Institute for Austrian and International Tax Law Dr Mario Tenore Vienna University of Economics and Business Brussels, 28 September 2009 La tassazione dei dividendi transnazionale in Europa Taxation of cross border dividends in Europe

Institute for Austrian and International Tax Law The content of my thesis  Taxation of cross-border dividends under the general tax law principles  Taxation of cross-border dividends under international tax law principles  Taxation of cross-border and European law – Primary Law and secondary Law  Taxation cross-border dividends from an Italian perspective.

Institute for Austrian and International Tax Law Taxation of cross-border dividends under OECD MC  Why do we go into art. 10 OECD MC? – Role of art. 7(7) and 10(4) OECD MC  Art. 10 OECD MC – Shared allocation of taxing rights between the Contracting States – General Issues: consistency within the Model and particularly with art OECD MC – Technical Issues: definition of dividends

Institute for Austrian and International Tax Law Taxation of cross-border dividends under OECD MC Art. 10.1: bilateral reach of the provision Art. 10.2: (il)limited taxation by S State Art. 10.3: definition  3 parts (interrelationship) Art. 10.4: PE proviso Art. 10.5: denial of extraterritorial taxation

Institute for Austrian and International Tax Law Taxation of cross-border dividends under OECD MC The reading of paragraphs 1 and 3 suggests that three elements are required: – a cross-border flows of dividends (para. 1); – the payment of such dividends by a company which is resident of a contracting State (para 1); – the income to be qualified as “dividends” according to the definition provided in article 10(3) OECD MC – N.B: If either of these elements is not met, Art. 7 (Business Profits) will apply

Institute for Austrian and International Tax Law Taxation of cross-border dividends under OECD MC Art. 10(3): Definition of dividends The term “dividends” as used in this Article means -income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares - - -or other rights, not being debt-claims, participating in profits, -as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

Institute for Austrian and International Tax Law Taxation of cross-border dividends under OECD MC –Entrepreneurial risk (commentary on art. 10 OECD MC) –No holding requirement in the definition –Holding requirement in art. 10.2(a): aimed at the application of the reduced rate (5%) –Residual part of the dividend definition: “….income from other corporate rights which is subjected to the same taxation treatment as income from shares” –Usufruct right? –Securities loan agreement (manufactured dividends)? –Comparison with the income covered by the Parent Subsidiary Directive

Institute for Austrian and International Tax Law OECD MC vs. Parent Subsidiary Directive –Comparison with the income covered by the Parent Subsidiary Directive –Les Vergers du Vieux Tauves SA (Case C-48/07), 22 December 2008: article 4(1) of the Directive does not apply in the case of a usufruct agreement as the position of the parent in respect of its subsidiary “is not such as to endow it with the status of the shareholder, as that position results solely from the right of usufruct that has been transferred to it by the owner of the shares in the capital of the subsidiary..:”.

Institute for Austrian and International Tax Law OECD MC vs. Parent Subsidiary Directive Indispensable status of shareholder: holding in the capital of the subsidiary –Reduce the scope of avoidance schemes based on usufruct agreements –Manufactured dividends? –Consistency with the aim of eliminating economic double taxation? –(re) qualified income? E.g. thin cap rules –Impact of Primary Law: no discriminatory situations are allowed

Institute for Austrian and International Tax Law Taxation of cross-border dividends the Parent Subsidiary Directive Art. 2: subject to tax requirement? –Subjective tax requirement –with no possibility of being exempt: domestic law or Treaty law exemption? –Treaty law exemption should not be taken into account: treaty law exemption is “objective” –Treaty law exemption looks at the income from a specific source (bilateral scope of the tax treaties) –Reference to treaty law is not made with respect in 1.2 c)

Institute for Austrian and International Tax Law Taxation of cross-border dividends the Parent Subsidiary Directive Dual resident situations involving third countries –Dual resident parent company –Dual resident subsidiary company If the EU country is the loser country, both scenarios are excluded from the Parent Subsidiary regime –However…… –EU Parent company with a PE in a third country (PE income exempt) –EU Subsidary company with a PE in a third country (PE income exempt)

Institute for Austrian and International Tax Law Taxation of dividends and in the case law European Court of Justice TaxedExempt Taxed Comparable (Fokus B.) Not Comparable (ACT GLO) Exempt Comparable (Denkavit) OK Resident Shareholders Non-Resident Shareholders

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach The Court used the pan-european approach in some cases (Manninen, Denkavit, Amurta) but rejected it in many others (e.g. Kerckhaert, FII GLO) Why is that? Source State cases Cases where there is a breach of EU law (e.g. in Kerckhaert and FII the ECJ found no breach)

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach Three types pf pan-european approach based on the same treatment (first type: M&S) based on a substantially similar treatment (second type: Manninen) based on the application of a DTC or on the interaction between domestic law (third type: Denkavit and Amurta)

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach First type pan-european approach: M&S: State of residence perspective Interaction of domestic law: same rules which eliminate the discrimination Pan-european approach used at the level of justifications

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach Second type pan-european approach: Manninen: State of residence perspective Pan-european approach used at the level of comparability Interaction of domestic law: in the other State the discrimination is (partially eliminated)

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach Third type pan-european approach (I): Denkavit: State of Source used at the level of comparability based on the application of a DTC is a DTC always relevant to ascertain the existence of a breach? Bouanich (para. 46)

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach Third type of pan-european approach (II): Amurta: State of source Similar to Denkavit but based on the interaction between national law Both AG and the Court denied the application of the second type pan-european approach (debatable!)

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach Third type of pan-european approach (III): Amurta: State of source perspective Difference with DTC law: usually DIE eliminated by the State of Source

Institute for Austrian and International Tax Law Pan-European approach vs. unilateral approach Procedural obstacles in the application of the third type pan-european approach: The burden of proof is on the taxpayer What if the credit is not effectively granted Partial credit? Absence of tax capacity (e.g. losses in the State of residence) Cash flow disadvantages?

Institute for Austrian and International Tax Law Grazie, Thanks, Merci….. Dr. Mario Tenore, LL.M Vienna University of Economics and Business Dr. Mario Tenore, LL.M Vienna University of Economics and Business