1. Highlights in this edition
CJ judgment on whether Dutch interest deduction limitation rule is in line with EU law (X BV v Staatssecretaris van Financiën, Case C-585/22) On 4 October 2024, the CJ delivered its judgment in the case X BV v Staatssecretaris van Financiën (Case C-585/22) where it found that the Dutch interest deduction limitation rule of Article 10a Corporate Income Tax Act 1969 (CITA) is not in breach of EU law, as it pursues the legitimate objective of combatting tax fraud and tax evasion.
In its judgment, the Court found that: (i) Article 10a CITA creates a restriction to the freedom of establishment which can be justified because the legislation pursues the goal of combatting tax avoidance and its application is limited to wholly artificial arrangements; (ii) EU law does not preclude Article 10a CITA refusing the deduction of the whole interest of a loan that is devoid of economic justification and would have never been contracted, absent the intragroup relationship between the parties to the loan and the tax advantage sought; and (iii) Article 10a CITA is not similar to the Swedish interest deduction limitation rule in the Lexel case (C-484/19), as the purpose of the legislation is not the same and the practical application of the former rule was not limited to artificial arrangements.
For more information on the CJ judgment please see our recent web post on this topic.
CJ judgment in the landmark Apple State aid case (Commission v Ireland and Others, Case C-465/20 P)
On 10 September 2024, the CJ delivered its final judgment in the case Commission v Ireland and Others (Case C-465/20 P). In its judgment, the Court set aside the 2020 ruling of the General Court and confirmed the 2016 decision of the European Commission, which had concluded that two Irish subsidiaries of the Apple group had received unlawful State aid from Ireland from 1991 to 2014.
Siding with the EU Commission, the CJ found that: (i) The Commission's decision contained an appropriate functional analysis of Apple's Irish branches and did not rely on a presumption that the activities had to be performed in the Irish branches because of the lack of substance in the offshore head offices; (ii) Under its interpretation of Irish law, the functions of Apple Inc. are irrelevant to the functional analysis for purposes of splitting the two subsidiaries' profits between the Irish branches and the offshore head offices. Also, Apple and Ireland should have provided proof during the administrative procedure of the role played by Apple Inc. employees on behalf of the two Irish subsidiaries; (iii) If board minutes do not mention certain decisions or topics, the Commission is entitled to use this fact as argument to support a finding that the functions allegedly performed by the board of directors did not exist; (iv) The Commission was entitled to rely on the Authorised OECD Approach when interpreting Irish law provisions on the taxation of Irish incorporated, non-Irish-resident companies, in particular as regards the allocation of profits between the Irish branch and the foreign head office; and (v) The two tax rulings provided a selective advantage as they reduced the tax burden of the two Irish subsidiaries of the Apple group compared to Irish standalone companies (which are taxed on their profits reflecting 'prices determined on the market and negotiated arm's length'). This judgment is final and consequently, Ireland will have recover more than EUR 13 billion. This judgment may boost the Commission's investigations in other pending cases after it had suffered several losses in the Fiat, Amazon and ENGIE cases, all concerning Luxembourg. Taxpayers should pay attention to the CJ's approach to the functional analysis and supporting documentation.
For more information on the CJ judgment in this landmark Apple State aid case, please see our web post on this topic.
CJ judgment regarding legal professional privilege in the context of an EoIR under the DAC (Ordre des avocats du Barreau de Luxembourg, Case C-432/23)
On 26 September 2024, the CJ delivered its judgment in the case Ordre des avocats du Barreau de Luxembourg (C432/23). The case concerns the issue of whether and, if so, under what conditions, a tax administration may seek disclosure of information from a lawyer in relation to its client in the context of an exchange of information on request (EoIR) under Council Directive 2011/16/EU (DAC). In particular, the case deals with the question of whether such request for information is compatible with the legal professional privilege (LPP) protected by Article 7 of the Charter of Fundamental Rights of the European Union (Charter). The judgment follows the Opinion of AG Kokott issued on 30 May 2024 and included in our EU Tax Law Alert 206.
This case involves an injunction order to provide information issued by the tax administration of Luxembourg to a law firm named F in relation to one of its clients, a Spanish legal entity called K. This order was issued because of a previous request for information submitted by the Spanish tax administration to its Luxembourg equivalent under the DAC. The data and documents requested under the injunction order concerned the services provided by F to K in connection with the acquisition of two shareholdings. F refused to comply with the order and provide the requested information/documents on the basis that it had acted as lawyer/legal counsel for the group to which K belongs and that, therefore, such information was covered by its LPP. Furthermore, F asserted that the services were not related to taxation but exclusively concerned corporate law. Under Luxembourg law, LPP does not apply to tax advisory or representation matters unless the disclosure of information would expose lawyers' clients to the risk of criminal prosecution. Disagreeing with F's views, the Luxembourg tax administration imposed a fine for failing to comply with the information order. After two appeals, the case reached the Luxembourg High Administrative Court, which decided to stay the proceedings and refer several questions to the CJ.
The questions addressed by the CJ essentially concerned whether: (i) communications concerning corporate law advice between a lawyer and his client are covered by article 7 of the Charter, and whether or not the injunction order of the Luxemburg tax authority constitutes an interference with the LPP guaranteed by such article; (ii) the DAC would be invalid in so far as it does not include provisions relating to the protection of the confidentiality of communications between lawyers and their clients in the context of information to be collected by Member States as a consequence of an EoIR; and (iii) EU law precludes an injunction order based on national legislation under which advice and representation by a lawyer in tax matters do not benefit (except where there is a risk of criminal prosecution for the client) from the enhanced LPP protection guaranteed by Article 7 of the Charter.
Regarding the first question above, the CJ found that, legal advice from a lawyer enjoys, whatever the field of law to which it relates (e.g. corporate law), the enhanced protection guaranteed by Article 7 of the Charter. On such basis, the Court considered that an injunction decision ordering a lawyer to nonetheless provide information based on the DAC is an interference of the LLP guaranteed by such article
In relation to the second question, the Court found that the fact that the system for EoIR provided by the DAC does not include provisions relating to the protection of the confidentiality of communications between a lawyer and his or her client, in the context of the collection of information for which the requested Member State is responsible, does not imply that that Directive infringes Article 7 and Article 52(1) of the Charter. The Court noted that it is for each Member State to ensure, in the context of the national procedures implemented for the purposes of that collection, the enhanced protection of these communications guaranteed by the Charter. Thus, the CJ found no factor that could affect the validity of the DAC.
When it comes to the third question, the Court held that the Luxembourgish legislation (as well as its application in the present case by means of the injunction order) is not limited to exceptional situations but, on the contrary, removes almost entirely from the enhanced protection afforded to LPP the content of lawyers' consultations provided in tax matters. On such basis, the Court found that this entails an infringement of the essence of the right to respect for communications between lawyer and client, and therefore, is an interference which cannot be justified.
CJ judgment on the compatibility of DAC6 reporting regime for cross-border arrangements with the EU law (Belgian Association of Tax Lawyers and Others v Premier ministre/Eerste Minister, Case C-623/22)
On 29 July 2024, the CJ delivered its judgment in the case Belgian Association of Tax Lawyers and Others v Premier ministre/Eerste Minister (Case C-623/22). The case concerns the compatibility of the mandatory reporting regime for cross-border arrangements introduced under DAC6, with various EU law principles, including equality, non-discrimination, legality in criminal matters, legal certainty, and the right to respect for private life. In its judgment, the CJ upheld the validity of DAC6 in line with AG Emiliou's Opinion. The conclusion of the AG in this case was included in the EU Tax Law Alert 204. The applicants, comprising several legal and tax professional bodies, challenged Belgium's national law implementing DAC6. They argued that the law infringed multiple provisions of the Charter and general principles of EU law. The Belgian Constitutional Court referred five questions to the CJ for a preliminary ruling.
The first question referred to the CJ concerned whether DAC6 violates the principles of equality and non-discrimination under Articles 20 and 21 of the Charter, in so far as it does not limit the reporting obligation to corporation tax, but makes it applicable to all taxes falling within its scope. Acknowledging that it is not apparent how the application without distinction of the reporting obligation at issue with regard to the various tax types concerned could reveal the existence of a difference in treatment, the CJ found no evidence that DAC6 violates the aforementioned principles. It emphasized that the Directive applies broadly to all taxes within its scope, noting that aggressive tax planning cannot only occur in the field of corporate tax but also in other direct taxation areas such as, for example, income tax applicable to natural persons. The CJ, therefore, concluded that DAC6 is not manifestly inappropriate and that its broad application beyond the field of corporate taxation is justified to meet its objectives of combating tax avoidance.
The second and third questions addressed by the Court refer to whether certain DAC6 concepts (i.e., 'arrangement', 'cross-border', 'marketable' and 'bespoke' arrangement, 'intermediary', 'participant' and 'associated enterprise', the different hallmarks, the 'main benefit test' and the 30-day rule) are sufficiently clear and precise to comply with the principle of legal certainty, legality in criminal matters and the right to respect for private life. The principles of legal certainty and legality (which is a specific expression of the former general principle) require laws to be clear and foreseeable, especially where penalties are involved. The applicants argued that the aforementioned DAC6's concepts were too vague, making it difficult for intermediaries and taxpayers to understand their legal obligations.
When addressing these questions, the Court first noted that: (i) the fact that legislation refers to broad concepts which must be clarified gradually does not, in principle, preclude that legislation from being regarded as laying down clear and precise rules; (ii) what matters is whether any ambiguity or vagueness in those concepts may be dispelled by using the ordinary methods of interpretation of the law' (including the possibility of relying on relevant international agreements and practices whenever they correspond to the vague EU concepts); and (iii) the degree of foreseeability required depends to a considerable extent on the content of the text in question, the field it covers and the number and status of those to whom it is addressed (e.g., persons carrying out a professional activity or not). In the light of the foregoing considerations, the CJ examined each of DAC6's concepts mentioned above and found that these are sufficiently clear and precise. On such basis, the Court consider that DAC6 complies with the requirements imposed by the principles of legal certainty and legality in criminal matters.
As regards compliance with Article 7 of the Charter, the Court noted that such article does not impose any obligation that is stricter than Article 49 of the Charter (Principle of legality in criminal matters) in terms of the requirement for clarity or precision of the concepts used and the time limits laid down. Thus, the Court held that the interference with the private life of the intermediary and relevant taxpayer entailed by the DAC6 reporting obligation is itself defined in a sufficiently precise manner in view of the information that that reporting must contain. Consequently, the CJ found no infringement of the Charter with such article.
The fourth question addressed by the CJ concerned whether the exemption from DAC6's reporting obligation, based on legal professional privilege (LPP) applies only to lawyers or whether it also extends to other professionals who are also subjected to LPP under the applicable national law (e.g., tax advisers, notaries, auditors, accountants, bankers or university professors). The applicants argued that limiting the exemption to lawyers unfairly discriminated against other tax professionals who also have confidentiality obligations. The CJ, however, ruled that the exemption applies only to lawyers. It reasoned that lawyers occupy a unique position in the administration of justice, with a special role in defending clients and ensuring the proper functioning of the legal system. This role justifies their exclusion from DAC6's reporting obligation. The CJ added that applying the exemption to other professionals, could undermine the effectiveness of DAC6's reporting regime by allowing too many actors to evade their obligations under the guise of professional confidentiality.
The fifth and final question the CJ addressed was whether DAC6 infringes the right to respect for private life protected by Article 7 of the Charter in so far as the reporting regime covers cross-border arrangements that are lawful, genuine, non-abusive and the main advantage of which is not fiscal in nature. In this regard, the CJ first found that DAC6's reporting obligation does create an interference with the right to privacy of taxpayers and intermediaries, as the reporting of lawful arrangements is liable to deter both those taxpayers and their advisers from designing and implementing them. However, the Court found this interference to be justified and proportionate. The CJ based its reasoning on three key points. First, the Court considered that the identified interference is provided by law and, thus, it meets the requirement that limitations on fundamental rights must be established by clear and foreseeable rules. Second, the Court considered that the interference created by the DAC6 reporting obligation does not impinge on the essence of the right to privacy, as it relates solely to the communication of data revealing the design and implementation of a potentially aggressive tax arrangement without even directly affecting the possibility of such design or such implementation. Third, the CJ found that the interference created by the DAC6 reporting obligation is proportionate, as it is a suitable, strictly necessary measure to achieve the Directive's objectives (i.e., combating aggressive tax planning, preventing the risks of tax avoidance and evasion). The Court also found that, while the interference created by DAC6 application to lawful cross-border arrangements is certainly not negligible, it does not outweigh the public interest objectives pursued by the Directive which are important and legitimate objectives.
In conclusion, the CJ ruled that the examination of the five questions referred did not reveal any factors affecting the validity of DAC6.
EU Commission initiates infringement procedure against the Netherlands on taxation of foreign investment funds
On July 2024, the EU Commission initiated an infringement procedure against the Netherlands for failing to extend a dividend tax reduction scheme to foreign investment funds, which are comparable to Dutch investment funds. The Commission considers that the relevant remittance reduction scheme (afdrachtsvermindering) restricts the free movement of capital by a discriminatory treatment of investment funds of other EU/EEA States.
The EU Commission initiated this infringement procedure against the Netherlands by issuing a formal notice. This is the first step in the procedure. The Netherlands had a two-month window to address the concerns raised in the Commission's letter. If these issues are not resolved, the Commission may advance to the second stage, which involves issuing a reasoned opinion. Please refer to our website post for a more detailed analysis of the infringement procedure.
CJ judgment regarding VAT exemption for management 'special investment funds' in relation to defined benefit pension funds (Joint cases X, C-639/22 and others)
On 5 September 2024, the CJ issued its judgment in the joint cases X (C-639/22), Fiscale Eenheid Achmea BV (C-640/22), Y (C-641/22), Stichting Pensioenfonds voor Fysiotherapeuten (C-642/22), Stichting BPL Pensioen (C-643/22) and Stichting Bedrijfstakpensioensfonds voor het levensmiddelenbedrijf (C-644/22). The cases concern the VAT exemption for the management of 'special investment funds' in relation to pension fund management services. Five applicants are Dutch pension funds and one applicant is a provider of asset management services for the benefit of a pension fund. All cases concern pension funds that operate pension plans based on a 'collective defined benefit pension scheme'. These pension schemes aim to provide pension benefits to employees. The amount of the pension benefits depends on the number of years of service and the salary. There is no guarantee that the target pension benefits will be achieved. The rights and benefits provided to members are not directly linked to the fund's investment performances. The question put before the CJ was whether the management of such pension funds qualifies for the fund management exemption. An important condition for this is that the pension participants bear the investment risks.
The CJ considered that regulated UCITS funds ('undertaking for collective investment in transferable securities') in any case qualify as 'special investment funds'. A pension fund may, therefore, qualify as a 'special investment funds' if the investment risk of a pension fund participant is comparable to that of a UCITS participant. This is not the case when the amount of pension entitlements or retirement benefits pension fund's investments should significantly affect the pension entitlements and retirement benefits due under the pension agreement.
A pension fund could qualify as a 'special investment funds' if the situation of a participant in the pension fund is comparable to that of participants in other collective investment funds recognized by the Member State. In the Dutch context, these include the pension funds that operate a defined contribution pension scheme. This comparison should be made from the viewpoint of the legal and financial situation of the participant in the pension fund. It is now up to the Dutch courts to assess whether the pension entitlements and benefits are primarily dependent on the results of the investments.
Case Law
CJ judgment on whether the application of tax and social security benefits only to employees working within a Member State is compatible with EU law (Nord Vest Pro Sani Pro, Case C-387/22)
On 26 September 2024, the CJ delivered its judgment in the case Nord Vest Pro Sani Pro (C387/22), which deals with the question of whether the application of certain tax and social security benefits only to employees working within a Member State is compatible with the freedom to provide services as laid down in Article 56 TFEU.
The case concerns a Romanian company named Nord Vest Pro Sani Pro SRL (Nord Vest Pro) which is active in the construction sector and, amongst other services, provides (Romanian) labour to construction sites in Germany and Austria. Romanian tax law provides certain tax and social security advantages to employees working in the construction sector, provided that they carry out their duties in Romania. These advantages consist in, first, an exemption from income tax of those employees, second, a reduction of their social security contributions, and third, an exemption from their health insurance contributions However, under Romanian law, such advantages are not applicable if the company's employees work abroad, as was the case for the employees of Nord Vest Pro. In the case referred to the CJ, the Romanian tax authority argued that Nord Vest Pro had unrightfully applied the aforementioned benefits and carried out financial corrections. Nord Vest Pro argued that the measure was discriminatory and therefore, incompatible with EU law. Following an action brought by Nord Vest Pro against a decision of the Romanian tax authorities rejecting its claim, the Regional Court of Romania referred the case to the CJ.
The referring court asked, in essence, whether Articles 26 and 56 TFEU must be interpreted as precluding legislation of a Member State that restricts the benefit of tax and social security advantages solely to employees of undertakings in the construction sector who carry on their activities in the territory of that Member State.
In its judgment, the CJ first found that since the free movement of workers and the freedom to provide services have been implemented by Articles 45 and 56 TFEU, it is not necessary to interpret Article 26 TFEU. Second, it considered that the case must be analysed in the light of Article 56 TFEU alone since national legislation governing the temporary movement of workers who are sent to another Member State to carry out work there in the framework of the provision of services by their employer and who return to their country of origin after the completion of their work, without at any time gaining access to the labour market of the host Member State, falls within the scope of the freedom to provide services.
When assessing whether the Romanian legislation creates a restriction on the freedom to provide services, the CJ found that such rules are capable of dissuading Romanian undertakings from providing construction services in another Member State by the posting of workers to the territory of that Member State. The Court noted that such measures in favour of employees are also liable, subject to verification by the referring court, to reduce labour costs and thus confer an advantage on undertakings in so far as their activities are carried out on Romanian territory, by making the provision of services in another Member State less attractive. Thus, the CJ found that the Romanian legislation creates a restriction on the freedom of services.
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