Free Movement and Taxation of Companies Piet Van Nuffel Court of Justice of the EC, Katholieke Universiteit Brussel 15 November th Annual Conference on EU Law, Kranjska Gora

Taxation: national competence…  Allows a Member State to perform State functions  Competence to be exercised Unilaterally Through conventions with other States

….but limited by EC law!  Harmonisation measures (Art. 94 EC) Mutual assistance amongst tax authorities (Directive 77/779) Grouping of companies (Directive 90/434, Directive 90/435, Convention 90/436)  In the absence of harmonisation: Treaty provisions on free movement Right of Establishment (Art. 43 EC) Free movement of capital (Art. 56 EC)

First « intrusion »: Avoir fiscal, 1986 Case 270/83, Commission/France  Distribution of dividends: tax credit granted to shareholders, including French companies but not branches/agencies of foreign companies  Such branches/agencies are subject to French corporate tax in the same way as French companies  Held: restriction of the right to set up a secondary establishment  Even though absence of harmonisation

« If you tax, respect EC law! » « although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with Community law»

Free movement; prohibition of discrimination  Prohibition of direct and indirect discrimination Less favourable treatment if company is not resident Less favourable treatment if parent/daughter company is not resident  Presupposes comparable situations Resident = non-resident? Cross-border transaction = internal transaction?

Different treatment to be justified?  Some grounds are not legitimate Lack of Community harmonisation Prevent reduction of tax revenue  Legitimate objectives, to be attained in a proportionate way Effectiveness of fiscal supervision Fight against fraud/ tax evasion (Preserve cohesion of tax system)

Case studies  Taxation of profits earned  Taxation of profits distributed (dividends) Outbound dividends Inbound dividends

Taxation of Profits Earned  No less favourable treatment for companies with foreign parent/daughter No higher tax rate if foreign parent Case C-311/97, Royal Bank of Scotland Deduction for financing costs not to be excluded if related to foreign (grand)daughter Case C-471/04, Keller Holding → if situations are comparable!

Taxation of Profits Earned (II)  Inclusion of profits of controlled foreign company in tax base of parent Case C-196/04, Cadbury Schweppes  Requalification as dividends of interests paid to parent Case C-524/04, Test Claimants in the Thin Cap Group Litigation → allowed but only in so far as to prevent wholly artificial arrangements which do not reflect economic reality

Taxation of Dividends: Outbound Outbound dividends: no discriminatory withholding tax  No withholding tax solely on distribution to foreign parent Case C-170/05, Denkavit Internationaal & Denkavit France

Taxation of Dividends: Inbound Inbound dividends: non- discriminatory application of systems to avoid double taxation  Relief cannot be granted solely to national dividend Case C-446/04, Test Claimants in the FII Group Litigation

Taxation of Dividends: Inbound (II)  No obligation to avoid double taxation… Case C-513/04, Kerckhaert-Morres Foreign and national dividends taxed at 25% Foreign dividends may be subject to foreign withholding tax, for which no tax credit But shareholder must bear consequences of parallel exercise by Member States of tax power

Conclusion  EC law respects Member States power to tax  If a Member States exercises power to tax, it should do so without discriminatory restrictions  Parallel exercise of tax power does not as such go against EC law: EC law does not resolve conflicts of law in taxation matters