1. Highlights in this edition
CJ judgment on the compatibility of Polish tax exemption applicable only to externally managed collective investment funds with the free movement of capital (F S.A. v Dyrektor Krajowej Informacji, Case C18/23)
On 27 February 2025, the CJ delivered its judgment in the case F S.A. v Dyrektor Krajowej Informacji (C-18/23). The case deals with the question of whether the free movement of capital must be interpreted as precluding the legislation of a Member State which grants a tax exemption only to externally managed non-resident investment funds while not granting such exemption to internally managed investment funds.
The case concerned F S.A. (F Fund), a closed-end investment fund established in Luxembourg and managed internally by a board of directors. F Fund sent a request for an advanced tax ruling to the Polish tax authority regarding its qualification for an exemption provided for under Polish domestic law. F Fund was of the opinion that the income which it generated in Poland would benefit from such exemption. However, the Polish tax authority considered that such exemption was not applicable because the applicant was an internally managed investment fund and that, under Polish national law, only externally managed investment funds can take advantage of the tax exemption. This on the basis that an essential condition for benefiting from the aforementioned tax exemption is that the investment fund is established in accordance with the Polish Law on investment funds, which foresees that no investment funds managed internally can be established. F Fund brought an action against this decision before a Polish Regional Administrative Court. Having doubts as to whether the Polish law is compatible with the fundamental freedoms and the Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITS), this domestic court referred the case to the CJ. In essence, it asked the Court whether Article 63 TFEU must be interpreted as precluding the aforementioned national legislation under which resident externally managed investment funds are exempt from corporate tax and non-resident internally managed investment funds are not.
In its judgment, the CJ assessed whether the Polish rules lead to a discrimination with regard to the free movement of capital. It is therefore relevant to note that, under Polish law on investment tax, no investment funds managed internally (that is to say, by their own bodies) can be established and, consequently, the Polish tax exemption on corporation tax applies only to externally managed investment funds (e.g., managed by an independent management company). As a result, all Polish investment funds benefit from the tax exemption and only externally managed collective investment undertakings from other Member States do not meet this condition and thus are ineligible for the tax exemption.
In the Court's view, the condition of being externally managed establishes a difference in treatment, not on the basis of the State of residence of the collective investment undertaking, but on the basis of its management form. Relying on its case law and understanding that even a differentiation based on objective criteria may de facto place cross-border situations at a disadvantage, the CJ found that the free movement of capital would be rendered ineffective if a non-resident collective investment undertaking (which adopted a management form authorised by the legislation of the Member State in which it is established and which operates in accordance with that legislation), were to be deprived of a tax advantage applicable to income derived from its investment in Poland solely on the ground that its management form does not correspond to the form required for collective investment undertakings established in that latter Member State. On such basis, the CJ concluded that the Polish legislation introduces a condition which is liable to deter non-resident collective investment undertakings from investing in Polish shares and bonds, thus restricting the free movement of capital.
The CJ continued by noting that differences in treatment are allowed only if they do not constitute arbitrary discrimination or a disguised restriction and concern situations that are not objectively comparable or are justified by an overriding public interest.
Reflecting on the objectives of the Polish legislation, and the requirement of an external management form (which the Polish government asserted is to mitigate the risk associated with the investments), the Court focused on determining the specific objective of the corporate tax exemption. In this regard, it noted that the referring court did not describe such objective and should determine it. Furthermore, it stated that - although the referring court reaches the conclusion that that exemption is intended to avoid double taxation of income derived from investments - the management form (internal or external) does not affect this objective, as it depends on the tax regime applied to the income received and distributed. The CJ further argued that the different levels of risk associated with the management forms of collective investment undertakings do not justify treating them differently for tax exemption purposes. Thus, the Court found that both internally and externally managed funds are in objectively comparable situations regarding the tax exemption.
Finally, the CJ assessed whether there may be an overriding reason in the public interest to justify the restriction to the free movement of capital. In this regard, the Court first noted that an objective of protecting investors may, in principle, constitute an overriding reason in the public interest, capable of justifying a restriction on the free movement of capital. However, when ascertaining whether the identified restriction on the free movement of capital is suitable for securing, in a consistent and systematic manner, the attainment of the objective which is pursued by the Polish legislation, the Court found that, first, the Polish Government failed to explain how granting the tax exemption to a non-resident internally managed fund would jeopardise the objective of protecting investors as pursued by the national authorities. Second, the Court considered that it cannot be inferred that a less favourable tax treatment of internally managed funds (in the form of a refusal to grant a tax exemption) makes it possible to protect investors against investments made in such funds. On such basis, the Court concluded that the Polish tax measure cannot be considered appropriate (suitable) for attaining the intended objective of protecting investors. The Court rejected the argument which claimed that the Polish legislation was also intended to prevent abuse on the basis that no explanation nor link was explained by the Polish government between the management form of a collective investment fund and a possible risk of abuse.
On such basis, the CJ concluded that Article 63(1) TFEU must be interpreted as precluding legislation of a Member State which provides that only a collective investment undertaking managed by an external entity which carries on its business on the basis of an authorisation issued by the competent financial market supervisory authorities of the State in which that entity has its registered office, may benefit from the exemption from corporation tax in respect of income derived from investments made by that undertaking, and which, therefore, does not grant such an exemption to internally managed collective investment undertakings constituted in accordance with the legislation of another Member State, where the law of the first Member State authorises only the creation of externally managed collective investment undertakings.
VAT in the Digital Age: EU Parliament approval
In plenary session on 12 February 2025, the European Parliament approved the ViDA proposal. The formal adoption of the ViDA proposal by the European Council is expected to take place in March 2025.
The ViDA proposal focuses on improving VAT efficiency, minimising VAT fraud and reducing foreign VAT registration obligations. Thereto, the new rules will introduce digital reporting requirements for cross-border transactions, require platforms to pay VAT on short-term accommodation rental and passenger transport services and will expand existing VAT simplification schemes to minimise foreign VAT registration obligations for businesses.
The measures introduced in the ViDA proposal will impact all businesses, particularly those carrying out cross-border transactions and platform companies. Businesses will have to amend their invoicing and VAT reporting processes. Businesses will further have to assess whether their foreign VAT registrations are still required after the implementation of ViDA proposal. The ViDA proposal also introduces new obligations and liabilities for platforms that facilitate supplies of goods. Businesses offering passenger transport by road and short-term accommodation rental through platforms and platforms that facilitate these services will also have to apply new VAT rules.
For more information about ViDA and its main elements, please see our dedicated web post on this topic.
European Commission publishes Clean Industrial Deal
On 26 February 2025, the European Commission published its Communication on the Clean Industrial Deal. The aim of the initiative is to boost European industrial competitiveness and support decarbonization. According to the Commission's work programme, this includes the development of a new State Aid Framework to accelerate the roll-out of renewable energy, strengthen industrial decarbonisation and ensure sufficient manufacturing capacities for clean tech.
In the Communication, the European Commission notes that tax policies are a key incentive to reach the objectives of the Clean Industrial Deal and they should not give fossil fuels an advantage over clean energy. It further notes that the Commission will recommend that Member States support a clean business case by means of their corporate tax systems. In this regard, it mentions that concrete measures could include: (i) shorter depreciation periods for clean technology assets, allowing businesses to quickly write off costs and benefit from tax incentives that offset high initial investments; and (ii) the use of tax credits for businesses in strategic sectors for the clean transition, to make it more financially attractive to invest in decarbonised practices.
The Communication further mentions that, to the extent such measures involve State aid, the new State aid framework will integrate these instruments in its compatibility rules. Moreover, it mentions that the Commission will simultaneously take further actions to scale down and phase out fossil fuel subsidies (e.g., in the context of the European Semester 2025). Finally, it notes that the Commission will propose a 28th legal regime, which will simplify applicable rules and facilitate growth and investment in new innovative companies.
The recommendations to Member States regarding tax incentives and measures are scheduled to be issued in the second quarter of 2025.
European Commission publishes EU Competitiveness Compass
On 29 January 2025, the European Commission published a Communication presenting the EU Competitiveness Compass, which is the first major initiative of this Commission's mandate providing a strategic framework aimed at enhancing the EU's economic dynamism and competitiveness.
The Competitiveness Compass outlines the EU's strategy to enhance competitiveness through three main pillars: (i) closing the innovation gap, (ii) creating a joint roadmap for decarbonisation and competitiveness, and (iii) reducing excessive dependencies while increasing security. The three pillars are further complemented by five horizontal enablers to reinforce competitiveness across all sectors. This includes a proposal for a harmonized set of EU-wide rules (i.e. the 28th legal regime), covering aspects of corporate law, insolvency, labour, and tax law, to create a more favourable business environment for innovative companies.
The Commission also emphasizes the importance of a flexible and supportive State Aid framework to encourage investment in decarbonization, while avoiding market distortions. Member States are encouraged to ensure that their tax systems, including depreciation rules and tax credits, support investments in clean production technologies. In addition, the review of the CBAM will analyse the possible extension of its scope to further sectors and downstream products, aiming to prevent carbon leakage and promote global carbon pricing.
To mobilize private investment, the Commission will present a strategy on a Savings and Investments Union, which includes measures to remove taxation barriers to cross-border investment and promote the EU's securitization market.
The Competitiveness Compass also highlights the need for better coordination of policies at both EU and national levels to maximize impact and ensure sustained economic growth. This comprehensive approach aims to position the EU as a leading global investment destination, fostering innovation, competitiveness, and sustainable prosperity.
European Commission publishes its Work Programme for 2025
On 11 February 2025, the European Commission published its Work Programme (WP) for 2025 which lists the most important legislative initiatives that the Commission plans to take in the course of the current year. The WP also includes plans to withdraw pending legislative proposals, to review existing EU legislation and to maintain and allow the due course of the legislative procedures for certain proposals.
Regarding initiatives in the field of (direct) taxation, the following elements are worth mentioning. According to its Annual plan for evaluations and fitness checks, the Commission is planning to finalize the evaluation of the Anti-Tax Avoidance Directive (ATAD) by the fourth quarter of 2025. The goal of the evaluations and fitness checks is to simplify, consolidate and codify the EU acquis and find opportunities to cut costs.
Furthermore, the Commission has withdrawn: (i) the Directive on taxation of interest and royalty payments between associated companies in different Member States, (which was deemed obsolete due to the adoption of the Minimum Taxation Directive); and (ii) the proposed Codification of the Directive on administrative cooperation in taxation (DAC) (as a new codified proposal will be tabled).
Conversely, the Commission decided to keep and continue advancing the legislative procedure for the following Directive proposals: DAC9, BEFIT, HOT, DEBRA, Unshell, Digital Taxation package (i.e., Digital Services Tax and taxation based on Significant Digital Presence and Financial Transaction Tax (FFT). Finally, the WP includes a Communication on Implementation and Simplification, which sets out how the Commission plans, over the next five years, to make implementation of EU rules easier in practice, and to reduce administrative burdens and simplify EU rules. No specific taxation measures are mentioned in this Communication.
Hoekstra's views on key priorities and measures of the European Commission in the field of taxation
On 6 February 2025, the subcommittee on Tax Matters (FISC) of the European Parliament hosted an exchange of views with the EU Commissioner responsible for taxation, Wopke Hoekstra. During this exchange of views, Hoekstra discussed key priorities of the EU Commission in the field of taxation, with a focus on upcoming initiatives and strategic goals. The first topic of discussion was the recent announcement that the United States will pull out of the OECD's Pillar Two agreement. In this respect, Hoekstra emphasized that global tax issues require global solutions, and that the European Union remains committed to the obligations it has undertaken. Hoekstra remarked that it is regrettable that the United States denounced the OECD Global Tax Deal. However, he noted that the European Union will not deviate from its course. Furthermore, he indicated that, by April 2025, the European Union will meet with OECD representatives to discuss a coordinated response, and that consultations with Member States are also envisaged in this respect. In addition, he highlighted that the European Union will seek opportunities to engage with the US administration on Pillar One and Pillar Two. Regarding the question of whether the EU would support a permanent safe harbour for Pillar 2, Hoekstra reportedly noted that 'Our approach and our line forward is clear, but we're open-mindedly going to have that conversation.'
In addition, Hoekstra stated that while the EU wants to avoid trade wars, it will not remain passive. He further stated that the EU's stance on digital services taxes (DSTs) is unchanged, viewing it as a fairness issue as digital platforms are highly profitable and part of a growing economy. Hoekstra further noted that he is uncertain whether bringing those companies into the scope of taxation will succeed at the international level, the European level, or the Member State level. He is also uncertain whether there is enough room for a European-level solution or if Member States will implement their own DST regimes with national variations.
Other topics (and the main takeaways) from Hoekstra's discussions at the EU Parliament were the following:
- The Commission has three (3) main priorities: green transition, competitiveness, and tax systems that are simple, equitable, and designed to prevent fraud.
- The Clean Industrial Deal, which the Commission presented on 26 February 2025, will include some tax measures. (e.g. immediate expensing and accelerated depreciation to encourage businesses to invest in clean tech production) and an update to the EU State Aid framework (see below),
- The Commission will explore ways of streamlining the VAT reporting scheme for payment service providers (PSPs)
- The Commission is working on a simplification of the Carbon Border Adjustment Mechanism (CBAM), which was published on 26 February 2025 (see below).
- The Commission will propose a 28th legal regime for corporate innovation and simplification, which – in Hoekstra's view - should be broader than taxation and broader than innovative companies.
- The Commission will propose further VAT reforms in key areas, including transport and tourism, to advance the green transition (e.g., revision of the special scheme for travel agents, aviation and maritime taxation and the circular economy tax treatment of second-hand goods and the destruction of recyclable goods).
- The Commission is reconsidering the draft proposal for a transfer pricing directive and working on a joint platform-based solution.
- The Commission will work on a more ambitious Energy Taxation Directive.
- Taxation of high-net-worth individuals: Despite being worthy of exploration, this measure is considered a long shot for Commissioner Hoekstra, who noted that his approach towards this topic would be European, and one firstly based on transparency.
European Commission publishes draft proposal to amend the CBAM Regulation
On 26 February 2025, the European Commission published a draft proposal to amend the Carbon Border Adjustment Mechanism (CBAM) Regulation (EU) 2023/956. This draft proposal is part of the Omnibus simplification package of the European Commission, which aims to simplify sustainability-related reporting requirements and also includes amendments to the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD). The draft regulation by the European Commission follows the ordinary legislative procedure. As such, the text of the proposal is subject to the approval of the European Parliament and of the Council.
The draft proposal contains several changes to the CBAM Regulation with the aim of simplifying the complex CBAM reporting requirements to ensure a more efficient and effective implementation. One of the key changes is the introduction of mass-based thresholds that will exempt importers of small quantities of CBAM products from the reporting requirements and the financial obligations of CBAM. Other key changes include simplifications of the calculation of embedded emissions and a delay of the obligation to purchase CBAM certificates for the embedded emissions of imported products in 2026.
2. Direct Taxation
CJ judgment on the compatibility of including Erasmus+ Funds granted to a dependent child in the calculation of a taxpayer's personal income tax allowance with the free movement of citizens (Bourse Erasmus +, Case C-277/23)
On 16 January 2025, the CJ delivered its judgment in the Bourse Erasmus+ case (C-277/23). The case deals with the issue of whether the Croatian income tax system, under which the calculation of the personal allowance for a dependent child takes into account the support for learning mobility received by a dependent child in the context of the Erasmus+ programme is in line with the free movement of citizens.
The case involved a Croatian taxpayer (E.P), with a dependent child who received support for learning mobility under the Erasmus+ programme. Prior to the receipt of this support, E.P benefited from an increase in the basic personal allowance for a dependent child, which could be deducted from personal income tax. However, this increase was removed in the tax assessment for FY 2014 by the tax authority of Croatia on the ground that the dependent child had received support for learning mobility under the Erasmus+ programme (Regulation (EU) No 1288/2013). E.P. brought an action against this decision and brought several appeals which eventually led to a constitutional appeal being lodged before the Constitutional Court of Croatia. Among other things, E.P. claimed that she was placed in a disadvantage, in breach of Articles 20 and 21 TFEU (right to move and reside freely within the territory of the Member States) as a result of her dependent child exercising the right to move and reside in a Member State other than that child's Member State of origin for the purposes of education.
The Constitutional Court of Croatia referred the case to the CJ for a preliminary ruling asking whether Articles 20 and 21 TFEU, read in the light of the second indent of Article 165(2) TFEU, are to be interpreted as precluding legislation of a Member State which, in order to determine the amount of the basic personal allowance to which a taxpayer parent is entitled in respect of his or her dependent child, takes into account the support for learning mobility which that child has received under the Erasmus+ programme, with the result, as the case may be, that the taxpayer parent loses the entitlement to the increase of that allowance for the purposes of calculating income tax
In its judgment, the CJ found that the aforementioned legislation is not compatible with the free movement of citizens. In reaching this conclusion, the CJ first considered the object and purpose of the Erasmus+ programme, which is that the programme promotes student mobility within the European Union and enables students to begin or pursue their studies in various Member States, irrespective of their place of origin, thereby strengthening the European dimension of education and training.
The CJ then stated that it is true that EU law offers no guarantee to a citizen of the Union that the exercise of his or her freedom of movement will be neutral as regards taxation. However, if a Member State participates in the Erasmus+ programme, it must ensure that the arrangements for the allocation and taxation of grants to support the mobility of beneficiaries of that programme do not create an unjustified restriction on the right to move and reside in the territory of the Member States.
Subsequently, the CJ stated that the taking into account the mobility support which a dependent child has received under the Erasmus+ programme for the purposes of determining the amount of the basic allowance to which a parent taxpayer is entitled in respect of that child, with the consequent loss of the entitlement to the increase in that allowance for the purposes of calculating income tax, is liable to constitute a restriction on the right to freedom of movement and residence enjoyed by citizens of the Union under Article 21 TFEU. In addition, the CJ stated that having regard to the economic links between the child and his or her parent, both the dependent child and the taxpayer parent may, in circumstances such as those in the case in the main proceedings, rely on Article 21 TFEU and the provisions adopted for its application.
Regarding whether the aforementioned restriction could be justified by an overriding reason of public interest and whether the provisions of the national law at issue are in line with the principles of proportionality, the Court first found that the provided justification (i.e., that the national legislation intends to take into account the real capacity of the taxpayer parent to pay income tax) constitutes an objective of public interest and, in principle, is a justification.
However, when considering whether the measure is appropriate for ensuring attainment of the objective relied on, the CJ considered that the receipt of the support under the Erasmus+ programme does not increase the taxpayer parent's capacity to pay tax, as the support is supposed to contribute to covering additional costs of studying abroad, which would not have arisen in the absence of the student mobility. On such basis, the CJ concluded that the tax treatment of the support for learning mobility is therefore not capable of considering the real capacity of the parent taxpayer to pay income tax and may even lead to a heavier tax burden for those taxpayers.
Considering the lack of compliance with the suitability element of the principle of proportionality, the CJ ruled that the aforementioned discussed component of the Croatian income tax system is precluded under EU law.
French Court judgment on the compatibility of retroactive legislation with the EU principles of legitimate expectations and legal certainty
On 5 February 2025, the French Supreme Administrative Court delivered a judgment which, among other things, concerns the issue of whether retroactive legislation is compatible with the EU principles of legitimate expectations and legal certainty.
The case deals with French legislation which provided for an exit tax applicable to individuals who transferred their residence out of France and was introduced into domestic law on 11 May 2011 and formally adopted on 29 July 2011. The exit tax applied retroactively to transfers of residence that took place on or after 3 March 2011, which was the day when the Budget Minister publicly mentioned the existence of reflections within the Ministry on a possible restoration of an exit tax. In such context, the question of whether the retroactive entry into force of the exit tax violated the EU principles of legitimate expectations and legal certainty was raised before the French Supreme Administrative Court.
The French Court first held that general principles of EU law must apply in all situations governed by EU law, which include exit tax rules as this tax infringes the freedom of establishment and constitutes an exception to the general prohibition of restrictions of this freedom (justified by the necessity to preserve the taxing rights of France).
The French Court further noted that pursuant to case law of the CJ (i.e., Stichting 'Goed Wonen' v Staatssecretaris van Financiën, C-376/02) a new tax measure may have a retroactive effect under the exceptional circumstance that such retroactive effect prevents taxpayers from using a tax loophole that is available during the legislative process, provided that taxpayers are warned of the impending adoption of the new measure. Based on the understanding that the opinion expressed by the French Budget Minister on 3 March 2022 was purely prospective and no official announcement of the exit tax had been made before the presentation of the amending finance bill on 11 May 2011, the French Supreme Administrative Court concluded that the application of the exit tax to transfers of residence that occurred between 3 March 2011 and 11 May 2011 amounted to a violation of the EU principle of legitimate expectations and legal certainty.
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