCHWEPPES UK CFC rules to be reviewed as
the only way to avoid their application is to demonstrate that the tax reduction was not the main purpose or one of the main purposes of the transactions concerned
the existence of tax motives may coexist with genuine economic activities, established by objective factors.

69. THIN CAP GROUP LITIGATION UK thin cap rules acceptable if
arm’s length principle applied (when the interest exceeds the commercial terms which the companies concerned would have accepted if they were not in the same group)
the taxpayer may provide without undue administrative constraints, evidence of any commercial justification;
the requalification is limited to the part of the payment in excess of the arm’s length rule.

70. COLOMBUS (AG)
German rules to be reviewed as they create an irrebuttable presumption
If there were no such presumption,
real physical installation in Belgium
compliance with the employment requirements of Belgian law for coordination centers
should be sufficient;
the fact that the activities be only financial being insufficient to prove the contrary.

71. Cohesion of the tax system always invoked by Member States … because the ECJ accepted it … once in 1992… (BACHMANN)
[Belgian law did not allow the deduction of life insurance premiums paid abroad. The Belgian system gave the choice of either deducting premiums but taxing future benefits or not deducting premiums and having future benefits exempted. The cohesion of the Belgian system required the certainty to tax the benefits if the premiums had been deducted, what was not the case if the benefits were paid abroad.]

72. but systematically refused it afterwards because the concerned national system did not fulfil the conditions imposed by the definition of the ECJ Cohesion of a tax system may only be invoked when :
One taxpayer only is concerned (difficult to meet this criterion for groups of companies, when parent companies and subsidiaries are concerned) ICI (1998) METALLGESELLSCHAFT (2001) BOSAL HOLDING (2003) ANNELIESE LENZ (2004)

73. One taxation is concerned (not possible to « compensate » corporation tax and income tax or corporation tax and wealth tax) ASSCHER (1996) BAARS (2000) VERKOOIJEN (2000) ANNELIESE LENZ (2004)

74. There is a direct link between a tax relief and a taxation,
There is a direct link between a tax relief and a taxation, DANNER (2002) BOSAL (2003) LANKHORST-HOHORST (2002) SKANDIA (2003)

75. COMM VS DANEMARK AG 01/06/2006 coherence in principle (as in Bachmann)
disproportionate as even the taxpayers who do not move are concerned by the non-deductibility of the premiums paid abroad and are still taxed on the benefits of the insurance contract.

76. ECJ (30/01/2007)
In that regard, the factor liable adversely to affect the cohesion of the Danish tax system is to be found in the fact that the transfer of the residence of the person concerned occurs between the time of payment of contributions to a pension scheme and that of payment of the corresponding benefits, and less in the fact that the pension institution is in another Member State. (§ 71)
It follows that, by refusing in general to grant a tax advantage in respect of contributions paid to a pension institution established in another Member State, the contested legislation cannot be justified by the need to guarantee the cohesion of the tax system (§ 74).

77. If under a double taxation convention, the cohesion of the tax system is realised at the level of the global relationships between the two countries, the Member States have to wave the right to ensure it at the individual level WILLOCKX (1995) XY (2002) WEIDERT-PAULUS (2004)

78. But for 2 Advocates General (in Maninnen and Marks & Spencer)
But for 2 Advocates General (in Maninnen and Marks & Spencer) these criteria are “OVER-RIGID”
“to relax [them],… I propose to revert to the criterion of the aim of the legislation at issue”.
(“useless” : THIN CAP GROUP LITIGATION (AG 2006))

79. MANINNEN
MARKS & SPENCER
Objective of the legislation
to avoid double taxation of the same profits
to ensure fiscal neutrality of the effects of the creation of the group of companies
the legislation at issue
does not avoid the double taxation of the profits distributed by a Swedish company (cfr FOKUS Bank)
refusing systematically any transfer of losses of foreign subsidiaries does not ensure the neutrality
and if the Member State says that it cannot charge to tax the profits of the Swedish company or of the foreign subsidiaries ?
this objective (to avoid a reduction of tax revenues) is not admissible (cfr FOKUS BANK) (and BACHMANN ?)
the State would then have objectives (protection of the revenue or favoring groups only active on its territory) contrary to EC law

80. two remaining questions :
If it is necessary to allow NON-RESIDENT SUBSIDIARIES to transfer losses if RESIDENT SUBSIDIARIES are allowed to,
two remaining questions :
“double dipping” ? NO, according to the Advocate General. Why ?
“coherent” with the objective of “neutrality” (Advocate General)
The “only once” rule does not create any obstacle to transnational activities (Gerritse (2003))
“loss shopping” ? PRIORITY TO THE STATE OF ESTABLISHMENT if “equivalent” system (carry forward ? transfer ?) (legally ? in fact ?) (cfr the priority to the State of residence given by the Court in the cases Gerritse (2003) – De Groot (2002))

81. Judgement Marks & Spencer of 13/12/2005
Evolution ? Coherence : NOTHING Risk of tax avoidance and two justifications with a new name

82. « balanced allocation of the power to impose taxes between the different Member States » (§ 44 to 46) Is it not simply another name for the protection of tax revenue ?
« risk of double use of losses » (§ 47 and 48)
« risk of tax avoidance » It can be justified “[to prevent] such practices which may be inspired by the realisation that the rates of taxation applied in the various Member States vary significantly” (§ 50) We are very far from “wholly artificial arrangements whose purpose is to circumvent or escape national tax law”.

83. That being said, these three justifications, justify the only measures taken to prevent :
the double dipping
(as far as the risk of double use of losses is concerned “it must be accepted that Member States must be able to prevent that from occurring” (§ 47)).
the loss shopping
(« to give companies the option to have their losses taken into account in the Member State in which they are established or in another Member State would significantly jeopardize a balanced allocation of the power to impose taxes between Member States … » (§ 46))
(as far as the risk of tax evasion is concerned, … “the possibility of transferring the losses incurred by a non-resident company to a resident company entails the risk that within a group of companies losses will be transferred to companies established in the Member States which apply the highest rates of taxation and which the tax value of the losses is therefore the highest » (§ 49).)

84. The conclusion ought to have been :
the measures to prevent double dipping : justified
the measures to prevent loss shopping : justified
the rest of the British legislation, i.e. the prohibition of group relief when non-resident subsidiaries are concerned even when there is no risk of double dipping or loss shopping : not justified

85. About the hard core of the UK legislation, the Court does not say anything. Instead, it reasons on the basis of proportionality : STRANGE. Indeed,
when the Court analyses the proportionality of a measure, it is normally because this measure is in principle justified, what the Court does not say here (and, in any case, it is not possible to see which justification could be invoked)
or proportionality is becoming in itself a justification (with the risk of a case law which becomes less foreseeable, more dependant on individual cases and finally less objective).

86. N (Advocate General 30/03/2006)
§ 92 In Marks & Spencer, the Court recognised that preservation of the allocation of the power to impose taxes between Member States constituted a legitimate purpose which could justify restrictions on freedom of establishment. In that context, the principle of territoriality… can be the determining principle on the basis of which the Member States allocate the power to impose taxes.

87. REWE (2007)
“balanced allocation of the taxing power of the different Member States
does note allow a parallelism between duty to accept losses and right to tax the profits (AG 2006).
only acceptable when linked with a risk of abuse of law (“loss shopping”) (as in Marks & Spencer) (AG 2006 and ECJ 2007, § 41)
cannot in itself justify a Member State systematically refusing to grant a tax advantage to a resident parent company on the ground that the company has developed a cross border economic activity which does not have the immediate result of generating tax revenues for that State (ECJ § 42)

88. OY AA
Finnish law accepts deductibility of intra-group financial transfers only between Finnish companies.
AG (12/09/2006)
justified by the combination of the three Marks and Spencer arguments (including the risk of “double non imposition”).
proportionate (!) even if the transferred amounts are taxed in another Member State.

89. In four cases of 2006-2007 CLT-UFA RITTER-COULAIS KELLER HOLDING FII GROUP LITIGATION REWE,
the Court comes back to its previous reasoning on the justifications.

90. Coherence : KELLER HOLDING (2006)
§ 43 “the legislation at issue… does not establish any relationship between the deductibility of the financing costs relating to the shareholdings of the parent company and the profits in respect of which the indirect subsidiary is liable to tax. Moreover, the profits realised by that indirect subsidiary which enabled it to distribute dividends are subject to corporation tax in Austria, just as the profits of an indirect subsidiary which has its registered office in Germany are taxable in that Member State, since the place of establishment of the parent company is of no importance in that regard”.

91. Coherence : CLT UFA (2006)
§ 27 “in respect of a German subsidiary of a Luxembourg company, it must also be added that the reduced tax rate which applies to the profits of such a subsidiary, in relation to the rate applicable to the profits of a branch, is not compensated for by applying a higher tax rate to the profits of the Luxembourg parent company”

92. Coherence : RITTER COULAIS (2006)
§ 40 “it is sufficient to state that while the German tax system takes into account positive income deriving from the use of a dwelling in another Member State for the purposes of determining the rate of taxation, fiscal coherence is not a suitable justification on any ground for refusing to take into account for the same purposes, income losses of the same kind arising in the same State”.

93. Coherence : FII GROUP LITIGATION (2006)
§ 93 “nor can the difference in treatment be justified by the need to preserve the cohesion of the tax system in place in the UK on the basis of a direct link between the tax advantage made available, namely the tax credit granted to a resident company receiving dividends from another resident company, and the corresponding tax liability, namely the ACT [Advanced corporation tax] paid the latter when it makes the distribution. The need for such a direct link must in fact lead to the same tax advantage being granted to companies receiving dividends from non-resident companies, since those companies are also obliged to pay corporation tax on distributed profits in the State in which they are resident”.

94. Coherence : REWE (2007)
§ 64 “since the German Government has not established the existence of a connection between the immediate deductibility, for a resident parent company, of losses stemming from partial write-downs to the book value of shareholdings in subsidiaries and the tax exemption for dividends received from those subsidiaries, the argument that it would be justified by the need to preserve the coherence of the German tax system in not granting advantages to German-resident parent companies in respect of losses relating to their foreign subsidiaries, because the dividends in not paid by those subsidiaries are exempt from tax in Germany pursuant to double taxation conventions, cannot be accepted”.

95. Territoriality : KELLER HOLDING (2006)
§ 44 “that legislation cannot be regarded as an application of that principle [of territoriality] since it excludes the deductibility of finance costs incurred by a parent company subject to unlimited tax liability in Germany and receiving dividends from an indirect subsidiary established in Austria by reason of the fact that they are exempt from tax in Germany whereas dividends paid to the same parent company by an indirect subsidiary subject to unlimited tax liability in Germany and having its registered office in that Member State also benefit in fact by means of the method of offsetting the tax paid by the distributing company, from such an exemption”.

96. Territoriality : REWE (2007)
§ 69 “such a principle does not in itself justify the Member State of residence of the parent company refusing to grant an advantage to that company on the ground that it does not tax the profits of its non-resident subsidiaries”.

97. CONCLUSION
As well to decide whether there is a forbidden restriction or not as to decide whether a restriction is or not justified, new weight is being given in the case law
to the competence of the Member States to allocate among themselves the fiscal competence (and the allocation of the fiscal competence comes before the exercise of this competence) (ACT GROUP LITIGATION – 2006) (KERCKHAERT-MORRES –2006)
to a balanced allocation of the power to impose taxes between the different Member States (MARKS & SPENCER)(N – AG 2006)(OY – AG 2006).