Volume 8, Number 1
The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.
The European Court of Justice
By John Graham, FCA, TEP
Graham, Smith and Partners (Amsterdam)
Would you be surprised to find that, even if you do not live in the European Union, decisions of the European Court of Justice can impact your taxes? In today's global economy, international tax laws must be considered when investing, doing business internationally or working abroad. Even if all your activities are in your home country, you will likely find your own government is changing its domestic tax laws to remain competitive globally. It is, therefore, interesting to consider some recent decisions of the European Court of Justice and how they are impacting tax laws.
EU law protects the ability of goods, services, capital, and labour to move freely within the EU.
Laws of individual EU member countries must uphold the following four "fundamental freedoms":
- The free movement of goods;
- The free movement of services and freedom of establishment;
- The free movement of persons (and citizenship), including free movement of workers; and
- The free movement of capital.
The European Court of Justice (ECJ) deals with cases, including tax cases, where one of these fundamental freedoms is breached. The cases have affected almost all taxes including value added tax, withholding tax, corporate income tax, personal income tax and inheritance tax.
One recent case concerned German inheritance tax. Under German law, certain assets (such as agricultural land and forests) in an estate could have a lower value if the assets were located in Germany than if the same assets were located in a different EU country. The German government said that the objectives were to maintain jobs in agricultural areas and prevent the disadvantageous breakup of farmlands. This was held to be in breach of the free movement of capital. ECJ held that the benefit of a reduced assessment should also be extended to similar property in other EU countries.
Germany was also on the wrong end of another case that concerns a difference in the valuation of an interest in a domestic partnership, compared with a foreign partnership. The value of the domestic interest in a partnership is effectively based on net asset values, rather than market values. On the other hand, the tax authorities generally take market value rules into account when valuing an interest in a foreign partnership. It is arguable that these differences in valuation methods are a restriction on the freedom of establishment. It has been held that a restriction on the freedom of establishment is prohibited, even if it is "of limited scope or minor importance".
Another case has been referred to the ECJ against Germany, Estonia and the Czech Republic for taxing dividends paid to foreign pension funds more heavily than those paid to domestic pension funds. It is considered that this is probably a restriction on the free movement of capital and possibly also on the freedom to provide services.
Finland has been taken to the ECJ by the European Commission for excluding public legal aid offices from the scope of VAT. Since these offices compete with the legal aid provided by private lawyers, it was argued that the exemption can give rise to a distortion of competition and, therefore, should be subject to VAT.
The Netherlands lost a case concerning dividends paid to a company established in another member state. It had introduced legislation to comply with the EU Parent-Subsidiary Directive, which allowed for a zero rate of withholding tax if the parent owned at least 25% of the Dutch company. However, for domestic purposes, a dividend received by a Dutch company which had a shareholding of at least 5% in another Dutch company, was not subject to dividend withholding tax. The ECJ held that the same percentage should be applied for shareholdings by companies in other EU countries. The legislation has since been amended.
France levies a tax of 3% in certain cases where a company with French real estate is owned by a non-resident company. The tax can be avoided, provided somewhat burdensome reporting requirements are complied with. French companies are not required to provide such reporting. This is a possible breach of the freedom of movement of capital. The ECJ has yet to decide on this.
Tax amnesties can also fall foul of the ECJ. A case has recently been taken to the ECJ with respect to Portugal, which in 2005 had a tax amnesty. The amnesty allowed people to regularise their position at a preferential tax rate if they invested in Portuguese Government bonds. In the view of the European Commission, this violates the free movement of capital, since it encourages people to invest in assets in Portugal in preference to other assets. It would seem quite likely that the Commission will win this case.
Sometimes the taxpayer does not win. The ECJ had a somewhat technical case to decide with respect to the merger directive, which allows certain types of cross-border mergers in the EU to be tax-free. The directive provides for an anti-abuse clause. The ECJ held that domestic legislation could be applied here.
New cases are being sent to the Court on almost a daily basis. It is worth checking with your tax advisor to see what cases are in progress and how you may be affected, especially when doing business in the EU.