June 2016 - edition 156EU Tax Alert

The EU Tax Alert is an e-mail newsletter to inform you of recent developments in the EU that are of interest for tax professionals. It includes recent case law of the European Court of Justice, (proposed) direct tax and VAT legislation, customs, state aid, developments in the Netherlands, Belgium and Luxembourg and more.

To subscribe (free of charge) see: www.eutaxalert.com

Please click here to unsubscribe from this mailing.

32

Highlights in this edition

Political agreement EU to implement anti tax avoidance measures (Anti Tax Avoidance Directive)Monday 20 June 2016 at midnight the EU Council reached political agreement on the Anti Tax Avoidance Directive

(ATAD). The main goal of the ATAD is to ensure a coordinated and coherent implementation at EU level of some

of the OECD’s recommendations regarding base erosion and profit shifting (BEPS) and to add certain anti tax

avoidance measures which are not part of the OECD BEPS project.

The Member States have to implement all measures as of 1 January 2019, except for the exit taxation provision

and the interest deduction limitation provision. The exit taxation provision must be implemented per 1 January 2020.

The implementation of the interest deduction limitation provision can be postponed until 1 January 2024, subject to

certain conditions.

EU CbC Directive adopted; EU-blacklist of non-EU tax havens announcedOn 25 May 2016, the EU Council adopted two texts regarding: (i) a directive on EU country-by-country reporting by

multinationals, and (ii) conclusions on external taxation strategy (EU-blacklist of non-EU tax havens) and measures

against tax treaty abuse.

Extensive Notice on the Notion of State Aid published On 19 May 2016, the European Commission published its Notice on the Notion of State aid. This Notice reflects the

Commission’s position on how it will apply State aid rules to, for instance, tax benefits. It intends to clarify previous

decision-making practices and supersede it where necessary.

3

Commission publishes the non-confidential version of the final decision on the APA of Fiat in LuxembourgOn 9 June 2016, the Commission published its final decision, dated 21 October 2015, concerning the State aid investigations

into the tax ruling granted by Luxembourg to Fiat related to an Advanced Pricing Agreement (‘APA’).

The Commission concluded that the tax ruling granted by Luxembourg to Fiat constituted a selective advantage that is

imputable to Luxembourg and financed through State resources and which distorts or threatens to distort competition and

is liable to affect intra-EU trade. Therefore, the Commission considered that the contested tax ruling constitutes State aid

within the meaning of Article 107 (1) TFEU, and ordered the recovery of the estimated tax advantage granted.

Commission publishes the non-confidential version of the decision to open an in-depth investigation into transfer pricing arrangements on corporate taxation of McDonalds in Luxembourg On 6 June 2016, the Commission published its decision of 3 December 2015 to open a formal investigation into the tax

position of McDonald’s in Luxembourg.

In contrast to other recent tax related State aid cases such as Fiat and Starbucks, this investigation does not relate

to transfer pricing matters. However, as in the other recent fiscal State aid cases, the focus is on whether a selective

advantage has been granted to the beneficiary of a tax ruling.

State aid - Belgian excess profit rulings decision is published On 4 May 2016, the Commission published on its website the State aid decision of 11 January 2016, in which the

Commission concludes that the Belgian excess profit rulings constitute illegal State aid. Belgium filed its appeal against the

decision on 22 March 2016. The published decision provides valuable insight into the legal reasoning of the Commission

in respect of State aid and transfer pricing.

4 5

capitalization applicable in the relevant Member

State is not in breach of the freedom of establishment

(Masco)

• AG Wathelet opines that Portuguese legislation

imposing an exit tax in the case of exchange of

shares followed by a transfer of place of residence

abroad or transfers of assets and liabilities relating to

an activity carried out on an individual basis in return

of shares in a non-resident company contravene the

fundamental freedoms (Commission v Portugal)

VAT• CJ rules that transport of pupils by Municipality for a

very limited contribution in principle does not qualify

as an economic activity for VAT purposes (Gemeente

Borsele)

• Ingots consisting of various scrapped, gold-bearing

metal objects and organic materials qualify as gold in

CJ’s view (Envirotec)

• CJ rules that debit and credit card handling services in

respect of cinema ticket are not VAT exempt (Bookit)

• CJ rules that processing of a payment by debit or

credit card for the purchase of an event ticket does

not qualify as VAT exempt service (National Exhibition

Centre)

• Council of the European Union and VAT Expert Group

welcome the VAT Action Plan

• Council adopts Directive maintaining VAT minimum

standard rate

Customs Duties, Excises and other Indirect Taxes• CJ rules on the CN classification of alcoholic

beverages (Toorank)

• CJ rules on the definition of the normal place of

residence (X case)

• CJ rules on the tariff classification of mobility scooters

(Invamed)

• CJ rules on the tariff classification of turret system

for armoured fighting vehicles (GD European Land

Systems – Steyr GmbH)

• CJ rules on the tariff classification of LPG (Latvijas

propāna gāze)

• EU Commission publishes guidelines on the Union

Customs Code

ContentsHighlights in this edition• Political agreement EU to implement anti tax

avoidance measures (Anti Tax Avoidance Directive)

• EU CbC Directive adopted; EU-blacklist of non-EU

tax havens announced

• Extensive Notice on the Notion of State Aid published

• Commission publishes the non-confidential version

of the final decision on the APA of Fiat in Luxembourg

• Commission publishes the non-confidential version

of the decision to open an in-depth investigation into

transfer pricing arrangements on corporate taxation

of McDonalds in Luxembourg

• State aid - Belgian excess profit rulings decision is

published

State Aid / WTO• Commission releases working paper on State aid and

tax rulings

Direct taxation• CJ rules that German legislation concerning the

calculation of the transfer duties payable in respect of

the gift of a plot of land in Germany contravenes the

free movement of capital (Hünnebeck)

• CJ rules that Swedish legislation on the taxation of

non-resident pension funds is not in breach with the

free movement of capital (Pensioenfonds Metaal en

Techniek)

• CJ rules that Belgian legislation which subjects non-

resident UCIs to an annual tax is not in breach of

the fundamental freedoms while a specific sanction

only for foreign UCIs which fail to pay amounts in

respect of annual tax is in breach of the fundamental

freedoms (NN (L) International)

• CJ rules that Greek legislation which provides for an

exemption from inheritance tax relating to primary

residence applicable solely to Greek residents is in

breach of the free movement of capital (Commission

v Greece)

• AG Kokott opines that Danish legislation which does

not grant a resident company a tax exemption on

interest income received from an affiliated company

established in another Member State which is

not entitled to a tax deduction as a result of thin

5

a) Interest deduction limitation rule

This rule limits the deduction of net borrowing costs to the

higher of (i) 30% of the earnings before interest, taxes,

depreciation and amortisation (EBITDA) and (ii) an

amount of EUR 3 million. The net borrowing costs are

defined as the balance of a taxpayer’s interest expenses

and economically equivalent costs and expenses

incurred in connection with the raising of finance, on the

one hand, and a taxpayer’s taxable interest income and

equivalent taxable income, on the other. The rule does not

distinguish between third party and related party interest.

The EBITDA is calculated on the basis of tax numbers

and excludes tax exempt income. Member States can

choose to apply the fixed rule of 30% and the EUR 3

million threshold escape at the level of a local group as

defined according to national tax law. Further, Member

States can choose to exclude standalone entities from

the application of the interest deduction limitation.

If the taxpayer is member of a consolidated group for

financial accounting purposes, the ATAD provides for two

alternative worldwide group ratio escape rules, namely

(1) an equity escape rule or (2) an earnings-based

worldwide group ratio rule. The Member States may

choose to implement one of these two escape rules, but

they are not obliged to do so. Under the equity escape

rule a taxpayer is allowed to fully deduct its exceeding

borrowing costs if it can demonstrate that the ratio of its

equity over its total assets is not more than 2 percentage

points lower than the equivalent ratio of the worldwide

group. Under the earnings-based worldwide group

ratio rule a taxpayer is allowed to deduct its exceeding

borrowing costs up to the level of the net interest/EBITDA

ratio of the worldwide group to which it belongs.

A Member State may give the taxpayer one of the

following rights to ensure a balanced application of the

interest deduction limitation rule over a number of years,

devoid of effects of incidental fluctuations in EBITDA and

net interest expense level:

1, To carry forward, without time limitation, non-

deductible borrowing costs to future years; or

2. To carry forward, without time limitation, and back,

for a maximum of 3 years, non-deductible borrowing

costs; or

Highlights in this editionPolitical agreement EU to implement anti tax avoidance measures (Anti Tax Avoidance Directive)Monday 20 June 2016 at midnight the EU Council

reached political agreement on the Anti Tax Avoidance

Directive (ATAD). The main goal of the ATAD is to ensure

a coordinated and coherent implementation at EU level

of some of the OECD’s recommendations regarding base

erosion and profit shifting (BEPS) and to add certain anti

tax avoidance measures which are not part of the OECD

BEPS project.

The Member States have to implement all measures as

of 1 January 2019, except for the exit taxation provision

and the interest deduction limitation provision. The exit

taxation provision must be implemented per 1 January

2020. The implementation of the interest deduction

limitation provision can be postponed until 1 January

2024, subject to certain conditions.

The ATAD lays down rules against tax avoidance in five

specific fields:

1. deductibility of interest;

2. exit taxation;

3. general anti-abuse rule (GAAR);

4. controlled foreign company (CFC) rules; and

5. hybrid mismatches.

Compared to the first proposal of the

European Commission (see our Tax Flash of

28 January 2016) substantial changes were made to

most of these rules. The switch-over clause, limiting tax

exemptions for income from low-taxed foreign subsidiaries

and permanent establishments, was eliminated.

The implementation of the ATAD will require changes to

currently existing corporate income tax rules, like interest

deduction limitations, but will also require the introduction

of completely new sets of rules like for CFCs and hybrid

mismatches in many Member States. The rules of the

ATAD merely set the minimum required standards:

Member States may apply additional or more stringent

provisions aimed at BEPS practices.

6 7

connected with a PE in the Member State of origin);

or

4. transfer of the business carried out in a PE out of a

Member State.

Members States to which assets are transferred must

accept the market value of the assets transferred

established by the transferor Member State as the

starting value for tax purposes (i.e., a step-up).

Member States must give taxpayers the right to defer

the exit tax payment by paying it in instalments spread

out over five years when the transfers occur between

Member States or states that are party to the European

Economic Area Agreement (EEA States; Liechtenstein,

Norway and Iceland). Contrarily to the initial proposal,

the ATAD provides that the deferral on payment in case

of EEA States can only occur in case the EEA State has

concluded an agreement with the EU Member State of

origin or with the European Union on mutual assistance

for the recovery of claims, equivalent to the mutual

assistance provided for in Directive 2010/24/EU.

Interest may be charged on deferred exit tax and the

deferral of payment of exit tax may be subject to security

arrangements to ensure proper collection. The deferral

of exit tax must be terminated if the transferred assets

are disposed of, are transferred to a third country or if the

taxpayer transfers its residence for tax purposes to a third

country or goes bankrupt. The deferral is also terminated

in case the taxpayer fails to fulfill its obligations in relation

to the installments and does not correct its situation over

a reasonable period of time (which shall not exceed 12

months).

c) GAAR

Under the GAAR, non-genuine arrangements or series

thereof that are put in place for the main purpose or one

of the main purposes of obtaining a tax advantage that

defeats the object or purpose of the applicable law should

be ignored for the purposes of determining the corporate

tax liability. The wording of the GAAR corresponds to

the wording of the general anti-abuse rule of the 2015

amendment to the EU Parent Subsidiary Directive, except

that the GAAR in the ATAD should be applied to the entire

domestic corporate tax laws of the Member States.

3. To carry forward, without time limitation, non-

deductible borrowing costs and, for a maximum of 5

years, unused interest capacity.

Member States are not obliged to apply the interest

deduction limitation rule to financial undertakings,

which are defined in the ATAD and generally comprise

regulated financial institutions such as banks, insurance

companies, pension funds and certain investment funds.

Member States may also exclude the application of this

rule with respect to loans used to fund certain long-term

infrastructure projects.

The agreed text includes a grandfathering clause which

excludes the application of the interest deduction limitation

rule in case of loans concluded before 17 June 2016,

but this exclusion shall not extend to any subsequent

modification of such loans.

On the basis of a special implementation rule, Member

States can postpone the implementation of the interest

deduction limitation rule, provided they already have

national rules preventing base erosion and profit shifting

in place, which are equally effective to the interest

deduction limitation rule as included in the ATAD. If so,

they can postpone the implementation of the interest

deduction limitation rule until the end of the year following

the date of the publication of the agreement between the

OECD members on a minimum standard with regard to

BEPS Action 4, but no later than 1 January 2024.

b) Exit taxation

The ATAD provides for an exit tax to be assessed in

the Member State of origin on the difference between

the market value of the transferred assets and their tax

value. Exit tax shall be triggered in the case of:

1. transfer of assets from the head office to a permanent

establishment (PE) located in another Member State

or in a third country in so far as the Member State

of the head office no longer has the right to tax the

transferred assets;

2. transfer of assets from a PE in a Member State to its

head office or another PE located in another Member

State or third country;

3. transfer of tax residence to another Member State

or third country (except when the assets remain

7

for situations where the CFC carries on a substantive

economic activity supported by staff, equipment,

assets and premises, as evidenced by relevant facts

and circumstances. If the CFC is not a resident of or

situated in a Member State or an EEA State, Member

States may decide to refrain from applying this

‘substantive economic activity’-exception. Exceptions

may be applied if the income of the CFC consists

for one third or less out of the specific types of listed

income and for financial undertakings when certain

conditions are met.

• Inclusion of non-distributed income arising from

non-genuine arrangements which have been put

in place for the essential purpose of obtaining a

tax advantage. An arrangement shall be regarded

as non-genuine to the extent that the CFC would

not own assets or would not have undertaken risks

if it were not controlled by a company where the

significant people functions, which are relevant

to those assets and risks, are carried out and are

instrumental in generating the controlled company’s

income. The attribution of income is then limited to the

income attributable to the significant people functions

carried out by the controlling company. In this case,

an exception may be provided by an Member State

for CFC entities or PEs with accounting profits of no

more than EUR 750.000 and non-trading income of

no more than EUR 75.000 or of which accounting

profits account to no more than 10 percent of its

operating costs for the tax period.

The provisions on CFC legislation in the ATAD provide

rules with respect to the computation of the income to be

included under the CFC rules (calculated in accordance

with the rules of the Member State where the taxpayer

resides) and the amount of income to be included under

the CFC rules (proportion of entitlement to profits of the

entity). The provisions also provides for relief of double

taxation through a credit for the underlying corporate tax

paid by the CFC.

e) Hybrid mismatches

Hybrid mismatches are situations in which an entity

is qualified differently in two Member States and this

difference in qualification results in:

Arrangements or series thereof shall be regarded as non-

genuine to the extent that they are not put into place for

valid commercial reasons, which reflect economic reality.

If the GAAR applies, the tax liability should be determined

in accordance with the respective national law. In

addition, according to the preamble, Member States may

apply penalties whenever the GAAR is applied.

d) CFC legislation

The ATAD prescribes Member States to implement CFC

legislation in their national laws. Under the ATAD, a

CFC refers to an entity or a PE that meets the following

conditions:

• a taxpayer holds (alone or together with associated

enterprises) a (direct or indirect) participation of more

than 50% of the voting rights, more than 50% in the

capital or the entitlement to more than 50% of the

profits of that entity; and

• the actual tax paid by the entity or PE in the CFC

jurisdiction is lower than the difference between

the corporate tax that would have been charged on

the entity or PE under the applicable corporate tax

system in the Member State of the taxpayer and

the actual tax paid on profits in the CFC jurisdiction.

The final wording reflects the concerns raised by

some Member States as to the use of the concept

of “effective tax rate” in previous draft versions of the

ATAD. Still, the approved version leads in fact to the

same result: a CFC will be any entity or PE that is

subject to an effective tax rate of less than 50% of the

effective tax rate in the country of the Member State

of the taxpayer.

The non-distributed income of such a CFC needs to be

included in the taxable income of a taxpayer in case

additional requirements are met. Member States may opt

for two alternative approaches:

• Inclusion of non-distributed specific types of income

as defined in the ATAD (i.e., interest, dividends,

income from the disposal of shares, royalties,

income from financial leasing, income from banking,

insurance and other financial activities, income from

invoicing associated enterprises as regards goods

and services where there is no or little economic

value added). In this case, an exception is provided

8 9

In the first draft of the ATAD, these mismatches were

solved by prescribing a full requalification of the hybrid

entity in one of the Member States involved. This Member

State had to follow the qualification of the other Member

State and in that way the mismatch was taken away. This

mechanism had lots of other tax consequences than

only solving the hybrid mismatch and was replaced by a

simpler set of rules.

Under the new rules, the general qualification of the

hybrid entity is left unchanged. The rules are limited to

a denial of the deduction of the payment that leads to a

double deduction or deduction/no inclusion in one of the

Member States.

• In case of a double deduction, only the Member

State where the payment has its source shall give

a deduction (in the first example above: country B).

This means that the other Member State involved (in

the first example above: country A) has to deny the

deduction of the payment.

• In case of a deduction/no inclusion, the Member

State of the payer shall deny the deduction (in the

second example above: country B).

The rules also apply to hybrid mismatches caused

by a structured arrangement with a different legal

characterization of a financial instrument.

The scope of the rules is limited to hybrid mismatches

between Member States. In the Annex to the ATAD the

EU Council requests the European Commission to put

forward a proposal for hybrid mismatches with non-EU

countries by October 2016.

EU CbC Directive adopted; EU-blacklist of non-EU tax havens announcedOn 25 May 2016, the EU Council adopted two texts:

(i) a directive on EU country-by-country reporting by

multinationals, and (ii) conclusions on external taxation

strategy (EU-blacklist of non-EU tax havens) and

measures against tax treaty abuse.

1. EU Country-by-Country reporting by multinationals

adopted

The EU Council officially adopted the EU directive

that will implement OECD anti-BEPS action 13, on

• a double deduction of certain costs or losses (“double

deduction” or “DD”); or

• a deduction of certain costs without taxation of the

corresponding income (“deduction/no inclusion” or

“D/NI”).

The most common types of these structures can be

depicted as follows:

Double deduction:

• B Co. is transparent in Country A

• B Co. is non transparent in Country B

• Interest expenses of B co. can therefore be deducted

in Country A and Country B

Deduction/no inclusion:

• B Co. is transparent in Country A

• B Co. is non transparent in Country B

• Interest expenses of B co. paid to A co. can therefore

be deducted in Country B, but is not visible or taxable

in Country A.

A Co.Country A

Country B

B Co.

B Sub 1

Bank

Interest

Loan- +

A Co. Country A

Country B

B Co.

B Sub 1

Interest Loan

-

+

9

Extensive Notice on the Notion of State Aid published On 19 May 2016, the Commission published its Notice

on the Notion of State aid. This Notice reflects the

Commission’s position on how it will apply State aid rules

to, for instance, tax benefits. It intends to clarify previous

decision-making practices and supersede it where

necessary. In respect of taxes, the Commission addresses

a number of specific issues in somewhat more detail:

i) special tax regimes for cooperatives (co-ops), (ii) special

tax regimes for collective investment vehicles (CIVs), (iii)

tax amnesties, (iv) tax rulings, including advance pricing

agreements, (v) tax settlements, (vi) special depreciation

and amortization rules, (vii) fixed basis regimes, such as

tonnage tax regimes, (viii) selective exemptions to anti-

abuse rules, and (ix) lowered excise duties.

The Notice reflects, amongst others, some core elements

of the approach the Commission took in the recent tax

ruling decisions although there are some noticeable

changes and omissions. While the Notice does bind the

Commission, it does not bind any aid recipient or the EU’s

Courts, especially in regard to viewpoints not previously

tested by the CJ.

Commission publishes the non-confidential version of the final decision on the APA of Fiat in Luxembourg On 9 June 2016, the Commission published its final

decision, dated 21 October 2015, concerning the State aid

investigations into the tax ruling granted by Luxembourg

to Fiat related to an Advanced Pricing Agreement (‘APA’).

The Commission concluded that the tax ruling granted

by Luxembourg to Fiat constituted a selective advantage

that is imputable to Luxembourg and financed through

State resources and which distorts or threatens to

distort competition and is liable to affect intra-EU trade.

In concrete terms, the Commission concluded that the

tax ruling did indeed grant a selective advantage to

FTT since it led to a lowering of that entity’s taxable

profit in Luxembourg as compared to non-integrated

companies whose taxable profits are determined by

transactions concluded on market terms. According

to the Commission, due to a number of economically

unjustifiable assumptions and downward adjustments,

the capital base approximated by the tax ruling is much

country-by-country reporting by multinationals and

the exchange thereof between tax administrations

(not to be confused with the European Commission’s

proposal of 12 April 2016 on public country-by-

country reporting for multinationals, which is still

pending). The political agreement on this proposal

was reached in March 2016. This directive needs

to be implemented into domestic law before

31 December 2016. The Netherlands had already

implemented country-by-country reporting for

multinationals as per 1 January 2016. 2. Conclusions on external taxation strategy (list of non-

cooperative jurisdictions) and measures against tax

treaty abuse

The EU Council has adopted conclusions on the third

country (non-EU States) aspects of the European

Commission anti-tax avoidance measures. The most

important element is that an EU-list of third country, non-

cooperative jurisdictions will be established and that

defensive measures against those third States, to be

implemented both in the tax area and in the non-tax area,

will be explored. The Code of Conduct Group will work on

this list and those defensive measures as of September

2016, with a view to endorsement by the EU Council in

2017.

Furthermore, the EU Council has invited the European

Commission to consider legislative initiatives on

mandatory disclosure rules for aggressive or abusive

transactions (based on Action 12 of the OECD BEPS

project) with a view to introducing more effective

disincentives for intermediaries who assist in tax evasion

or tax avoidance schemes.

Finally, the EU Council has welcomed the European

Commission’s recommendation to implement OECD

BEPS Actions 6 (tax treaty abuse) and 7 (artificial

avoidance of permanent establishment) by including

a principal purpose test and permanent establishment

provisions as proposed by the OECD in tax treaties.

10 11

a US perspective, confers a selective advantage to

McDonald’s for the purposes of Article 107(1) TFEU. On

that basis, the Commission has decided to open (the now

pending) formal investigation.

State aid - Belgian excess profit rulings decision is published On 4 May 2016, the Commission published on its website

the State aid decision of 11 January 2016, in which the

Commission concludes that the Belgian excess profit

rulings constitute illegal State aid. Belgium filed its

appeal against the decision on 22 March 2016. The

published decision provides valuable insight into the

legal reasoning of the Commission in respect of State aid

and transfer pricing. You can find the decision published

on the website of the Commission.

Under the excess profit rulings, the actual recorded profit

of a Belgian company forming part of a multinational

group is compared with the hypothetical average profit

a stand-alone company in a comparable situation would

have made. The difference is deemed to be excess profit

that is not taxed in Belgium. These rulings are based

on the premise that multinational companies operating

in Belgium realise excess profit as a result of being

part of a multinational group, e.g. due to synergies and

economies of scale. In its decision of 11 January 2016,

the Commission concludes that the excess profit rulings

regime constitutes illegal State aid since it derogates

both from the normal practice under Belgian company tax

rules and the arm’s length principle that can be derived

from EU State aid principles. The Commission requires

Belgium to recover all asserted aid granted under the

excess profit ruling regime.

Belgium, other Member States, the beneficiaries of the

excess profit rulings or other parties who are directly and

individually concerned by the decision may challenge

it before the EU General Court under Article 263 of the

TFEU. Belgium already filed its appeal against the decision

on 22 March 2016. For others, there is a two-month term

(increased with 24 days) within which to file such appeal,

which starts running once the decision is published

in the Official Journal of the European Union. The

decision provides detailed insight into the Commission’s

reasoning in respect of State aid and transfer pricing.

lower than the company’s actual capital. In addition, the

estimated remuneration applied to this capital already

lowered for tax purposes is also lower compared to

market rates.

Therefore, the Commission considered that the contested

tax ruling constitutes State aid within the meaning of

Article 107 (1) TFEU and ordered the recovery of the

estimated tax advantage granted accrued with interest.

Commission publishes the non-confidential version of the decision to open an in-depth investigation into transfer pricing arrangements on corporate taxation of McDonalds in Luxembourg On 6 June 2016, the Commission published its decision

of 3 December 2015 to open a formal investigation into

the tax position of McDonald’s in Luxembourg.

In contrast to other recent tax related State aid cases

such as Fiat and Starbucks, this investigation does not

relate to transfer pricing matters. However, as in the other

recent fiscal State aid cases, the focus is on whether a

selective advantage has been granted to the beneficiary

of a tax ruling.

The Commission takes the view that a ruling confirming

the attribution of income to a permanent establishment

(PE) abroad, where no such PE is recognized in the

source State, is not in line with the object and purpose

of tax treaties and, thus, an exemption for the income of

such PE is not justified. While the Commission seems

willing to accept that an exemption may be given even

in the absence of effective taxation abroad, it will test

whether the treaty conditions for such an exemption have

been met. In this respect, the Commission argues that if

the source State is clearly unable to tax the income as

no PE exists under its domestic legislation, no exemption

should have been offered by the residence State of the

taxpayer.

Overall, the Commission considers that the Luxembourg

tax administration, by confirming in the revised tax

ruling an erroneous interpretation of the Luxembourg–

US tax treaty and the Luxembourg domestic law that

transposes it, in full knowledge of the fact that the US

Franchise Branch does not constitute a taxable PE from

11

companies that are part of group companies or rulings

which endorse tax deductions for payments or changes

between group companies, even where such payments

are not actually made.

Furthermore, this working paper sets out that the inquiry

suggests that the use of certain transfer pricing methods

provides a more reliable means to approximate a market

based outcome than others.

Direct TaxationCJ rules that German legislation concerning the calculation of the transfer duties payable in respect of the gift of a plot of land in Germany contravenes the free movement of capital (Hünnebeck) On 8 June 2016, the CJ delivered its judgment in the

case Sabine Hünnebeck v Finanzamt Krefeld (C-479/14).

The case concerns the German legislation regarding the

calculation of the transfer duties payable in respect of the

gift of a plot of land in Germany, when neither the donor

nor the recipient of the gift resides in that Member State.

Specifically, the case deals with the compatibility with

EU law of the amendments to the German legislation in

accordance with which the higher tax allowance reserved

for German residents is applicable to a gift between non-

residents of an asset situated in Germany if the donee

requests that the gift be subject to the tax scheme for

residents (unlimited tax liability).

Ms Hünnebeck and her two daughters are German

nationals residing in the UK. Ms Hünnebeck was a

co-owner of a plot of land located in German that

was donated to the two daughters. It was stipulated

in the transfer agreement that Ms Hünnebeck would

be liable for any gift tax which might become payable.

In calculating the amount of the transfer duties to be

paid, the German tax authorities applied the EUR 2,000

share of personal allowance that was granted to non-

resident German persons. Ms Hünnebeck appealed from

this decision requesting for the application of the EUR

400,000 personal allowance that was applied to German

residents as otherwise, non-residents would be subject

to a less favourable tax treatment.

Similar reasoning seems to have been applied in the

Fiat and Starbucks cases, the final decisions of which

are yet to be published. The Commission uses the arm’s

length principle to test whether the taxable income of a

group company is determined in a way that approximates

market conditions. In the view of the Commission,

even though non-binding, the OECD Transfer Pricing

Guidelines can be helpful and a source of inspiration

in determining whether an outcome is at arm’s length.

Nonetheless, in the view of the Commission, both the

choice for a transfer pricing method and the application

of such transfer pricing method should be thoroughly

tested by tax authorities as to whether the result is in line

with a market result. In other words, even an outcome

fully in line with the OECD Transfer Pricing Guidelines

should still be tested on market conformity based on

the Commission’s own interpretation of the arm’s length

principle.

State Aid/WTOCommission releases working paper on State aid and tax rulings On 3 June 2016, the Commission released a working

paper identifying possible issues related to profit

allocations and arm’s length standards across Member

States’ transfer pricing rulings. The working paper

inquires whether certain tax rulings are prohibited under

EU State aid rules.

The working paper analysis is based on the interpretation

of the State aid Notion as referred to in Article 107(1)

TFEU. A measure by which public authorities grant

certain undertakings a favourable tax treatment which

places them in a more favourable financial position

than other taxpayers amounts to State aid. The working

paper is based on an inquiry conducted by the DG for

Competition into over more than 1,000 tax rulings.

According to the Commission, a considerable number of

rulings relating to transfer pricing arrangements appear

to reflect an approximation of a market based outcome

in line with the arm’s length principle. However, it also

considers that other arrangements do not reflect such

approximation. This concerns, for example, a number

of tax rulings regarding remuneration of financing

12 13

respect of which at least one of the parties is a resident,

constitutes a restriction on the free movement of capital,

which is prohibited, in principle, by Article 63(1) TFEU.

The CJ then went then to analyse whether the restriction

on the free movement of capital could be justified by

overriding reason in the general interest.

First of all, as regards the need to safeguard the

coherence of the tax system, the Court stated that

Germany had failed to demonstrate how the aggregation

of the gifts over a period of 20 years, where the beneficiary

seeks to avail of the higher tax-free allowance, might

be considered to be an appropriate means by which to

achieve the objective of safeguarding the coherence of

the German tax system. In that regard, the tax advantage

derived from taking into account, for the application of the

higher allowance, a period of 10 years preceding the gift

in respect of which at least one resident in Germany is a

party is not offset by any particular tax relating to gift tax.

Second, and concerning the justification based on the

principle of territoriality and the alleged need to ensure

a balanced allocation of the powers to impose taxes,

the CJ observed that in the present case, the unequal

treatment as regards the period to be taken into account

for the application of the higher tax-free allowance results

from the application of the German legislation in question

alone. Furthermore, the Court considered that the

German Government had failed to demonstrate that such

difference in treatment is necessary in order to safeguard

the power of Germany to impose taxes.

CJ rules that Swedish legislation on the taxation of non-resident pension funds is not in breach with the free movement of capital (Pensioenfonds Metaal en Techniek) On 2 June 2016, the CJ delivered its judgment in the

case Pensioenfonds Metaal en Techniek v Skatteverket

(C-252/14). The case deals with the Swedish legislation

that provides for a different tax treatment of resident

and non-resident pension funds. In essence, resident

pension funds are subject to lump sum taxation on the

basis of notional yield while non-resident pension funds

are subject to withholding tax on dividends.

The German tax authorities rejected the appeal,

considering that the German legislation already gave the

possibility to benefit from this higher personal allowance

by granting the possibility to opt to be treated as a

German resident. In this case, all transfers made in the

previous or subsequent 10 years following the transfer of

the assets would be treated as subject to unlimited tax

liability.

In this regard, the CJ started by stating that the

mechanism of taxation that allows the beneficiary of a

gift between non-residents to benefit from the higher tax-

free allowance provided for in the case of gifts involving

at least one resident, is of optional application and the

exercise of such option by the non-resident beneficiary

involves the aggregation, for the purposes of calculating

the tax payable in respect of the gift in question, of all the

gifts received by that beneficiary from the same person

over the course of the 10 years preceding and of the 10

years following that gift, whereas, for gifts involving at

least one resident, only the gifts made within a period of

10 years are aggregated.

Furthermore, the CJ added that, as regards the optional

nature of that mechanism of taxation, even if such

mechanism would be compatible with EU law, a national

scheme that restricts the freedom of movement may

still be incompatible with EU law even being of optional

application. In fact, the existence of an option which

would possibly render a situation compatible with EU law

does not, in itself, correct the unlawful nature of a system,

such as the system provided for by the contested rules,

which still includes a mechanism of taxation that is not

compatible with that law. It should be added that this is

even more so in the situation where, as in the present

case, the mechanism incompatible with EU law is the

one which is automatically applied in the case where

the taxpayer fails to make a choice. In the concrete

case, the CJ considered that subject to the checks to be

carried out by the referring court as to the length of the

period to be taken into account for the purpose of the

application, at the request of non-resident beneficiaries,

of the higher tax-free allowance, it must be held that, as

regards the length of the period for the aggregation of

the gifts to be taken into account for the application of

the higher allowance, the tax treatment of gifts between

non-residents that is less favourable than that of gifts in

13

non-resident pension funds from making investments

in that Member State and, consequently, amounts to

a restriction of the free movement of capital. However,

the Court observed that provisions can be considered

compatible with the TFEU if they refer to situations which

are not objectively comparable. The comparability to

be assessed having regard to the aim pursued by the

national provisions at stake as well as its purpose and

content.

In this respect, the CJ considered that that the taxation

affecting resident pension funds has a different purpose

from that applied to non-resident pension funds. Thus,

whereas the former are taxed on the basis of their total

income, calculated on the basis of their assets reduced

by their liabilities, to which a standard yield rate is applied,

irrespective of the actual receipt of dividends in the

course of the tax year at issue, the latter are taxed on the

dividends received in Sweden in that tax year. Therefore,

it concluded that a non-resident pension fund is not in a

situation comparable to that of a resident pension fund.

Nevertheless, the CJ stated that in relation to professional

expenses directly linked to an activity that has generated

taxable income in a Member State, residents and non-

residents of that State are in a comparable situation.

CJ rules that Belgian legislation which subjects non-resident UCIs to an annual tax is not in breach of the fundamental freedoms while a specific sanction only for foreign UCIs which fail to pay amounts in respect of annual tax is in breach of the freedoms (NN (L) International) On 26 May 2016, the CJ delivered its judgment in the

case Etat belge SPF Finances v NN (l) International,

formerly ING International SA, successor to the rights

and obligations of ING Dymanic SA (C-48/15). The case

concerns the Belgian annual tax on undertakings for

collective investment (UCIs) which is levied on the basis

of the net value of the assets of those undertakings, both

domestic and foreign. In addition, it considers the specific

sanction for foreign UCIs which fail to pay amounts falling

due in respect of the annual tax. The proceedings concern

the refusal by the Belgian tax authorities to reimburse the

amount of the annual tax paid by NN (L) International

Pensioenfonds Metaal en Techniek (‘PMT’) is a pension

fund established in the Netherlands that received

dividends from Swedish limited companies that were

subject to a 15 withholding tax. PMT asked for a refund

of that tax considering that such taxation was in breach

of the free movement of capital. PMT was of the view that

the scheme of the national legislation on the taxation of

pension funds was discriminatory. PMT considered that

the capital yield tax replaces not only the withholding tax,

but also capital gains tax on transfers and on interest,

and the taxation of the dividends paid to Swedish pension

funds was considerably lower than the formal levy on

capital yield tax. Foreign pension funds, being subject

to gross taxation in the form of a withholding tax levied

at the point of distribution of those dividends, could also

not benefit from capping over time, sought by the lump

sum method. Furthermore, the calculation of capital yield

tax applicable to resident pension funds allows for the

deduction of financial liabilities, whereas the withholding

of tax applicable to non-resident shareholding pension

funds did not allow it. Finally, whereas tax was withheld

when the dividends were distributed, capital yield tax, for

its part, is calculated and levied in the year following the

distribution of dividends, creating a liquidity disadvantage

for non-resident pension funds.

The CJ started by recalling that the less favourable

treatment by a Member State of dividends paid to non-

resident pension funds, compared to the treatment of

dividends paid to resident pension funds, is liable to deter

companies established in a Member State other than

that first Member State from pursuing investments in that

same first Member State and, consequently, amounts

to a restriction of the free movement of capital. In that

regard, the CJ stated that it was necessary to determine

whether the existing difference in tax treatment led to a

less favourable taxation of non-resident pension funds.

In this regard. the CJ observed that the difference in

treatment established by the Swedish tax laws, regarding

the taxation of dividends paid to resident pension funds

and the taxation of similar dividends paid to non-resident

pension funds, is capable of resulting in the dividends

paid to those latter funds bearing a heavier tax burden

in comparison to that borne by resident pension funds.

Such a difference in treatment is liable to deter such

14 15

by Belgian UCIs. However, NN (L) contented that there

was discriminatory treatment because the tax was applied

similarly to the situations of resident and non-resident

UCIs, which nevertheless, were not in comparable

situations. The CJ recalled that disadvantages which

arise from the parallel exercise of tax competences by

different Member States do not constitute restrictions

on the freedom of movement to the extent that such

an exercise is not discriminatory. Accordingly, Member

States are not obliged to adapt their tax systems to those

of other Member States in order to eliminate double

taxation. Therefore, it concluded that there was no

breach of the free movement of capital

Finally, the Court analysed the specific sanction only

applicable to foreign UCIs. This sanction essentially

determines the prohibition of foreign UCIs to carry out

activities in Belgium in the case they fail to submit their

tax declarations within the prescribed period or to pay

the annual tax. The CJ noted, following the AG’s Opinion,

that since this legislation may prohibit UCIs established

in other Member States from carrying out their activities

in Belgium, even if they may lawfully continue with the

same activities in their Member State of origin, it should

be examined in the light of the freedom to provide

services. The Court concluded that this sanction, although

potentially justified by the need to ensure collection of

annual tax on UCIs, did indeed constitute a breach of the

free movement of services, notably by considering that

being potentially unlimited in time, it does not satisfy the

requirements of proportionality.

CJ rules that Greek legislation which provides for an exemption from inheritance tax relating to primary residence applicable solely to Greek residents is in breach of the free movement of capital (Commission v Greece) On 26 May 2016, the CJ delivered its judgment in

the case European Commission v Hellenic Republic

(C-244/15). The case concerns the Greek legislation that

provides for an exemption from inheritance tax relating

to the primary residence on condition that the heir is

permanently resident in Greece.

for the year 2006. The referring court asked whether EU

law precludes the application of the annual tax to foreign

UCIs and the imposition of a specific sanction on foreign

UCIs who fail to observe this tax obligation. The questions

referred concern, in particular, the interpretation of

Directive 69/335/EEC (on harmonization of indirect taxes

on raising of capital in Member States), and Directive

85/611/EEC (on harmonization of UCITS), the freedom

to provide services and the free movement of capital.

The CJ started by analysing the first question on whether

the Articles 2, 4, 10 and 11 of Directive 69/335, precludes

a Member State from imposing an annual tax on UCIs

which levies that tax on UCIs governed by foreign law

marketing units in that Member State.

The Court recalled that the purpose of this Directive is

to abolish indirect taxes, other than capital duty, which

have the same characteristics as that duty, namely those

applied to the transactions covered by that directive.

In that regard, and taking into account that the base of

annual tax consists of net amounts invested in Belgium in

the preceding year, it concluded that such a tax does not

relate to any of the types of transactions subject to capital

duty under this Directive.

In regard to Directive 85/611, the question raised was

whether this Directive should be interpreted as precluding

the imposition of the annual tax, because it prejudices the

principal aim of that directive of facilitating the marketing

of UCITS in the EU. The CJ considered that Directive

85/611 does not contain any provision on taxation and

thus does not have any bearing on the present case.

Subsequently, the CJ dealt with the issue of compatibility

of the annual tax charged on foreign UCIs. As a preliminary

issue, the Court determined what fundamental freedom

was applicable in this case, concluding that the annual

tax was primarily concerned with the free movement of

capital being the free movement of services secondary in

relation to the free movement of capital.

The CJ observed that it was apparent that the national

legislation was applicable without distinction to resident

and non-resident UCIs. In addition, the application of

the annual tax does not result in foreign UCIs ultimately

bearing a heavier tax burden in Belgium than that borne

15

provision is not subject to the obligation that the heir

establish the inherited property as his primary residence

or that he occupy that property at all. Furthermore, the

Court also gave no relevance to the Greek argument

according to which the legislation would aim at making

the granting of that exemption dependent upon the heir

maintaining a connection with Greek society and on his

level of integration. For the Court, an heir who is not

permanently resident in Greece at the time when the

process for settling the inheritance commences and

who does not have property may, just as much as an

heir who is resident in that Member State, have a close

link with Greek society and wish to acquire, in that State,

the inherited property in order to establish his primary

residence there.

Finally, the Court also rejected other arguments raised

by Greece that the legislation at stake would be relevant

to prevent a reduction in tax revenues, it would be

necessary for the allocation of taxation powers between

the Member States or necessary to prevent abuses.

AG Kokott opines that Danish legislation which does not grant a resident company a tax exemption on interest income received from an affiliated company established in another Member State which is not entitled to a tax deduction as a result of thin capitalization applicable in the relevant Member State is not in breach of the freedom of establishment (Masco) On 12 May 2016, AG Kokott delivered her Opinion

in case Masco Denmark ApS and Damixa ApS v

Skatteministeriet (C-593/14). The case deals with the

Danish legislation which provides for a tax exemption

on interest income received by a resident company in

the case such interest is not deductible at the level of a

paying company also located in Denmark due to interest

deduction limitation as a result of thin capitalization.

However, such tax exemption is not allowed in the case

of interest income received from an affiliated group

company located in another Member State in which a

similar interest deduction limitation rules apply in the said

Member State.

According to the Greek legislation, an exemption from

inheritance tax applies in respect of immovable property

received through inheritance by the spouse or child of a

deceased person if they are Greek nationals or nationals

of another EU Member State and are permanently

resident in Greece. In this regard, the CJ started by

observing that the legislation of a Member State under

which the application of an exemption from inheritance

tax depends on the place of residence of the deceased

person or of the beneficiary at the time of the death, in

the case where it leads to inheritances involving non-

residents being subject to a higher tax liability than those

involving residents alone, constitutes a restriction on

the free movement of capital. In this context, the Greek

provision has the effect of reducing the value of the estate

for the heir who fulfils all of those requirements, apart from

the requirement of being permanently resident in Greece,

by depriving the person concerned of the exemption from

inheritance tax and thereby, resulting in that person being

subjected to a heavier tax burden than that borne by an

heir who is permanently resident in Greece. According

to the CJ, such constitutes a restriction on the free

movement of capital that is prohibited, in principle, by

Article 63 TFEU.

As regards, the comparability of the situations at issue,

the CJ noted that where, for the purposes of taxing

immovable property acquired by inheritance and located

in the Member State concerned, national legislation

places non-resident and resident heirs on the same

footing, it cannot, without infringing the requirements of

EU law, treat those heirs differently in connection with

that tax in respect of that immovable property. By treating

inheritances of those two classes of persons in the same

way, except in relation to the exemption which an heir

may receive, the national legislature acknowledges that

there is no objective difference between them as regards

the detailed rules and conditions for charging inheritance

tax such as to justify a difference in treatment.

In regard to possible justifications, the CJ considered

that the legislation at stake was not appropriate for

guaranteeing attainment, in a systematic and consistent

manner, of the general social-interest objective of

addressing housing needs in Greece advanced by the

Hellenic Republic, since the exemption laid down by that

16 17

(C-593/14). The case deals with the Portuguese

legislation which triggers taxation in the case of

(i) exchange of shares followed by a transfer of place of

residence abroad, and (ii) transfer of assets and liabilities

relating to an activity carried out on an individual basis in

return of shares in a non-resident company.

According to the Portuguese Personal Income Tax

Code (CIRS), if the shareholder is no longer resident in

Portugal, capital gains resulting from a share exchange

will form part of the taxable income of the calendar year

in which the change of place of residence occurred.

Under that same article, the value of the capital gains

corresponds to the difference between the actual value of

the shares received and the value of the older shares at

the time of their purchase. By contrast, if the shareholder

is resident in Portugal, the value of the shares received is

the same as that of those transferred, without prejudice

to the taxation of any monetary sums paid for the shares

which were transferred. That is to say, where a taxable

person remains resident in Portugal, a share exchange

gives rise to the immediate taxation of the capital gains

generated only and insofar as an additional monetary

payment is made. If there is no such payment, the capital

gains tax will be levied only if and when the shares

received have been definitively divested. The same tax

regime is applicable to the allocation of shares in the

case of mergers or the division of companies.

On the other hand, the transfer to an undertaking of assets

and liabilities related to the exercise of an economic or

professional activity by a natural person in exchange for

shares is tax exempt at the time of transfer if, among

other conditions, the legal person to which the assets

and liabilities are transferred has its seat or registered

office in Portugal. In that case, taxation occurs only when

and if the legal person which received such assets and

liabilities has divested itself of them. However, such a

tax deferment does not apply if the legal person to which

the assets and liabilities were transferred has its seat or

registered office outside of Portugal. In that case, capital

gains tax is immediately applicable.

The Commission brought the case before the CJ by

considering that the differences in taxation penalise

those who decide to leave Portuguese territory, in that

it treats such persons differently from those who remain

Damixa ApS is a Danish resident company which is part

of a tax group together with Masco Denmark ApS. Damixa

granted a loan to its wholly owned German subsidiary

Damixa Armaturen GmbH. The German subsidiary was

not allowed to deduct the interest paid by virtue of the

application of the German thin capitalization rules (at the

time based on the 1.5:1 ratio).

Damixa ApS claimed that the interest income should

benefit from the tax exemption applicable in the case of

interest not deductible at the level of the payer. However,

the Danish tax authorities rejected such claim considering

that such exemption was only applicable in the case of

companies subject to Danish income tax, that is to say,

Danish resident companies.

AG Kokott considered that the Danish legislation,

although appearing to constitute a restriction to the

freedom of establishment, in fact could not be considered

to be the cause of such restriction. According to the AG,

the unfavourable treatment suffered by Damixa ApS was

not exclusively attributable to Denmark. For the AG, this

conclusion can rely on the principle of autonomy that

states that a Member does not infringe the fundamental

freedoms when the unfavourable treatment arises from a

disparity, meaning the interaction of the tax legislation of

two Member States.

In any event, the AG observed that, even if the CJ

considers that the Danish legislation would restrict the

freedom of establishment, such restriction would be

justified by the need to preserve a balanced allocation of

the powers to tax between Member States as well as the

coherence of the Danish tax system.

AG Wathelet opines that Portuguese legislation imposing an exit tax in the case of exchange of shares followed by a transfer of place of residence abroad or transfers of assets and liabilities relating to an activity carried out on an individual basis in return of shares in a non-resident company contravene the fundamental freedoms (Commission v Portugal)On 12 May 2016, AG Wathelet delivered his Opinion

in case European Commission v Portuguese Republic.

17

a breach of the fundamental freedoms. As regards

possible justifications, the AG started by dealing with the

need to preserve the coherence of the tax system. In this

regard, he observed that Portugal did not demonstrate

the existence of a direct link between the tax advantage

and the possible compensation with a tax disadvantage.

Differently, the AG accepted the justification based on

the need to preserve a balanced allocation of the powers

to tax between Member States linked to the principle of

territoriality. In this respect, the AG refuted the argument

of the Commission that this justification was not

applicable to individuals but merely to companies. The

AG recalled that the reasoning based on this justification

was used in National Grid Indus (C-371/10) as applicable

to companies but not in Lasteyrie du Saillant (C-9/02)

as applicable to individuals because this last judgment

was delivered even before Marks & Spencer (C-446/03),

which was the first case in which such justification was

accepted.

Therefore, while accepting this justification, the AG

considered it not proportional because the Portuguese

legislation does not offer any alternative to the immediate

payment of the tax.

However, as concerns the EEA States, the AG concluded

that neither Iceland nor Liechtenstein provide for an

agreement for administrative cooperation as required by

the CJ case law.

As regards the second plea on the tax treatment

applicable to the transfer of assets and liabilities

relating to an activity carried out on an individual basis

in return of shares in a non-resident company, the AG

considered that the difference in treatment provided

by the Portuguese law amounts to a restriction to the

fundamental freedoms. While considering this restriction

justified by the principle of territoriality, the AG concluded

that this justification was not proportionalin light of the

existence of less restrictive measures, notably, Directive

2011/16/EU on administrative cooperation in the field of

taxation and Directive 2010/24/EU concerning mutual

assistance for the recovery of claims relating to taxes,

duties and other measures.

in the country. The Commission is of the view that the

deferment of taxation, in the case of profits made in

exchanging shares, should not be reserved to cases in

which the taxpayer continues to reside in Portuguese

territory whilst denied in cases in which the tax payer

transfers his place of residence to another EU or EEA

Member State. Consequently, for the Commission,

the difference in treatment put in place by the CIRS is

incompatible with Articles 21 TFEU, 45 TFEU and 49

TFEU, and Articles 28 and 31 of the EEA Agreement.

Moreover, the protection of the tax credits resulting from

pending revenue should be assured in conformity with

the principle of proportionality laid down in the case

law of the Court of Justice. In the present case, the

Commission considers that the Portuguese legislation

goes beyond what is necessary to attain the objectives of

ensuring an efficient tax regime, and that the Portuguese

legislation should apply the same rule irrespective of

whether a natural person keeps his place of residence in

Portuguese territory or not.

As regards the transfer of assets, the benefit in the

CIRS is reserved to cases in which the company which

receives the assets has its seat or registered office in

Portugal. The Commission takes the view that Portugal

should apply the same rule irrespective of whether the

legal person to which the assets and liabilities have been

transferred has its seat or registered office in Portuguese

territory or elsewhere. The Commission considers that

the CIRS goes beyond what is necessary to attain the

objective of ensuring an efficient tax regime. It is of the

opinion that taxable persons who exercise their right to

freedom of establishment by transferring assets and

liabilities abroad in exchange for shares in a non-resident

undertaking cannot be subject to taxation at an earlier

point in time than is the case for those who carry out such

operations with an undertaking based in Portugal.

As regards the first plea on the tax treatment applicable

to the exchange of shares, AG Wathelet considered that

the difference in treatment depending on the transfer

of residence to another Member State amounted to

18 19

Municipality and the payment to be made by parents is

sufficiently direct for that payment to be regarded as an

economic activity. As a result, the CJ ruled that a regional

or local authority which provides transport services such

as the one at hand, does not qualify as a VAT taxable

person.

Ingots consisting of various scrapped, gold-bearing metal objects and organic materials qualify as gold in CJ’s view (Envirotec) On 26 May 2016, the CJ delivered its judgment in the

case Envirotec Denmark ApS (C-550/14). In the fourth

quarter of 2011, Envirotec Denmark ApS (‘Envirotec’)

purchased 24 ingots from another Danish company.

These ingots, with an average gold content of between

500 and 600/1000, consisted of a random, rough fusion

of various scrapped, gold-bearing metal objects and also

miscellaneous organic materials. In order to use the ingots

for the manufacturing of new gold-bearing products, the

other materials had first to be removed. Envirotec paid

the amount including VAT to the supplier of the ingots, but

the supplier did not pay VAT to the Danish tax authorities

and was subsequently put into liquidation on grounds of

insolvency.

Envirotec requested the Danish tax authorities for a

refund of the VAT paid to the supplier, but the Danish

tax authorities took the view that the VAT on the supply

was due by Envirotec itself under the reverse charge

mechanism. Therefore, according to the Danish tax

authorities, the VAT paid by Envirotec to the supplier

cannot be deducted. Envirotec opposed this view and

stated that the reverse charge mechanism of Article

198(2) of the EU VAT Directive is not applicable in this

specific situation. The matter ended up with the High

Court of Eastern Denmark, which doubted whether

ingots, such as in the case at hand, are covered by the

terms ‘gold material or semi-manufactured products’

within the meaning of Article 198(2) of the EU VAT

Directive. For this reason, the High Court referred to the

CJ for a preliminary ruling.

Since the wording and the context cannot determine

the scope of Article 198(2) of the EU VAT Directive it is,

according to the CJ, appropriate to consider its objective.

VAT CJ rules that transport of pupils by Municipality for a very limited contribution in principle does not qualify as an economic activity for VAT purposes (Gemeente Borsele) On 12 May 2016, the CJ delivered its judgment in

the case Gemeente Borsele (C-520/14). During the

school year 2008/2009, the municipality of Borsele

(‘the Municipality’) arranged the transport of eligible

pupils. For this purpose, the Municipality used the

services of transport undertakings who charged VAT to

the Municipality. In accordance with the Decree of the

Municipality, contributions of approximately one-third

of the parents were collected, equivalent to 3% of the

amount paid by the Municipality to fund school transport

services.

The Municipality claimed that it was a VAT taxable person

in respect of the provision of school transport services

in return for the contributions and that it was entitled

to deduct the VAT that had been charged to it by the

transport undertakings. The Netherlands tax authorities,

however, rejected this claim on the ground that the

Municipality did not provide services for consideration

and accordingly, did not carry out any economic activity.

The matter ended up with the Supreme Court, which

decided to stay the proceedings and to refer to the CJ for

a preliminary ruling.

First of all, the CJ stated that a transaction effected for

consideration, which is necessary in order to be able

to take a VAT taxable supply into account, requires a

direct link between the provision of services and the

consideration actually received. Secondly, according

to the CJ, the existence of a supply of services for

consideration however, is not sufficient to establish the

existence of an economic activity. With regard to all

circumstances, the CJ noted that the Municipality through

the contributions only recovers a small part of the costs

incurred, which suggests that the parental contribution

must be regarded more as a levy than as a consideration

(see, by analogy, Commission/Finland, C-246/08).

Therefore, in the view of the CJ, it does not appear that

the link between the transport service provided by the

19

merchant acquirer in conjunction with the card issuers.

The services provided by Bookit are therefore subject

to the standard VAT rate. Bookit opposed this view and

finally, this matter ended up with the Tax Chamber which

decided to stay proceedings and to refer to the CJ for a

preliminary ruling in respect of the applicability of Article

135(1)(d) of the EU VAT Directive.

In the view of the CJ, the provider of a card handling

services, such as that at issue, plays no specific and

essential part in achieving the changes in the legal and

financial situation that are the result of a transfer of

ownership on the funds concerned, but does no more

than provide technical and administrative assistance.

The fact that such a service is provided by electronic

means cannot alter the nature of the service provided.

As a result, according to the CJ, the exemption of Article

135(1)(d) of the EU VAT Directive is not applicable to a

‘card handling’ service such as that issue, supplied by

a VAT taxable person (the service provider), where an

individual purchases, via the service provider, a cinema

ticket which the service provider sells for and on behalf of

another entity and which the individual pays for by debit

or credit card.

CJ rules that processing of a payment by debit or credit card for the purchase of an event ticket does not qualify as VAT exempt service (National Exhibition Centre)On 26 May 2016, the CJ rendered its judgment in

the case National Exhibition Centre Limited (‘NEC’)

(C-130/15). The NEC, which company is established in

the United Kingdom, hires the National Exhibition Centre

and other venues to third party promoters and sells, as

an agent for the promotors, tickets for the events staged.

It does not at any time take ownership of the tickets. The

tickets can be bought from the NEC’s call centre, via its

website, by post or over the counter. In certain situations,

NEC invoices customers in addition to the price of the

tickets for a ‘booking fee’ of at least 10%. Within the

purchase process, NEC passes the customer’s details

and payment information to its merchant acquirer bank

which forwards the information to the cardholder’s bank.

Once NEC, via the merchant acquirer bank, has received

an authorization code from the bank, NEC informs the

In that regard, the CJ stated that the aim of this provision

is the prevention of tax evasion. The risk of tax evasion

concerning such goods is all the greater given that the

gold content of that object is high. In the view of the

CJ, it therefore follows that the degree of purity of the

gold in the object concerned is crucial for the purposes

of determining whether or not a supply of gold material

or semi-manufactured products, not being a finished

product, falls within the scope of Article 198(2) EU VAT

Directive. As a result, the CJ ruled that Article 198(2)

EU VAT Directive applies to the supply of ingots, such

as those at issue in the main proceedings, consisting of

various objects and materials, and which, depending on

the ingot, have a gold content of approximately 500 or

600/1000.

CJ rules that debit and credit card handling services in respect of cinema ticket are not VAT exempt (Bookit) On 26 May 2016, the CJ delivered its judgment in the

case Bookit Ltd (C-607/14). Bookit is a company wholly

owned by Odeon Cinemas Holding Limited (‘Odeon’),

which owns and operates a chain of cinemas in the

United Kingdom. Telephone and Internet sales are made

by Bookit, acting as agent for Odeon. Within this process,

customers of the Odeon group of companies provide

Bookit with the relevant data concerning the debit or

credit card that they want to use, which Bookit sends,

via another service provider, to the merchant acquirer.

The latter transmits the data to the card issuer who, if the

data is accepted, ring fences the money and transmits

an authorization code to the merchant acquirer, which

transmits the code to Bookit. The cinema tickets are

then allocated (if still available) to the customer and the

transaction is completed by Bookit. Once the merchant

acquirer has credited Booking’s bank account, the ticket

sale revenue is transferred by Bookit to Odeon. Bookit

retains the card handling fees.

The British tax authorities took the view that the supplies

made by Bookit, in consideration of payments described

as ‘card handling fees’, are not supplies of services

that are exempt ex Article 135(1)(d) EU VAT Directive.

According to the tax authorities, Bookit is not engaged

at any time in transferring funds on behalf of Odeon’s

customers, since that transfer is carried out by the

20 21

The Council of Europe welcomes the VAT Action Plan and

the call by the Commission to reduce VAT compliance

burdens for business, particularly for SMEs, both within

Member States and across borders. Furthermore, it

welcomes the in-depth technical work conducted by the

Commission so far, as well as the broadly based dialogue

it initiated with Member States to examine in detail the

different possible ways how to best implement the

destination principle.

Also, the VAT Expert Group (VEG) welcomes the initiative

of the EU Commission to further explore possible options

for implementing the destination principle in B2B cross-

border trade in order to ensure a level playing field

between EU cross-border and domestic transactions

and at the same time tackling the problem of VAT fraud.

In this respect, the VEG urges the Commission and EU

Member States to abstain from supporting EU Member

State specific approaches and to work together with all

stakeholders in devising a definitive VAT system.

Council adopts Directive maintaining VAT minimum standard rate Pending discussions on definitive VAT rules, on 25 May

2016, the Council adopted a Directive maintaining the

minimum standard VAT rate at 15% until the end of

2017. The minimum standard rate is aimed at preventing

excessive divergence between the VAT rates applied

by EU Member States and the structural imbalances or

distortions of competition that, as a result, could arise.

In view of on-going discussions on definitive rules for

a single European VAT area, the directive extends the

minimum standard rate for a period long enough to

ensure legal certainty.

Customs Duties, Excises and other Indirect TaxesCJ rules on the CN classification of alcoholic beverages (Toorank)On 12 May 2016, the CJ delivered its judgment in the

Toorank cases (C-532/14 and C-533/14). The cases

concern the classification in the Combined Nomenclature

(CN) of certain alcoholic beverages obtained through

fermentation followed by purification, to which additives

customer that the operation has been authorized and

allocates the ticket to him. After receipt of the payment,

NEC refunds the event promotor the part of the amount

paid by the customer for the ticket price and keeps the

amount corresponding to the booking fee.

NEC claimed a VAT repayment on the basis that it

considered that it had overpaid in respect of the booking

fees charged to customers during the period August

1999 – April 2002. The tax authorities refused that claim

on the basis that those fees charged by NEC were a

consideration for supplies that were subject to VAT at

the standard rate. The matter ended up with the Upper

Tribunal, which questioned whether it is possible to apply

the exemption under Article 13B(d)(3) of the EU Sixth

Directive for transactions concerning payment transfers

to a card processing services of the kind at issue before

it. Therefore, the Upper Tribunal decided to stay the

proceedings and to refer to the CJ for a preliminary ruling.

According to the CJ, the provider such as that at issue,

does not participate specifically and essentially in the

legal and financial changes, but merely applies technical

and administrative means. In that regard, the automated

nature of such a service, cannot alter the nature of the

service supplied. Consequently, the CJ ruled that the VAT

exemption of Article 13B(d)(3) of the EU Sixth Directive,

in respect of transactions concerning payments and

transfers, does not apply to a service described as

‘processing of payment by debit or credit card’ such as

that at issue, carried out by a VAT taxable person, the

provider of that service, where an individual buys, via

that provider, a ticket for a show or other event which the

provider sells in the name and on behalf of another entity,

which that individual pays for by debit or credit card.

Council of the European Union and VAT Expert Group welcome the VAT Action Plan On 7 April 2016, the European Commission adopted its

new Action Plan on VAT, which aims to make the EU VAT

system fit for the 21st century. The Action Plan calls for

urgent action to tackle the VAT Gap in the short term and

to create a robust, fair and efficient Single European VAT

Area by devising a destination based definitive system.

21

That court notes, first, that heading 2206 of the CN

also includes mixtures of fermented beverages and

non-alcoholic beverages and that, by virtue of the HS

explanatory note relating to heading 22.06 of the HS,

such beverages remain classified under that heading

even when fortified with added alcohol or when

their alcohol content has been increased by further

fermentation, provided that they retain the character of

products classified under that heading. Second, heading

2208 of the CN covers liqueurs, which generally have an

alcoholic strength by volume of more than 13.4%. The

addition of distilled alcohol to a beverage falling under

heading 2206 of the CN does not automatically mean

that that beverage will be excluded from that heading.

Nevertheless, if the quantities of fermented alcohol and

distilled alcohol in a product such as Petrikov Creamy

Green are not decisive for the classification of that

product and if the beverage to which the distilled alcohol

has been added has the properties and characteristics

of products falling under heading 2208 of the CN, that

product should, according to that court, be classified

under that second heading.

The referring court is unsure how the judgment of 7 May

2009 in Siebrand (C-150/08) should be interpreted. In

particular, it questions whether that judgment, particularly

paragraph 35 thereof, should be interpreted as meaning

that the quantity of distilled alcohol added, assessed in

terms of both volume and alcohol content, is the element

which determines the classification under heading

2208 of the CN, whatever the other characteristics and

properties of the product under consideration might be,

or whether it is necessary, in all cases, to verify whether

the organoleptic characteristics and the intended use of

that product correspond to those of beverages which are

classified under heading 2208 of the CN.

In those circumstances, the Hoge Raad der Nederlanden

(Supreme Court of the Netherlands) decided to stay the

proceedings and to refer the following questions to the

Court of Justice for a preliminary ruling:

‘(1) Should heading 2206 of the CN be interpreted as

meaning that a beverage with an alcoholic strength

by volume of 13.4% which is manufactured by mixing

a purified, alcoholic beverage (base) known as ‘Ferm

are added. The CN classification is of importance for the

rate of alcohol excise to be applied.

Case C-532/14

Toorank Productions submitted an application to the

tax authorities for binding tariff information in respect

of a beverage known as ‘Petrikov Creamy Green’,

asking them to classify that beverage under subheading

2206 00 59 of the CN. By decision confirmed following

an administrative appeal, those authorities classified that

beverage under subheading 2208 70 10 of the CN.

The beverage in question is manufactured by mixing a

fermented beverage, known as ‘Ferm Fruit’, with distilled

alcohol, sugar syrup, skimmed milk, vegetable fat and

aromatic substances. It has an alcoholic strength by

volume of 13.4%, and at least 51% of the alcohol which

it contains is the result of fermentation. Ferm Fruit, which

has an alcoholic strength by volume of 16%, is prepared

using an alcohol resulting from the fermentation of

fruit which is then purified through filtration. Its smell,

colour and taste are neutral. Used for the manufacture

of end products, Ferm Fruit is also suitable for human

consumption as it is.

After an action was brought before it by Toorank

Productions against the tax authorities’ decision, the

Rechtbank Amsterdam (District Court, Amsterdam,

the Netherlands) annulled that decision, considering

that Petrikov Creamy Green fell to be classified under

subheading 2206 00 59 of the CN.

After an appeal was lodged by the State Secretary

for Finance, the Gerechtshof te Amsterdam (Court of

Appeals, Amsterdam) held that it was appropriate to

classify Petrikov Creamy Green as a liqueur falling under

subheading 2208 70 10 of the CN by reason of its high

sugar content, the addition of distilled alcohol, aromatic

substances and a cream base, and its green colour.

Toorank Productions lodged an appeal in cassation

before the Hoge Raad der Nederlanden (Supreme Court

of the Netherlands) against that decision.

22 23

manufactured by adding sugar, aromatic substances,

colouring and flavouring agents, thickening agents and/or

preservatives and, for one of those beverages, cream, to

Ferm Fruit. The alcohol in those beverages is exclusively

obtained through fermentation without the addition of

distilled alcohol. Ferm Fruit represents between 80% and

90% of the content of those beverages.

In the decision at issue in the main proceedings, the tax

authorities considered that Ferm Fruit and the Ferm Fruit

based beverages fell under heading 2208 of the CN.

Toorank Productions brought an action against that

decision before the Rechtbank te Breda (District Court,

Breda, the Netherlands), which annulled the decision and

reduced the amount of the adjustment.

After an appeal was lodged by Toorank Productions

and the State Secretary for Finance, the Gerechtshof te

’s-Hertogenbosch (Court of Appeals, ’s-Hertogenbosch,

the Netherlands) confirmed the decision of the Rechtbank

te Breda, but held that Ferm Fruit fell under heading 2206

of the CN and that the Ferm Fruit based beverages fell

under heading 2208 of the CN.

Toorank Productions lodged an appeal in cassation and

the State Secretary for Finance lodged a cross-appeal

in cassation before the Hoge Raad der Nederlanden

(Supreme Court of the Netherlands).

The referring court considers that Ferm Fruit could be

classified under both heading 2206 of the CN, insofar

as the alcohol which it contains is obtained through

fermentation, and under heading 2208 of the CN,

insofar as, being colourless, odourless and tasteless,

it resembles, in terms of its organoleptic properties, an

alcoholic product resulting from distillation. However,

it would appear that the HS explanatory notes exclude

beverages obtained through fermentation from that

second heading.

On the other hand, that court notes that it is apparent

from the judgment of 14 July 2011 in Paderborner

Brauerei Haus Cramer (C-196/10) that products resulting

from a process of fermentation followed by a process

Fruit’ — obtained through fermentation of an apple

concentrate — with sugar, aromatic substances,

colouring and flavouring agents, thickening agents,

preservatives and distilled alcohol, where that

distilled alcohol does not exceed, either in volume

or in percentage, 49% of the alcohol present in that

beverage, while 51% thereof is alcohol resulting from

fermentation, must be classified under that heading?

(2) If not, should subheading 2208 70 of the CN be

interpreted as meaning that such a beverage must

be classified as a liqueur under that subheading?’

Case C-533/14

Toorank Productions received an adjustment notice

regarding the excise duties claimed following the

clearing from its bonded warehouse of various alcoholic

beverages during the period running from 1 to 31 October

2008. That notice was confirmed by a decision of the tax

authorities adopted following an administrative appeal.

The products in respect of which the excise duty was

claimed are Ferm Fruit, on the one hand, and the

beverages manufactured using a Ferm Fruit base to

which various ingredients are added (‘the Ferm Fruit

based beverages’), on the other.

Ferm Fruit is a beverage with an alcoholic strength by

volume of 16%. One litre of that product is manufactured

using 275 ml of sugar syrup, 711 ml of demineralised

water, 10 ml of apple concentrate and 4 ml of vitamins and

minerals. Those ingredients are mixed, then the mixture

is pasteurised and wine yeast is added, which triggers

the fermentation process. The liquid obtained from that

process is purified using various filtration techniques such

as ultrafiltration, kieselguhr filtration, microfiltration and

carbon filtering. It does not contain distilled alcohol and

has not undergone any process designed to increase the

level of alcohol which it contains. It is neutral in terms of

smell, colour and taste. Suitable for human consumption,

it is not exclusively designed for the manufacture of other

products.

The Ferm Fruit based beverages are beverages with

an alcoholic strength by volume of 14% which are

23

2208 of the CN be interpreted as meaning that such

a beverage must be classified under that heading?’

The CJ ruled that:

1. a beverage, such as Ferm Fruit, which is obtained

through fermentation of an apple concentrate and

is designed to be consumed either undiluted or as

a base in other beverages, being neutral in terms

of colour, smell and taste as a result of purification

(including ultrafiltration) and having an alcoholic

strength by volume, without the addition of distilled

alcohol, of 16% falls under heading 2208 of the

Combined Nomenclature.

2. beverages with an alcoholic strength by volume

of 14% which are manufactured by adding sugar,

aromatic substances, colouring and flavouring

agents, thickening agents and preservatives and,

for one of those beverages, cream, to Ferm Fruit,

and which do not contain distilled alcohol, fall under

heading 2208 of the Combined Nomenclature.

3. a beverage with an alcoholic strength by volume

of 13.4% which is manufactured by adding sugar,

aromatic substances, colouring and flavouring agents,

thickening agents, preservatives and distilled alcohol

to Ferm Fruit, where that distilled alcohol does not

exceed, either in volume or percentage, 49% of the

alcohol present in that beverage, with the remaining

51% resulting from a process of fermentation, falls

under heading 2208 of the Combined Nomenclature.

As a result of the judgments of the CJ, the products

involved will be subject of the high alcohol excise rates

in the Netherlands that is related to distilled alcohol

products.

CJ rules on the definition of the normal place of residence (X case) On 27 April 2016, the CJ delivered its judgment in the

X case (C-528/14). The case concerns the determination

of the place of residence of a person who has

occupational and personal ties in Qatar and personal ties

in the Netherlands.

of ultrafiltration may fall under heading 2208 of the CN

where they have acquired the properties of products

falling under that heading.

Regarding the Ferm Fruit based beverages, the

referring court considers that, were it to be necessary

to classify Ferm Fruit under heading 2206 of the CN,

those beverages could not fall under heading 2208 of

the CN. That court infers from the wording of heading

2208 of the CN and the explanatory notes relating thereto

that that heading includes only beverages — including

liqueurs — which contain distilled alcohol. It also notes

that the Ferm Fruit based beverages have a relatively

low alcoholic strength by volume (14%) compared to the

generally high alcoholic strength by volume of liqueurs

and other spirituous beverages. However, as the Ferm

Fruit based beverages have lost the properties of products

falling under heading 2206 of the CN, the referring court

acknowledges that the classification of those beverages

under that heading is open to discussion.

In those circumstances, the Hoge Raad der Nederlanden

decided to stay the proceedings and to refer the following

questions to the Court of Justice for a preliminary ruling:

‘(1) Should heading 2206 of the CN be interpreted as

meaning that the beverage known as ‘Ferm Fruit’

which is obtained through fermentation of an apple

concentrate, is also used as a beverage base for

the manufacture of certain other beverages, has an

alcoholic strength by volume of 16%, and, as a result

of purification (including ultrafiltration), is neutral in

terms of colour, smell and taste, and to which no

distilled alcohol has been added, must be classified

under that heading? If not, should heading 2208 of the

CN be interpreted as meaning that such a beverage

must be classified under that heading?

(2) Should heading 2206 of the CN be interpreted as

meaning that a beverage with an alcoholic strength

by volume of 14% which is manufactured by mixing

the beverage base described in question 1 above with

sugar, aromatic substances, colouring and flavouring

agents, thickening agents and preservatives, and

which does not contain any distilled alcohol, must be

classified under that heading? If not, should heading

24 25

court observed that the approach adopted by the

Gerechtshof Amsterdam raised the issue of whether,

during the period concerned, the applicant had a normal

place of residence in both the Netherlands and Qatar. It

stated that the objectives of that regulation do not appear

to preclude, in circumstances such as those under

consideration here, either the existence of a normal place

of residence in both the Netherlands and Qatar or the

application of the relief from import duties provided for in

Article 3 of the regulation, as the applicant gave up his

place of residence in Qatar and transferred his personal

property to the Netherlands.

In the event that Regulation No 1186/2009 is to be

interpreted as precluding the possibility of a dual place of

normal residence, the referring court seeks to ascertain

the criteria to be taken into account, in circumstances

such as those in the main proceedings, in determining

which of the two places of residence is to be regarded

as the normal place of residence for the purposes of the

application of that regulation. In that regard, the referring

court asks whether the criteria established by the Court

in the judgments in Louloudakis (C-262/99) and Alevizos

(C-392/05) are relevant for the purpose of determining

the ‘normal place of residence’ within the meaning

of Article 7(1) of Directive 83/182 and Article 6(1) of

Directive 83/183, in particular the primacy to be given to

personal ties in that determination.

In those circumstances, the Hoge Raad der Nederlanden

decided to stay the proceedings and to refer the following

questions to the Court for a preliminary ruling:

‘(1) Does Regulation No 1186/2009 include the possibility

that a natural person has at the same time his normal

place of residence in both a Member State and a

third country and, if so, does the relief from import

duties provided for in Article 3 of the regulation apply

to personal property, which, when a person ceases

to have his normal place of residence in the third

country, is transferred to the European Union?

(2) If Regulation No 1186/2009 precludes two normal

places of residence and an assessment of all the

circumstances does not suffice to determine the

normal place of residence, on the basis of which

rule or which criteria is it necessary to determine, for

Until 1 March 2008, the applicant in the main proceedings

(‘the applicant’) resided and worked in the Netherlands.

From 1 March 2008 until 1 August 2011, he worked in

Qatar, where accommodation was made available to him

by his employer. The applicant had both occupational and

personal ties with that third country. His wife continued

to live and work in the Netherlands. She visited him

six times, the total duration of her visits being 83 days.

During the period in question, the applicant spent 281

days outside Qatar, during which he visited his wife, his

adult children and his family in the Netherlands and went

on holiday in other States.

With a view to his return to the Netherlands, the applicant

requested authorisation to import his personal property

into the European Union from Qatar free of import duties,

pursuant to Article 3 of Regulation No 1186/2009. That

request was refused by decision of the Inspector of Taxes

on the ground that there was no transfer of the normal

place of residence to the Netherlands within the meaning

of that article. He was deemed to have maintained

his normal place of residence in that Member State

throughout his stay in Qatar, so that that third country

had never been his normal place of residence.

The applicant brought an action challenging that decision

before the Rechtbank te Haarlem (District Court, Harlem),

which upheld the action. The Inspector of Taxes appealed

against that court’s decision before the Gerechtshof

Amsterdam (Appeals Court, Amsterdam). The latter court

observed that, according to the case law of the Court of

Justice, the normal place of residence is the place where

the person concerned has the permanent centre of his

interests. It went on to state that, having regard to the

applicant’s personal and occupational ties, it was not

possible to determine where the permanent centre of his

interests was. In those circumstances, according to that

court, primacy should be given to personal ties, with the

result that, during the period concerned, the applicant’s

normal place of residence was the Netherlands, not

Qatar.

The applicant lodged an appeal in cassation before the

referring court. After noting that Regulation No 1186/2009

did not provide a definition of ‘normal residence’, that

25

Following a tax audit, the tax authority classified the

scooters under heading 8703 as ‘motor cars and other

motor vehicles, principally designed for the transport of

persons (other than those of heading 8702), including

station wagons and racing cars’.

Between 24 April 2007 and 3 July 2008, the tax

authority issued to those companies tax adjustments

corresponding to the customs duties and turnover tax

relating to the goods concerned for a total amount of GBP

6,479,007 (approximately EUR 9,114,450).

The applicants brought an appeal against the tax

adjustments before the First Tier Tribunal (Tax Chamber)

(United Kingdom). They argue that the scooters at issue

must be classified under heading 8713 of the CN on the

ground, in particular, that the words ‘for disabled persons’

under that heading do not mean ‘exclusively for disabled

persons’.

According to the referring court, the scooters are driven by

electric motors powered by a battery. Each model has the

following features: a seat for one person (which is wider

and more luxuriously padded in the larger scooters), a

tiller with a wig wag, a platform connecting the front and

back wheels on which to mount onto the scooter and on

which the feet could be kept during a journey, and either

four wheels (two driven wheels at the back and two at

the front) or three wheels (two at the back and one at the

front). Most seats had moveable adjustable armrests and

many seats could be raised and lowered and swivelled

through 360 degrees.

The referring court starts from the premise that key

elements support the classification of the electric

mobility scooters at issue under subheading 8713 of

the CN. However, it expresses doubts about such a

classification.

In those circumstances, the First-Tier Tribunal (Tax

Chamber) decided to stay proceedings and to refer the

following questions to the Court for a preliminary ruling:

‘(1) Do the words ‘for disabled persons’ mean ‘only’ for

disabled persons?

the purposes of the application of that regulation, in

which country the person concerned has his normal

place of residence in a case such as the present

case in which that person has both personal and

occupational ties in the third country and personal

ties in the Member State?’

The CJ ruled as follows:

1. Article 3 of Council Regulation (EC) No 1186/2009 of

16 November 2009 setting up a Community system

of reliefs from customs duty is to be interpreted as

meaning that, for the purposes of the application

of that provision, a natural person may not have at

the same time a normal place of residence in both a

Member State and in a third country.

2. In circumstances such as those in the main

proceedings, where the person concerned has both

personal and occupational ties in a third country and

personal ties in a Member State, it is necessary, for

the purpose of determining whether the normal place

of residence of that person within the meaning of

Article 3 of Regulation No 1186/2009 is in the third

country, to attach particular importance to the length

of that person’s stay in the third country when carrying

out an overall assessment of the relevant facts.

CJ rules on the tariff classification of mobility scooters (Invamed) On 26 May 2016, the CJ delivered its judgment in the

Invamed case (C-198/15). The case concerns the

classification in the Combined Nomenclature (CN) of

certain mobility scooters.

Between 2004 and 2007, the applicants made

declarations for the release for free circulation of certain

mobility scooters imported into the United Kingdom.

Those scooters were declared under heading 8713 of

the CN as ‘carriages for disabled persons, whether or

not motorised or otherwise mechanically propelled’. In

accordance with the classification under that heading,

those scooters were released for free circulation without

customs duties being levied and with import turnover tax

being charged at a reduced rate.

26 27

CJ rules on the tariff classification of turret system for armoured fighting vehicles (GD European Land Systems – Steyr GmbH) On 26 May 2016, the CJ delivered its judgment in the GD

European Land Systems – Steyr GmbH case (C-262/15).

The case concerns the classification in the Combined

Nomenclature (CN) of a turret system for armoured

fighting vehicles.

GD is a limited liability company which is part of an arms-

industry group with a worldwide presence and the objects

of which include the manufacture of combat tanks. On

25 February 2014, that company declared, at the customs

office, goods described as a turret system for armoured

fighting vehicles, so that they could be released into free

circulation within the European Union.

The customs office accepted those goods for free

circulation and informed GD of the rate of import duty owed

for them, namely 1.7%, resulting from the classification

of those goods under heading 8710 of the CN. The

customs office concluded that the goods concerned were

‘an armoured turret which, as an identifiable part, will be

fitted solely or principally in armoured fighting vehicles’.

According to the referring court, that communication is to

be regarded as a decision on customs duties.

On 11 March 2014, GD challenged that decision of the

customs office and requested that the goods in question

in the main proceedings be classified under subheading

9305 91 00 of the CN, corresponding to military weapons,

thereby involving a customs duty rate of 0%. Following

the rejection of its request by the customs office, GD

brought an action before the Bundesfinanzgericht

(Federal Finance Court, Austria).

Before that court, GD produced a binding tariff information

issued on 11 April 2014 by the Hauptzollamt Hannover

(Principal Customs Office, Hanover), which, according

to GD, classified goods identical to those at issue in the

main proceedings under subheading 9305 91 00 of the

CN.

The description of the goods at issue in the main

proceedings is included in that tariff information, which the

(2) What is the meaning of the words ‘disabled persons’;

in particular:

(a) is their meaning confined to persons who have

a disability in addition to a limitation on their

ability to walk or to walk easily; or does it include

persons whose only limitation is on their ability to

walk or to walk easily?

(b) does ‘disabled’ connote more than a marginal

limitation on some ability?

(c) is a temporary limitation such as results from a

broken leg capable of being a disability?

(3) Do the Explanatory Notes to the CN of 4 January

2005, in excluding scooters fitted with separate

steering columns, alter the meaning of heading

8713?

(4) Does the possibility of use of a vehicle by a person

without a disability affect the tariff classification if

it can be said that the vehicle has special features

which alleviate the effects of a disability?

(5) If suitability for use by non-disabled persons is

a relevant consideration, to what extent should

the disadvantages of such use also be a relevant

consideration in determining such suitability?’

The CJ ruled that:

1. Heading 8713 of the Combined Nomenclature set out

in Annex I to Council Regulation (EEC) No 2658/87 of

23 July 1987 on the tariff and statistical nomenclature

and on the Common Customs Tariff, as amended

by Commission Regulation (EC) No 1810/2004 of

7 September 2004, must be interpreted as meaning:

- the words ‘for disabled persons’ mean that the

product is designed solely for disabled persons;

- the fact that a vehicle may be used by non-disabled

persons is irrelevant to the classification under

heading 8713 of the Combined Nomenclature

- the Explanatory Notes to the Combined

Nomenclature are not capable of amending the

scope of the tariff headings of the Combined

Nomenclature.

2. the words ‘disabled persons’ under CN heading 8713,

must be interpreted as meaning that they designate

persons affected by a non-marginal limit on their

ability to walk, the duration of that limitation and the

existence of other limitations relating to the capacities

of those persons being irrelevant.

27

there appears, in its view, to be a contradiction between

the Explanatory Note concerning heading 8710 of the

HS, according to which ‘bodies of armoured vehicles

and parts thereof (turrets, armoured doors and bonnets,

etc.)’ come under that heading, and the Explanatory Note

concerning heading 9305 of the HS, which states that

parts for military weapons, such as turrets, machine-guns

and sub-machine-guns, come under that latter heading.

In addition, that court was not sure what interpretation

should be given to note 3 of Section XVII of the CN, which

provides that only the parts which are suitable for use

solely or principally with goods coming under Chapters

86 to 88 of the CN, in particular, heading 8710 of the CN,

constitute ‘parts’ within the meaning of those chapters.

In those circumstances the Verwaltungsgerichtshof

decided to stay the proceedings and to refer to the Court

the following questions for a preliminary ruling:

‘(1) Does the exception specified in point (c) of note 1 to

Chapter 93 of the CN, in the version applicable to the

facts in the present case, which is worded ‘armoured

fighting vehicles (heading 8710)’, apply also to ‘parts

thereof’?

(2) Must note 3 to Section XVII of the CN be interpreted

as meaning that a ‘weapons station (armoured turret)’

which may be used on armoured fighting vehicles or

on ‘mobile maritime transport systems’ or in stationary

installations must be classified under heading 8710

of the CN as a part of an armoured fighting vehicle

because that weapons station was imported by the

manufacturer of armoured fighting vehicles for the

production or assembly of armoured fighting vehicles

and is used in fact for that purpose?’

The CJ ruled that the Combined Nomenclature must be

interpreted as meaning that a turret system, such as that

at issue in the main proceedings, which was imported

for the production of armoured fighting vehicles and

was indeed used subsequently for that purpose, comes

under heading 8710 of the Common Nomenclature if it

is ‘principally’ intended for use on an armoured fighting

vehicle, this being a matter for the referring court to

determine on the basis of the objective characteristics

and properties of the turret system, without the end use

to which it is put in the case at hand being determinant for

referring court reproduced in the request for a preliminary

ruling. That description reads as follows:

‘… it is a combination of individual technical elements

integrated in a turret-like construction made principally

of base metal. The turret system is the basis for a

weapons station and is fitted principally with the following

subsystems and components: electrical motors, gyro

stabilisation, optical and electronic sight instruments

including displays and operating units for the crew

(gunner and commander), a firing guidance system,

several sensors, storage units for munitions and devices

for feeding munitions to the weapons. The system is ready

to be fitted with an automatic cannon and a machine gun

(neither of these military weapons is part of the present

BTI). The combined effect of the subsystems mentioned

permits the crew to operate the on-board cannon and

machine guns and, thus, to fire targeted shots. The turret

system is intended to be mounted in a rotatable position

on the roof of mobile maritime transport systems and

mobile land transport systems or used also in stationary

installations.’

On 29 October 2014, the Bundesfinanzgericht

(Federal Finance Court) dismissed GD’s action. That

court classified the turret system at issue in the main

proceedings, as being part of an armoured fighting

vehicle, under heading 8710 of the CN, and indicated

that the tariff information issued by the Principal Customs

Office, Hanover, could not have retroactive effect.

GD brought an appeal before the Verwaltungsgerichtshof

(Administrative Court) against the decision of the

Bundesfinanzgericht dismissing its action. The

Verwaltungsgerichtshof stated that, according to the

Bundesfinanzgericht, the goods covered by the binding

tariff information issued by the Principal Customs Office,

Hanover, and submitted by GD are the same as the

goods at issue in the main proceedings. It nevertheless

takes the view that that BTI cannot apply to the present

case as the declaration of 25 February 2014 predates the

adoption, on 11 April 2014, of that tariff information.

The referring court stated that the goods at issue in the

main proceedings were mounted on a vehicle that must

be classified under heading 8710 of the CN as a tank or

other self-propelled armoured fighting vehicle. However,

28 29

propylene provided the excess pressure for the LPG,

but its calorific capacity is determined jointly by all its

components.

The Tax Authority took the view that the LPG at issue

in the main proceedings had to be classified, by the

application of rules 2(b), 3(b) and 6 of the General rules

for the interpretation of the CN, according to the material

which gave it its essential character.

The Tax Authority considered that, in the present

circumstances, the substance which gives the goods

their essential character is that present in the largest

proportion in their content by weight. Accordingly, after

finding that, according to the certificate of quality, the

LPG at issue in the main proceedings corresponded to

a liquefied gas type CΠБT (SPBT) and that, according to

the Russian national standard ΓOCT 20448-90 (GOST

20448-90), liquefied gases the principal components

of which are propane and butane may be considered

CΠБT(SPBT)-type liquefied gas, the Tax Authority

concluded that both those substances gave that LPG

its essential character, and that the other components,

namely, methane, ethane, ethylene, propylene and

butylene, cannot alter that essential character.

Latvijas propāna gāze brought an action against the

Tax Authority’s decision before the Administratīvā

apgabaltiesa (Regional Administrative Court, Latvia).

In its judgment of 10 April 2014, that court referred, first,

to the case law of the Court of Justice, according to

which in carrying out the tariff classification of goods it is

necessary to identify, from among the materials of which

they are composed, that which gives them their essential

character. This may be done by determining whether the

goods would retain their characteristic properties if one

or other of their constituents were removed from them.

The factor which determines the essential character

of the goods may, depending on the type of goods, be

determined, for example, by the nature of the constituent

material or components, its bulk, quantity, weight or

value, or the role of a constituent material in relation to the

use of those goods (judgment in Kloosterboer Services,

C-173/08, paragraphs 31 and 32).

the purpose of its classification. If that is not the case, that

turret system must be classified, as a part or accessory of

a ‘military weapon’, under subheading 9305 91 00 of the

Combined Nomenclature.

CJ rules on the tariff classification of LPG (Latvijas propāna gāze) On 26 May 2016, the CJ delivered its judgment in the

Latvijas propāna gaze case (C-286/15). The case

concerns the classification in the Combined Nomenclature

(CN) of Liquid Petrol Gas (LPG).

It is apparent from the documents submitted to the Court

that Latvijas propāna gāze classified the LPG which it

imported into Latvia from Russia, during the period from

20 March 2009 to 15 January 2010, under the sub-

heading 2711 19 00 and, accordingly, applied a rate of

import duty of 0% of its customs value. However, based

on the information in that company’s documents, the Tax

Authority took the view that propane and butane were

the substances which predominated in that LPG, with a

preponderance of propane, and classified the LPG under

the sub-heading 2711 12 97.

As the referring court sets out, the LPG at issue in the

main proceedings contains methane, ethane, ethylene,

propane, propylene, butane and butylene. However,

the certificate of quality for that LPG (‘the certificate

of quality’), issued by the producer, AAS ‘Gazprom’,

established in Orenburg (Russia), does not indicate

separately the percentage, in content by weight, of

each of those substances and simply mentions the sum

of methane, ethane and ethylene (0.32% of the LPG’s

content by weight), the sum of propane and propylene

(58.32%) and the sum of butane and butylene (no more

than 39.99%).

The referring court stated that, in the context of the main

proceedings, the Technical University of Riga (Latvia)

issued an opinion according to which it was not possible

to determine, from the certificate of quality, that one of

the substances comprising the LPG at issue in the main

proceedings alone gave the LPG its essential character

as a source of energy, namely, its calorific capacity and

excess pressure. According to that opinion, propane and

29

proceedings, is under an obligation to indicate precisely

the percentage amount of the dominant substance in that

LPG.

The referring court notes, lastly, that it was no longer

possible to take samples of the LPG at issue in the

main proceedings or, therefore, carry out an analysis

of the LPG at the Customs laboratory of the Latvian

Tax Authority in order to determine its composition.

Consequently, in order to determine correctly the tariff

heading applicable, the factual circumstances which

have already been clarified in the main proceedings must

be taken into consideration.

In the light of the foregoing considerations, the Augstākā

tiesa, Administratīvo lietu departaments (Supreme Court,

Administrative law division, Latvia), decided to stay the

proceedings and to refer the following questions to the

Court of Justice for a preliminary ruling:

‘1. Must the general rules for the interpretation of the CN

2(b) and 3(b) be interpreted as meaning that if the

essential character of the goods LPG is determined

by all the components of the gas mixture together

and no component of that mixture may be identified

separately as the factor giving that gas its essential

character, it must be presumed that the factor which

gives the goods their essential character within the

meaning of the general … rule 3(b) is that substance

which is present in the greatest proportion in the

mixture?

2. Does it follow from Article 218(1)(d) of Regulation

No 2454/93 that the declarant of the goods LPG

is under an obligation to indicate precisely the

percentage amount of the substances present in the

greatest quantity in the mixture?

3. If the declarant of the goods has failed to indicate

precisely the percentage amount of the substances

present in the greatest quantity in the mixture, is it

the EU Combined Nomenclature code 2711 19 00,

applied by the declarant of the goods in the present

case, or code 2711 12 97, applied by the Valsts

ieņēmumu dienests Latvian State Tax Authority, that

must be applied to a gas of which 0.32% is the sum

of methane, ethane and ethylene, 58.32% the sum of

propane and propylene and no more than 39.99% the

sum of butane and butylene?’

Next, in applying those considerations to the main

proceedings, the Administratīvā apgabaltiesa (Regional

Administrative Court) found that the Tax Authority had

neither proved which was the essential character of the

LPG at issue in the main proceedings nor shown that the

propane or butane had to be regarded as the substance

which give the LPG its essential character. In that regard,

after stating that the percentage of propane or butane in

the LPG was not indicated separately on the certificate

of quality, the Administratīvā apgabaltiesa referred to the

opinion of the Technical University of Riga according to

which it was not possible to determine that one of the

substances in that LPG may alone give it its essential

character. Lastly, that court observed, on examining the

certificates of quality submitted by Latvijas propāna gaze

in relation to the LPG which had on another occasion

been purchased in Lithuania, that the amount of

propylene could, in certain cases, exceed that of propane

in the LPG.

As noted by the referring court, before which the Tax

Authority brought an appeal on a point of law, it may be

seen from the circumstances of the main proceedings

that, even if propane predominates in content by weight

in the LPG at issue in the main proceedings, the different

substances comprising that LPG together give it its

calorific capacity as a source of energy. The referring

court was, therefore, uncertain as to the merits of the

Latvian Tax Authority’s arguments that the substance

which is present in the greatest proportion gives the LPG

concerned its essential character, and added that, if such

arguments are rejected, LPGs in which propane or butane

predominate should always be classified under the tariff

sub-heading 2711 19 00, to which a rate of import duty of

0% of the Customs value is applied.

In addition, according to the referring court, it is apparent

from Article 218(1)(d) of Regulation No 2454/93 that a

person wishing to import LPG and classify it under a tariff

heading which corresponds to a rate of import duty which

is favourable to him must, on importing the LPG, adduce

evidence to the Customs authorities concerned which

removes any doubt as to validity of that classification.

In the present case, the referring court stated that it is

necessary to clarify whether it follows from that provision

that the importer of LPG, such as that at issue in the main

30

EU Commission publishes guidelines on the Union Customs Code The EU Commission has published its guidelines on the

implementation of the new Union Customs Code (UCC).

This has become an extensive set of documents (+

500p) some of which are still considered ‘draft’ versions.

Although the guidance is of a mere explanatory and

illustrative nature, it seems to address at least some of

the remaining uncertainties in the UCC.

The guidelines can be found at the following link:

http://ec.europa.eu/taxation_customs/customs/customs_

code/union_customs_code/ucc/guidance_en.htm?_clde

e=anVhbml0YS50cm90dEBsb3llbnNsb2VmZi5jb20%3d

&urlid=0

The CJ ruled as follows:

1. Rules 2(b) and 3(b) of the general rules for the

interpretation of the Combined Nomenclature set out

in Annex I to Council Regulation (EEC) No 2658/87 of

23 July 1987 on the tariff and statistical nomenclature

and on the Common Customs Tariff, in the versions

resulting from Commission Regulation (EC)

No 1031/2008 of 19 September 2008 and Commission

Regulation (EC) No 948/2009 of 30 September 2009,

respectively, must be interpreted as meaning that,

where the essential character of a gas mixture, such

as the liquefied petroleum gas at issue in the main

proceedings, is determined by all the components of

that mixture together, so that no component may be

identified as the factor giving it its essential character

and, in any event, the exact quantity of each of the

components of the liquefied petroleum gas at issue

may not be determined, a presumption that the factor

which gives the goods their essential character, within

the meaning of rule 3(b) of those general rules, is the

substance which is present in the greatest proportion

in the mixture must not be used.

2. That combined nomenclature must be interpreted as

meaning that a liquefied petroleum gas, such as that

at issue in the main proceedings, containing 0.32%

methane, ethane and ethylene, 58.32% propane

and propylene and no more than 39.99% butane

and butylene, and in respect of which it may not

be determined which of its constituent substances

gives it its essential character, comes under the sub-

heading 2711 19 00, as ‘Petroleum gases and other

gaseous hydrocarbons, Liquefied, Other’.

3. Article 218(1)(d) of Commission Regulation (EEC)

No 2454/93 of 2 July 1993 laying down provisions

for the implementation of Council Regulation (EEC)

No 2913/92 establishing the Community Customs

Code must be interpreted as meaning that it does

not follow from that provision that a declarant of

liquefied petroleum gas, such as that at issue in the

main proceedings, is under an obligation to indicate

precisely the percentage amount of the substance

present in the greatest quantity in that liquefied

petroleum gas.

31

Correspondents● Gerard Blokland (Loyens & Loeff Amsterdam)

● Kees Bouwmeester (Loyens & Loeff Amsterdam)

● Almut Breuer (Loyens & Loeff Amsterdam)

● Robert van Esch (Loyens & Loeff Rotterdam)

● Raymond Luja (Loyens & Loeff Amsterdam;

Maastricht University)

● Arjan Oosterheert (Loyens & Loeff Zurich)

● Lodewijk Reijs (Loyens & Loeff Rotterdam)

● Bruno da Silva (Loyens & Loeff Amsterdam;

University of Amsterdam)

● Patrick Vettenburg (Loyens & Loeff Rotterdam)

● Ruben van der Wilt (Loyens & Loeff Amsterdam)

www.loyensloeff.com

About Loyens & LoeffLoyens & Loeff N.V. is the first firm where attorneys at law,

tax advisers and civil-law notaries collaborate on a large

scale to offer integrated professional legal services in the

Netherlands, Belgium, Luxembourg and Switzerland.

Loyens & Loeff is an independent provider of corporate

legal services. Our close cooperation with prominent

international law and tax law firms makes Loyens & Loeff

the logical choice for large and medium-size companies

operating domestically or internationally.

Editorial boardFor contact, mail: eutaxalert@loyensloeff.com

● René van der Paardt (Loyens & Loeff Rotterdam)

● Thies Sanders (Loyens & Loeff Amsterdam)

● Dennis Weber (Loyens & Loeff Amsterdam;

University of Amsterdam)

Editors● Patricia van Zwet

● Bruno da Silva

Although great care has been taken when compiling this newsletter, Loyens & Loeff N.V. does not accept any responsibility whatsoever for any

consequences arising from the information in this publication being used without its consent. The information provided in the publication is intended

for general informational purposes and can not be considered as advice.

www.loyensloeff.com

Amsterdam

Arnhem

Brussels

Dubai

Hong Kong

London

Luxembourg

New York

Paris

Rotterdam

Singapore

Tokyo

Zurich

16-06-EN

-EU

TA