BCL Law Notes > University Of Oxford (Bcl) BCL Law Notes > Corporate and Business Tax Law (BCL) Notes

9. European Union Cross Border Corporate Taxation Notes

This is a sample of our (approximately) 80 page long 9. European Union Cross Border Corporate Taxation notes, which we sell as part of the Corporate and Business Tax Law (BCL) Notes collection, a Distinction package written at University Of Oxford (Bcl) in 2014 that contains (approximately) 506 pages of notes across 11 different documents.

Learn more about our Corporate and Business Tax Law (BCL) Notes

The original file is a 'Word (Docx)' whilst this sample is a 'PDF' representation of said file. This means that the formatting here may have errors. The original document you'll receive on purchase should have more polished formatting.

9. European Union Cross Border Corporate Taxation Revision

The following is a plain text extract of the PDF sample above, taken from our Corporate and Business Tax Law (BCL) Notes. This text version has had its formatting removed so pay attention to its contents alone rather than its presentation. The version you download will have its original formatting intact and so will be much prettier to look at.

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

9. EUROPEAN UNION CROSS-BORDER CORPORATE TAXATION

1. STEP 1: Scope - Material, Personal and Territorial A. The Internal Market and European Union Fundamental Freedoms B. Does the Measure Fall within the Scope of European Union Law?
C. Which Fundamental Freedom Applies - Establishment or Capital?

2. STEP 2: Discriminatory Measures, Restrictions and Disparities A. What is Discriminatory?
B. What is Not Restrictive?

3. STEP 3: Justification Grounds A. Express Justifications (Treaty-Based Derogations) (Direct Discrimination) B. Unwritten Successful Justifications: Cohesion of the Tax System C. Unwritten Successful Justifications: Justifications Taken Together D. Unwritten Successful Justifications: Prevention of Evasion and Avoidance - Thin Cap Rules E. Unwritten Successful Justifications: Prevention of Evasion and Avoidance - CFC Rules F. Unwritten Successful Justifications: Comparability of Situation G. Unwritten Successful Justifications: Effectiveness of Fiscal Supervision H. Unsuccessful "Economic" Justifications I. Unsuccessful "Non-Economic" Justifications

4. STEP 4: Proportionality A. Two-Fold Test - Is there a Third Element of "Adequacy"?

5. EU Cross-Border Tax Problem Question Plan

6. BCL Past Exam Questions & Essay Plans __________________________________________________________________________________

As was seen in the context of Corporate Groups Loss Relief, and in particular the ICI and Marks & Spencer cases, national tax laws may conflict with EU laws; and in the event that there is a conflict, the ECJ has adopted a 4-fold method of testing national law compliance. In order to assess the compatibility of national tax measures with the fundamental freedoms

1.

2.

3.

4.

STEP STEP STEP STEP

1: 2: 3: 4:

Scope - Material, person and territorial Discriminatory measures, restrictions and disparities Justification Grounds Proportionality

1. STEP 1: Scope - Material, Personal and Territorial A. The Internal Market and European Union Fundamental Freedoms

1

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

1. INTERNAL MARKET: "An area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties (Article 26(2) TFEU)." o

De Búrca: "Internal market" is an example of terms which are highly significant within the EU legal order but which remain nonetheless or even deliberately uncertain in scope and meaning"

2. FREE MOVEMENT OF GOODS: Prohibition of custom duties and quantitative restrictions on import/export, as well as all measures having equivalent effect (Articles 28-36 TFEU)

3. FREE MOVEMENT OF SERVICES: Covers nationals of Member States who are established in a Member State other than that of the person for whom the services are intended (Arts 49-50)

4. FREE MOVEMENT OF PERSONS: Covers workers, self-employed persons, as well as primary and secondary establishments (Article 45 TFEU)

5. FREE MOVEMENT OF CAPITAL: Restriction on the movement of capital between Member States and between Member States and third countries (Articles 63-65 TFEU) o

Article 63: "…Restrictions on the movement of capital… and on payments… between Member States, and between Member States and third countries shall be prohibited"

o

But Article 65 this applies without prejudice to the right of MSs to apply provisions of tax law which "distinguish taxpayers who are not in the same situation w/ regard to place of residence or place where capital is invested…" (DEROGATIONS)

o

But Article 65(3): Those measures shall "not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital…"

6. FREEDOM OF ESTABLISHMENT: Prohibits restrictions on freedom of establishment as well as restrictions on setting up agencies, branches of subsidiaries; and shall include the right to pursue activities as selfemployed persons, to manage undertakings (firms and companies) under the conditions "laid down for its own nationals by the law of the country where such establishment is effected…" (Article 49 TFEU) o

Article 54 TFEU: Personal scope - "Companies of firms having their registered office, central administration or principal place of business within the Union shall be treated in the same way as natural persons who are nationals of Member States"

2

Corporate & Business Taxation (BCL)/Magister Juris (MJur) o

Bachelor of Civil Law

Article 52 TFEU: Derogations - "… shall not prejudice provisions…
providing for the special treatment for foreign nations on grounds of public policy, security or health"

B. Does the Measure Fall within the Scope of European Union Law?

Before deciding which of the above fundamental freedoms applies in a particular case, it is first necessary to decide whether EU law is even engaged by the impugned national measure EU law can only apply insofar as it has effects on bodies situated inside the EU

C-264/96 ICI v Colmer (Denial of Consortium Relief where non-EU Subsidiaries) The ECJ

The difference of treatment applied according to whether or not the business of the holding company belonging to the consortium consists in holding shares in subsidiaries having their seat in non-member countries lies outside the scope of Community law Consequently, [Article 65 TFEU derogations] do not preclude domestic legislation under which tax relief is not granted to a resident consortium member where the business of the holding company owned by that consortium consists in holding shares in subsidiaries which have their seats in non-member countries…
Thus the national court is not required to interpret its legislation in conformity with EU law or to dis-apply that legislation in a situation falling outside the scope of Community law

C. Which Fundamental Freedom Applies - Establishment of Capital?


The free movement of people, goods and services only apply to citizens or employees of the Member States: and they only apply to movement within the territory of the EU/EEA This is different under the free movement of capital, which extends to third countries Thus Member States are allowed to discourage economic activities beyond the external borders of the EEA/EU unless the legal transaction/movements qualify as capital movements - the freedom of establishment will not prevent discrimination outside the EU/EEA Thus it is important to identify which fundamental freedom applies in a given situation

C-196/04 Cadbury Schweppes (Controlled Foreign Companies Legislation) The ECJ

The national court asks whether Article 49 TFEU (freedom of establishment), Article 56 (free movement of services) and Article 63 TFEU

3

Corporate & Business Taxation (BCL)/Magister Juris (MJur)


Bachelor of Civil Law

(free movement of capital) preclude national tax law which provides a charge on the parent company on the profits made by a CFC That question must be understood are referring to Article 54 TFEU (personal scope under the freedom of establishment) under which companies and firms are treated in the same way as natural persons, referred to in Article 49 TFEU…
National provisions which apply to holdings by nationals of one MS concerned in the capital of a company established in another Member State (CFC), giving them definite influence on the company's decisions and allowing them to determine its activities, comes within the substantive scope of the Treaty on freedom of establishment In this case… the legislation on CFCs… must therefore be examined under Articles 49 and 54 If that legislation has restrictive effects on the free movement of services or capital - such effects are an unavoidable consequence of a restriction on freedom of establishment, and do not justify an independent examination under Articles 56 or 63 TFEU…

Comment

In the two Test Claimants/FII Group Cases, the ECJ had to decide whether it was freedom of establishment (Article 49 TFEU) which applied, or whether Article 63 (free movement of capital) in cases of national law taxing controlled foreign companies outside the EU Broadly speaking, the ECJ concluded that if the tax legislation in question is of general nature then the free movement of capital also applies where EU resident entities derive taxable proceedings or dividends from interests held in companies resident in third countries In situations where the interest does not confer a decisive influence, the ECJ's approach seems to be that the investment and accompanying proceeds are capital movements

C-35/11 Test Claimants in the Franked Investment Income Group Litigation (FII 2) (Dividends) The ECJ 1 - Establishment of Capital?

The referring court asks whether a company resident in a Member State whose shareholding in a company resident in a third country which gives it definite influence over the latter, may rely on Article 63 TFEU [free movement of capital] to question the compatibility of a national provision which taxes foreign-sourced dividends and does not apply exclusively to situations in which the parent exercises decisive influence…
The tax treatment of dividends may fall within Article 49 [establishment]
or Article 63…

4

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

The starting point is to take into account the purpose of the national legislation:

1. Article 49 applies to national law which intends to apply only to those shareholdings which enable the holder to exert a definite influence on a company's decisions

2. Article 63 applies to national law which intends to apply only to those shareholdings which do not enable the holder to exert a definite influence on company's decision

3. However, in the present case, where the national law applies to both, it cannot be determined from the purpose of the national legislation [alone] whether it falls predominantly within the scope of Article 49 TFEU or Article 63 TFEU…

o

In these circumstances the Court can take into account the facts of the case

o

However, the Court can only look to the facts of the case where it concerns EU-resident companies which receive dividends from companies established in other Member States…

o

Where, however, like the present case, the dividends originate from a third country, it is sufficient to examine the purpose of the national legislation…

But since the provisions on freedom of establishment do not extend to a company in a third country, the legislation relating to the treatment of dividends originating in third countries cannot fall within the scope of Article 49 TFEU; thus where the national legislation applies only to exerting a definite influence, neither Article 49 TFEU nor Article 63 can be relied on [viz. the third country element bars Art 49 applying; the definite influence bars Article 63]
But where the national rules apply also to situations where the parent company does not exert a definite influence, this must be assessed in light of Article 63 and so a company which is resident in that Member State may thus rely on Article 63 to call in question such rules… [viz. the third country element bars Art 49; but there is no bar on Article 63]

2 - Limitation

Since the Treaty does not extend freedom of establishment to third countries, it is important to ensure that the interpretation of Article 63(1) TFEU as regards relations with third countries does not enable economic operators who do not fall within the limits of the

5

Corporate & Business Taxation (BCL)/Magister Juris (MJur)


Bachelor of Civil Law

territorial scope of freedom of establishment to profit from that freedom [of capital]
Such a risk does not exist in a situation such as that at issue in the main proceedings. The legislation of the Member State in question does not relate to the conditions for access of a company from that Member State to the market in a third country or of a company from a third country to the market in that Member State. It concerns only the tax treatment of dividends which derive from … third country company

C-446/04 Test Claimants in the FII Group Litigation (FII 1) The ECJ

…Dispute relates to the effect of national legislation on the situation of resident companies which receive dividends on the basis of a holding which does not give them definite influence over the decisions of the company making the distributions, and does not allow them to determine its activities, the legislation must be considered in light of Art 63 TFEU In so far as the question concerns companies established in nonmember countries, which do not fall within the scope of Article 49 TFEU
[freedom of establishment], the question arises whether national measures also contravene Art 63 TFEU [free movement of capital]

Comment - E Nijkeuter, M F de Wilde "FII 2 and Applicable Freedoms" (2013) EC Tax Review 1 - What the ECJ held in FII 2

Before the decision in FII2 the ECJ used two different tests to deal with majority interests in third country situations:

1. Factual Approach: If the shareholder had a "decisive influence" on the underlying business activities, then this is regarded as an act of establishment such that if the fact concerns an act of establishment outside the EU, then primary EU law did not apply - the Dutch Supreme Court had followed this line of reasoning.

2. Object and Purpose Approach: ECJ looked at the aim and spirit of the potentially restricting measure in order to qualify the capital movement. If the measure only applies to interests that allow the shareholder to exercise a decisive influence then it was considered an act of establishment; if it had a more general purpose, then this was considered a capital movement - followed by UK, German and French courts.

6

Corporate & Business Taxation (BCL)/Magister Juris (MJur)



Bachelor of Civil Law

The ECJ tried to clarify its approach in FII2 by merging the two into one consistent approach The ECJ based its choice of applicable freedom on the object and purpose approach, only applying the factual approach where it considered this necessary The ECJ ruled that (1) measures whose subject matter is restricted in purpose to a majority participation must be assessed as acts of establishment (e.g. group relief, tax consolidation and thin-cap rules); (2) tax measures relating to portfolio investments or measures relating to combating use must be assessed as capital movements (e.g. CFC rules); (3) but measures of general application are assessed in light of capital movements in third country contexts However, the ECJ held that this object and purpose approach was unhelpful in this particular case (on UK CFC rules) because it could not tell whether the general tax measure related to acts of establishment or to capital movements Where the purpose approach was not helpful, the court looked to the factual approach It noted that the UK rules fell under the provisions concerning freedom of establishment But then noted that the freedom of establishment cannot apply in third country situations like the one here; thus it concluded that the CFC rules must be assessed in the light of the free movement of capital, irrespective of the actual size of the shareholding

2 - Analysis of the ECJ's Approach


The ECJ further pointed out that the fact that the freedom of establishment does not apply to third country situations means that it is important to ensure that the Article 63 TFEU free movement of capital is not used by economic operators solely to apply that freedom The ECJ seems to be formulating a type of anti-abuse approach in order to prevent EU law being applied to acts of establishment through the backdoor But who are the "economic operators"?
We think the ECJ meant those legal entities with a "European nationality" that are for tax purposes resident outside the EU but e.g. incorporated in EU, or are resident inside the EU but whose acts of establishment occur outside the EU: these entities have a personal scope of freedom of establishment but do not fall under the territorial scope of this freedom as they are in fact investing outside the EU/EAA territory (thus involving outbound investments) On the other hand, the ECJ also refers to legislation of a Member State that "applies to a company from a third country in that Member State" - this indicates inbound investors i.e. those entities performing acts of establishment within the EU but fall outside the personal scope of

7

****************************End Of Sample*****************************

Buy the full version of these notes or essay plans and more in our Corporate and Business Tax Law (BCL) Notes.