1. Direct Taxation
Case Law
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 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 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.
CJ judgment on whether a withholding tax exemption applicable only to resident public pension institutions is compatible with the free movement of capital (Keva, Landskapet Ålands pensionsfond, Kyrkans Centralfond v Skatteverket, Case C-39/23)
On 29 July 2024, the CJ delivered its judgment in case Keva, Landskapet Ålands pensionsfond, Kyrkans Centralfond v Skatteverket (C-39/23). The case concerned the issue of whether Swedish legislation under which dividends distributed by resident companies to non-resident pension institutions governed by public law are subjected to a withholding tax (whereas dividends distributed to resident pension funds are exempted) is compatible with the free movement of capital. The Opinion of AG Collins in this case was included in our EU Tax Law Alert 205.
This case involves Keva, Landskapet Ålands pensionsfond and Kyrkans Centralfond (the Finnish pension funds), which received dividend payments from Swedish companies. Sweden has so-called general pension funds (GP), which manage capital to protect the income-based pension system. Such funds aim to balance any surpluses and deficits between pension contributions and pension payments in a given year, and to contribute to the long-term performance of the Swedish pension system. These GP funds are part of the Swedish government and, therefore, are exempt from taxation in Sweden. However, Sweden levies a withholding tax of 15% on dividends received by analogous foreign pension funds in Finland. Since these foreign pension funds are exempted from tax in Finland, they cannot offset the tax withheld against any tax liability in Sweden. As a consequence of this situation, the Finnish pension funds requested a refund of the tax withheld in Sweden. They claimed that, due to being analogous to Swedish GP funds, they should also be entitled to an exemption from taxation in Sweden.
In its judgment, the CJ first reiterated that, according to established case law, measures that may deter non-residents from investing in a Member State or discourage residents from investing abroad restrict the free movement of capital. It also reaffirmed that this freedom applies equally to both private and public undertakings, meaning public entities are also covered under its scope.
The CJ then observed that the difference in tax treatment between Swedish public pension institutions and their foreign counterparts results in unfavourable treatment for non-resident pension institutions, potentially discouraging them from investing in Swedish companies. Following this reasoning and in line with the AG's Opinion, the CJ concluded that the contested Swedish legislation constitutes a restriction on the free movement of capital.
However, the CJ noted that such differential treatment might be permissible if the situations are not objectively comparable or if the restriction is justified by an overriding reason of public interest.
In examining comparability, the CJ reiterated that, based on established case law, crossborder and domestic situations should be assessed in terms of: (i) the objectives and purpose of the national legislation in question; and (ii) the relevant distinguishing criteria established by that legislation. As regards, in the first place, the objectives and purpose of the Swedish scheme on the taxation of dividends, the CJ ruled that Sweden's exemption for domestic public pension funds is intended to avoid a circular flow of public resources within the Swedish State. However, the CJ found that the fact that such funds are part of the Swedish State does not necessarily place them in a different position from foreign public pension institutions. The CJ reasoned that this goal could still be achieved by extending the tax exemption to non-resident pension institutions. Moreover, the Court rejected the argument alleging that non-resident funds are not covered by the exemption because they are not intended to promote the financial stability and viability of the Swedish social security system. In this regard, the CJ found that although, by definition, the objective of each fund is to protect the stability and viability of a separate national pension system, that cannot render impossible the cross-border comparison of pension funds.
In the second place, as regards the relevant distinguishing criteria established by the Swedish legislation, the CJ held that both Swedish and Finnish pension funds share the same social objectives, tasks and type of legal organization.
While acknowledging certain differences between resident and non-resident funds (i.e., collection of pension contribution, payment of pensions and legal form of the fund concerned), the Court concluded that these distinctions do not seem directly linked to the tax treatment of dividends received from Swedish companies. Therefore, it ruled that, under the Swedish legislation, the only true distinction between Swedish and foreign public pension funds is their place of residence, which is why foreign funds are denied the exemption. Therefore, the CJ held that the different tax treatment applies to objectively comparable situations.
Lastly, the CJ assessed whether the Swedish government's justifications (i.e., protecting Swedish social policy and ensuring a balanced allocation of taxing powers) could justify the identified restriction. While the CJ recognized the need to safeguard the objective pursued by the Swedish social policy (i.e., avoiding a costly circular flow of resources and ensuring the autonomy of Sweden's pension system), it found that administrative inconvenience alone is insufficient to justify the restriction.
.Regarding the need to preserve a balanced allocation of taxing rights between Member States, the Court noted that this justification may be accepted where a scheme seeks to prevent risks posed to a Member State's taxing powers in relation to activities carried out within its territory. However, it found that where a Member State has chosen not to tax resident funds on their domestic income, it cannot rely on such justification to ta
Based on the above, the CJ ruled that the Swedish legislation constitutes a restriction on the free movement of capital which cannot be justified by an overriding reason of public interest.x non-resident funds which receive such income. On such basis, the Court also rejected the justification based on the preservation of a balanced allocation of taxing rights.
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