1. Highlights in this edition
FASTER Directive adopted by the Council of the European Union
On 10 December 2024, the Council of the EU adopted the Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER). The FASTER Directive introduces a unified framework for withholding tax (WHT) relief procedures for dividends and interest on publicly traded instruments. It aims to make WHT relief processes faster and more efficient as well as to prevent tax fraud and abuse.
The text of the FASTER Directive adopted by the Council is aligned with the compromise text politically agreed by the Member States in May 2024 (see our previous web post and EU Tax Alert 206).
Core elements of the FASTER Directive are the introduction of:
- Two fast-track procedures enhancing the current standard withholding tax relief or refund procedures. These consist of: (i) a 'relief at source procedure', whereby the applicable tax rate is applied at the payment date of dividends or interests; and (ii) a 'quick refund procedure', whereby initially the withholding tax is deducted at the payment date, but the refund of the excess withholding tax is granted within a fast term.
- A common EU digital tax residence certificate, which investors (taxpayers) are required to use to benefit from the fast-track procedures mentioned above.
- A registration and standardised reporting obligations for financial intermediaries. The registration ensures that only certified financial intermediaries can apply for a relief of withholding tax on behalf of their clients through the fast-track procedures. The standardised reporting obligation harmonises the main compliance requirements in this area across the EU and equips tax authorities with the essential information to check the eligibility for the relief of withholding tax, trace the relevant payments and avoid potential tax abuse or fraud.
Following adoption of the FASTER Directive, the final version will be published in the Official Journal of the EU. Member States will have to transpose the FASTER Directive into national legislation by 31 December 2028, and the national rules will apply from 1 January 2030.
DAC9 proposal published by the European Commission
On 28 October 2024, the European Commission proposed amending again the Directive on Administrative Cooperation (DAC) to facilitate the filing and exchanging of Pillar Two-related information in the EU. This proposal is referred to as "DAC9". The proposal transposes, in a coordinated manner, the OECD's GloBE Information Return into EU law by making it the Top-up Tax Information Returns (TTIR), as already contemplated by the EU directive implementing Pillar Two. It also lays down an EU framework to facilitate the exchange of TTIRs between Member States. If adopted by the Council, the DAC9 would have to be implemented into national law by 31 December 2025 (i.e., six months prior to the first filing deadline of the TTIR for most groups in scope of Pillar Two rules).
In-scope groups must file TTIRs by 30 June 2026, and tax authorities will exchange information by 31 December 2026. For exchanges with third countries, international agreements, including a Multilateral Competent Authority Agreement, are in development.
For more information on the DAC9 proposal, please see our dedicated web post on this topic.
CJ rules that Dutch 'net taxation' regime restricts the free movement of capital (XX v Inspecteur van de Belastingdienst, Case C-782/22)
On 7 November 2024, the CJ delivered its judgment in case XX v Inspecteur van de Belastingdienst (C-782/22). The case concerned the question whether Dutch legislation, under which dividends distributed by resident companies to non-resident insurance companies are subjected to a withholding tax of 15%, while dividends distributed to resident companies are effectively tax-exempt, is compatible with the free movement of capital.
This case involves XX, a UK-based life insurance undertaking, which received dividend payments from Dutch companies in the context of its 'unit-linked' insurance contracts. For resident taxpayers, Dutch dividend withholding tax acts as an advance levy on corporate income tax. The tax paid on dividends can be fully offset against their corporate income tax liability, with any excess refunded. This means resident investors subject to corporate income tax are taxed only on the net income from their investments after deducting certain costs. In contrast, non-resident taxpayers are subjected to a 15% withholding tax on the gross amount, which typically serves as a final levy.
Following a previous ruling of the CJ, Miljoen and Others (C-17/14), Dutch dividend tax rules allow non-residents to claim a refund if they can show they are taxed more heavily than comparable resident investors. This involves comparing the dividend tax paid with the hypothetical corporate income tax burden on the dividend income. A key factor in this comparison is the extent to which costs can be deducted from the (hypothetical) tax base. In accordance with the previous CJ ruling, non-residents can only consider costs directly related to receiving the dividend, such as bank fees associated with the dividends.
XX requested a refund of Dutch withholding tax, arguing that if it had been a resident of the Netherlands, the Dutch tax burden on the dividend income would have been nil. This is because, when determining profit, the dividends are matched by a corresponding increase in commitments to customers under unit-linked insurance contracts. Therefore, it argued, the corporate income tax due on the income would be nil, so that the dividend withholding tax paid must be refunded.
In its judgment, the CJ first reiterated its established case law that measures deterring nonresidents from investing in a Member State or discouraging residents from investing abroad constitute restrictions on the free movement of capital. It also reaffirmed that this freedom applies to both private and public undertakings. The CJ then observed that the difference in tax treatment between Dutch resident companies and their foreign counterparts results in an unfavorable treatment for non-resident companies, potentially discouraging them from investing in Dutch companies. Following this reasoning, the CJ concluded that the contested Dutch legislation in principle constitutes a restriction on the free movement of capital.
The CJ ruled that while the increase in commitments to unit-linked policies does not meet the definition of 'directly linked' costs of the C-17/14 precedent, it found that the situations of resident and non-resident dividend recipients may nevertheless be comparable in the light of the Netherlands legislation at issue. The court thereby refers to its previous ruling College Pension Plan of British Columbia (C-641/17), in which it had considered in the case of a non-resident pension fund that uses dividends income to cover pension obligations, the increase in future liabilities should be recognised when determining a hypothetical tax burden on the dividend income.
In the C-641/17 ruling, the CJ held that if resident taxpayers are not taxed on dividend income due to the specific purpose of their investment activities, non-resident companies in similar situations with dividends from Dutch sources are in an objectively comparable situation, provided their activities are the same and the dividends received change the level of customer commitments.
The CJ further examined whether the restriction could be justified by overriding reasons in the public interest, such as safeguarding the allocation of taxing powers among Member States and maintaining the coherence of the national Dutch tax system. The Dutch government claimed that permitting non-resident companies to deduct certain expenses might undermine these objectives. However, the CJ ruled that since the Netherlands does not tax the relevant dividends when received by Dutch resident companies, it cannot justify taxing the same dividends when received by non-resident companies. The Court concluded that no overriding reason in the public interest justified the restriction.
In conclusion, the CJ ruled that the Dutch legislation constitutes a restriction on the free movement of capital that cannot be justified by an overriding reason of public interest.
CJ judgment regarding VAT on termination fees (Rhtb, Case C-622/23)
On 28 November 2024, the CJ issued its judgment in the case Rhtb (C-622/23), which deals with the question of whether VAT should apply to contract termination fees.
Rhtb, an Austrian company, entered into a contract to construct a drywall. After the work began, the client terminated the contract, stating that the services were no longer needed. Rhtb sued for unjustified termination, seeking compensation for the agreed amounts. The Austrian High Court referred the question of whether VAT should apply to these termination fees to the CJEU.
The main issue was whether the amount owed by the client, despite the incomplete work, should be considered remuneration for a supply of services and thus subject to VAT.
The CJ confirmed that these termination fees fall are subject to VAT. The Court reiterated that for an amount to qualify as remuneration for a supply of services, there must be a direct link between the service provided and the payment received. This direct link remains even if the client does not use the service before terminating the contract, resulting in termination fees.
Applying these principles, the Court concluded that the termination fee was indeed linked to the (non-) completed construction services and, therefore, subject to VAT.
CJ judgment regarding VAT position of charging card issuers (Digital Charging Solutions, Case C 60/23)
On 4 October 2024, the CJ issued its judgment in the case Digital Charging Solutions (C60/23). The case deals with the vat treatment of issuers of charging cards for electric vehicles.
The case concerns a German card issuer that facilitated charging sessions for electric vehicles in Sweden. The card issuer entered into contracts with charge point operators where drivers - on presentation of the EV charging card - could procure a charging session. The operator invoices the charging sessions to the card issuer and the card issuer invoices the charging sessions to the driver. The driver chooses the amount of electricity and the time and place of charging.
The ECJ considered that the card issuer acts as a commissionaire for the charging sessions by the drivers. The ECJ leaves open whether the card issuer acts as a commissionaire of the operator or of the driver. By applying the VAT commissionaire rule, the card issuer is deemed to purchase the electricity from the operator and to resell that electricity to the driver. This allows the card issuer to recover the input VAT on the purchase of the charging sessions from the tax administration.
For more information, please refer to our L&L newsletter.
2. Direct Taxation
Case Law
CJ judgment on the compatibility of non-reimbursement of Spanish withholding tax on dividends to loss-making non-residents with free movement of capital (Credit Suisse Securities, Case C-601/23)
On 19 December 2024, the CJ issued its judgment in the case Credit Suisse Securities (Case C-601/23). The case deals with the issue of whether the free movement of capital precludes Spanish rules under which withholding tax levied on dividends received by resident loss-making companies is reimbursed in full, whereas no reimbursement of such tax is provided when the recipient of the dividends is a non-resident loss-making company.
This case concerns Credit Suisse Securities (Europe), a UK-based company with no permanent establishment in Spain, which received dividends from a Spanish company. A withholding tax was applied on these dividends under Spanish provincial law, which was initially set at 19% (i.e. the same percentage as that applicable to dividends paid to resident companies) but ultimately reduced to 10% pursuant to the Hispano-British bilateral tax convention. Credit Suisse, being loss-making in the relevant year, could not offset the withheld tax against profits in the UK and sought reimbursement, arguing that the Spanish law discriminated against non-resident companies by treating the tax withheld as definitive, unlike resident companies, which could recover such tax if loss-making. Following a series of administrative and judicial rejections in Spain, the High Court of Justice of the Basque Country referred the matter to the CJ to assess the compatibility of this tax treatment with EU principles, particularly the free movement of capital.
In its judgment, the CJ found that the rules at issue constitute a restriction on the free movement of capital within the meaning of Article 63(1) TFEU. It noted that the tax regime in Spain confers an advantage on resident companies, as dividends paid to loss-making resident companies are reimbursed, whereas dividends paid to non-resident companies are subject to immediate and definitive taxation, irrespective of their financial results. This difference in treatment is liable to deter non-resident companies from making investments in Spain, thus restricting the movement of capital, which is prohibited in principle under Article 63(1) TFEU.
The court rejected the argument that the potentially lower nominal tax rate for nonresidents offsets this disadvantage, stating that unfavourable tax treatment contrary to a fundamental freedom cannot be justified by the existence of other advantages. Furthermore, the CJ found that the less favourable treatment of dividends paid to non-resident companies compared to resident companies amounts to discrimination that cannot be mitigated by situations where the legislation does not discriminate. Consequently, the Court concluded that the rules at issue restrict the free movement of capital.
When assessing the existence of a justification for the restriction, the Court first analysed the comparability of the situations at issue. In this regard, it found that resident and non-resident companies are in objectively comparable situations and that the tax rules in question treat such comparable situations differently. Second, the Court found that the rules at issue cannot be justified on neither the effective collection of tax, the balanced allocation of the power of taxation between the Member States, preventing a risk of losses being used twice, and maintaining the cohesion of the tax system.
On those grounds, the Court concluded that Article 63 TFEU must be interpreted as precluding rules applicable in a Member State under which dividends distributed by a company established in a fiscally autonomous territory of that Member State are subject to a withholding tax that, where those dividends are received by a resident company, which is subject to corporation tax in that fiscally autonomous territory, serves as a payment on account of that tax and is reimbursed in full if that company is loss-making at the end of the tax year concerned, whereas no reimbursement is provided for where those dividends are received by a non-resident company in the same situation.
CJ judgment on whether national legislation that differentiates taxpayers based on the form used to purse their economic activity abroad is compatible with EU Law (Volvo Group Belgium, Case C-436/23)
On 12 December 2024, the CJ issued its judgment in the case Volvo Group Belgium NV (Case C-436/23). The case deals with the question of whether a Belgian legislation under which a differentiation is made between taxpayers based on form used to pursue their economic activity in other country (i.e. a subsidiary or a PE or branch) is compatible with the freedom of establishment.
The case involves Volvo Group Belgium, a Belgian company that challenged the imposition of a fairness tax on its corporate income. The company argued that the aforementioned tax violated EU law, double taxation agreements, and the Belgian Constitution. Although the Belgian Constitutional Court annulled the fairness tax provisions, it maintained their effects for certain tax years, which included those relevant to Volvo Group Belgium. The case was referred to the CJ, which was asked about whether Article 49 TFEU must be interpreted as precluding the legislation of a Member State under which a resident subsidiary of a non-resident company is subject to a 'fairness tax' on the distribution of profits (which, as a result of the use of certain tax advantages provided for by the national tax system, are not included in the final taxable profits of that subsidiary), whereas a nonresident company pursuing an economic activity in that Member State through a PE or a branch is not subject to that tax.
When addressing the question above, the Court first found that that maintenance of the effects of the fairness tax for certain tax years does not enable the subsidiaries of nonresident companies to pursue their activities under the same conditions as those which apply to PEs of such companies. Therefore, the CJ considered that the former are placed at a disadvantage in comparison with the latter. On such basis, the CJ noted that such circumstance is likely to make it less attractive for companies that have their registered office in another Member State to pursue their activities in Belgium through a subsidiary. It also found that such difference in treatment capable of limiting a business' freedom to choose the appropriate legal form in which to pursue an activity in another Member State is liable to constitute a restriction on the freedom of establishment.
Second, the CJ assessed the objective comparability of the situations of subsidiaries and PEs. In this regard it clarified that such assessment involves examining cross-border and internal situations based on the location of companies' registered offices, which determine their connection to a particular State's legal system. In the context of the fairness tax, the Court noted that the treatment of a resident subsidiary of a non-resident company must be compared to that of a resident PE of the same company, as these represent the tax treatment of a resident versus a non-resident entity, respectively.
Highlighting the fact that the comparability analysis must consider the aim of the national tax legislation at issue, the Court considered that Belgium's fairness tax was designed to prevent profits generated within its jurisdiction from being distributed without proper taxation. Thus, it found that the situation of a non-resident taxpayer operating through a PE in Belgium is comparable to that of a resident taxpayer in terms of the legislation's objective to exercise taxation rights over profits within its jurisdiction.
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