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Overview 2012 - edition 112EU 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.

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European Tax Law Overview 2012

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Contents

State Aid• New Code of Conduct Work Package approved

• New rules on services of general economic interest

• General Court rules on UK levy on aggregates

(British Aggregates)

• CJ upholds the General Court’s judgement on

capital injections into a public undertaking by the

State (EDF)

• CJ upholds recovery in Italian bank restructuring

case (BNP Paribas and BNL)

• EFTA Court upholds recovery order in respect of tax

exemption of Liechtenstein investment companies’

management activities

• EU State Aid Modernisation Communication adopted

• State Aid Modernisation effort progresses

• First modernization proposals for new State aid

Regulations launched

Direct taxation• European Parliament supports a mandatory CCCTB

• European Parliament calls for stepping up the fight

against tax fraud and tax evasion

• European Parliament endorses the proposed

Financial Transaction Tax

• Commission proposes to Council to authorize

enhanced cooperation on Financial Transaction Tax

• European Parliament gives consent to enhanced

cooperation on Financial Transaction Tax

• CJ rules that Italian amnesty relating to either direct

tax or VAT claims pending before the courts for more

than 10 years is compatible with EU law (3 M Italia;

Belvedere Costruzioni)

• CJ rules that the free movement of capital excludes

French withholding tax levied only on dividends paid

to foreign investment funds (Santander)

• CJ rules that not granting an income tax allowance

by the Member State of source to non-resident

pensioners earning less than 75% of their total

income in that Member State infringes EU law

(Commission v Estonia)

• CJ rules that Belgian tax rules regarding a share

buy-back of foreign collective investment funds is

in breach of the EEA Agreement (Commission v

Belgium)

• CJ rules that national legislation which precludes

cross-border conversion of companies is

incompatible with the freedom of establishment

(VALE)

• CJ holds that Spanish rules on transfer of residence

of individuals abroad constitute a restriction on the

EU free movement provisions (Commission v Spain)

• CJ rules that Belgian legislation regarding non-

deductibility of payments to non-residents for supply

of services is in breach of EU law (SIAT)

• CJ rules that the free movement of capital does not

apply to inheritance of major shareholdings in third-

country companies (Scheunemann)

• CJ rules that freedom of establishment under the

EEA Agreement requires tax neutral treatment

of exchange of shares between EU and EEA

companies (A Oy)

• CJ rules that UK group relief provisions are in

breach of the freedom of establishment (Philips

Electronics)

• CJ rules that Portuguese provisions on exit taxes

are in breach of the freedom of establishment

(Commission v Portugal)

• CJ rules that Luxembourg legislation making the

grant of a net wealth tax reduction conditional on the

taxpayer remaining subject to that tax for a certain

period is contrary to the freedom of establishment

(DI. VI. Finanziaria di Diego della Valle)

• CJ rules that Belgian legislation on the taxation of

non-resident investment companies is incompatible

with EU law (Commission v Belgium)

• CJ rules that Netherlands wage withholding tax on

remuneration payments to foreign football clubs

for services rendered in the Netherlands is not an

infringement of EU law (X NV)

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• Polish court refers preliminary question to the CJ

regarding the taxation of dividends paid to third-

country investment funds (Emerging Markets Series)

• Portuguese court refers preliminary question to the

CJ concerning thin capitalisation rules in a third

country context (Itelcar)

• Commission formally requests Belgium to amend its

rules on notional interest deduction

• Commission launches public consultation on double

non-taxation

• Commission requests the United Kingdom to amend

its company exit tax legislation

• Commission requests Sweden to change its tax

rules discriminating against foreign pension funds

• Commission refers Germany to CJ over tax

treatment of group companies

• Commission outlines concrete measures to tackle

tax fraud and evasion

• Commission publishes report of the responses

received on the public consultation concerning

double non-taxation

• Commission refers UK to the CJ over cross-border

loss relief

• Commission requests the Netherlands to amend

legislation on cross-border pensions

• EFTA Surveillance Authority requests Iceland to

amend discriminatory taxation of unrealized capital

gains in case of cross-border mergers

• Commission publishes Action Plan to strengthen the

fight against tax fraud and tax evasion

• Developments in the Netherlands: Supreme Court

refers preliminary question to CJ on whether

dividend tax withheld on distributions to Netherlands

Antilles is in breach of the free movement of capital

with third countries

• Developments in the Netherlands: Supreme Court

rules that standstill clause regarding the free

movement of capital applies in case of a majority

interest

• Developments in Germany and France: Green

Paper regarding German-French harmonization of

corporation tax; a further step to a common tax base

within the EU

• Developments in the Netherlands: Bill on deferral of

payment of exit tax due approved by Parliament’s

Lower House

• Dissolution by way of merger is not ‘liquidation’ in

terms of the Parent-Subsidiary Directive (Punch

Graphix)

• CJ holds that national law may require obtaining

prior authorization to make use of tax advantages

under the Merger Directive (Pelati)

• CJ rules that Finish legislation regarding dividends

paid to foreign pension funds is in breach of the free

movement of capital (Commission v Finland)

• CJ dismisses infringement case against Germany

regarding taxation of foreign pension funds

(Commission v Germany)

• CJ rules in FII 2 case: the asymmetrical application

of the exemption and the credit method to nationally-

sourced and foreign-sourced dividends is in breach

of EU law; the free movement of capital applies in

the case of dividends distributed by third country

companies in which the shareholder holds a majority

participation

• CJ rules that Italian rules on intra-Union transfers of

assets are not in breach of the Merger Directive (3D

I)

• Advocate General opines that the ne bis in idem

principle of the EU Charter of Fundamental Rights

does not preclude the imposition of multiple

penalties in national proceedings concerning the

evasion of VAT (Åkerberg)

• Advocate General opines Finnish rules on

deductibility of losses upon a merger of two

companies resident in different Member States not

in breach of the freedom of establishment (A Oy)

• Advocate General considers that Belgian rules on

the notional interest deduction infringe the freedom

of establishment (Argenta Spaarbank)

• Advocate General opines that the EC-Switzerland

Agreement on the free movement of persons cannot

be relied on by nationals of a Contracting Party

against their own State (Ettwein)

• UK court refers preliminary question to the

CJ concerning group relief in a consortium of

companies (Felixstowe Dock)

• Hungarian court refers preliminary question to the

CJ regarding discriminatory taxation of dividends

paid to non-residents (Franklin Templeton

Investment Funds)

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• CJ declares that a transport company which merely

carries out the transport of persons does not qualify

as a travel agency (Star Coaches)

• CJ rules on VAT treatment of telecommunications

services (Lebara)

• CJ rules that irregularities by supplier in principle

cannot lead to refusal of deducting input VAT

(Mahagében and Péter Dávid)

• Time limit of six months for VAT refund requests by

non-established taxpayers is mandatory (Elsacom)

• CJ rules on scope of VAT exemption for transactions

in shares for services rendered by real estate

brokerage (DTZ Zadelhoff)

• CJ rules on time limits and penalties for belated

declaration and deduction of acquisition VAT (EMS-

Bulgaria Transport)

• CJ rules that the supply of an old building

undergoing transformation into a new building is VAT

exempt if the building was only partly demolished

and still in use (J.J. Komen)

• CJ rules that it is for the national law to determine

what type of interest is calculated on a repayment on

unduly paid VAT (Littlewoods Retail)

• CJ holds that VAT on alteration of capital good for

temporary use for private purposes is deductible (X)

• CJ rules on scope of VAT exemption for supply of

aircraft to airlines operating chiefly on international

routes (A Oy)

• CJ rules that supplies resulting from a force majeure

can qualify as economic activities (Ainārs Rēdlihs)

• CJ rules that the winnings that have to be returned

to players of bingo games should not be included

for calculation of the taxable amount (International

Bingo Technology SA)

• CJ rules that portfolio management services are VAT

taxable (Deutsche Bank AG)

• CJ rules that the margin scheme is not applicable

in the case of second-hand vehicles acquired from

a person with a partial right to deduct VAT (Bawaria

Motors)

• CJ rules on deduction of VAT on costs on-charged

by holding company (Portugal Telecom)

• CJ elaborates on deductibility of VAT on invoices

issued by fraudulent supplier (Tóth)

VAT• Council conclusions on the future of VAT

• Commission adopts Implementing Regulation on

one-stop shop schemes

• Council adopts Regulation for mini One Stop Shop

scheme

• CJ rules that non-customs warehouse-keeper may

not unconditionally be held jointly and severally

liable for VAT due by warehouse user (Vlaamse

Oliemaatschappij NV)

• CJ rules that Member State may in principle require

suppliers to obtain an acknowledgement of receipt of

issued correcting invoices (Kraft Foods Polska SA)

• CJ rules that supply of self-employed lorry drivers

qualifies as the supply of staff (ADV Allround

Vermittlungs AG)

• According to the CJ, untaxed ‘subsidy’ does not

have to be taken into account when determining

the amount of deductible input VAT based on the

method of actual use (Varzim Sol)

• CJ rules that flat-rate method for calculating VAT

payable in respect of private use of goods has

to be proportional to that actual private use (Van

Laarhoven)

• CJ clarifies rules for deduction of incurred input

VAT on the lease of vehicles (Eon Aset Menidjmunt

OOD)

• CJ rules that input VAT incurred by partners before

formal registration of partnership is deductible

(Polski Trawertyn)

• CJ clarifies rules for deductibility of VAT on

immovable property in relation to the intended use of

that property (Klub)

• CJ rules that deduction of import VAT cannot

be made conditional upon actual prior payment

(Véléclair)

• CJ rules that private use of a building forming part of

the business assets may not be qualified as letting

when the characteristics of letting are not present

(BLM)

• CJ clarifies the circumstances under which the

taxable amount of transactions can be set at their

open market value (Balkan and Sea Properties)

• CJ declares that VAT is not due on costs or amounts

which could but have not actually been charged

(Connoisseur Belgium BVBA)

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• CJ rules that right to deduction may be denied if the

taxable person knew or should have known that he

was involved in VAT fraud (Bonik)

• CJ clarifies meaning of the term ‘construction work’

in derogating measure (BLV)

• CJ rules on retrospective reduction of taxable

amount under the Second VAT Directive (Grattan)

• CJ rules on chargeable event in the case of supply

of construction services where consideration is

provided in kind in the form of building right (Orfey)

• Advocate General opines on scope of exemption for

management of special investment funds (GfKb)

• Advocate General opines that non-taxable persons

may be a member of a VAT group (Commission v

Ireland)

• Presidency progress report regarding VAT treatment

of insurance and financial services

• Commission publishes annual report on fight against

fraud

• Commission publishes proposal for a procedure to

take immediate measures against VAT fraud

• Commission requests France and Luxemburg to

amend their VAT rates on e-books

• Developments in the Netherlands: Netherlands

Supreme Court delivers judgment concerning abuse

in a hospital equipment leasing scheme

Customs Duties, Excises and other Indirect Taxes• Revised scheme for tariff preferences for developing

countries

• CJ rules on the levy of Netherlands car registration

tax in the case of borrowing of cars registered in

another Member State (Van Putten and Others)

• CJ rules on the correction of export documents after

the goods have been released and the effects on

export refunds (Südzucker AG and Others)

• CJ rules on the repayment of anti-dumping duty that

was not legally owed (CIVAD)

• CJ rules on the customs debt incurred by the

delayed entry in warehouse stock records (Eurogate

Distribution)

• CJ rules on the customs debt incurred by non-

fulfilment of obligations related to Inward Processing

relief (Döhler Neuenkirchen)

• CJ elaborates on evidence required for application

of VAT exemption for intra-Community supplies

(Mecsek-Gabona)

• CJ rules that the VAT exemption for intra-Community

supplies may also apply when supplier is not in

possession of the VAT number of the customer

(VSTR)

• CJ rules that service charges may form part of a

single supply consisting in the lease of immovable

property (Field Fisher Waterhouse LLP)

• CJ rules on Bulgarian provision that allows an

adjustment to the VAT deducted on goods that have

been stolen (PIGI – Pavleta Dimova ET)

• CJ rules that no input VAT adjustment is necessary

in respect of modernization of a building (TETS

Haskovo)

• CJ rules that Latvian provision on refund of excess

VAT does not comply with the EU VAT Directive

(Mednis SIA)

• CJ rules that refund of VAT to foreign taxable person

cannot be refused on the ground that it has a fixed

establishment without taxable transactions (Daimler

and Widex)

• CJ rules that travel operator scheme does not apply

to in-house transport services (Maria Kozak)

• CJ rules that sale of goods under a customs

suspension arrangement is in principle VAT taxable

(Profitube)

• CJ rules that Member States may apply an

alternative method than the turnover method

for calculating the deductible proportion (BLC

Baumarkt)

• CJ rules on inclusion of ground already owned for

calculation of VAT on deemed supply (Gemeente

Vlaardingen)

• CJ clarifies the type of conditions to which the

exemption for out-patient care services may be

subject (Ines Zimmermann)

• CJ rules that letting of houseboat and adjacent

land constitutes a single VAT exempt supply of

immovable property (Susanne Leichenich)

• CJ rules that VAT on acquired buildings that

are demolished with a view to construction of a

residential complex is deductible (SC Gran Via

Moineşti)

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• CJ rules on the burden of proof for certificates of

origin (Lagura)

• Netherlands Supreme Court refers preliminary

question to the CJ regarding the imposition of

double car registration tax (X case)

• Authorised Economic Operator Programme and

Customs-Trade Partnership Against Terrorism

Program of the US – Proposal

• Anti-Counterfeiting Trade Agreement – ACTA

• EU challenges United States’ failure to remove

illegal subsidies in Aircraft Trade Dispute

• EU and Latin American countries formally end

banana disputes

• Commission adopts Communication clarifying EU

rules on car taxes

• Commission adopts Communication on Customs

Union: boosting EU competitiveness, protecting EU

citizens in the 21st century

Capital Duty• CJ rules on compatibility of Polish tax on civil law

transactions with Capital Duty Directive (Pak-

Holdco)

• CJ rules that Italian contribution to chamber of

commerce is compatible with Capital Duty Directive

(Grillo Star Srl Fallimento)

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the obligation to notifiy any compensation for social

services, including health and long term care, childcare,

reintegration services and social housing (up to 2012:

hospitals and social housing only). For other services

of general economic interest (‘SGEI’), notification will

only be necessary for amounts as from EUR 15 million

a year per recipient (up to 2012: EUR 30 million or a

turnover of EUR 100 million or more). A public service

contract would be required for any such service (i.e. a

contractual obligation to make certain costs eligible for

compensation). The costs eligible for compensation will

primarily be determined by comparing the net costs of a

company executing a public service contract and the net

costs of a comparable company without such obligation.

Existing compensation schemes will have to be adapted

to these new rules by the end of January 2014.

Even though compensation could theoretically be

granted through the tax system, it should be pointed

out, however, that the need for ex-ante determination

of the relevant amounts makes it nearly impossible

to successfully bring most kinds of tax benefits within

the scope of these decisions. To the extent State

aid would be granted to SGEI, such as in case of

overcompensation or other cases of non-compliance

with the aforementioned decision, a further proposal

will be published this spring. According to the released

draft regulation, amounts up to EUR 500,000 per three

years will be deemed de minimis aid, which – in the

Commission’s reasoning – has a negligible effect on

competition and trade. (For non-SGEI, the level of de

minimis aid will remain at EUR 200,000.)

General Court rules on UK levy on aggregates (British Aggregates)

On 7 March 2012, the General Court gave its second

ruling in the British Aggregates case (T-210/02 RENV).

The case concerns a levy introduced by the UK on

the commercial exploitation of certain materials as

aggregates in construction. In its 2002 decision, the

Commission did not raise objections against the

introduction of the levy on the ground that its scope

was justified by the nature and general scheme of

the system. The General Court (‘GC’) upheld that

State Aid

New Code of Conduct Work Package approved

On 16 December 2011, the Council approved the new

Work Package for the Code of Conduct Group, which

has to report back on its progress by mid-2013. The

Package contains a shortlist of priorities addressing

harmful tax competition. The Group will continue to

direct its work at mismatches and guidance notes. The

monitoring of administrative practices, such as advance

tax rulings and pricing agreements, will continue and

is considered an open issue. Also efforts to promote

the Code of Conduct in neighbouring third countries, in

particular Liechtenstein and Switzerland, will continue.

The Group points out that as for Switzerland, it will

follow an alternative approach should satisfactory

progress not be achieved. The possibility of unilateral

assessment of Swiss regimes against Code of Conduct

criteria is explicitly mentioned, even though no hint is

given as to any consequence of such action. In regard

to Liechtenstein, particular attention will be given

to its full exemption for dividends and capital gains,

its exemption of capital gains combined with a tax

deductible write down for devaluing participations and its

special regime for private asset structures.

Also on the list is an examination of policy responses

to address potential harmful tax planning practices by

multinationals via investment fund regimes. It is for

Member States to (confidentially) provide relevant cases

for such examination. No mention is (yet) being made

in respect of potential parallel State aid investigations

by the Commission in respect of these investment fund

regimes.

New rules on services of general economic interest

With the publication of a revised decision on the

application of Article 106(2) of the TFEU, the

Commission decided to exempt Member States from

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CJ upholds the General Court’s judgement on capital injections into a public undertaking by the State (EDF)

On 5 June 2012, the CJ upheld the General Court’s

(‘GC’) 2010 judgment annulling the Commission’s

decision which declared, without applying the ‘private

investor test’, that a waiver of tax claim by the French

State in favour of EDF constituted State aid (C-124/10

P).

Électricité de France (EDF), which at the material time

was a public undertaking wholly owned by the French

State, was allowed a reclassification of a debt to the

government into capital, together with a partial tax

exemption of the debt release resulting in a savings in

taxes of nearly EUR 889 million.

In its judgment, the CJ held that a measure is not to

be treated as State aid if the aid recipient as a public

undertaking could have obtained the same advantage

in normal market conditions. Under the ‘private investor

test’ it must be determined whether the State, in its

capacity as a shareholder and not in the exercise of its

public authority, conferred an economic advantage. For

this, the Member State must present clear, objective

and verifiable evidence of its actions having to be

ascribed to its role of shareholder at that time and not

retrospectively.

Even though in this case the transfer of debt into capital

was facilitated by not having to pay taxes upon the debt

release (the amount of which otherwise could have been

used for an additional capital injection), the Commission

should have verified whether a capital injection was

done by France in normal market conditions regardless

of the way the capital was provided. The CJ held that

under the ‘private investor test’ it would have been

possible to determine that a private shareholder would

have provided additional capital at an amount equal

to the tax due. Neither the CJ nor the General Court

prejudged the outcome of the test in the case at hand as

this is still up to the Commission to assess given that its

previous decision has definitively been annulled.

decision in 2006, however, the Court of Justice (‘CJ’)

overturned the latter judgment in 2008 and sent the

case back to the GC. In the present judgment, the GC

held that, in accordance with the position taken by the

CJ, the environmental objective of a particular tax is not

sufficient to exclude such a measure from the State aid

scrutiny from the outset. In the case at hand, the UK

intended to promote the use of ‘secondary’ aggregates

which are by-products or waste materials. This in order

to reduce the use of virgin (‘primary’) aggregates which

are non-renewable natural resources.

The GC found that certain materials, which are factually

and legally comparable to those materials subjected

to the levy, had been exempt. In its view, both the

UK and the Commission had failed to explain why the

extraction of exempted materials was not as harmful

to the environment as the extraction of those materials

subject to the levy. The GC also found that by exempting

comparable materials there would be an economic

incentive to extract those exempted primary materials,

reinforcing the unequal treatment in respect of the

exploitation of taxed materials. In addition, the GC ruled

that the difference in treatment could not be justified in

light of the nature of the tax, as the exemption resulted

in an even greater demand for primary aggregates of

exempt materials instead of secondary aggregates of

any material (either taxed or exempted). Intensifying the

extraction of other primary aggregates was considered

contrary to the environmental objective of the levy.

The GC did uphold an exemption for exported materials,

as it would be impossible for the UK to check whether

materials would be used as aggregates abroad or

not. In the absence of such exemption, exported

materials would otherwise be subject to a levy without

the possibility to exempt them from taxation if such

materials should not be exploited as aggregates.

Accordingly, the Commission’s decision not to object

to the UK levy was annulled and the Commission must

now either take a new decision, or again appeal this

decision of the GC.

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considered to be domiciliary companies. As a result,

their capital was exempt from income tax and subject to

a reduced capital tax. Furthermore, no coupon tax was

due.

Contrary to regular Liechtenstein undertakings

(including investment funds – the latter consisting of

two legal entities, one managing funds, one holding

funds), the income and own assets from management

activities by investment companies would effectively

not be taxed (except for the strongly reduced capital

tax). This difference in treatment as far as it considered

investment management as a business activity was

considered to be unlawful aid, as it could not be justified

by the logic and nature of the Liechtenstein tax system.

The tax benefits in respect of the management activities

were thus to be recovered from the beneficiaries.

Of note is that the managed assets themselves (the

fund capital) were subject to a reduced capital tax only,

both in respect of investment companies and investment

funds. The taxation of these assets themselves was

not at issue in the ESA’s original decision of November

2010.

EU State Aid Modernisation Communication adopted

On 8 May 2012, the Commission announced its State

Aid Modernisation (SAM) initiative, a major overhaul of

its State aid framework. This project aims at ensuring

better targeted State aid and faster decision-making

and on focusing enforcement efforts on cases with the

biggest impact on the internal market. In order to ensure

a better quality of spending, a number of guidelines

will be revised and streamlined, such as in the area

of environmental benefits, regional aid, risk capital,

broadband, as well as rescue and restructuring aid to

firms. The Commission will identify common principles

to assess compatibility of aid.

As to enforcement, the Commission will provide for

stronger scrutiny of larger and potentially distortive aid.

In so doing, it will also initiate enquiries both by sector

and across Member States. From this perspective, it is

most likely that also in the area of taxation, a number of

CJ upholds recovery in Italian bank restructuring case (BNP Paribas and BNL)

On 21 June 2012, the CJ upheld the Commission’s

2008 decision in the BNP Paribas and BNL case, which

held an Italian tax benefit for restructuring in the banking

sector to be unlawfully granted State aid and ordered its

recovery to the extent benefits exceeded the benefits

of the normal, generally accessible tax regime for

restructuring (C-452/10 P).

The CJ first set aside the GC’s judgement reviewing

the Commission’s decision on the ground that the GC

had failed to conduct a full and comprehensive review,

in particular, in regard to checking whether the benefit

could fit within the nature and general scheme of the tax

system. The CJ then decided to give final judgement

itself without referring the case back to the GC as the

information available from previous proceedings so

allowed.

The CJ did not accept the argument from the Italian

government that the regime at hand was a mere

repetition of a general corporate restructuring scheme

already in place, resulting in ‘practically identical’

taxation of the capital gains resulting therefrom.

As the regime for the banking sector provided

additional benefits over time in respect for future

value realignments (which could be settled by paying

a substitute tax), the CJ did not consider it justifiable

based on the inherent logic of the tax system.

EFTA Court upholds recovery order in respect of tax exemption of Liechtenstein investment companies’ management activities

On 30 March 2012, the EFTA Court upheld a decision

of the EFTA Surveillance Authority (ESA) in respect of

a Liechtenstein investment companies regime that had

been in force from 1996 to 2006 (Joined Cases E-17/10

and E-6/11, published in October 2012). Investment

companies – i.e. single legal entities that engage both

in holding funds and the management thereof – were

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Specific guidelines on risk capital investments and

broadband networks are also being reviewed and

subject to public consultations currently running.

First modernization proposals for new State aid Regulations launched

In December 2012, the Commission launched its first

set of proposals for revision of State aid Regulations,

two of which are of particular interest to the tax field.

Firstly, if the proposals are adopted, the 1999

Procedural Regulation (Council Regulation No

659/1999) will be renewed with the objective to focus

State aid enforcement on the more distortive cases

in the internal market while speeding up the decision-

making process. Complainants must provide the

Commission with more complete and correct information

about the alleged aid and the complainant must

demonstrate how his interests would be affected by

the aid. As a result, the Commission could restrict itself

to dealing with well-founded complaints. Currently, the

Commission receives over 300 complaints per year,

many of which are either ‘not motivated by genuine

competition concerns or not sufficiently substantiated’

in the Commission’s view. The Commission, however,

must investigate every alleged infringement under

current rules.

The cooperation between the Commission and national

judges will be formalized and the Commission will be

requesting the authority to conduct parallel inquiries

about aid in a certain sector or of a certain type in

several Member States at once. The Commission

also proposed that it be allowed to submit its views in

national court proceedings as amicus curiae if the EU’s

public interest so requires.

The Commission also proposed that it be granted the

authority to enforce the gathering of market information.

Upon opening a formal investigation, it may request

information with the possibility to apply a pecuniary

sanction if incorrect or misleading information is

provided (there would still be no obligation to reply) or

a pecuniary sanction for late or non-compliance with

comparable high-impact tax regimes will be selected for

an EU-wide review of their State aid compatibility.

Both the General Block Exemption Regulation

(Commission Regulation (EC) No 800/2008 of 6 August

2008) and, potentially, the De Minimis Regulation

(Commission Regulation (EC) No 1998/2006 of

15 December 2006) may be simplified. Also, the notion

of State aid will be clarified – that is to say, the notion

as understood by the Commission – and the Procedural

Regulation (Council Regulation No 659/1999 of 22

March 1999) will be modernized and streamlined in

order to ‘deliver decisions within business-relevant

timelines’.

State Aid Modernisation effort progresses

As part of its major overhaul of State aid regulations, the

Commission announced the opening of consultations

with the Member States and interested parties in respect

of some of its core regulations. Besides the Procedural

Regulation (Council Regulation No 659/1999), where

the Commission pays special attention to the complaint

procedure for competitors and the gathering of

information from the Member States, the General Block

Exemption Regulation (Commission Regulation No

800/2008) - allowing for the immediate clearance of aid

without notification - is being reviewed.

In addition, on 26 July 2012, a public consultation was

launched on the ‘de minimis’ Regulation (Commission

Regulation No 1998/2006), which applies to small

aid amounts that are deemed not to have an impact

on competition and trade within the internal market

and, therefore, are exempted from the notification

obligation. The Commission invites comments from

public authorities and stakeholders. These will be taken

into account when preparing a revised draft Regulation

that the Commission promises to deliver by the end of

2013. Another public consultation was started, on 31

July 2012, as part of the review of the EU Guidelines on

State Aid for Environmental Protection dating from 2008.

The Commission will propose revised draft guidelines in

2013.

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proposes, inter alia, a ‘road map’ to make the CCCTB

mandatory.

The Commission published the proposed CCCTB

Directive on 16 March 2011 (see EU Tax Alert edition

no. 91, April 2011). On 26 October 2011 and 14

December 2011, the European Economic and Social

Committee and the Committee of the Regions gave their

opinions on the proposal. On 21 March 2012, the EP’s

Committee on Economic and Monetary Affairs adopted

a report regarding the proposed Directive endorsing

the latter proposing, however, several amendments.

The report has now been adopted by the EP’s plenary

session with 452 votes in favour, 172 votes against and

36 abstentions.

The EP proposes 38 amendments to the Commission’s

proposed Directive. Most importantly, the EP suggests

that the CCCTB, which the Commission proposed as an

optional scheme, should gradually become mandatory.

In particular, two years after the Directive’s date of

application, European Companies (‘SE’) and European

Cooperative Societies (‘SCE’) would be considered to

have opted for the CCCTB regime. Not later than five

years after the date of application of the Directive, all

eligible companies, except for small- and medium sized

enterprises (SMEs), would have to apply the CCCTB in

a compulsory manner. Furthermore, when first reviewing

the application of the Directive, the Commission would

have to assess whether the compulsory application

should also be extended to SMEs.

The EP also suggests that during the first review

of the application of the Directive, the Commission

should consider whether a minimum tax rate should be

introduced within the CCCTB system. Another important

proposal in the EP’s resolution is lowering the weight

of the sales factor in the apportionment formula from

one third proposed by the Commission to 10%. The

justification for this proposed amendment is that it would

deviate less from the internationally accepted principle

of source-State entitlement, it would be more favourable

to small and medium-sized Member States with limited

domestic markets and it would be less susceptible to

manipulation. Some proposed amendments set out

in the resolution are aimed at making the anti-abuse

provisions of the proposed Directive more stringent. The

a request for information. Member States and public

authorities would be exempt from such sanctions.

Secondly, the Council’s Enabling Regulation (Council

Regulation (EC) No 994/98) will be amended which

is the basis for the Commission’s General Block

Exemption Regulation (GBER). The latter allows

Member States to proceed with granting certain types of

aid – within strict limits – without first having to wait for a

decision by the Commission. In the proposal, the scope

of the Enabling Regulation will be extended to new

categories of aid in the following areas:

Culture and heritage conservation; damages caused

by natural disasters; damages caused by adverse

weather conditions in the fisheries sector; forestry and

the promotion of certain food products; conservation

or marine biological resources; amateur sports; aid of

a social character for transport of residents in remote

regions; coordination of transport or reimbursements

for the discharge of certain public service obligations;

certain broadband infrastructure and – most important

for the tax domain – innovation.

Once the Enabling Regulation has been adopted by

the Council and entered into force, the Commission will

adopt a gradual approach in changing its GBER, as

the latter spells out the strict conditions for each type

of aid in order to be exempt from the prior notification

and stand-still procedure. Only in areas where the

Commission has sufficient experience to define those

conditions will it be able to do so.

Direct Taxation

European Parliament supports a mandatory CCCTB

On 19 April 2012, the European Parliament (‘EP’) –

acting in a consultative role – adopted a resolution

on the proposed Council Directive on a Common

Consolidated Corporate Tax Base (‘CCCTB’) which,

13

the possibility of EU coordination in changing such

agreements between the Member States in order to

make tax avoidance more difficult

• adequate resources to be allocated by the Member

States to the national services that are empowered

to combat tax fraud

• coordination by the Member States of their tax

systems to avoid unintended non-taxation and tax

avoidance

• strengthening the regulation of, and transparency as

regards, company registries and registers of trust

• increased transparency and tighter control in order

to prevent the use of tax havens.

European Parliament endorses the proposed Financial Transaction Tax

On 23 May 2012, the EP in its plenary session adopted

a Resolution on the Commission’s Proposal for a

Council Directive on a common system of a financial

transaction tax (‘Proposal for an FTT’) with 487 votes

in favour, 152 against and 46 abstentions. It endorsed

the Proposal for an FTT together with the changes

that the EP’s Committee on Economic and Monetary

Affairs suggested with a view to strengthen the Proposal

(see EU Tax Alert edition no. 105, May 2012). The

Proposal for an FTT is to be adopted by way of a

special legislative procedure in which the EP plays only

a consultative role. Accordingly, the EP’s opinion is not

binding on the Council.

Commission proposes to Council to authorize enhanced cooperation on Financial Transaction Tax

On 23 October 2012, the Commission adopted a

proposal for a Council Decision which would authorize

the introduction of a Financial Transaction Tax (‘FTT’)

within the EU through enhanced cooperation.

As to the background of this initiative, the Commission

tabled a proposal for a Council Directive on a common

system of FTT on 28 September 2011 (see EU Tax Alert

no. 97, October 2011). Following intense discussions

EP proposes to insert a recital in the text of the Directive

envisaging the possibility of enhanced cooperation

if the Council fails to adopt the proposed Directive

unanimously. Such enhanced cooperation would

encompass the euro area Member States but it would

be open for other Member States to join. Furthermore,

the EP also suggests setting up a CCCTB Forum

to which companies and Member States could refer

questions and disputes relating to the CCCTB.

The proposed CCCTB Directive is based on Article

115 of the Treaty on the Functioning of the European

Union (‘TFEU’), which prescribes a special legislative

procedure in which the EP plays only a consultative

role. Although the Council has to consult the EP, it is not

required to take the EP’s opinion into account.

European Parliament calls for stepping up the fight against tax fraud and tax evasion

On 19 April 2012, the EP adopted a resolution calling for

concrete ways to combat tax fraud and tax evasion. The

document, which consists of 16 points, highlights some

of the concrete measures that the European Parliament

considers necessary, most importantly:

• the review of the Savings Taxation Directive, in this

respect, it emphasises the need to extend the scope

of the Directive in order to effectively end bank

secrecy and calls on the Commission to find a swift

agreement with Switzerland and the Member States

concerned on these issues

• the review of the Parent-Subsidiary Directive and

the Interests and Royalties Directive in order to

eliminate evasion via hybrid financial instruments in

the EU

• implementing new and innovative strategies for

combating VAT fraud across the EU

• keeping focus on the key role that the CCCTB can

play in the fight against tax fraud

• review of bilateral agreements currently in force

between Member States and bilateral agreements

between Member States and third countries, in this

respect, it calls on the Commission to report on

14

enhanced cooperation as regards the FTT. The

procedure for enhanced cooperation is regulated by

Article 20 of the Treaty on the European Union (‘TEU’)

and Articles 326 to 334 of the TFEU. A decision to

authorise enhanced cooperation is taken by the

Council ‘as a last resort’ once it has established that the

objectives cannot be attained within a reasonable period

by the EU as a whole, and provided that at least nine

Member States participate. After the Member States

willing to participate had submitted requests to the

Commission for the initiation of enhanced cooperation,

the Commission may decide to submit a proposal to the

Council to that effect. The authorisation is granted by

the Council by qualified majority and after obtaining the

consent of the European Parliament. The substance of

the enhanced cooperation must be agreed unanimously

by the participating Member States.

The Commission also announced that later this year it

will table the substantive proposal on the harmonised

FTT, for discussion and adoption by the participating

Member States. That proposal will be very much along

the lines of the original FTT proposal, as requested by

the Member States in their letters.

European Parliament gives consent to enhanced cooperation on Financial Transaction Tax

On 12 December 2012, the EP voted in favour of

authorizing 11 Member States to go ahead with the

introduction of the FTT via enhanced cooperation.

The resolution was adopted by 533 votes to 91,

with 32 abstentions. The text adopted by the

Parliament stresses that the ultimate goal should still

be a worldwide FTT, and urges the EU to continue

campaigning for it. To this end, the 11 willing Member

States, which together account for 90% of Eurozone

GDP, should set an example of what a geographically

wider tax could achieve, added the Parliament.

Having obtained Parliament’s consent, the Council now

needs to secure a qualified majority vote to allow the

Commission to initiate enhanced cooperation on the

FTT. Commissioner Šemeta urged the Finance Ministers

on the FTT proposal, it became clear in the (ECOFIN)

Council meetings held in June and July 2012, that

unanimity would not be reached within a reasonable

period. In the course of the following months, several

Member States expressed interest in proceeding with a

common system of FTT through enhanced cooperation.

By mid October 2012, ten Member States had sent

official requests to the Commission for enhanced

cooperation on an FTT; these were Germany, France,

Austria, Belgium, Greece, Italy, Portugal, Slovakia,

Slovenia and Spain. As the minimum number of Member

States necessary to participate in enhanced cooperation

had been reached, the Commission set out to analyse

whether the conditions for enhanced cooperation laid

down in the Treaties are satisfied in this case.

Having examined the relevant legal conditions laid

down in the Treaties, the Commission concluded

that all such conditions for introducing the FTT via

enhanced cooperation had been met. Furthermore, the

Commission stated that that the implementation of a

common system of FTT amongst a sufficient

number of Member States would entail immediate

tangible advantages in handling the following problems

currently in place:

- a fragmentation of the tax treatment in the internal

market for financial services -

- increasing number of uncoordinated national tax

measures being put in place with the consequent

possibilities of distortions of competition between

financial instruments, actors and market places

across the EU and double taxation or double non-

taxation;

- the financial institutions do not make a fair and

substantial contribution to covering the cost of the

recent crisis and a level playing field with other

sectors from a taxation point of view is not ensured;

- taxation policy does not contribute to provide

disincentives for transactions which do not enhance

the efficiency of financial markets nor complement

regulatory measures to avoid future crises.

Therefore, the Commission submitted the current

proposal to the Council, which is an important

procedural step on the road towards establishing

15

compatible with the principle of prohibition of abuse of

rights, Article 4(3) of the Treaty of the European Union

(‘TEU’), the freedoms guaranteed by the Treaty on

the Functioning of the European Union (‘TFEU’), the

principle of non-discrimination, the rules on State aid

and the obligation to ensure the effective application of

EU law. (For a fuller account of the facts see EU Tax

Alert edition no. 85, November 2010).

In giving an answer to this question, the CJ emphasized

that the provision at hand was more than a mere waiver

of a tax; it is aimed at ensuring compliance with the

fundamental right of keeping judicial proceedings within

reasonable time limits. It also pointed out that the facts

in the main proceedings went back more than 20 years.

In view of this, it held that none of the rules or principles

of EU law mentioned by the referring court precluded

the application of the national provision. In particular,

no general principle exists under EU law which might

entail an obligation for the Member States to combat

abusive practices in the field of direct taxation. The case

law laying down the principle of prohibition of abuse of

rights (Halifax C-255/02 and Part Service C-425/06),

is not relevant to the case at hand where the taxpayer

has not relied on any provision of harmonized EU law

for fraudulent or abusive ends. Likewise, the CJ held

that the case law on abuse of rights in the field of direct

taxation (Cadbury Schweppes C-196/04, Thin Cap GLO

C-524/04 etc.) is also not relevant, as the case does not

involve the application of a national provision restrictive

on one of the fundamental freedoms where the issue

of justification by the need to prevent abusive practices

could have occurred. As regards the fundamental

freedoms guaranteed by the TFEU and the principle

of non-discrimination on grounds of nationality, the CJ

observed that only the free movement of capital seemed

to be concerned by the facts of the case, the exercise of

which, however, is not affected by the provisions at hand

granting an amnesty in tax proceedings.

With respect to the State aid rules, the CJ held that

even if we assume that the national provision indeed

leads to an advantage for the beneficiary, the Italian

provision at issue is not selective. The fact that the

provision applies upon the meeting of certain conditions

(i.e. tax proceedings pending for more than 10 years,

to make this matter a top priority in the Council in 2013

in order to give the green light needed for the FTT to

proceed.

CJ rules that Italian amnesty relating to either direct tax or VAT claims pending before the courts for more than 10 years is compatible with EU law (3 M Italia; Belvedere Costruzioni)

On 29 March 2012, the Court of Justice (‘CJ’) delivered

its judgments in two cases regarding the issue of

whether or not it is compatible with various rules and

principles of EU law for national rules to provide for tax

proceedings pending for an extended time before the

last instance courts to be concluded, without a decision

on the substance of the matter, automatically or in return

for a payment of a symbolic amount in order to comply

with fundamental rights relating to judicial procedures (3

M Italia C-417/10; Belvedere Costruzioni C-500/10).

In 2010, Italy adopted a legislative provision under

which proceedings that had been pending for more

than 10 years at the date of its entry into force, in which

the tax authorities had been unsuccessful in the first

and second instances, were concluded without an

examination of the appeal. The aim of the provision

was to reduce the length of tax proceedings with a view

to the principle that judgment must be given within a

reasonable time, as set out in the European Convention

for the Protection of Human Rights and Fundamental

Freedoms (‘ECHR’). In particular, proceedings pending

before the Central Tax Court were automatically

concluded, and those pending before the Court of

Cassation of Italy could be concluded on payment of an

amount equivalent to 5% of the value of the claim and

the abandoning of any claim to compensation.

In 3 M Italia, the Court of Cassation asked the CJ

whether the application of the national provision

described above to a case pending before it where the

tax authorities had challenged a scheme which involved

the transfer of usufruct rights over dividends by a US

company to a company established in Italy, which

resulted in considerable withholding tax savings, was

16

CJ rules that the free movement of capital excludes French withholding tax levied only on dividends paid to foreign investment funds (Santander)

On 10 May 2012, the CJ handed down its judgment in

the Santander case (Joined cases C-338/11– C-347/11).

This break-through judgment is likely to have a major

impact on the levying of withholding tax on dividends

by EU Member States. The CJ ruled that certain non-

French mutual investment funds were entitled to a full

refund of 25% French dividend tax withheld on French

source portfolio dividends they received. The judgment

of the CJ supports the position of EU and non-EU

investment funds to claim a refund of withholding taxes

suffered across Europe. In allowing for a reduction

or refund of source country withholding tax, most EU

Member States differentiate between domestic and

foreign investment fund investors. The importance of

the CJ’s ruling is major, not only for France, but also for

other Member States and not only for EU investment

funds, but also for investment funds established in many

third countries.

The Santander case forms part of a number of joined

cases in which Spanish, German, Belgian mutual

investment funds in transferable securities (‘UCITS’) and

US regulated investment funds argued that the levy of

25% (currently 30%) French withholding tax on French

source dividends received by them is in breach of EU

law, because such French source portfolio dividends

paid to French mutual investment funds are fully exempt

from French withholding tax.

The CJ considered that the difference in treatment

constitutes a restriction on the free movement of capital

(Article 63 TFEU). Such a difference in treatment is not

allowed if the foreign and domestic investment funds

are in a comparable situation and the restriction is not

capable of being justified by imperative reasons in the

public interest. The CJ first pointed out that the French

legislation made a distinction based on the place of

residence of the investment fund. Then it confirmed that

since in the case at hand the position of the investors in

the investment funds claiming the refund was irrelevant

for the application of the challenged French tax rules,

the comparison should only be made at the level of

tax authorities unsuccessful in the first and second

instances) and benefits only those taxpayers who satisfy

those conditions cannot in itself make the provision

selective. It is apparent that persons who do not meet

those conditions are not in a comparable factual and

legal situation to the taxpayers who do so from the

point of view of the objective of the measure, which

is ensuring compliance with the principle of giving

judgment within a reasonable time. As the measure

does not fulfil the selectivity condition, it cannot be

considered State aid.

Finally, as none of the rules or principles of EU law

mentioned above are infringed by the Italian provision,

it cannot be considered that such provision prevents the

court adjudicating the case from ensuring the effective

application of EU law.

In the Belvedere Costruzioni case, which concerns the

automatic conclusion of proceedings pending before the

Central Tax Court, hearing applications for adjustment of

VAT, the CJ recalled that every Member State is under

an obligation to take all legislative and administrative

measures appropriate for ensuring collection of all

the VAT, which forms part the EU’s own resources,

due on its territory. The CJ distinguished the case at

hand from Commission v Italy (C-132/06), where the

general and indiscriminate waiver of verification of the

taxable transactions effected during a series of tax

periods, introduced very shortly after the expiry of the

deadlines for payment of the VAT due was considered

to be contrary to EU law. The automatic conclusion

of proceedings pending before the tax court of third

instance is a different matter. The CJ stressed that

this is an exceptional provision, of a specific and

limited nature, whose aim is to ensure observance

of the principle that judgment must be given within a

reasonable time, and which does not create significant

differences in the way in which taxable persons are

treated as a whole. It does not, therefore, infringe the

principle of fiscal neutrality. Consequently, the CJ found

that EU law does not preclude the provision of Italian

law at issue.

17

CJ rules that not granting an income tax allowance by the Member State of source to non-resident pensioners earning less than 75% of their total income in that Member State infringes EU law (Commission v Estonia)

On 10 May 2012, the CJ rendered its judgment in

the Commission v Estonia case (C-39/10) holding

that Estonian legislation that excludes non-resident

pensioners earning less than 75% of their total income

in Estonia from the benefit of an income tax allowance

is contrary to EU law where, because of the low amount

of their total income, the non-resident pensioners are

not liable to tax in their Member State of residence.

Such legislation infringes the freedom of movement

for workers under Article 45 TFEU and Article 28 of the

Agreement on the European Economic Area (‘EEA’).

The Commission started an infringement procedure

against Estonia on the basis of a complaint made by

an Estonian national residing in Finland and receiving

retirement pension from Estonia. The complainant

challenged the refusal by the Estonian tax authorities

to apply a tax allowance to his pension received from

Estonia, the amount of which was below the exempt

threshold applicable to the income of resident taxpayers.

The complainant also received a pension from Finland

which was approximately of the same amount as the

Estonian pension. Estonian legislation grants the

allowance at issue to non-resident taxpayers only where

they receive the majority of their income, that is, at

least 75% of the total income, in Estonia. This is in line

with Recommendation 94/79/EC which sets out that a

Member State must treat residents and non-residents

equally only if non-residents receive at least 75% of their

income from that Member State. As the complainant

received only 50% of his aggregate pension from

Estonia, he was denied the allowance by the Estonia

authorities. At the same time, the complainant was not

liable to tax in his Member State of residence, Finland,

on account of the very low level of his total income.

Estonia argued that it follows from the Schumacker

case (C-279/93) that the situation of residents and

non-residents are to be regarded as comparable only

the investment fund without taking into consideration

the (fiscal) position of its investors. Based on this

reasoning, the CJ ruled that the foreign applicants were

comparable to French domestic investment funds which

are eligible for exemption from French withholding tax.

Furthermore, the CJ considered that the restriction could

not be justified by an overriding reason in the public

interest.

Finally, the CJ confirmed that far-reaching budgetary

consequences, as brought forward by the French

government, could not justify a limitation in time of the

effects of the ruling.

Comment

It is noteworthy that a case comparable to the

Santander case is currently pending before the

Netherlands Supreme Court where a Finnish investment

fund is claiming a refund of Netherlands withholding tax.

The situation in the Netherlands is not identical to

the French system, as Netherlands investment funds

(‘FBIs’) are subject to a very specific ‘credit system’

(afdrachtvermindering). This credit system is in essence

a refund of withholding tax on Netherlands source

dividends to Netherlands investment funds. Foreign

investment funds cannot benefit from this credit system.

There are however also important similarities between

the Netherlands and the French system. Like in the

French system, the credits given to a Netherlands FBI

are not made conditional upon effective taxation in the

hands of its participants, and no credits are available to

Netherlands investors who invest in Netherlands stock

through foreign funds. As a result many investors - both

Netherlands and foreign - in Netherlands equities will be

better off investing through a Netherlands fund than they

would have been if they had invested through a foreign

fund. Therefore, it seems quite likely that the CJ would

apply similar reasoning to claims by foreign investment

funds against Netherlands dividend tax.

18

Estonia failed to fulfil its obligations under the TFEU,

given that it only requires to treat residents and non-

resident equally where non-residents earn at least 75%

of their income in the source Member State, the CJ

pointed out that a recommendation has no binding force.

Moreover, the procedure for a declaration of failure to

fulfil obligations is based on the objective finding that a

Member State has failed to fulfil its obligations under EU

law, so that the principle of the protection of legitimate

expectations cannot be relied on by Estonia against

such finding.

CJ rules that Belgian tax rules regarding a share buy-back of foreign collective investment funds is in breach of the EEA Agreement (Commission v Belgium)

On 10 May 2012, the CJ issued its judgment in the

Commission v Belgium case (C-370/11). The CJ ruled

that the Belgian tax rules regarding a share buy-back of

foreign collective investment vehicles are in breach of

the free movement of capital as set out in Article 40 of

the EEA Agreement.

According to the Belgian rules at stake, capital gains

realized by a Belgian resident upon a buy-back of

shares of collective investment funds, which do not

qualify as UCITS under the Directive 85/611/EEC and

which invest more than 40% of their portfolio in debt

claims, are tax exempt only if these investment funds

are resident in Belgium, but are taxed if the investment

funds are resident in Norway or Iceland.

The CJ first noted, by invoking settled case law, that

Article 40 of the EEA Agreement had the same legal

scope as Article 63 TFEU and that measures prohibited

by Article 63 TFEU, as restrictions on the free movement

of capital, include those which are likely to discourage

non-residents from making investments in a Member

State or to discourage that Member State’s residents

to do so in other States. The CJ considered that the

difference in treatment made it less attractive for Belgian

investors to invest through a collective investment fund

established in Norway or Iceland. In its argumentation,

the Belgian government had acknowledged its failure to

where the non-residents receive the most substantial

part of their income in the source Member State. If it is

not the case, non-residents do not have to be treated

equally to residents. The Commission asserted that,

contrary to the submission of Estonia, what follows from

the Schumacker case law is that the Member State

of source is required to take account of the personal

situation of the taxpayer where the Member State of

residence is unable to do so. This is the case where the

taxpayer’s income is subject to very little or no tax at all

in his Member State of residence.

The CJ first recalled the principles emerging from

its case law. In particular, the fact that a Member

State does not grant to a non-resident certain tax

advantages which it grants to a resident is not, as a

rule, discriminatory, having regard to the objective

differences between the situations of residents and

non-residents from the point of view both of the source

of their income and of their personal ability to pay tax or

their personal and family circumstances. Discrimination

can only arise where the two categories of taxpayers

are in a comparable situation having regard to the

purpose and content of the national legislation. That

is the case in a Schumacker-like situation where a

non-resident has no significant income in his Member

State of residence earning most of his income in the

Member State of source where, therefore, the Member

State of residence cannot take into account his personal

circumstances. In contrast, where nearly 50% of the

total income of the taxpayer is received in his Member

State of residence the latter is normally able to take

into account his personal circumstances. However, in a

case such as that of the complainant, who because of

the modest amount of worldwide income is not taxable

in the Member State of residence, that State is not in a

position to take into account the ability to pay tax and

the personal and family circumstances of the person

concerned, in particular, the consequences for that

person of taxation of the income received in another

Member State. In those circumstances, the refusal

of the Member State of source to grant an allowance

provided for under its tax legislation constitutes

discrimination which cannot be justified.

In response to Estonia’s argument that

Recommendation 94/79/EC precludes a finding that

19

company which is not Hungarian cannot be listed as

a predecessor in law of a Hungarian company. In the

ensuing national proceedings, the Hungarian Supreme

Court referred questions for preliminary ruling to the CJ

inquiring whether the Hungarian legislation at issue is

compatible with the freedom of establishment set out in

Articles 49 and 54 of the TFEU.

First, the CJ analysed whether a cross-border

conversion, i.e. a transfer of the seat of a company

with a change of the applicable national law while

maintaining the legal personality of the company, falls

within the scope of the freedom of establishment. It

pointed out, referring to the SEVIC Systems case

(C-411/03), that company transformation operations

fall, in principle, within the scope of the latter freedom.

Although a cross-border conversion leads to the

incorporation of a company in the host Member State, it

does not mean that an obligation on the Member States

to permit cross-border conversion by virtue of Article 49

and 54 TFEU would interfere with the Member States’

power to define the conditions under which companies

can be regarded as incorporated under their laws.

Such power has been acknowledged to the Member

States by the case law; notably, by Daily Mail (Case

81/87), Cartesio (C-210/06) and National Grid Indus (C-

371/10). In Cartesio, the CJ also stated that the power

of a Member State to define both the connecting factor

required of a company to be regarded as a company

governed by the laws of that State and the conditions

under which a national company may maintain that

status cannot justify that Member State (i.e. home

State) preventing a national company from converting

itself into a company governed by the law of the other

Member State (i.e. host State) ‘to the extent that it is

permitted under that law to do so’ (paragraph 112).

In this case, the CJ clarified that the latter expression

cannot be interpreted in a way that it removes, from

the outset, the legislation of the host Member State

on company conversion from the scope of the Treaty

provisions on the freedom of establishment. Instead this

statement only reflects the mere consideration that a

company established in accordance with national law

exists only on the basis of the national legislation which

‘permits’ the incorporation of the company, provided

the conditions laid down to that effect are satisfied.

amend the rules at stake and had indicated that a Royal

Decree was to be adopted at short notice to terminate

the difference in treatment. Based on the foregoing,

the CJ concluded that the Belgian rules constituted a

restriction to the free movement of capital under Article

40 of the EEA Agreement for which no justification

ground was present.

CJ rules that national legislation which precludes cross-border conversion of companies is incompatible with the freedom of establishment (VALE)

On 12 July 2012, the CJ rendered its judgment in the

VALE case (C-378/10) holding that Hungarian legislation

which enables national companies to convert into

another company form whilst it precludes companies

governed by the law of another Member State to

convert into a national company infringes the freedom of

establishment set out in Article 49 and 54 TFEU.

In the case at hand, VALE Costruzioni Srl (‘VALE

Costruzioni’), a limited liability company governed by the

laws of Italy, was registered in the Rome commercial

register. It asked to be deleted from that register on the

ground that it intended to transfer its seat and business

to Hungary and continue to operate in accordance with

Hungarian law. Upon this request, VALE Costruzioni

was deleted from the Rome commercial register on

13 February 2006. An entry was made in the register

under the heading ‘Removal and transfer of seat’,

stating that ‘the company had moved to Hungary’. On 14

November 2006, the director of VALE Costruzioni and

another individual adopted the articles of association of

VALE Építési kft, a limited liability company governed

by Hungarian law with a view to registration in the

Hungarian commercial register. On 19 January 2007,

VALE Építési kft applied to the competent court in

Budapest to be registered requesting that VALE

COSTRUZIONI be indicated as its legal predecessor.

The court rejected the application with the reasoning

that a company which was incorporated and registered

in Italy cannot, by virtue of Hungarian company

law, transfer its seat to Hungary and cannot obtain

registration there in the form requested. Specifically, a

20

the ‘predecessor in law’ of the converted company is

not compatible with the principle of equivalence if, in

relation to the registration of domestic conversions, such

a record is made of the predecessor company. Finally,

the authorities of the host Member State are required,

pursuant to the principle of effectiveness, to take due

account, when examining a company’s application for

registration, of documents obtained from the authorities

of the Member State of origin certifying that that

company has indeed complied with the conditions laid

down in that Member State – for example, those relating

to the dissociation of the company from that law while

retaining its legal personality – provided that those

conditions are compatible with EU law.

CJ holds that Spanish rules on transfer of residence of individuals abroad constitute a restriction on the EU free movement provisions (Commission v Spain)

On 12 July 2012, the CJ rendered its judgment in the

Commission v Spain case (C-269/09). The case deals

with the compatibility of the Spanish rules on transfer

abroad of the taxpayer’s residence with the provisions

on the freedom of movement for persons under the EC

Treaty (now TFEU) and the EEA Agreement.

Under Spanish legislation, taxpayers who transfer

their residence abroad must include, in the tax base

for the last year in which they were treated as resident

taxpayers, any income not yet charged to tax. Those

persons are accordingly required to pay the tax at

the time when they transfer their residence whereas

taxpayers who retain their residence in Spanish territory

are not under such an obligation.

According to the CJ, rules that preclude or deter a

national of a Member State from leaving his country

of origin in order to exercise his right to freedom of

movement constitute an obstacle to that freedom. In

the case of the Spanish rules at stake, although they

do not forbid a taxpayer resident in Spain to exercise

his right to freedom of movement, they are capable of

having a deterrent influence on taxpayers wishing to

Consequently, national legislation, which allows national

companies to convert whilst it does not allow companies

of another Member State to do so, falls within the scope

of Articles 49 and 54 TFEU.

Next, the CJ concluded that by treating companies

established in another Member State differently from

a national company with respect to the possibility to

convert into (another) national company the Hungarian

legislation at issue constitutes a restriction on the

freedom of establishment of the former. Such restriction

cannot be justified by overriding reasons in the

public interest, such as protection of the interests of

creditors, minority shareholders and employees or the

preservation of the effectiveness of fiscal supervision

and the fairness of commercial transactions. This is

so because the Hungarian legislation precludes in a

general manner cross-border conversions even when

these interests are not threatened and as such, it is

disproportionate to the aims pursued.

As regards the specific rules according to which cross-

border conversion can be carried out, the CJ pointed

out that in the absence of harmonized secondary EU

law on this matter, it is for national law to lay down such

rules. The implementation of cross-border conversions

requires the consecutive application of the national

laws of the home Member State and the host Member

State. The CJ held that the principle of equivalence and

effectiveness developed for other areas of EU law and

designed to protect rights which individual derive from

EU law must be complied with, also by national rules

governing cross-border conversions.

In the light of this, first, the application by Hungary

of the provisions of its national law on domestic

conversions governing the incorporation and functioning

of companies, such as the requirements to draw up lists

of assets and liabilities and property inventories, cannot

be called into question. Second, if such legislation

requires strict legal and economic continuity between

the predecessor company which applied to be converted

and the converted successor company in the context

of a domestic conversion such a requirement may also

be imposed in the context of a cross-border conversion.

However, the refusal to record in the commercial

register the company of the Member State of origin as

21

rejected such justification. In the CJ’s view, the measure

at stake does not concern the determination of the tax

debt (e.g. on unrealized capital gains) at the time of the

transfer of residence but rather the immediate recovery

of tax debt with regard to income already realized. In

that regard, Spain – contrary to the situation at issue,

for example, in National Grid Indus (C-371/10) – does

not, on the transfer of a taxpayer’s residence to another

Member State, lose the power to exercise its powers of

taxation in relation to activities already carried out in its

territory and accordingly, need not to give up its right to

determine the amount of corresponding taxation.

Insofar as concerns the justification by reference to

the need to preserve the coherence of the national

tax system, the argument brought forward by Spain

was, notably, that the legislation at stake was vital to

ensure that coherence, given that the option of deferring

payment of the tax corresponding to income which

has already been received is granted on the basis of

the guarantee of payment which is constituted, for the

tax authorities, by the fact that the taxpayer resides

in Spain and that he is, consequently, subject to the

direct and effective authority of those authorities.

The disappearance of that relationship of direct and

effective authority justified the loss of the tax advantage

consisting of the option to defer payment of the tax. Also

in this case, the CJ rejected this justification, essentially

due to the fact that no direct link was established in the

national legislation at issue between, on one hand, the

tax advantage represented by the possibility of charging

income to a number of tax periods and, on the other, the

offsetting of that advantage by some kind of tax charge.

As regards the proportionality of the justifications, even

if the justification grounds above were to be accepted,

the CJ considered that the measure would in any

case go beyond what is necessary for the purpose

of achieving these objectives. The Court relied in

that regard on the same arguments referred to when

dealing with the justification based on the need to

ensure effective recovery of tax – i.e. EU Directives

providing for less restrictive mechanisms – considering

them equally applicable in the case of the remaining

justifications.

settle in another Member State. The CJ admitted that

the Spanish legislation concerns only the taxation of

income which has already been realised; accordingly,

the person liable for the tax debt is not subject to an

additional tax at the time of transferring his residence.

He is merely deprived of an advantage inherent in the

deferral of the tax debt. The CJ pointed out, however,

that the withdrawal of that advantage constitutes a clear

disadvantage in terms of cash flow. Referring, inter alia,

to Metallgessellschaft (C-397/98 and C-410/98) and

Rewe Zentralfinanz (C-347/04), the Court reminded that

the exclusion of a cash flow advantage in a cross-border

situation where it is available in an equivalent domestic

situation is a restriction on the relevant freedoms.

Hence, the different treatment at issue places persons

who transfer their residence abroad at a financial

disadvantage which obstructs the fundamental freedoms

set out in Articles 18, 39 and 43 EC (now Articles 21, 45,

49 TFEU).

The CJ then went on to analyse the possible

justifications for the restrictions, namely, the effective

recovery of tax debts, the balanced allocation between

the Member States of powers of taxation and the

need to preserve the coherence of the tax system.

As regards the justification relating to the need to

ensure effective recovery of the tax debt, the CJ

considered the measure at issue as disproportionate

to achieving that aim having regard to the existence

of other less restrictive mechanisms for the recovery

of the related tax debt. This is due to the existence of

other appropriate instruments by which such recovery

of the tax may be ensured such as Council Directive

76/308/EEC on mutual assistance for the recovery of

claims relating to certain levies, duties, taxes and other

measures, Council Directive 77/799/EEC concerning

mutual assistance by the competent authorities of

the Member States in the field of direct taxation and

taxation of insurance premiums, and Council Directive

2008/55/EC on mutual assistance for the recovery of

claims relating to certain levies, duties, taxes and other

measures.

As regards the purported justification relating to the

preservation of the balanced allocation between the

Member States of powers of taxation, the Court also

22

tax regime in Belgium, unless the Belgian company

proves that the payments relate to genuine and proper

transactions and do not exceed certain normal limits. It

had not been clarified by the Belgian authorities under

what circumstances a foreign tax regime is considered

‘appreciably more advantageous’. The latter term is

neither defined by the laws nor interpreted by way of

administrative guidance. Furthermore, the provision at

issue does not apply to payments made to a Belgium

resident company. The deductibility of the latter is

subject to the lighter condition that the payment is

necessary for acquiring or retaining income and its

authenticity and amount are demonstrated by the

taxpayer.

The CJ concluded that the rule at issue, by laying down

stricter conditions for the deductibility of payments made

to non-resident service providers than those applicable

to payments to resident providers and by not having a

sufficiently defined scope, is liable to dissuade Belgian

taxpayers from making use of the services of providers

established in another Member State. It also dissuades

those providers from offering their services to recipients

established in Belgium and therefore, is a restriction on

the freedom to provide services.

As to the justification of the restriction, the CJ indicated

that the Belgian legislation is suitable for attaining the

legitimate objectives of preventing tax evasion and

avoidance and of preserving both the effectiveness of

fiscal supervision and the balanced allocation between

the Member States of the power to impose taxes. The

CJ, however, considered that the Belgian legislation at

issue goes beyond what is necessary in order to attain

those objectives. In this respect, the CJ first stated that

the need to provide proof of the genuine and proper

nature of the transactions and the normal nature of

the expenses incurred does not seem, in and of itself,

excessive. However, the rule requires Belgian taxpayers

to provide, as a matter of course, proof of the above

without the tax authority being required to provide even

prima facie evidence of tax avoidance or evasion. The

CJ also emphasized that the rule only takes account

of the level of taxation to which the service provider is

subject in the other Member State. Apparently, in the

eyes of the CJ, such factor cannot be considered as an

Finally, the CJ dealt briefly with the possible breach of

the provisions of the EEA Agreement. It considered that,

due to the fact that the Directives mentioned above are

not applicable in the case of EEA countries, and since

Spain submitted that it had not concluded any bilateral

tax treaty with either Norway, Iceland or Liechtenstein

providing for mutual assistance in respect of the levying

or recovery of taxes, the justification concerning the

need to ensure effective recovery of the tax debt could

be accepted. Consequently, it concluded that the

Spanish rules do not infringe the EEA Agreement.

CJ rules that Belgian legislation regarding non-deductibility of payments to non-residents for supply of services is in breach of EU law (SIAT)

On 5 July 2012, the CJ rendered its judgment in the

SIAT case (C-318/10). The CJ ruled that Belgian

legislation limiting the deductibility of payments for

supplies or services made by Belgian taxpayers to non-

resident taxpayers or a foreign establishment infringes

the freedom to provide services (Article 56 TFEU).

A Belgian company (‘SIAT’) established a joint

subsidiary together with a Nigerian group for the

exploitation of palm plantations. Under the joint venture

agreements, SIAT was required to pay part of the profits

it had obtained from the joint venture to a Luxembourg

company, MISA, heading the Nigerian group as a

commission for the introduction of business. After the

termination of the joint venture, SIAT had included in its

annual accounts an amount of approximately BEF 28

million as commission payable to MISA.

Since MISA had the status of a tax exempt Luxembourg

1929 holding company and therefore was not liable to

pay any tax analogous to the Belgian corporate income

tax, the Belgian tax authorities denied the deduction of

the commission as business expenses based on Article

54 of the Belgian 1992 Income Tax Code. According to

this provision, expenses are not considered deductible

business expenses if the foreign supplier is not subject

to tax on its income or is subject to a tax regime which

is ‘appreciably more advantageous’ than the applicable

23

had doubts on this, as the CJ had considered previously

in a number of cases that the treatment for tax purposes

of inheritances affected the movement of capital and as

such, fell within Article 63 TFEU.

When analysing which Treaty freedom was applicable

the CJ stated, referring to the Haribo and Salinen cases

(Joined Cases C-436/08 and C-437/08), that the aim of

the underlying national legislation must be taken into

consideration. The aim of the measure at issue is to

make a provision for the tax treatment of inheritances.

In this regard, the CJ pointed out that in line with

previous case law, for example, Eckelkamp (C-11/07),

Arens-Sikken (C-43/07) Busley and Cambrian (C-

35/08) and Missionswerk (C-25/10), the tax treatment of

inheritances, in general, falls under the scope of the free

movement of capital . However, if the national legislation

is intended to apply only to shareholdings which

enable their holders to exert a definite influence over a

company’s decisions and determine its activities, it will

fall under the freedom of establishment. On the other

hand, national legislation which applies to shareholdings

acquired solely with the intention of making a financial

investment falls exclusively within the scope of the

free movement of capital. The CJ accepted that the

shareholding threshold of 25% specified by the German

legislation at issue was sufficiently high to enable the

shareholder to influence the management and control of

the company. In addition, other features of the German

legislation, such as the provision which rendered the tax

advantages at issue retroactively inapplicable in cases

where the heir disposed of the shareholding within five

years of its acquisition, confirmed that such legislation

was intended to encourage the heir to get involved in

the management of the company on a lasting basis

instead of making a mere financial investment. In light

of this, the CJ held that the German rules at issue

primarily affect the freedom of establishment and should

only be examined in the light of that freedom. This was

reaffirmed by the concrete facts of the case, as Ms

Scheunemann had inherited 100% of the shares in the

Canadian company, which undoubtedly enabled her to

have definite influence over the company’s matters.

Because the freedom of establishment is not applicable

in relation to third countries and the main proceedings

concerned a shareholding in a Canadian company,

objective criterion verifiable by a third party on the basis

of which a presumption of wholly artificial arrangements

could be based, as required previously by the Thin

Cap case (C-524/04). Moreover, the CJ confirmed that

the Belgian rule did not meet the requirements of the

principle of legal certainty, since it had not been made

clear at the outset under what circumstances a tax

regime is ‘appreciably more advantageous’. The CJ held

that a rule which does not meet the requirements of the

principle of legal certainty cannot be considered to be

proportionate to the objectives pursued, and therefore,

is in breach of EU law.

CJ rules that the free movement of capital does not apply to inheritance of major shareholdings in third-country companies (Scheunemann)

On 19 July 2012, the CJ delivered its judgment in the

Scheunemann case (C-31/11) concerning the question

whether it is the free movement of capital (Article 63

TFEU) or the freedom of establishment (Article 49

TFEU) that applies to the calculation of inheritance tax

on a shareholding in a capital company established in a

third country.

In this case, Ms Scheunemann, who was resident

in Germany, was the sole heir of her father, also

resident in Germany, who died in February 2007. The

inheritance included a shareholding owned by her

father as a 100% shareholder in a capital company

with its registered office in Canada. The shares formed

private assets. Ms Scheunemann’s inheritance was

made subject to unlimited German inheritance tax for

its full value. Had she inherited (more than 25% of the)

shares in a German capital company, she would have

been granted a tax-free amount of EUR 225,000 and

a reduction of the taxable value of the shares of 35%.

Ms Scheunemann claimed that the denial of these tax

advantages in case of the inheritance of a shareholding

in a third-country company was a forbidden difference in

treatment. The German lower court dismissed the claim,

as it considered that only the freedom of establishment

applied, which does not have effect with regard to (non-

EU) third countries. The German Federal Finance Court

24

be regarded as a taxable disposal. The tax authorities

sought the annulment of this ruling before the Supreme

Administrative Court. The latter referred a question on

the matter for a preliminary ruling to the CJ.

The CJ first recalled that the Merger Directive applies

only to exchanges of shares involving companies from

two or more Member States whereas in the case at

hand, B is established in a non-Member State, Norway.

Although the exchange of shares at issue does not fall

within the scope of the Merger Directive, the national

tax law at issue must be examined in the light of the

provisions of the EEA Agreement given that Norway

is party to that Agreement. Next, the CJ found that the

freedom that applies to the situation at hand was the

freedom of establishment set out in Article 31 EEA.

The national rules at issue provided that, in order for

an exchange of shares not to be regarded as a taxable

disposal, the acquiring company must own or acquire

shares in the other company entitling it to more than

half of the voting rights in the latter company. National

provisions relating to holdings giving the holder a

definite influence on the decisions of the company

concerned and allowing him to determine its activities

come within the material scope of the freedom of

establishment.

Next, the CJ pointed out that the Finnish legislation at

issue entails a difference in treatment in that the tax

treatment of exchange of shares to which a domestic

transferring company is subject depends solely on

where the acquiring company has its registered office.

Tax neutral treatment is granted to the transferring

company only if the registered office of the acquiring

company is also in Finland or in another EU Member

State, whereas if it is in an EEA country, the exchange of

shares is treated as a taxable disposal. Such legislation

restricts the freedom contained in Article 31 EEA.

Thereafter, the CJ examined whether such a restriction

could be justified by the need to combat tax evasion and

to safeguard the effectiveness of fiscal supervision. As

regards the former, the mere fact that, in an exchange

of shares, the acquiring company has its registered

office in an EEA country cannot set up a general

presumption of tax evasion and justify a measure which

the CJ ruled that such situation is not covered by the

provisions on the freedom of establishment.

CJ rules that freedom of establishment under the EEA Agreement requires tax neutral treatment of exchange of shares between EU and EEA companies (A Oy)

On 19 July 2012, the CJ delivered its judgment in the

case A Oy (C-48/11) concerning the question whether

or not an exchange of shares between a Finnish

company and a Norwegian company is to be granted

the same tax neutral treatment, by virtue of Articles 31

and 40 EEA, as an exchange of shares between Finnish

domestic companies or companies with their seat in EU

Member States.

A Oy owned approximately 19.7% of the shares in

the capital of C Oy (‘C’), a company incorporated

under Finnish law. The other owner of C, which had

a share of approximately 80.3% in the shares of that

company, was B AS (‘B’), a Norwegian company. A Oy

transferred its shares in C’s capital to B and received

in exchange, shares newly issued by B corresponding

to approximately 6% of its capital. As a result of that

operation, B would own 100% of C’s capital.

Finnish legislation provides that an exchange of shares

between domestic companies is not regarded as a

disposal and as such, does not give rise to capital gains

taxation. Further, the legislation extends such tax neutral

treatment to companies falling under the scope of

Council Directive 2009/133/EC on the common system

of taxation applicable to mergers, divisions, partial

divisions, transfers of assets and exchanges of shares

concerning companies of different Member States

and to the transfer of the registered office of an SE or

SCE between Member States (‘the Merger Directive’).

A Oy asked the Finnish Central Tax Board for a ruling

on whether the tax neutral treatment applies to the

exchange of shares at issue in the main proceedings.

The Central Tax Board held that the principles deriving

from the Finnish law at issue were applicable to the

case at hand, thus the exchange of shares should not

25

the Netherlands and therefore the condition under UK

legislation – that the losses can only be surrendered

in case they are not deducted elsewhere in any State

outside the UK it being insufficient that relief available

overseas has not in fact been claimed– was not

satisfied.

The first question dealt with by Court was whether the

abovementioned condition which was only applicable

in cross-border situations constituted a breach of the

freedom of establishment. The CJ considered that the

different treatment provided to foreign companies with

a permanent establishment in UK in comparison with

UK subsidiaries constituted a restriction on the freedom

of choosing the appropriate legal form of secondary

establishment. The CJ further added that a resident

company and a non-resident company which operates

domestically through a permanent establishment were

in objectively comparable situations as concerns the

possibility of transferring group relief losses. Therefore,

it concluded that the condition under UK law regarding

group relief in relation to companies established in a

Member State other than the UK constituted a restriction

on the freedom of establishment.

The second question concerned the possible

justifications: whether the restriction established above

could be justified either by the need to safeguard the

balanced allocation of taxing rights or the prevention

of double use of losses or both. The CJ answered this

question negatively. Regarding the balanced allocation

of taxing rights it pointed out that the power of taxation

enjoyed by the UK with regard to the taxpayer’s income

was not impaired by the surrender of the losses. Only

losses which were incurred within the scope of the

power of taxation of the UK were to be surrendered

under the group relief requested by Philips Electronics

UK. All the transactions at issue in the present case

are subject to the fiscal jurisdiction of the UK: domestic

losses of a domestic taxable person (LG Philips

Display Netherlands BV with regard to its permanent

establishment in the UK) are intended to be credited

against domestic profits of another domestic taxable

person (Philips Electronics UK). The CJ highlighted the

difference between the situation at hand and losses

sustained in another Member State; in the latter case

compromises the exercise of a fundamental freedom

guaranteed by the EEA Agreement. As to the need

to protect the effectiveness of fiscal supervision, the

CJ recalled that the exercise of freedoms guaranteed

by the EEA Agreement takes place in a different legal

context than that of the TFEU freedoms. In particular,

Council Directive 77/799/EEC (‘Mutual Assistance

Directive’) and Council Directive 2011/16/EU (‘Directive

on Administrative Cooperation’) do not apply to an EEA

country. Where the legislation of a Member State makes

the grant of a tax advantage dependent on satisfying

requirements, compliance with which can be verified

only by obtaining information from the competent

authorities of the other State, it is in principle legitimate

for the Member State to refuse to grant that advantage

if it proves impossible to obtain such information from

that country. However, the CJ observed that there is

an agreement on mutual administrative assistance in

the field of taxation between Finland and Norway with

respect to which the Finnish Government stated that it

provides for an exchange of information between the

two national authorities as effective as that provided

for by the provisions of the two Directives referred to

above. Under those circumstances, the objective of

safeguarding the effectiveness of fiscal supervision

cannot justify the restriction entailed by the Finnish

legislation at issue.

CJ rules that UK group relief provisions are in breach of the freedom of establishment (Philips Electronics)

On 6 September 2012, the CJ rendered its judgement in

the case Philips Electronics (C-18/11). The case deals

with the compatibility of the UK group relief provisions

with the freedom of establishment provided in Article 49

TFEU.

Philips Electronics, a company resident in the UK

(‘Philips Electronics UK’), made various consortium

claims for group relief regarding the losses incurred by

a UK branch of the Netherlands company, LG Philips

Display Netherlands BV. The UK tax authorities refused

such group relief based on the fact that those UK losses

had already been, in principle, taken into account in

26

provisions with the freedom of establishment provided

for in Article 49 TFEU.

According to Articles 76-A to 76-C of the Portuguese

Corporate Income Tax Code (CIRC), the following

situations give rise to an immediate taxation of

unrealised capital gains: transfer by a Portuguese

company of its registered office and effective

management to another Member; cessation of the

activities of a Portuguese permanent establishment of

transfer of its assets from Portugal to another Member

State. In addition, also the members of a company

which transfers its registered office and its effective

management outside Portuguese territory are subject to

a tax on the difference between the company’s net asset

value (calculated at the date of the transfer, at market

price) and the cost of acquiring the corresponding

shares.

The Court started by analysing that under the

Portuguese provisions, a Portuguese company

which transfers its registered office and its effective

management outside Portuguese territory is taxed

on unrealised capital gains while that is not the case

where that company maintains its seat in Portugal.

That is also the case of partial or total transfer to

another Member State of the assets of a permanent

establishment in Portuguese territory of a company not

resident in Portugal, whereas a transfer or assets in

Portuguese territory does not result in such taxation.

Therefore, the CJ considered that the difference in

treatment constitutes a restriction on the freedom of

establishment. Different is the case of the cessation of

the activity of a permanent establishment in Portugal.

In such case similarly to a pure domestic situation there

is taxation on the unrealised capital gains. Therefore, in

that particular case the CJ considered that there was no

restriction on the freedom of establishment.

As regards possible justifications and the justification’s

proportionality, the Court made reference to its finding

in the National Grid Indus case (C-371/10), where it

held (in paragraph 73) that national legislation offering

a company the choice between immediate payment of

tax or deferred payment of the amount of tax, possibly

together with an interest charge, would constitute a

the symmetry between the right to tax profits and the

right to deduct losses would not be safeguarded.

Regarding the dual use of losses the CJ ruled that,

even if it could be considered independently, it could

not be accepted as a justification in the present case. In

this respect it referred to the fact that the double use of

losses had no effect on the power of the UK to tax the

permanent establishment. Such power is not affected

by the possibility that the losses could be used in the

Netherlands.

As regards the combination of these two justifications,

the Court also rejected such possibility with reference to

the arguments stated above.

The last question dealt with by the Court related to the

legal consequences of the prohibition of the restriction.

The background to this question is the fact that in the

present case only LG Philips Display Netherlands BV

had exercised the freedom of establishment granted

by Article 49 TFEU. The freedom of establishment of

Philips Electronics UK, which is claiming an entitlement

to group relief in the main proceedings, is not restricted.

Rather it suffers because the freedom of establishment

of its contracting partner, from which it wishes to

assume the losses in return for a payment, is restricted

under the UK tax rules. The question was then whether

Philips Electronics UK would nevertheless be able to

benefit from the prohibition under Article 49 TFEU. The

Court concluded affirmatively by considering that in

order to be effective, the freedom of establishment must

also entail the possibility that Philips Electronics UK can

benefit from the group relief by setting it off against its

profits.

CJ rules that Portuguese provisions on exit taxes are in breach of the freedom of establishment (Commission v Portugal)

On 6 September 2012, the CJ rendered its judgement

in the case Commission v Portugal (C-38/10). The case

deals with the compatibility of the Portuguese exit tax

27

preliminary ruling, inquiring whether the legislation at

stake is compatible with the freedom of establishment

set out in Article 49 TFEU.

The CJ observed that under the legislation at stake, the

transfer of seat of a Luxembourg company to another

Member State during the five-year period following the

creation of the reserve entails the immediate withdrawal

of the benefit of the tax reduction, whereas there is

no such withdrawal if that company keeps its seat in

Luxembourg (unless the NWT Reserve is used, before

expiry of the five-year period for purposes other than

capitalisation of the company). According to the CJ,

the difference of treatment can deter Luxembourg

companies from transferring their legal seat to another

Member State during the five-year period following the

tax year for which the net wealth tax reduction was

obtained.

The justifications put forward by the Luxembourg

Government were rejected by the Court. The restriction

could not be justified by the need to preserve a

balanced allocation of taxing rights among Member

States, as the described mechanism of withdrawing the

tax advantage is not capable of ensuring that objective

given that the Member State had agreed in advance to

reduce its capital tax claim upon the meeting of certain

conditions. The need to protect the coherence of the

national tax system could not justify the restriction

as well, since there is no direct link between the tax

advantage concerned (i.e. reduction of capital tax) and

the offsetting of the same advantage by a particular tax

levy (i.e. corporate income tax to be collected from the

taxpayer during the period while the reserve must be

maintained). Finally, and consistently with its settled

case law, the Court refused a justification based on the

need to protect the Member State’s tax revenues. The

CJ concluded that the provision that makes the grant of

a reduction in net wealth tax conditional upon remaining

liable to that tax for the next five fiscal years is contrary

to the freedom of establishment.

measure less restrictive on the freedom of establishment

than the measures at issue in the present case.

CJ rules that Luxembourg legislation making the grant of a net wealth tax reduction conditional on the taxpayer remaining subject to that tax for a certain period is contrary to the freedom of establishment (DI. VI. Finanziaria di Diego della Valle)

On 6 September 2012, the CJ delivered its judgment

in the case DI. VI. Finanziaria di Diego della Valle (C-

380/11) regarding the compatibility with the freedom of

establishment of Luxembourg rules which provide for

a recapture of net wealth tax reduction if the taxpayer

transfers its seat to another Member State and thereby

ceases to be subject to Luxembourg net wealth tax

before the expiry of a certain period set as a condition

for the net wealth tax reduction.

Under the Luxembourg Net Wealth Tax Act (NWT Act),

a Luxembourg company may benefit from a reduction of

its annual net wealth tax liability if it allocates an amount

equivalent to five times the net wealth tax reduction

sought to a specific net wealth tax reserve (NWT

Reserve). The NWT Reserve must be maintained for a

five-year period. If the NWT reserve is used before the

expiry of the five-year period for purposes other than

the capitalisation of the company, the net wealth tax

becomes payable.

In the case concerned, a Luxembourg private limited

liability company (LuxCo) allocated funds to the NWT

Reserve for the years 2004, 2005 and 2006 in order

to benefit from the net wealth tax reduction. In 2006,

LuxCo migrated to Italy and kept the NWT Reserve in

its accounts. This notwithstanding, the Luxembourg

tax authorities issued an assessments and requested

the payment of the previously reduced net wealth tax

arguing that migrating abroad LuxCo became a non-

resident taxpayer before the five-year period expired,

and hence it lost the benefit of the reduction. LuxCo

appealed against the assessments and the Luxembourg

Supreme Court referred the question to the CJ for a

28

to settled case law, if a Member State imposes a

charge to tax on both residents and non-residents,

their situation becomes comparable. In such cases,

the Member State must ensure that procedures for the

mitigation of liability to tax or prevention of economic

double taxation available to its residents, are also

available to non-residents. Further, the existence of a

double tax convention – specifically the tax credit which

such convention may provide for with respect to the tax

levied in Belgium – does not neutralise in every case

the differentiation arising from Belgian law. Secondly,

the CJ dismissed the arguments of the Belgian

government according to which the Commission’s basis

of comparison was incorrect. The Belgian government

argued that a non-resident investment company

should be compared to Belgian common funds, which

are transparent for tax purposes, and therefore, the

withholding tax on dividends and interest that are

assigned to them is levied definitively on them just as on

non-resident investment companies. The CJ pointed out

that common funds, which do not have legal personality,

take a different legal form than investment companies.

In addition, the fact that Belgian tax legislation seems

to treat Belgian common funds and non-resident

investment companies identically is not sufficient in

itself to preclude the conclusion that the situation of

non-resident investment companies is comparable to

that of resident investment companies. The CJ also

dismissed the Belgian government’s argument that

the activities of resident and non-resident investment

companies differ and for this reason, they should not

be considered comparable. In particular, the CJ did not

agree with the argument that non-resident investment

companies address themselves solely to investors that

are not resident in Belgium. Moreover, according to

the CJ, this argument is not aimed at underlying the

intrinsic differences between the activities of resident

and non-resident investment companies. Lastly, the CJ

stated, with reference to its previous ruling in Santander

(C-338/11), that the comparison of tax treatment must

be made only at the level of the investment company

and not its investors.

No justification for the infringement was accepted by the

CJ. The CJ found that the need to ensure a balanced

allocation of the power to tax was not in jeopardy in the

CJ rules that Belgian legislation on the taxation of non-resident investment companies is incompatible with EU law (Commission v Belgium)

On 25 October 2012, the CJ delivered its judgment in

the Commission v Belgium case (C-387/11) regarding

the difference in treatment between the taxation of

dividends and interest in the hands of resident and non-

resident investment companies.

Under Belgian tax law, an investment company

resident in Belgium is subject to common corporate

income tax but its taxable base is restricted to so-

called received ‘abnormal and gratuitous advantages’

(i.e. profits from non-arm’s-length transactions) and

non-tax deductible expenditures and charges (except

for capital losses and depreciations on shares).

Therefore, resident investment companies are exempt

from corporate income tax on profits from capital and

movable property. This exemption is not available to

non-resident investment companies, except if these

non-residents have a permanent establishment in

Belgium. Non-resident investment companies having

no permanent establishment in Belgium are, in

Belgium, subject to a definite withholding tax on Belgian

dividends and interest. The Commission considered

that this difference in treatment between resident and

non-resident investment companies infringed the EU

fundamental freedoms; therefore, it brought infringement

proceedings against Belgium. As Belgium had not

changed its legislation in the administrative phase of the

proceedings, the Commission referred the case to the

CJ.

The CJ found that the Belgian legislation establishes

a less favourable tax treatment for non-resident

investment companies with no permanent establishment

than for resident investment companies. It therefore

constitutes an infringement of the free movement of

capital and the freedom of establishment under both the

TFEU and the EEA Agreement.

The CJ did not agree with Belgium’s contention that the

resident and non-resident investment companies are in

different situations. Firstly, the CJ held that, according

29

based on the fact that the service provider is established

in another country. Settled case law shows that this

applies to service providers as well as to recipients of

services. The obligation to withhold the aforementioned

wage tax results in an additional administrative burden

including liability risks. Consequently, it can be less

attractive and even discourage domestic recipients

of services to make use of foreign service providers

instead of domestic service providers. For that reason,

a different treatment of domestic and foreign service

providers constitutes a restriction on the freedom to

provide services.

Furthermore, the CJ ruled that said restriction could

be justified to ensure the effective collection of income

tax. The CJ held that, in line with FKP Scorpio case

(C-290/04) foreign service providers who provide

occasional services in other Member States and where

they remain only for a short period of time, a withholding

tax regime constitutes an appropriate way of ensuring

the effective collection of tax due. Moreover, the CJ

considered, also in the light of the Mutual Assistance

Directive for the Recovery of Taxes (Council Directive

76/308/EEC Directive of 15 March 1976 on mutual

assistance for the recovery of claims relating to certain

levies, duties, taxes and other measures), that the wage

withholding tax did not go beyond what is necessary

to ensure such effective collection of tax due. In this

respect, the CJ observed that the renunciation of the

withholding tax would not necessarily eliminate the

formalities for which the service recipient is responsible.

The obligation on the service provider to file a tax return

– instead of the imposition of the withholding tax – could

deter the service provider from offering services in

another Member State and lastly, the latter method of

collection would also entail more administrative burdens

for the authorities in the Member State where the

service is rendered. In view of this, the direct collection

of tax from the non-resident service provider may not

constitute a less restrictive means than the withholding

tax at source.

Finally, the CJ ruled that it is irrelevant that the

Netherlands government has meanwhile abolished

these wage withholding tax rules. It is also irrelevant,

according to the CJ, whether the foreign service

case at hand. It considered that a tax exemption on

distributed dividends did not imply that Belgium could

not tax the economic activities on its territory since it

had the power to tax the distributing company on its

profits. The need to guarantee the effectiveness of fiscal

supervision was also dismissed.

The CJ therefore found that the legislation at hand

constitutes an unjustified infringement of EU law and

that Belgium has failed to fulfil its obligations under both

the TFEU and the EEA Agreement.

CJ rules that Netherlands wage withholding tax on remuneration payments to foreign football clubs for services rendered in the Netherlands is not an infringement of EU law (X NV)

On 18 October 2012, the CJ delivered its judgment

in the X NV case (C-498/10). The CJ ruled that the

Netherlands wage withholding tax on remunerations

paid to foreign football clubs for services performed in

the Netherlands is not an infringement of the freedom

to provide services set out in Article 56 TFEU. Although

such wage withholding tax constitutes a restriction

to said freedom, it can be justified by the need to

safeguard the levy and collection of taxes.

A Netherlands football club (‘X NV’) invited two

British football clubs to play friendly matches in the

Netherlands. X NV omitted the obligation to withhold a

20% wage tax on the remuneration payments made to

the British football clubs for their participation in these

games. Consequently, the Netherlands tax authorities

imposed an additional wage tax assessment. X NV

objected to this additional assessment by arguing that

this wage withholding tax did not apply to services

rendered by football clubs established within the

Netherlands.

In response to the question referred by the Netherlands

Supreme Court for a preliminary ruling, the CJ ruled – in

line with the Opinion of Advocate General Kokott – as

follows. Article 56 TFEU requires the abolition of any

restriction to the freedom to provide services solely

30

in Article 4(1) of the Directive, also excludes merger

surpluses.

The CJ, after having found that the Parent-Subsidiary

Directive did not define the concept of ‘liquidation’, found

that the concept of ‘merger’ used in the Merger Directive

(Council Directive 90/434/EEC of 23 July 1990 on the

common system of taxation applicable to mergers,

divisions, partial divisions, transfers of assets and

exchanges of shares concerning companies of different

Member States and to the transfer of the registered

office of an SE or SCE between Member States, now

replaced by Council Directive 2009/133/EC of 19

October 2009) should be used to interpret Article 4(1)

of the Parent-Subsidiary Directive in relation to merger

surpluses. The CJ found that a reference to the Merger

Directive to interpret the Parent Subsidiary Directive is

particularly relevant as both Directives were submitted

and adopted on the same day. As the Merger Directive

defines a merger as a company’s dissolution without

the company’s liquidation, the CJ ruled that a merger

surplus is covered by the Parent-Subsidiary Directive.

CJ holds that national law may require obtaining prior authorization to make use of tax advantages under the Merger Directive (Pelati)

On 18 October 2012, the CJ delivered its judgement in

the Pelati case (C-603/10) regarding the issue whether

or not Article 11(1)(a) of the Merger Directive precludes

Slovenian legislation which subjects the grant of the

advantages provided for by the Directive to the condition

of requesting an authorization from the tax authorities to

that effect within a certain time limit prior to the carrying

out of the transaction concerned.

By a notarial act of 30 June 2005, Pelati d.o.o.

(‘Pelati’) adopted a draft division under which part

of its undertaking would be transferred to a new

company. On 27 September 2005, Pelati filed with

the court competent for keeping the register of

commercial companies an application for registration

of the amendments to its articles of association.

Those amendments were registered by order of 12

provider can offset the wage withholding tax against the

tax due in its resident Member State.

Dissolution by way of merger is not ‘liquidation’ in terms of the Parent-Subsidiary Directive (Punch Graphix)

On 18 October 2012, the CJ issued its judgment in

the Punch Graphix case (C-371/11) regarding the

interpretation of the term ‘liquidation’ as used in the

Parent-Subsidiary Directive (Council Directive 90/435/

EEC of 23 July 1990 on the common system of taxation

applicable in the case of parent companies and

subsidiaries of different Member States, now replaced

by Council Directive 2011/96/EU of 30 November 2011).

Three Belgian companies were involved in a ‘silent’

merger. The acquiring company, Punch Graphix, was

the 100% shareholder of the other two companies.

The transaction was a merger by acquisition within the

meaning of the Belgian Companies Code, in which the

absorbed companies were dissolved without going into

liquidation and all their assets were transferred to the

acquiring company. The acquiring company realised a

merger surplus.

At the time, Belgian tax law provided that merger

surplus realised by the absorbing company could

benefit from the 95% deduction provided for dividends

between related companies. At the time, if the 95%

deduction exceeded the amount of taxable income,

the deduction surplus could not be carried forward. For

ordinary dividends this particularity was challenged with

success before the CJ in the Cobelfret case (C-138/07)

where the CJ found that the lack of a carry-forward

of exempted dividend surpluses was contrary to the

Parent-Subsidiary Directive.

Punch Graphix had insufficient taxable income to deduct

the full 95% merger surplus deduction.

The referring court sought to ascertain whether a

merger surplus is covered by the Parent-Subsidiary

Directive or whether the Parent-Subsidiary Directive,

by excluding liquidation surpluses through the wording

31

principle of legal certainty, Member States have an

obligation to establish a system of time limits that is

sufficiently precise, clear and foreseeable to enable

individuals to ascertain their rights and obligations. It

was left for the national court to establish whether those

requirements were complied with in the case at hand.

CJ rules that Finish legislation regarding dividends paid to foreign pension funds is in breach of the free movement of capital (Commission v Finland)

On 8 November 2012, the CJ delivered its judgment

in the case of Commission v Finland (C-342/10). The

case deals with the compatibility of Finish legislation

regarding dividends paid to non-resident pension

funds with the free movement of capital provided for in

Article 63 TFEU and Article 40 EEA. According to the

legislation at issue in the case, dividends paid to non-

resident pension funds are subject to a withholding tax

of 19.5% or a reduced rate – pursuant to an applicable

double tax convention – of typically 15%. Resident

pension funds are, in principle, also subject to taxation

at a rate of 19.5% on all their income including dividends

received. However, the dividends received by resident

pension funds, which are transferred to reserves from

which pensions are paid out to the beneficiaries, are

treated as if they were expenditure, and thus, can be

deducted from the taxable income. This leads to a

de facto exemption (or limited taxation) of dividends

received by resident pension funds as opposed to the

taxation at 19.5% of dividends paid to non-resident

funds which are not entitled to a similar deduction. The

Commission claimed that such a difference in treatment

was discriminatory, and brought the matter, eventually,

to the CJ.

The CJ considered that the less favourable treatment

granted to dividends paid to non-resident pension

funds in comparison with dividends received by

resident pension funds constitutes a restriction on

the free movement of capital. It further added that

such restriction cannot be offset by the double tax

conventions concluded by Finland due to the fact

October 2005. On 21 October 2005, Pelati submitted

an application to be granted tax advantages on the

division that had thus taken place. The tax authorities

rejected Pelati’s application on the ground that such

application should have been made at least 30 days

before the restructuring operation took place, as was

required by Slovenian law at the time. Pelati challenged

that decision in front of the Administrative Court arguing

that the rejection of its application as being time-barred

is contrary to the Merger Directive. Furthermore, it

asserted that observance of that time limit does not

depend entirely on the taxpaying company, since it

is the date of registration of the amended articles of

association in the register of commercial companies by

the competent court which determines the date of expiry

of the period.

The CJ first observed that the Merger Directive does

not contain any provisions on the detailed procedures

according to which tax advantages provided for by that

Directive are to be granted. Thus, in accordance with

the principle of procedural autonomy, the domestic law

of the Member States must provide for the procedural

rules which enable individuals to make use of the rights

that they derive from EU law. Those procedural rules

have to comply with the principle of equivalence and

effectiveness. As regards the present case, only the

principle of effectiveness appears to be relevant. The

latter is infringed by the national provisions concerned

where the exercise of rights conferred by EU law

proves to be impossible or excessively difficult. The

CJ examined whether the requirement of filing an

application 30 days before the restructuring operation

meets the requirements of the principle of effectiveness

with respect both to its length and to its starting-point. As

regards its length, the CJ found that a 30-day deadline

preceding the restructuring, even when failure to meet

it results in forfeiture of the right, is not contrary to the

principle of effectiveness. As regards its starting point,

the 30-day period is to be calculated backwards from

the date on which the restructuring operation is effected,

which is regarded to be the date of registration of that

operation in the register of commercial companies.

Accordingly, the taxpayer is not in a position to know

precisely either when the 30-day period starts or when

it ends. The CJ pointed out that, to comply with the

32

interest payments to non-resident pension funds under

German law.

Dividend distributions and interest payments made by

German companies to a German pension fund are taxed

at the level of the German pension fund on a net basis,

whereas said distributions and payments are subject to

withholding tax on a gross basis when paid to a non-

resident pension fund without the possibility to deduct

any business expenses directly related to the dividend

or interest income received by the non-resident pension

fund.

Considering such different taxation, the Commission

brought an infringement action against Germany based

on an alleged breach of the free movement of capital

(Article 63 TFEU), which had, eventually, been referred

to the CJ. The CJ considered that prohibited restrictions

include measures of a Member State that are likely to

discourage non-residents from making investments

in such Member State, such as a different taxation

of dividends in the case of resident and non-resident

pension funds. The CJ observed that the situations

of non-resident and resident pension funds must be

objectively comparable in order for a restriction to exist.

In that respect, the CJ pointed out that, in line with

settled case law with respect to business expenses

directly linked to an activity which has generated taxable

income in a Member State, residents and non-residents

are in a comparable situation. The CJ however held that

the Commission had failed to prove sufficiently, amongst

others, that (i) the business expenses (such as bank

fees) were directly linked to any dividend or interest

income received by a non-resident pension fund and

that (ii) the German legislation was as such in breach of

EU law.

The CJ therefore dismissed the claim of the Commission

by concluding that it had not succeeded in establishing

that Germany treated non-resident pension funds less

favourably than resident pension funds when denying

non-resident pension funds a deduction of business

expenses directly related to any dividend or interest

income received by them.

that the latter had concluded only three conventions

providing for a withholding tax rate of 0%, whereas the

majority provided for a rate of 15%.

It then analyzed whether resident and non-resident

pension funds can be considered as objectively

comparable. In that regard, it recalled that the

comparability of cross-border situations with internal

ones must be examined having regard to the aim

pursued by the national provisions at stake. It

considered that the specific purpose of both resident

and non-resident pension funds – i.e. to accumulate

capital, by way of investments producing, in particular,

dividend income in order to meet their future obligations

under insurance contracts – is identical and therefore,

they are in a situation objectively comparable as

regards Finish sourced dividends. The CJ’s reasoning

referred to the case law laying down that in relation

to business expenses which are directly linked to

an activity which has generated taxable income in a

Member State, residents and non-residents of that State

are in a comparable situation. The direct link between

expenses and taxable income in this case results from

the technique of assimilation chosen by the Finnish

legislature (among other possible techniques, such as

a simple tax exemption) which is intended to take into

account the specific purpose of pension funds. The

legislation which denies non-resident pension funds

the right to deduct such expenses, while, on the other

hand, allowing resident funds to do so, constitutes

discrimination, according to the CJ.

The CJ dismissed possible justifications for the

discriminatory treatment of non-resident pension funds

on the grounds of both the principle of territoriality and

the coherence of the tax system.

CJ dismisses infringement case against Germany regarding taxation of foreign pension funds (Commission v Germany)

On 22 November 2012, the CJ delivered its judgment

in the case Commission v Germany (C-600/10). The

case deals with the taxation of dividend distributions and

33

The CJ added, at paragraph 56 of its first FII judgment,

that:

‘it is for the national court to determine whether the tax

rates are indeed the same and whether different levels

of taxation occur only in certain cases by reason of a

change to the tax base as a result of certain exceptional

reliefs’.

Following the first FII judgment, the claimants in the

main proceedings proved that the effective level of

taxation of the profits of companies resident in the UK

was lower than the nominal tax rate in the majority of

cases. The defendants in the main proceedings did not

contest this evidence. They maintained, however, that

the instruction given to the national court in paragraph

56 of the first FII judgment related to the examination of

nominal rates and not that of effective levels of taxation.

In particular, according to the defendants, the national

court had to examine exclusively the question whether

or not resident companies paying dividends and resident

companies receiving dividends were subject to different

nominal rates of tax only in exceptional circumstances.

Having regard to this controversy, the High Court

made a second referral to the CJ asking whether the

references to ‘tax rates’ and ‘different levels of taxation’

at paragraph 56 of the first FII judgment refer to (a)

solely nominal rates of tax; or (b) the effective rates

of tax paid as well as the nominal rates of tax; or (c)

whether they have any other meaning.

The CJ considered that the question to be answered

is essentially whether the freedom of establishment

(Articles 49 TFEU) and the free movement of capital

(Article 63 TFEU) precludes legislation of a Member

State which applies the exemption method to nationally-

sourced dividends and the credit method to foreign-

sourced dividends when, in that Member State, the

effective level of taxation of company profits is generally

lower than the nominal rate of tax. This requires the

determination whether the exemption method and the

credit method can be considered equivalent. Although

– as the first FII judgment held – the two methods

are, in principle, equivalent, the CJ pointed to two

circumstances where that is not the case insofar as the

CJ rules in FII 2 case: the asymmetrical application of the exemption and the credit method to nationally-sourced and foreign-sourced dividends is in breach of EU law; the free movement of capital applies in the case of dividends distributed by third country companies in which the shareholder holds a majority participation

On 13 November 2012, the CJ delivered its judgment

in case FII 2 (C-35/11). The High Court of Justice of

England and Wales, Chancery Division (‘High Court’)

asked the CJ for a clarification of its previous ruling

in the FII Group Litigation case (C-446/04) (‘the first

FII judgment’), which dealt with various aspects of the

formerly applicable UK dividend taxation system. In this

second case, the High Court referred five questions to

the CJ. The summary below will discuss only the CJ’s

answers to the two most important questions.

Exempting nationally-sourced dividends while taxing,

with a credit, foreign-sourced dividends

In the first FII judgment, the CJ held that Articles 49 and

63 TFEU did not preclude legislation of a Member State

which, on the one hand, exempted from corporation

tax dividends which a resident company received

from another resident company (‘nationally-sourced

dividends’) and, on the other, imposed corporation tax

on dividends which a resident company received from

a non-resident company (‘foreign-sourced dividends’)

while at the same time granting a tax credit in the latter

case for the tax actually paid by the company making

the distribution in the Member State in which it was

resident. However, this was subject to the proviso that:

‘the rate of tax applied to foreign-sourced dividends is

no higher than the tax rate applied to nationally- sourced

dividends and that the tax credit is at least equal to

the amount paid in the Member State of the company

making the distribution, up to the limit of the amount of

the tax charged in the Member State of the company

making the distribution’.

34

dividends is suitable to secure the cohesion of the tax

system having regard to the fact that it ensures that

the tax advantage (i.e. the credit or exemption) granted

is matched by a corresponding tax levy (the tax to

which the profits underlying the distribution have been

subject). However, it is not necessary – continued the

CJ – in order to maintain the cohesion of the tax system

to make a differentiation in applying the two methods

in regard to whether the effective level or the nominal

rate of taxation is taken into account. The exemption

method has regard only to nominal rates of tax, as it

grants the relief irrespective of what the level of effective

taxation was at the distribution level thus assuming that

the profits from which the distribution was made were

taxed at the nominal rate. On the other hand, the credit

method takes into account the effective level of taxation

on the profits underlying the distribution, as it grants

credit for the tax actually paid. The CJ held that national

rules which would take account, also under the credit

method, of the nominal rate of tax to which the profits

underlying the dividends paid have been subject would

be appropriate for preventing the economic double

taxation of the distributed profits and for ensuring the

internal cohesion of the tax system while being less

restrictive on the freedom of establishment and the free

movement of capital.

Finally, the CJ concluded that the application of the

exemption method to nationally-sourced dividends and

the credit method to foreign-sourced dividends is in

breach of Article 49 and 63 TFEU if it is established,

first, that the tax credit to which the company receiving

the dividends is entitled under the credit method is

equivalent to the amount of tax actually paid on the

profits underlying the distributed dividends and, second,

that the effective level of taxation of company profits in

the Member State concerned is generally lower than the

prescribed nominal rate of tax.

Free movement of capital or freedom of establishment

in relation to third countries in majority shareholding

situations

In short, the question to be resolved is which of

the Treaty provisions – in particular, the freedom of

establishment or the free movement of capital – applies

credit method leads to a higher tax rate and thus, a less

favourable treatment of foreign-source dividends. First,

this is the situation if the resident company distributing

the dividends is subject to a lower nominal rate of tax

than the resident company receiving the dividends.

Second, there is also no equivalence if the profits of

the resident company paying the dividends are subject

to an effective level of taxation lower than the nominal

rate of tax which is applicable in its residence State. In

such case, nationally-sourced dividends may benefit

from that lower effective taxation, as the dividends

distributed are exempt in the hands of the recipient

company irrespective of the level of effective taxation

at the distribution level. Contrarily, in the case of

foreign-sourced dividends, the credit method has the

effect of undoing all the benefits which the distributing

company might have received in the form of reliefs and

reductions in the tax base in its State of residence.

Having regard to these two circumstances, the Court

held that paragraph 56 of the first FII judgment is meant

to refer both to the applicable nominal rates of tax and

to the effective levels of taxation. The ‘tax rates’ to which

paragraph 56 refers relate to the nominal rate of tax and

the ‘different levels of taxation … by reason of a change

to the tax base’ relate to the effective levels of taxation.

As in the case at hand it has been proven that in

the UK the effective level of taxation of the profits of

resident companies is lower than the nominal rate

of tax not exceptionally but in the majority of cases,

the simultaneous application of the two methods to

nationally-sourced dividends, on the one the hand,

and foreign-sourced dividends, on the other, results

in a difference in treatment of the two types of

dividends. According to settled case law, the situation

of shareholders receiving foreign-sourced dividends

is comparable to that of shareholders receiving

nationally-sourced dividends. Differential treatment

of comparable situations results in discrimination and

in turn, restriction on Articles 49 and 63 TFEU. Such

restriction, however, may be justified in this case by the

overriding public interest of ensuring the cohesion of

the national tax system provided that the measure at

issue is proportional to such objective. The application

of the credit method to foreign-sourced dividends and

that of the exemption method to nationally-sourced

35

While this seems to be a straightforward clarification

of the scope of the free movement of capital in third

country relations and a respectable effort to explain

the previous – far from consistent – case law, the final

statement of the CJ seems to raise new questions. In

particular, the CJ stated that it is important to ensure

that the free movement of capital, as interpreted in

relation to third countries, does not become a backdoor

to the freedom of establishment for those economic

operators who do not otherwise fall within the limits of

the territorial scope of the latter. The Court then added

that such a risk does not exist in the present case, as

‘the legislation of the Member State in question does

not relate to the conditions for access of a company

from that Member State to the market in a third country

or of a company from a third country to the market in

that Member State. It concerns only the tax treatment

of dividends which derive from investments which their

recipient has made in a company established in a third

country.’

CJ rules that Italian rules on intra-Union transfers of assets are not in breach of the Merger Directive (3D I)

On 19 December 2012, the CJ delivered its judgment

in the 3D I case (C-207/11). The case deals with the

compatibility of Italian provisions relating to the deferral

of capital gains tax arising from an intra-Union transfer

of assets with the Merger Directive.

3D I is an Italian company which transferred a branch

of its business located in Italy to a company resident in

Luxembourg receiving shares in return. Following this

transaction the transferred branch became part of the

Luxembourg company as its permanent establishment

located in Italy.

3D I chose to attribute to its shares in the receiving

company a value that was higher than the value, for

tax purposes, of the branch that had been transferred. 3

D I elected to pay Italian substitution tax for the capital

gain resulting from the operation at a rate of 19%.

Therefore, it renounced of the regime of fiscal neutrality

which would have exempted it from paying tax on the

capital gains arising at the time of the transfer. Under

to tax treatment of dividends emanating from a company

which is resident in a third country and in which the

shareholding enables the holder to exert a definite

influence on the company’s decisions and to determine

its activities, while bearing in mind that the national

legislation in question does not apply exclusively to such

situations.

The CJ, first, recalled that as regards the question

whether national legislation falls within the scope of one

or other of the freedoms, the purpose of the legislation

concerned must be taken into consideration. National

legislation intended to apply only to those shareholdings

which enable the holder to exert a definite influence on

a company’s decisions and to determine its activities

falls within the scope of Article 49 TFEU whereas that

which applies to shareholdings acquired solely with the

intention of making a financial investment without any

intention to influence the management and control of the

undertaking falls exclusively under Article 63 TFEU.

The UK rules at issue applied irrespective of whether

the dividends were received on majority shareholdings

of the type described above or on holdings of a smaller

size. Insofar as such rules apply in an intra-EU situation,

i.e. on dividends received from a company resident in

a Member State, both the freedom of establishment

and the free movement of capital may apply. In such

case, the purpose of the legislation is not helpful in

deciding which freedom is ultimately applicable. The

CJ pointed out that it is in this situation, which was also

at issue in the first FII case, that the facts of the case

must be taken into account. However, in the case at

hand – where dividends originate in a third country – it

is sufficient to examine the purpose of the national

legislation in order to determine the scope of what

freedoms are engaged by it. Thus, the Court concluded

that national rules relating to the tax treatment of

dividends from a third country, which do not apply

exclusively to situations in which the parent company

exercises decisive influence over the company paying

the dividends fall within the scope of the free movement

of capital. A company resident in a Member State may

therefore rely on that provision in order to call into

question the legality of such rules, irrespective of the

size of its shareholding in the company paying dividends

established in a third country.

36

must have the option of taking advantage of fiscal

neutrality as guaranteed by the Directive. But this is

where the Member State’s obligations end. There is no

requirement for transferring companies to value shares

received in any particular way.

The CJ stressed that it is clear that the Italian legislation

would have allowed 3D I to attribute the value which

the business transferred had before that operation to

the securities received in exchange for that transfer of

assets and would thus have allowed it to benefit from

the deferral of taxation of the capital gains relating to

those securities, subject to a single condition which is

compatible with EU law. Therefore it concluded that

the fact that the Italian legislation offers the transferring

company the additional option of attributing a higher

value to those securities than the value of the business

transferred before that operation, corresponding, in

particular, to the value of the capital gain arising upon

that transfer, but makes the exercise of that option

conditional upon that company carrying over in its own

balance sheet a special reserve fund equivalent to

the capital gains thus arising, cannot be considered

incompatible with the Merger Directive.

Advocate General opines that the ne bis in idem principle of the EU Charter of Fundamental Rights does not preclude the imposition of multiple penalties in national proceedings concerning the evasion of VAT (Åkerberg)

On 12 June 2012, Advocate General Cruz Villalón

delivered his Opinion in the Åkerberg case (C-617/10)

concerning the interpretation of the principle of ne bis in

idem set out in the EU Charter of Fundamental Rights

(‘Charter’) with regard to Swedish tax procedural rules

which allow the accumulation of administrative and

criminal penalties in respect of the same tax offence.

The case centres around two issues. The first is the

determination of whether or not the CJ has jurisdiction

to interpret the fundamental rights set out in the

Charter in an essentially domestic scenario which

involves the enforcement of a VAT claim in national

the fiscal neutrality regime the value of the shares

received must be the same as the last book value

which the transferred branch of activity had before the

transfer. When the shares are entered at a higher value

it is necessary under Italian law to constitute a reserve

between the book values of the transferred branch and

the shares received which would constitute taxable

income at the rate of 33% if distributed. 3 D I argued

that this accounting condition was incompatible with the

Merger Directive this being the reason why it had opted

to pay the substitution tax.

The CJ started by recalling that the Merger Directive

imposes a fiscal neutrality requirement with regard to

the receiving and acquired companies which participate

in a transfer of assets. However, such requirement is

not unconditional. In particular, the receiving company

must compute any new depreciation and any gains or

losses in respect of the assets and liabilities transferred

according to the rules that would have applied to the

transferring company if the transfer of assets had not

taken place. While is true that the Merger Directive sets

conditions for the deferral at the level of the receiving

company as regards the valuation of the business

transferred, it is however silent on the valuation for

tax purposes by the Member State of residence of

the transferring company (Italy) of the shares that are

received in exchange for a transfer of assets. This is

further confirmed by the history of the Merger Directive,

as the Commission had attempted, on two occasions,

to ensure that the Merger Directive addresses the

valuation of shares received by transferring companies

in order to avoid economic double taxation of the

“same” capital gain. It did so in the 1969 proposal which

included a provision according to which the shares

of the receiving company could be attributed in the

balance sheet of the transferring company with a value

corresponding to the real value of the transferred assets

without this leading to taxation. In 2003 the Commission

proposed a similar amendment to the Merger Directive

that has not been adopted. Therefore, the Merger

Directive imposes limited obligations on Member States

with respect to companies which transfer assets to a

company resident in another Member State and receive

shares in exchange. That limited obligation is that both

the transferring company and the receiving company

37

from the formulations that had been used by the CJ

in the case law before the Charter obtained binding

force (‘field of application of Union law’ or ‘scope of

Union law’). The Advocate General proposed that all

these expressions should be construed uniformly as

expressing the common requirement that Union law

must have a presence at the origin of the exercise of

public authority by the Member State in order for the

Member State action to be reviewable under the EU

fundamental rights. According to the Advocate General,

in the context of the constitutional structure of the

Union it is, as a rule, for the Member States to control

the acts of their public authorities in the light of their

constitutional order and their international obligations.

It occurs only as an exception to that main rule that the

Union assumes responsibility for enforcing fundamental

rights vis-à-vis national authorities. In order for the

Union to have such a competence, it is not sufficient

for Union law to be at the origin of the exercise of

public authority but the Union must have a specific

interest in guaranteeing the respect for fundamental

rights itself in the case concerned. In the case at hand,

the VAT Directive is the piece of Union law, which

formed the basis for the imposition of penalties by the

Member State. Although this may, in principle, legitimise

the transfer of the responsibility of guaranteeing

fundamental rights from the Member State to the Union,

the specific circumstances of the case do not reinforce

such a conclusion. The Swedish system of tax penalties

is a general system applicable to infringements of all

sorts of tax obligations. It has not been adopted with

reference to the VAT Directive let alone in transposition

thereof; it serves the enforcement and collection of

VAT claims in the same way as that of any other tax

claims. Therefore, in the view of the Advocate General,

the degree of connection between Union law (i.e. the

VAT Directive) and the exercise of public authority of

the State is too weak to form a sufficient basis for a

clearly identifiable interest on the part of the Union that

could justify the assumption of the responsibility by the

latter of guaranteeing respect for the ne bis in idem

principle. Hence, the Advocate General concluded that

the situation at hand did not involve ‘implementation

of Union law’. Accordingly, he proposed that the Court

declare that it lacked jurisdiction to answer the questions

referred by the Swedish court.

administrative and criminal proceedings. Answering

this question requires the interpretation of the term set

out in Article 51(1) of the Charter, according to which,

the fundamental rights contained in the Charter bind

the Member States ‘only when they are implementing

Union law’. If the answer to the first question affirms the

Court’s jurisdiction, the second issue to be clarified by

the Court in this case is the interpretation of the ne bis

in idem principle included in Article 50 of the Charter,

stipulating that ‘No one shall be liable to be tried or

punished again in criminal proceedings for an offence

for which he or she has already been finally acquitted or

convicted within the Union in accordance with the law’.

In particular, the second question asks whether such

principle excludes the imposition of both administrative

and criminal penalties for the same conduct involving

the evasion of VAT obligations.

As to the facts of the case, the taxpayer, a self-

employed fisherman residing and working in Sweden,

failed to provide tax information to the Swedish tax

authorities for the fiscal years 2004 and 2005 which

resulted in a loss of tax revenue, including VAT, for the

Swedish State. In 2007, the tax authorities imposed

an administrative fine on the taxpayer on the basis of

the Swedish legislation relating to tax assessment,

a part of which related to the evasion of VAT. The

fine subsequently became final. In 2009, the Public

Prosecutor initiated criminal proceedings against the

taxpayer, pursuant to the Swedish legislation on tax

offences, in front of the Haparanda District Court based

on the same facts as those that had been subject to

the administrative procedure. The District Court stayed

the proceedings and referred several questions to the

CJ for a preliminary ruling inquiring whether or not the

accumulation of administrative and criminal penalties in

such a case is in violation of the ne bis in idem principle

as set out in Article 50 of the Charter as well as the

corresponding right included in Article 4 of Protocol No 7

of the European Convention on Human Rights (‘ECHR’).

As regards the jurisdiction of the CJ, first, the Advocate

General pointed out that the Charter defines the

‘implementation of Union law’ as the condition for

reviewing Member State actions in the light of the

fundamental rights contained therein, which is different

38

Finally, the Advocate General addressed the question

whether the requirement developed by the Swedish

Supreme Court that in order to disapply a national

provision which is incompatible with the Charter the

provision of the Charter at hand must be sufficiently

clear is contrary to EU law, specifically the principle

of primacy and direct effect. He opined that such

requirement is not contrary to EU law as long as it does

not hinder the national courts in exercising the powers of

interpretation and disapplication assigned to them under

Union law.

Advocate General opines Finnish rules on deductibility of losses upon a merger of two companies resident in different Member States not in breach of the freedom of establishment (A Oy)

On 19 July 2012, Advocate General Kokott delivered her

Opinion in the A Oy case (C-123/11). The case deals

with the compatibility of Finnish rules on the deductibility

of losses upon a cross-border merger with the freedom

of establishment provided in Articles 49 and 54 TFEU.

A Oy is a Finnish resident company which holds all the

shares in the Swedish company B AB. This subsidiary

company had ceased its trading activities and incurred

losses for the period of 2001 to 2007. The Finnish

company planned a merger with its Swedish subsidiary,

which would result in the dissolution of such subsidiary

and the acquisition of all its assets by the taxable

company.

Under Finnish legislation, upon a merger of companies,

the receiving company shall have the right to deduct

from its taxable income any loss made by the merged

entity, provided certain conditions are met. Such

possibility is excluded, however, with regard to losses

from business activity which is not subject to Finnish

taxation (foreign accumulated losses).

The first question dealt with by Advocate General

Kokott was whether the abovementioned limitation

in cross-border situations constituted a breach of the

freedom of establishment. As a preliminary remark,

However, the Advocate General also proposed an

alternative answer regarding the substantive issue if the

Court decided that it did have jurisdiction; that issue is

whether the ne bis in idem principle in Article 50 of the

Charter precludes a Member State from imposing both

an administrative and a criminal penalty for the same

offence. The Advocate General pointed out that such

dual punishment appears to be widespread practice in

the Member States. On the other hand, the case law

of the European Court of Human Rights excludes the

accumulation of administrative and criminal penalties

for the same offence on the basis of the ne bis in idem

principle as set out in Article 4 of Protocol No 7 to

the ECHR (see Zolotukhin v Russia, judgment of 10

February 2009 (No 14939/03, ECHR 2009)). This would

suggest that the same interpretation is to be adopted

under the Charter having regard to the provision, which

prescribes that the rights which are also included in the

ECHR will have the same scope and meaning as their

equivalents (Article 52(3) Charter). In contrast to this,

the Advocate General suggested to interpret Article 50

of the Charter autonomously. He justified this by the fact

that Protocol No 7 of the ECHR has not been ratified by

several Member States, and other Member States have

made reservations or declarations relating to Article

4 thereof. This shows that the prohibition of double

punishment when applied to administrative sanctions,

on the one hand, and criminal penalties, on the other, is

actually not part of the common constitutional traditions

of the Member States. In such a situation, the level of

protection of a right under the Charter granted by the CJ

does not have to match the one which prevails under

the ECHR based on the case law of the European

Court of Human Rights. The independent interpretation

of Article 50 of the Charter led the Advocate General

to conclude that such provision does not preclude the

Member States from bringing criminal proceedings

relating to facts in respect of which a final penalty has

already been imposed in administrative proceedings,

provided that the criminal court is in a position to take

into account the prior existence of an administrative

penalty for the purposes of mitigating the criminal

penalty to be imposed by it. He proposed to leave it up

to the Swedish national court to assess whether or not

such ‘offsetting’ is permitted under its national law.

39

As regards the proportionality of the Finnish provision,

the Advocate General was of the view that the restriction

on the freedom of establishment was not particularly

serious in the present case.

The second question dealt with by Advocate General

Kokott concerned the calculation of the loss and – in

case the CJ does not follow her Opinion that there is

a justified restriction under the first question – whether

it should be calculated in accordance with the rules of

the State of residence of the receiving company or that

of the transferring company. According to the Advocate

General, in principle, the rules to be followed are the

ones of the receiving company’s State of residence as

that is the only way to achieve equal treatment between

domestic and cross- border situations.

Advocate General considers that Belgian rules on the notional interest deduction infringe the freedom of establishment (Argenta Spaarbank)

On 19 September 2012, Advocate General Mengozzi

delivered his Opinion in the case Argenta Spaarbank

(C-350/11) regarding the application of the Belgian

notional interest deduction to taxpayers having a foreign

permanent establishment.

The notional interest deduction is a tax deduction

calculated as a fictitious interest expense on the

adjusted equity of the company. The rules on

adjustments of the equity, amongst others, set out that

the net asset value of foreign permanent establishments

must be deducted from the equity of the company. The

net asset value of the permanent establishment is the

positive difference between (i) the net book value of

the assets of the permanent establishment, and (ii) the

total liabilities that are imputable to that permanent

establishment. This adjustment is only required where

the permanent establishment is situated in a country

with which Belgium has entered into a tax treaty that

exempts from Belgian tax the profits derived through the

permanent establishment in the other country.

In the case at hand, a bank established in Belgium,

Argenta Spaarbank, was denied the notional interest

Advocate General Kokott analysed the scope of the

Merger Directive. Looking in particular to Article 6 of

the Directive, she concluded that it only refers, in the

context of the case at hand, to the use of the losses in

the framework of Swedish taxation. Therefore, and from

the perspective of the receiving company’s Member

State (Finland), there is no obligation to take into

account the transferring company’s accumulated losses

from another Member State.

With respect to the analysis under the freedom of

establishment, Advocate General Kokott found that the

fact that a parent company may use for tax purposes

the accumulated losses of a Finnish subsidiary whereas

that is not possible in the case of losses of a foreign

subsidiary constitutes a restriction to the freedom of

establishment by the Finnish tax legislation.

Turning to the analysis of the possible justifications,

the issue was whether the exception ruled by the CJ in

Marks & Spencer (C-446/03) – i.e. in general terms, that

the Member State of the parent company has to take

into account foreign losses when those can no longer

be used in the State of the subsidiary – was applicable

in the case at stake. According to Advocate General

Kokott, the evolution of the CJ’s case law reveals

that the Marks & Spencer exception can no longer

be applied. In principle, excluding the use of foreign

losses is justified by the preservation of the allocation

of taxation powers among Member States which would

be impaired if these losses were taken into account by

Finland regarding a Swedish subsidiary the activity of

which it cannot tax.

Advocate General Kokott further considered that, even

if the Marks & Spencer exception were still to apply, its

conditions would not be fulfilled in the present case. She

considered that although the losses turn final upon a

merger that is a mere consequence of the merger itself

which arose from a free decision of the parent company.

In addition, she observed that the losses could not be

considered final even before the merger on the ground

that the Swedish subsidiary had ceased trading since

the Finish company still has the option of using those

losses in the future by resuming trading and through the

resulting profits.

40

regarding the free movement of (self-employed) persons

under the agreement concluded between the European

Community and its Member States, on the one hand,

and Switzerland, on the other (‘EC-Switzerland

Agreement’).

The underlying case concerns Mrs Ettwein and her

husband both of whom are German nationals and

pursue an independent professional activity in Germany.

Mrs and Mr Ettwein moved their place of residence

to Switzerland on 1 August 2007. They continued

to pursue their professional activity in Germany and

earning almost all their income in Germany. In their

2008 personal income tax return, they applied, as they

had done in the previous years, for joint taxation under

the splitting method.

The German tax authorities rejected this on the ground

that the splitting method was not applicable to Mrs and

Mr Ettwein, as their residence was neither in Germany,

nor in one of the Member States of the European Union,

nor in a State which is a party to the EEA. Mrs and Mr

Ettwein challenged the rejection before the Finance

Court of Baden Württemberg which referred a question

for a preliminary ruling to the CJ on the interpretation

of the relevant provisions of the EC-Switzerland

Agreement.

Advocate General Jääskinen first pointed out that

Switzerland had not joined the internal market of the

European Union. Therefore, as stated in the Grimme

(C-351/08) and Fokus Invest cases (C-541/08), the

interpretation given to the provisions of European

Union law concerning the internal market cannot be

automatically applied by analogy to the interpretation

of the EC-Switzerland Agreement, unless expressly

provided for in the Agreement itself. The Advocate

General then recalled the objective of the EC-

Switzerland Agreement, which is to grant nationals of

the Member States and Switzerland a right of entry,

residence, access to work as employed persons,

establishment on a self-employed basis and the right

to stay in the territory of the Contracting Parties under

the same conditions as those granted to nationals.

These rights are different in spirit and purpose from

the fundamental freedoms laid down in the TFEU,

deduction on its equity to the extent of the net asset

value of its permanent establishment situated in the

Netherlands.

The Advocate General points out that under the Belgian

rules at issue, a Belgian company with a permanent

establishment in another Member State with which

Belgium has concluded a tax treaty is subjected to a

less favourable tax treatment than a Belgian company

with a Belgian permanent establishment. The benefit of

the notional interest deduction is subject to a territoriality

condition insofar as the equity of the Belgian company

must be imputable to a taxable entity in Belgium. The

freedom of establishment precludes the application of

such a provision as such a tax treatment discourages

the exercise of the right of establishment in another

Member State. Furthermore, according to the Advocate

General, this difference in treatment is solely the result

of the application of Belgian law, and not, as the Belgian

Government claims, of the allocation of fiscal jurisdiction

between two Member States.

The Advocate General further concludes that neither the

cohesion of the Belgian tax system, nor the balanced

allocation of taxation rights can be invoked to justify the

difference in treatment. The Advocate General does not

agree with the contention of the Belgian Government

that a perfect symmetry exists between the benefit of

the fiscal advantage and the right to tax the generated

benefits. This is not the case given that the possibility to

benefit from the notional interest deduction is not linked

in any way to the realisation of benefits in Belgium,

in fact, the goal of the notional interest deduction is a

general reduction of tax rates. Therefore, the restriction

on the freedom of establishment imposed by the Belgian

rules at issue is not capable of being justified.

Advocate General opines that the EC-Switzerland Agreement on the free movement of persons cannot be relied on by nationals of a Contracting Party against their own State (Ettwein)

On 18 October 2012, Advocate General Jääskinen

delivered his Opinion in the Ettwein case (C-425/11)

41

employed activity in the Member State of which they

are nationals, do not derive rights from the provisions

of the EC-Switzerland Agreement on freedom of

establishment, equal treatment and non-discrimination.

UK court refers preliminary question to the CJ concerning group relief in a consortium of companies (Felixstowe Dock)

On 15 February 2012, the UK First-tier Tribunal (Tax

Chamber) referred a question for a preliminary ruling to

the CJ in the Felixstowe Dock case (C-80/12).

Facts

Hutchison Whampoa is a worldwide group of companies

headed by Hutchison Whampoa Limited, a Hong

Kong resident company. Some of the UK subsidiaries

of the group claimed group relief in respect of losses

made by one member of the group, Hutchison 3G UK

Limited (‘the Surrendering Company’). At the time, the

Surrendering Company was owned by a consortium of

companies through the intermediate holding company,

Hutchison 3G UK Investment Sarl, a company resident

in Luxembourg. Under the applicable UK law, in order

for the group relief to be available, a link company must

exist which in the case at hand is Hutchison 3G UK

Investment Sarl. It is further required by the relevant

legislation that the link company is itself able to make a

relief claim. For that purpose the condition is that the link

company should be a UK resident or a non-resident with

a UK permanent establishment. Since this requirement

was not met in the case of Hutchison 3G UK Investment

Sarl, the surrender of the losses by the Surrendering

Company was rejected by the UK tax authorities.

In this context, the UK court referred the following

question:

‘In circumstances where:

The provisions of a Member State (such as the United

Kingdom) provide for a company (a claimant company”)

to claim group relief for the losses of a company that is

owned by a consortium (a consortium company”) on the

which is apparent from the political context in which

the EC-Switzerland Agreement was signed. Thus, the

objective of the EC-Switzerland Agreement is not the

creation of an internal market but the strengthening of

relations between the Contracting Parties, without any

prospect of extending the application of the fundamental

freedoms as a whole to Switzerland.

The Advocate General then interpreted the material

scope of the provisions of the EC-Switzerland

Agreement relating to the free movement of self-

employed persons and the prohibition of discrimination

on ground of nationality. On the basis of the wording

of those provisions, he concluded that nationals of

a Contracting State cannot invoke the rights under

the Agreement, specifically those corresponding

to EU primary law, against their own State. The

relevant provisions prohibit discrimination on ground

of nationality only against a national of the other

Contracting Party. That is not the case with Mrs and Mr

Ettwein who are German nationals trying to invoke the

Agreement against Germany. The Advocate General

was of the view that the fact that Mrs and Mr Ettwein

had moved their personal residence to Switzerland

does not change this conclusion. In this connection,

the Advocate General referred to the CJ’s Werner case

(C-112/91). This case, according to the provisions of

the EC-Switzerland Agreement, could be taken into

account, as its judgment had been delivered before

the signing of the Agreement (i.e. 21 June 1999). The

Werner case shows that before the signing of the EC-

Switzerland Agreement, a mere change of residence in

an EU context could not be considered as establishment

for the purpose of pursuing self-employed activity and

as such, did not fall within the scope of the provisions

on the freedom of establishment. The CJ’s case law

relating to free movement within the EU developed

after the signing of the Agreement has no relevance,

according to the Advocate General, to the interpretation

of the Agreement due to the provision of the Agreement

referred to above.

Consequently, the Advocate General proposed

a restrictive interpretation of the EC-Switzerland

Agreement having regard to its wording and objective.

Accordingly, Mrs and Mr Ettwein, as they pursue self-

42

bilateral tax treaty. In particular, the Hungarian court

asks:

‘Is the exemption from tax on dividends granted by the

Hungarian legislation to a recipient of dividends resident

in Hungary compatible with the provisions of the EU

Treaties on the principle of freedom of establishment

(Article 49 TFEU), the principle of equal treatment

(Article 54 TFEU) and the principle of free movement of

capital (Article 56 TFEU (sic)), given that

a non-resident recipient of dividends is exempt

from tax on dividends only if it meets certain legal

requirements, namely that its holding (in the case

of shares, the proportion of its registered shares) in

the company capital of the resident company at the

time of distribution (allocation) of dividends amounted

permanently to at least 20% for at least two consecutive

years, taking account of the fact that, in the event that

the permanent holding of 20% is maintained for less

than two consecutive years, the company distributing

the dividends is not obliged to withhold the tax on

the dividends and the company which receives the

dividends or, in the event of non-monetary allocations,

the company which distributes them are not obliged to

pay that tax on submission of their tax return if another

person or the party distributing the dividends has

guaranteed the payment of the tax;

further, a non-resident recipient of dividends does not

meet the requirements of the national legislation for

exemption from tax when its holding (in the case of

shares the proportion of its registered shares) in the

company capital of a resident company at the time

of distribution (allocation) of dividends is below the

minimum level of 20% required by law, or when it has

not maintained that percentage permanently for at

least two consecutive years, or, in the event that the

permanent holding of 20% has been maintained for

less than two consecutive years, if payment of the tax

was not guaranteed by any third party or by the party

distributing the dividends;

Would the answer to question 1(b) be different, that is to

say, would there be any effect on the answer, if:

condition that a company that is a member of the same

group of companies as the claimant company is also a

member of the consortium (a “link company”), and

The parent company of the group of companies (not

itself being the claimant company, the consortium

company or the link company) is not a national of the

United Kingdom or any other Member State,

Do Arts. 49 and 54, TFEU preclude the requirement

that the “link company” be either resident in the United

Kingdom or carrying on a trade in the United Kingdom

through a permanent establishment situated there?

If the answer to question 1 is yes, is the United Kingdom

required to provide a remedy to the claimant company

(for example, by allowing that company to claim relief for

the losses of the consortium company) in circumstances

where:

the “link company” has exercised its freedom of

establishment but the consortium company and the

claimant companies have not exercised any of the

freedoms protected by European Law,

the link(s) between the surrendering company and

the claimant company consists of companies not all of

which are established in the EU/EEA.’

Hungarian court refers preliminary question to the CJ regarding discriminatory taxation of dividends paid to non-residents (Franklin Templeton Investment Funds)

On 1 March 2012, the Hungarian Supreme Court

referred a question to the CJ for a preliminary ruling

in the case of Franklin Templeton Investment Funds

(C-112/12) regarding the compatibility with EU law

of Hungarian tax rules which unconditionally exempt

dividends paid to resident companies while granting

such exemption to non-resident companies only upon

meeting the conditions set out under the Parent-

Subsidiary Directive or those under an applicable

43

in a Member State of the European Union but do not

provide for such an exemption for an investment fund

which is resident for tax purposes in the USA?

Can the difference between the treatment of funds

established in a non-member country and that of

funds established in a Member State of the European

Union, as provided for in national law with regard to

the exemption relating to corporation tax, be regarded

as legally justified in the light of Article 58(1)(a) EC, in

conjunction with Article 58(3) EC (now Article 65(1)(a)

TFEU, in conjunction with Article 65(3) TFEU)?’

Portuguese court refers preliminary question to the CJ concerning thin capitalisation rules in a third country context (Itelcar)

On 6 June 2012, the Portuguese South Administrative

Central Court referred a question for a preliminary ruling

to the CJ in the case Itelcar (C-282/12), concerning

the question whether the application of the Portuguese

thin capitalization rules in situations where the lender

is resident in a third country is compatible with the free

movement of capital.

Itelcar-Aluguer de Automóveis, Lda (‘Itelcar’) is a

Portuguese company which is held in 99.98% by the

Belgian resident company General Electric International

(BENELUX), B.V. with the remaining 0.02% belonging to

the US company GE Capital Fleet Services International

Holding, Inc (‘GE Capital’). In the course of its activity,

Itelcar and GE Capital entered into a loan agreement

according to which the US company lent funds to

its subsidiary. Itelcar deducted the related interest

paid to GE Capital. The Portuguese tax authorities

denied such deduction and imposed an additional

assessment on Itelcar based on the thin capitalization

regulations provided in Article 61 (currently Article 67)

of the Portuguese Corporate Income Tax Code which

provide for a limit of interest deduction relating to debts

exceeding a 2:1 debt-equity ratio. These rules do not

apply if the lender is either resident in Portugal or in an

EU Member State.

while a resident recipient of dividends is exempt from

tax on dividends under the Hungarian legislation, the

tax burden of a non-resident recipient of dividends

depends on the applicability to it of [Council Directive

90/435/EEC of 23 July 1990 on the common system

of taxation applicable in the case of parent companies

and subsidiaries of different Member States] or the

[Convention between the Republic of Hungary and

the Grand Duchy of Luxembourg for the avoidance of

double taxation with respect to taxes on income and on

capital, done at Budapest on 15 January 1990],

while a resident recipient of dividends is exempt from

tax on dividends under the Hungarian legislation, a

non-resident recipient of dividends may either offset

such tax against its national tax or bear the final burden,

depending on the provisions of its national law.

May the national tax authority invoke Article 65(1) TFEU

(formerly Article 58(1) EC) and the former Article 220 EC

in order to disapply Community law of its own motion?’

Polish court refers preliminary question to the CJ regarding the taxation of dividends paid to third-country investment funds (Emerging Markets Series)

On 23 April 2012, the Regional Administrative Court

in Bydgoszcz referred a question to the CJ for a

preliminary ruling in the Emerging Markets Series

case (C-190/12) asking whether or not national tax

rules which exempt dividends paid to investment funds

established in a Member State while taxing dividends

paid to investment funds resident in a third-county

are compatible with the free movement of capital. In

particular, the Polish court asks:

‘Does Article 56(1) EC (now Article 63 TFEU) apply to an

assessment of the permissibility of the application by a

Member State of provisions of national law which draw a

distinction between the legal situation of taxable persons

in such a way that they grant, as part of a general tax

exemption, an exemption from flat-rate corporation tax

on dividends received by investment funds established

44

within two months, the Commission may refer the matter

to the CJ.

It is noteworthy that a preliminary ruling request is

pending before the CJ on the same issue in the Argenta

Spaarbank case (C-350/11)..

Commission launches public consultation on double non-taxation

On 29 February 2012, the Commission launched

a public consultation on the double non-taxation of

companies operating cross-border within the EU.

The Commission intends to combat this problem

for the reason that double non-taxation deprives

Member States of significant revenues and creates

unfair competition between businesses in the Single

Market. The Commission had already projected in its

Communication on Double Taxation in the Single Market

that action would be taken in order to tackle not only

double taxation but also double non-taxation. In the

Annual Growth Survey 2012, the Commission pointed

out that better tax coordination aimed at, inter alia,

preventing non-taxation and abuse, may be, at the times

of the economic crises, an important revenue-raising

measure (see EU Tax Alert edition no. 99, December

2011).

The public consultation covers cross-border double

non-taxation of companies. It concerns direct taxes

such as corporate income taxes, non-resident income

taxes, capital gains taxes, withholding taxes, inheritance

taxes and gift taxes. Double non-taxation arises due to

mismatches between national tax systems. These can

be exploited by aggressive tax planners with the specific

intention to avoid taxes. The Consultation document

invites the public to provide factual examples of cases

of double non-taxation that they have knowledge of, for

example, in the following areas:

• mismatches of entities

• mismatches of financial instruments

• application of Double Tax Conventions leading to

double non-taxation

In this context, the Portuguese court referred the

following question:

‘“Do Articles 63 TFEU and 65 TFEU (Articles 56 EC and

58 EC) preclude legislation of a Member State, such

as that contained in Paragraph 61 CIRC (Código do

Imposto sobre o Rendimento das Pessoas Coletivas) in

the wording resulting from [Decree-Law No] 198/2001

of [ 3 July 2001], as amended by [Law No] 60 A/2005

of 30 [December 2005] (State Budget Act for 2006),

which, in connection with the indebtedness of a taxable

person residing in Portugal to an entity of a non-member

country with which it maintains special relations within

the meaning of Paragraph 58(4) CIRC, does not allow

the setting off against tax of interest relating to the

part of its indebtedness regarded as excessive under

Paragraph 61(3) CIRC, borne and paid by a taxable

person residing within national territory on the same

basis as interest borne and paid by a taxable person

residing in Portugal who is found to be excessively

indebted to an entity residing in Portugal with which it

maintains special relations?”

Commission formally requests Belgium to amend its rules on notional interest deduction

On 26 January 2012, the Commission issued a

reasoned opinion against Belgium requesting it to

amend its legislation on the notional interest deduction.

This constitutes the second stage of the infringement

procedure under Article 258 TFEU. The Belgian rules

at issue provide for a notional interest deduction on

own assets (taking into account the risk of investing

own assets in a business activity). Notional interest

deduction is granted for Belgian real estate and

permanent establishments, whereas no deduction

is granted for foreign real estate and permanent

establishments. The Commission is of the opinion that

these rules are contrary to the freedom of establishment

(Articles 49 and 54 TFEU) and the free movement of

capital (Article 63 TFEU).

Belgium has two months to comply with the request. If

the rules are not brought into compliance with EU law

45

The Commission considers that these provisions are in

breach of the freedom of establishment set out in Article

49 TFEU. In the absence of a satisfactory response

within two months, the Commission may refer the UK to

the CJ.

Commission requests Sweden to change its tax rules discriminating against foreign pension funds

On 22 March 2012, the Commission officially asked

Sweden to amend its tax rules on pension funds, which,

according to the Commission, discriminates against

non-resident pension funds compared to domestic

pension funds when it comes to taxing dividends

distributed in Sweden. The request takes the form of an

additional reasoned opinion. The Commission issued

the first reasoned opinion on this matter on 28 October

2010 (see EU Tax Alert edition no. 85, November 2010).

According to Swedish legislation, non-resident pension

funds are subject to domestic withholding tax on

dividends. The withholding tax rate amounts to 30%.

This may be reduced to 15% as a result of Swedish

double tax conventions. Resident pension funds are

exempt from the withholding tax on dividends as well

as from corporation tax. They are subject to a 15% tax

on their yield. The taxable base for this tax is not based

on actual profits but on a notional calculation with the

possibility to deduct costs. As a result of this system,

the effective tax rate on dividends received by resident

pension funds will frequently be lower than the 15% tax

rate that is applied to non-resident pension funds.

The Commission considers these rules contrary to the

TFEU provisions on the free of movement of capital, as

they discriminate against non-resident pension funds

and thus, may deter the latter from investing in Sweden.

If the rules are not brought into compliance with EU law

within two months, the Commission may refer the matter

to the CJ.

• transfer pricing and unilateral Advance Pricing

Arrangements

• transactions with associated enterprises in countries

with no or extremely low taxation

• debt financing of tax exempt income

• different treatment of passive and active income

• double tax conventions with third countries

• mandatory disclosure rules (as a ways of tackling

the problem)

This list is not exhaustive; therefore, other issues of

double non-taxation should also be brought to the

Commission’s attention.

In order to encourage participation by those who may

have insight into real-life exploitation of double non-

taxation by companies, anonymous contributions will be

accepted. The consultation runs until 30 May 2012.

The launch of the public consultation constitutes the

first step in tackling the problem of double non-taxation.

The aim of the consultation is to assess the full scale

of the problem and see where the main weaknesses

lie. On this basis, the Commission promises to develop

the most appropriate policy response before the end of

2012.

Commission requests the United Kingdom to amend its company exit tax legislation

On 22 March 2012, the Commission formally

requested the United Kingdom (‘UK’) to amend its

legislation providing for exit taxes on companies. The

Commission’s request takes the form of a reasoned

opinion.

The UK legislation at stake results in immediate taxation

of unrealised capital gains in respect of certain assets

when the seat or place of effective management of

a company is transferred to another EU/EEA State.

However, a similar transfer within the UK would not

generate any such immediate taxation and the relevant

capital gains would only be taxed once they have been

realised.

46

expenditures and raise revenues in order to achieve

fiscal consolidation, combating tax fraud and evasion

is of higher importance than ever. Substantial amounts

are lost from public finances due to tax evasion and

avoidance, with the shadow economy estimated to be

around one fifth of GDP on average, i.e., EUR 2 trillion.

In a globalized economy, measures taken merely at the

national level cannot be sufficiently effective; therefore,

coordination at the EU level is indispensable.

The Commission has issued the present Communication

upon the call of the European Council. The latter asked

the Commission, in March 2012, to develop concrete

ways to improve the fight against tax fraud and tax

evasion. Similarly, the European Parliament issued

a resolution in April 2012 emphasizing the need for

concrete measures in this respect (see EU Tax Alert

edition no. 105, May 2012). The Communication was

submitted to the European Council summit of 28-29

June 2012.

The Communication sets out a three-tier approach

aimed at attacking evasion and fraud from every

possible angle:

• At the national level: Member States should focus

on improving their administrative capacity to collect

taxes, as was pointed out in the Country Specific

Recommendations (see EU Tax Alert edition no.106,

June 2012). The Commission promises to monitor

closely the Member States’ progress in this field,

while also providing technical assistance where

needed. National authorities should also make it

easier for the willing to comply, for example, through

voluntary disclosure programmes. EU instruments

such as the one-stop-shop and a possible Tax Web-

Portal should also assist better compliance.

• At the EU level: the most essential is that the

Member States reach agreement on the revised

Savings Directive (see EU Tax Alert edition no.

90, March 2011). In addition, the Communication

presents a number of new ideas, such as a possible

European cross border tax identification number,

a quick reaction mechanism for VAT fraud and

minimum EU rules and sanctions for fraud and

Commission refers Germany to CJ over tax treatment of group companies

On 22 March 2012, the Commission decided to refer

Germany to the CJ for excluding certain companies

established in other Member States from the benefits of

its corporation tax fiscal unity regime (Organschaft).

Under German law, a company cannot be part of a

fiscal unity if its registered office is outside Germany

even if its place of effective management is in Germany.

Therefore, even if such a company were fully liable to

tax in Germany, it would be deprived of the tax benefits

of the fiscal unity regime. One of the benefits of this

regime is the domestic offsetting of profits and losses

within the fiscal unity. The German rules, in the view of

the Commission, infringe the freedom of establishment,

as they disadvantage foreign companies in comparison

with domestic competitors which, therefore, may be

deterred from establishing a business in Germany.

After the Commission had issued a reasoned opinion

(see EU Tax Alert edition no. 85, November 2010),

Germany published an administrative circular in 2011

to eliminate the infringement. However, according to

the CJ’s case law, an infringement caused by a legal

provision can only be effectively eliminated by amending

the law and not by a mere circular. As Germany failed

to change its law within one year, the Commission has

decided to pursue the procedure.

Commission outlines concrete measures to tackle tax fraud and evasion

On 27 June 2012, the Commission issued a

Communication on concrete ways to reinforce the

fight against tax fraud and tax evasion including in

relation to third countries (COM(2012) 351 final).

The Communication makes proposals as to how to

strengthen current measures and sets out possible new

initiatives for eliminating fraud and evasion in Europe.

The Commission explains that in the current

economic climate where Member States need to cut

47

on double taxation (see EU Tax Alert edition no. 79,

May 2010). As regards the reaction of the business

community, many of the contributors from this circle

did not provide answers to the specific questions in the

public consultation note but instead, gave more general

comments on double non-taxation issues. Most of them

stressed that direct taxation falls within the Member

States’ sovereignty; thus, any measures against double

non-taxation should be dealt with at the Member State

level. Many of the contributors also pointed out that the

issue of double non-taxation should not be addressed

separately from that of double taxation. The double

non-taxation issue which most contributors find least

acceptable is double-non taxation due to mismatches

between countries qualification of hybrid entities and

hybrid financial instruments.

As regards the follow-up to the public consultation, the

Commission expressed the view that there is a need for

a more in-depth analysis of double non-taxation. At the

same time, it emphasized that the activity of the Code

of Conduct Group (e.g. as regards profit participating

loans) as well as that of the OECD (e.g. report on

‘Hybrid Mismatch Arrangements: Tax Policy and

Compliance Issues’) in this area needs to be taken into

account in order to avoid duplication of work. The report

stated that the Commission will continue to examine

the potential benefits of setting up a Forum on double

taxation for purely EU tax matters and will examine

whether it should also cover double non-taxation.

Finally, the Commission reiterated that it intends to

publish a Communication on good governance in the

tax area in relation to tax havens and aggressive tax

planning before the end of 2012.

Commission refers UK to the CJ over cross-border loss

relief

On 27 September 2012, the Commission decided to

refer the UK to the CJ for its tax legislation on cross-

border loss relief. The Commission considers that the

UK has failed to properly implement the CJ’s Marks &

Spencer ruling (C-446/03) on this matter. (For details

see EU Tax Alert, edition no. 59, October 2008).

evasion. Further, Eurofisc will be extended to cover

direct, as well as indirect, taxes. The Commission

will also develop a taxpayers’ charter in the spirit of

Corporate Social Responsibility.

• At the international level: international partners

must apply good governance standards that are

equivalent to those of the EU. The mandates

that the Commission has requested to negotiate

stronger Savings Agreements with key neighbouring

countries (Switzerland, Andorra, Monaco,

Lichtenstein and San Marino) are crucial in this

respect (see EU Tax Alert edition no. 106, June

2012). Before the end of 2012, the Commission

will also set out a ‘stick and carrots’ approach to

dealing with tax havens, and measures to deal with

aggressive tax planners.

As to the next steps, the Commission is to start

working on developing the ideas set out in the present

Communication. Before the end of 2012, it will present

an Action Plan on fighting fraud and evasion, with

specific measures that could be rapidly developed. In

tandem, the Commission will also come forward with its

initiative on tax havens and aggressive tax planning.

Commission publishes report of the responses received on the public consultation concerning double non-taxation

On 9 July 2012, the Commission published a summary

report of the responses received in the public

consultation ‘Factual examples and possible ways

to tackle double non-taxation cases’ running from 29

February to 30 May 2012. The Commission launched

this fact-finding public consultation in order to establish

evidence concerning double non-taxation within the EU

and in relation with third countries.

Both non-governmental organizations and the business

community submitted contributions in this consultation

although the number of contributions received (i.e.

25) was rather low as compared to those received

in previous public consultations, for example, that

48

According to Icelandic tax rules, companies in Iceland

that merge cross-border within the EEA are required

to pay tax on all capital gains relating to assets and

shares when they leave Iceland, even though the gains

have not been realised. Icelandic companies that merge

with other companies within Iceland are under no such

obligation. The Authority considers those rules to be a

restriction on the freedom of establishment and the free

movement of capital.

The Authority acknowledges that Iceland may protect

its right to tax gains that accrued while a company was

resident in Iceland. However, Iceland should apply less

restrictive measures to protect this right, for example, by

offering companies the option to defer the payment of

the tax instead of the immediate payment thereof at the

time of relocation.

Commission publishes Action Plan to strengthen the fight against tax fraud and tax evasion

On 6 December 2012, following its earlier

Communication in June 2012, the Commission

presented an Action Plan to strengthen the fight

against fraud and tax evasion. The Commission also

adopted two Recommendations, one on tax havens

and the other on aggressive tax planning, to encourage

Member States to take immediate and coordinated

action on specific pressing problems. The package

contains measures that will have to be implemented

by the Member States in order to have direct effect on

European taxpayers.

The Action Plan contains an extensive package of

recommended measures against tax fraud and tax

evasion. Most of these concern enhanced administrative

procedures and co-operation between revenue

authorities and measures in the field of tax compliance.

There are, however, also some proposals that could

have much wider implications outside the area of fraud

and tax evasion. These proposed measures are the

following.

Commission requests the Netherlands to amend legislation on cross-border pensions

On 21 November 2012, the Commission formally

requested the Netherlands to change three rules

related to the taxation of cross-border pensions. The

Commission’s request takes the form of a reasoned

opinion. In the absence of a satisfactory response within

two months, the Commission may decide to refer the

matter to the CJ.

According to the legislation at issue, first, foreign

pension service providers have to give guarantees

to the Netherlands authorities if they transfer

pensions abroad or if they want to do business on the

Netherlands market. Second, employees have to give

guarantees if their pensions are transferred abroad

or if they want to buy pension services abroad. Third,

transfers of pensions to foreign providers by workers

employed outside the Netherlands are only exempt from

tax if the taxpayer provides a guarantee or if foreign

providers assume the responsibility for any tax claims.

None of these conditions has to be met by Netherlands

pension service providers.

The Commission considers that these rules constitute

restrictions on the free movement of citizens and

workers, the freedom of establishment, the freedom

to provide services and the free movement of capital

(Articles 21, 45, 49, 56 and 63 TFEU).

EFTA Surveillance Authority requests Iceland to amend discriminatory taxation of unrealized capital gains in case of cross-border mergers

On 28 November 2012, the EFTA Surveillance Authority

(Authority) sent Iceland a reasoned opinion regarding

its legislation which taxes unrealized capital gains of

companies that merge cross-border. This is the second

step in an infringement procedure. The Authority may

bring the matter before the EFTA Court if Iceland fails to

comply with the reasoned opinion within two months.

49

include such countries in national blacklists and

to renegotiate, suspend, or terminate existing tax

treaties with them.

• The Commission will propose, in the course of 2013,

a revision of the Parent-Subsidiary Directive in

order to allow effective measures by Member States

against double non-taxation in the area of hybrid

loan structures.

It should be noted that, for the time being, the points

mentioned above are no more than recommendations

from the Commission to the Member States. Member

States will have to implement the proposed measures

before they can have any direct effect on European

taxpayers.

Developments in the Netherlands: Supreme Court refers preliminary question to CJ on whether dividend tax withheld on distributions to Netherlands Antilles is in breach of the free movement of capital with third countries

On 23 December 2011, the Supreme Court referred a

question to the CJ for a preliminary ruling on whether

dividend tax withheld on dividends distributed to

Netherlands Antilles is in breach of the free movement

of capital with third countries set out in Article 63 TFEU.

The case (in fact, two joined cases) involved

Netherlands BVs that had distributed dividend to their

Antillean parent companies (majority situations). In

a domestic situation, an exemption from dividend

tax would have applied, whereas in the cross-border

situation, 8.3% of dividend tax is to be withheld based

on the special tax agreement between the Antilles and

the Netherlands (‘BRK’). This rate was fixed in 2002;

prior to 2002 it was lower. The (former) Netherlands

Antilles qualify as Overseas Territory under EU law.

According to the Supreme Court, doubts arose in a

number of respects in this case, therefore a reference

to the CJ for a preliminary ruling was considered

necessary. The Supreme Court noted that in the Prunus

• Member States are urged to introduce a subject-

to-tax requirement both in their unilateral double

tax relief rules and in their bilateral tax treaties,

whereby income is only to be allocated to a certain

State when this income is actually taxed there.

The other State would thus retain the right to tax in

situations where there would otherwise be double

non taxation.

• Member States are encouraged to incorporate the

following General Anti-Abuse Rule (GAAR) in their

national legislation.

An artificial arrangement or an artificial series of

arrangements which has been put into place for the

essential purpose of avoiding taxation and leads to

a tax benefit shall be ignored. National authorities

shall treat these arrangements for tax purposes by

reference to their economic substance.

The recommendation contains an explanatory

section on how this provision is to be applied and

interpreted. The Commission further proposes to

review the anti-abuse provisions in the Interest and

Royalty Directive, the Merger Directive and the

Parent-Subsidiary Directive to bring them into line

with the GAAR.

• The Commission recommends measures intended

to encourage third countries to apply minimum

standards of good governance in tax matters. A

third (non-EU) country only complies with these

minimum standards where: “(a) it has adopted legal,

regulatory and administrative measures intended

to comply with detailed standards of transparency

and exchange of information and effectively applies

those measures, and (b) it does not operate harmful

tax measures in the area of business taxation’. The

recommendation contains a detailed definition of

the term harmful for this purpose. Broadly speaking,

a measure is considered harmful if it provides for

a significantly lower effective level of taxation,

including zero taxation, than those levels which

generally apply in the third country. Such a level of

taxation may operate by virtue of the nominal tax

rate, the tax base or any other relevant factor. If third

countries do not comply with the minimum standard

of good governance, the Commission proposes to

50

2b. If the decrease of the taxation in the Netherlands

Antilles also has to be taken into account, does also

the Netherlands Antillean ruling practice of the past

have to be taken into account, as a result of which

prior to 1 January 2002 and also as far back as

1993, the actual tax due on dividends received from

a Netherlands subsidiary was substantially lower

than 8.3%?

Developments in the Netherlands: Supreme Court rules that standstill clause regarding the free movement of capital applies in case of a majority interest

The Netherlands Supreme Court delivered a judgment

on 16 December 2011, in which it ruled that the

standstill clause under Article 64(1) TFEU - laying down

that certain legislation enacted before 1 December 1993

which restricts the free movement of capital in relation

to third countries can be maintained - applied in a case

of a majority interest, irrespective of the fact that the

presence of a direct investment was challenged.

The case is an appeal against the judgment of the Court

of Appeal in Amsterdam of 7 October 2010, in which it

decided that the free movement of capital vis-á-vis third

countries cannot apply in case of a majority interest.

The case involved a Canadian company that held

100% of the shares in a Netherlands BV. This BV had

distributed dividends on which Netherlands dividend

withholding tax was withheld. The BV objected and

appealed against this withholding on the grounds that

the levy was in breach of the free movement of capital

with third countries, given that in a domestic situation,

an exemption from dividend withholding tax would have

applied.

BV argued that the free movement of capital with third

countries applies (or at least that doubt is present)

due to decisions of various courts in Germany and the

UK. These courts decided that the free movement of

capital can apply in majority situations. In addition, a

preliminary ruling has been requested in the follow-up

case (C-384/09), the free movement of capital with

third countries was applied with regard to an Overseas

Territory, but the case involved the relation between an

Overseas Territory of an EU Member State and another

Member State. Previously, the Supreme Court has

taken the position that an Overseas Territory is a third

country in relation to the Member State of which it is

an Overseas Territory. Conversely, Advocate General

Wattel of the Supreme Court has opined in the past that

in such a case, a strict internal situation (not protected

by the EU Treaty) is present. All in all, there were

sufficient reasons for requesting a preliminary ruling. In

addition, this case is also related to the pending follow-

up FII case (C-35/11), where the question whether or

not the free movement of capital can apply in majority

situations, awaits an answer from the CJ.

Regarding the standstill clause under Article 64(1)

TFEU, the Supreme Court raises the question whether

the change in the BRK in 2002 (which involved an

increase of the tax rate) is sufficient to claim that the

contested provision is not protected by the standstill

clause, or whether also the treatment at the level of

the Antilles should be taken into account (leading to

the conclusion that the overall tax burden has not

increased).

In light of the above, the Supreme Court referred the

following questions to the CJ (unofficially translated and

abbreviated):

1. Can an own Overseas Territory be regarded as a

third State for the application of the free movement

of capital, which means that capital movements

between the Member State and its Overseas

Territory are protected by the free movement of

capital with third countries?

2a. If the answer to the first question is in the affirmative,

for the purposes of the standstill clause does the

increase by the Netherlands of the withholding

tax rate from 7.5% to 8.3% have to be taken into

account solely or is also the treatment by the

Netherlands Antilles (a decrease in taxation) to be

considered?

51

proposal for the Common Consolidated Corporate Tax

Base (‘CCCTB’) further.

The Green Paper basically entails a comparison

regarding six particular topics of their respective

corporation tax systems. The Green Paper further

indicates the direction in which both Member States

will seek to converge their systems. The six topics

concerned are the following:

1 tax rate

2 tax grouping concepts

3 revenue/costs, the treatment of dividends and

certain expenses

4 loss compensation

5 depreciation

6 partnerships

The Green Paper is the output of a combined working

group appointed by both governments late 2010.

The objective is to determine the direction of the

convergence, with the intention to take concrete steps

towards reaching convergence by 2013. We also refer

to our more extensive Newsletter on the Green Paper

dated 17 February 2012, which we would be pleased to

forward to you upon request.

Developments in the Netherlands: Bill on deferral of payment of exit tax due approved by Parliament’s Lower House

On 4 December 2012, the Lower House of the

Netherlands Parliament approved the Bill on the deferral

of the payment of exit tax due. This Bill regarding the

implementation of the CJ’s ruling in the case National

Grid Indus (C-371/10) is currently pending before the

Upper House and – if approved – will become effective

with retroactive effect from 29 November 2011.

In National Grid Indus, the CJ ruled that taxation of

unrealized capital gains at the time when an entity

transfers its place of effective management to another

Member State is in itself not precluded by the freedom

of establishment even though future value fluctuations

are not taken into account in the exit State (see EU Tax

FII case (C-35/11), where this matter will be decided by

the CJ.

The Netherlands Supreme Court noted that as the

question whether the free movement of capital can

or cannot apply in case of a majority interest is under

review by the CJ, for purposes of the case at hand, it

would assume the application of the free movement

of capital with third countries. However, thereafter, the

Supreme Court noted that the 100% shareholding in

the BV was a direct investment. BV had argued that

the investment itself was a passive portfolio investment

and that the parent company did not actively involve

itself in decisions at BV level and that, therefore, no

direct investment was involved within the meaning of the

standstill clause. According to the Supreme Court, this

reasoning did not suffice. Within a international group,

the Court deems it impossible that an intermediate

holding company can be considered not having a direct

investment in the subsidiary. Therefore, the standstill

clause applied to the effect that the restriction on the

free movement of capital from a third country was not

precluded.

Apparently, the Supreme Court was of the view that

an acte clair or éclare was present, and dismissed the

appeal of BV.

Developments in Germany and France: Green Paper regarding German-French harmonization of corporation tax; a further step to a common tax base within the EU

On 6 February 2012, the German and French Ministries

of Finance simultaneously issued a Green Paper

with a comparison of their respective corporation tax

systems. The Green Paper further indicates in which

direction both Member States will seek to converge

their corporate tax systems. In this way, these Member

States based at the heart of the European Union with

economies that play a major role in the Union would

establish a standard that can be used as a benchmark

for harmonization by other Member States. It would also

support other initiatives by the Commission in taking its

52

Proceedings of the Netherlands Lower House make

clear that the State Secretary expects that the

infringement procedure started by the Commission

against the Netherlands on this matter (see EU Tax Alert

edition no. 86, December 2010) will not be terminated

until the amended legislation has been adopted.

At the request of the Netherlands Parliament, the

State Secretary will suggest during the hearing of the

infringement case before the CJ a ten or twelve year

period of deferral as an alternative to the collection of

the tax at the moment of realization.

VAT

Council conclusions on the future of VAT

In its meeting of 15 May 2012, the ECOFIN Council

adopted Conclusions on the future of VAT as a follow-

up to the Commission’s Green Paper and recent

Communication on the future of VAT (see EU Tax Alert

editions no. 88, January 2011 and no. 101, January

2012). The Council acknowledged the need to simplify

the current VAT system, to make the VAT system

more efficient, robust and fraud-proof, and to tailor it

to the single market. The Council adopted separate

Conclusions on the priorities for further work highlighting

what it considers the most urgent steps in carrying out

the reform of the VAT system.

Commission adopts Implementing Regulation on one-stop shop schemes

On 13 September 2012, the Commission adopted

Implementing Regulation (EU) No 815/2012 regarding

the special schemes for non-established taxable

persons supplying telecommunications, broadcasting

or electronic services to non-taxable persons. Those

schemes, which will apply as of 1 January 2015, involve

a taxable person established outside the Member State

of consumption declaring the VAT due on relevant

sales in the Member State of consumption via an

Alert edition no. 99, December 2011). However, instead

of the immediate payment of the exit tax due, such entity

should have a possibility to opt for a deferral of payment

under the condition of providing security until actual

realization of the capital gains.

On 14 May 2012, the Bill on the deferral of payment of

the exit tax due, which now appears to be in line with

EU law, was submitted to Parliament and has now been

approved by the Lower House. It is likely that approval

by the Upper House where the Bill is currently pending

will follow. It will enter into force when published in the

Government Gazette, and will have retroactive effect

to 29 November 2011. Compared to the Decree by

the Netherlands State Secretary of Finance issued

earlier (see EU Tax Alert edition no. 102, February

2012) the scope of the deferral has been broadened.

A deferral is not only available in the case of a transfer

of the effective place of management but also in the

case of business restructurings which effectively wind

up all Netherlands activities. The Bill applies also

to businesses of individuals other than substantial

shareholdings or portfolio investments.

Instead of immediate payment, the proposed Bill

provides a taxpayer the option to request an unlimited

deferral at the time of filing the corporate income tax

return. Sufficient securities must be provided to the tax

authorities. To the extent that securities are no longer

provided, the deferral will be terminated and the exit

tax will become immediately due. Furthermore, the

deferral discontinues to the extent a capital gain would

be recognized under Netherlands law. To monitor this

condition, the taxpayer is obliged to file annually an

unofficial corporate income tax return. The deferral

will also be cancelled if the former taxpayer is no

longer a resident of an EU or an EEA country. During

the deferral period, statutory interest will be charged.

As an alternative, the taxpayer can opt for a ten-year

periodic payment of exit tax due. The same events for

cancellation will apply as those for unlimited deferral as

well as the conditions are the same, except for the filing

obligation. As a result, the administrative burden of this

alternative is considerably less.

53

warehousing arrangements applied or that they were

supplied for valuable consideration.

One of its customers, Ghebra NV (Ghebra), stored

petroleum products in VOM’s warehouse. During an

audit, the tax authorities established that Ghebra had

supplied goods for valuable consideration, and that

those goods were released from VOM’s warehouse. As

a result, VAT was due by Ghebra to the tax authorities.

However in the meantime, Ghebra had been declared

insolvent. Based on a national provision, the Belgian

tax authorities, therefore, issued an order for recovery

against VOM for the amount of the VAT owed by

Ghebra. VOM contested this decision on the grounds

that it would be contrary to the principles of legal

certainty and proportionality to hold the warehouse-

keeper jointly and severally liable for VAT owed by the

warehouse user if the warehouse-keeper acted in good

faith. Eventually, preliminary questions were referred to

the CJ.

The CJ ruled that Article 21(3) of the Sixth EU VAT

Directive did not authorize a Member State to hold a

warehouse-keeper other than a customs warehouse-

keeper jointly and severally liable for the VAT owed on

a supply of goods made for valuable consideration,

and released from the warehouse by the owner of the

goods who was liable for the tax on those goods, in

the circumstances where the warehouse-keeper acted

in good faith or where no fault or negligence could be

imputed to him.

CJ rules that Member State may in principle require suppliers to obtain an acknowledgement of receipt of issued correcting invoices (Kraft Foods Polska SA)

On 26 January 2012, the CJ delivered its judgment in

the Kraft Foods Polska SA case (C-588/10).

Kraft Foods Polska SA (KFP), a producer and distributor

of foodstuffs, issued a significant number of invoices and

correcting invoices in the course of its business. The

correcting invoices were issued in respect of discounts,

goods returned or identified errors. KFP often received

electronic interface in the Member State of identification

(one-stop shop). The system requires exchange of

information between the Member States involved. In the

Implementing Regulation, the Commission has adopted

the technical details necessary for such exchange of

information.

Council adopts Regulation for mini One Stop Shop scheme

On 9 October 2012, the Council adopted a Regulation

laying down rules for non-established taxable persons

supplying telecommunication services, broadcasting

services or electronic services to non-taxable persons

(the so-called “mini One Stop Shop”). The Regulation

amends Regulation 282/2011 and will enter into force on

1 January 2015.

Under the mini One Stop Shop, the supplier uses a web

portal in the Member State in which he is registered

for VAT purposes to account for the VAT due in other

Member States on supplies of such services to private

consumers. A scheme is already in operation for non-EU

businesses supplying electronic services.

CJ rules that non-customs warehouse-keeper may not unconditionally be held jointly and severally liable for VAT due by warehouse user (Vlaamse Oliemaatschappij NV)

On 21 December 2011, the CJ delivered its judgment in

the Vlaamse Oliemaatschappij NV case (C-499/10).

Vlaamse Oliemaatschappij NV (VOM) rendered

services to its customers consisting of the unloading,

storing in warehouses and transferring of petroleum

products for its customers. The products were stored

in the warehouses until they were sold to the final

customer. Pursuant to an authorization, VAT suspension

arrangements applied with respect to the goods

deposited in the warehouse. Therefore, VAT became

chargeable on the goods when they were removed from

the warehouse provided that either no other customs

54

he is aware of it and that the transaction in question was

in fact carried out in accordance with the conditions set

out in the correcting invoice.

CJ rules that supply of self-employed lorry drivers qualifies as the supply of staff (ADV Allround Vermittlungs AG)

On 26 January 2012, the CJ delivered its judgment in

the ADV Allround Vermittlungs AG case (C-218/10).

ADV Allround Vermittlungs AG (ADV) is a German

company whose business consisted of the supply of

self-employed lorry drivers to haulage contractors in

Germany and Italy. For the work carried out, the drivers

invoiced ADV which, in its turn, invoiced the haulage

contractors with a mark up of between 8% and 20%.

Initially, ADV did not charge VAT when invoicing Italian

customers. However, the tax office Hamburg-Bergedorf

ruled that that the services rendered by ADV did not

qualify as the supply of staff. In compliance with the

view of the tax office, ADV started charging 16%

German VAT to its Italian customers. When the Italian

customers applied for a refund of the German VAT at the

Federal Central Tax Office, this tax office indicated that

the services rendered by ADV qualified as the supply of

staff and that the services were, therefore, not taxable

in Germany. As a result, the tax office refused to refund

the German VAT to the Italian customers. Subsequently,

the Italian customers refused to keep paying ADV the

German VAT on the invoices. As a result, ADV had to

bear the 16% non-refundable VAT. With its margin being

between 8% and 20%, ADV eventually had to cease

its activities. In the following proceedings, the Finance

Court of Hamburg decided to refer preliminary questions

to the CJ.

According to the CJ, the ‘supply of staff’ as referred to

in the provision of Article 9(2)(e) of the Sixth EU VAT

Directive also includes the supply of self-employed

persons not in the employment of the trader providing

the service.

Moreover, in view of the fact that both the service

provider and the recipient of the services have the

acknowledgments of receipt of correcting invoices with

some delay or did not receive any acknowledgements

of receipt at all. In this regard, KFP submitted a request

to the Polish tax authorities to obtain confirmation that it

could take the correcting invoices into account in its VAT

returns relating to the period during which the correcting

invoices were issued, even when it had not received

acknowledgement of receipt of the correcting invoices.

The Polish tax authorities indicated, however, that it

was required on the basis of national provisions that

an acknowledgement of receipt was received and that

any practical difficulties that KFP might experience in

obtaining such acknowledgements were irrelevant.

In the following proceedings, the Administrative

Court of Warsaw ruled that, unlike the national law,

Articles 73 and 92 of the VAT Directive did not lay

down any requirement to be in possession of an

acknowledgement of receipt, and that the introduction

of such a requirement was contrary to the principles of

VAT neutrality and proportionality. Subsequently, the

Polish Minister of Finance lodged an appeal in cassation

before the Administrative Court of Naczelny, which

decided to refer preliminary questions to the CJ.

The CJ indicated that Member States have a margin

of discretion based on the provisions of Article

90(1) and Article 273 of the EU VAT Directive to lay

down rules in order to ensure that, where the price

is reduced after the supply has taken place, the

taxable amount is reduced accordingly. On the basis

of Article 90(1) of the EU VAT Directive, Member

States may, according to the CJ, require suppliers

to be in possession of acknowledgement of receipt

of a correcting invoice in order for them to be entitled

to reduce the taxable amount as set out in the initial

invoice. Moreover, the CJ ruled that the principles of

VAT neutrality and proportionality in principle do not

preclude such a requirement. However, where it is

impossible or excessively difficult for the supplier to

obtain acknowledgement of receipt within a reasonable

period of time, the CJ ruled that the supplier should be

allowed to establish by other means that he has taken

all the steps necessary in the circumstances of the case

to satisfy himself that the purchaser of the goods or

services is in possession of the correcting invoice, that

55

tax authorities, the deduction made from the annual

consideration to compensate for the entertainment

and promotion expenses had to be classified as an

operating subsidy. Considering that the subsidy was

not subject to VAT, the tax authorities claimed that the

catering and entertainment activities had to be treated

as mixed activities that only gave partial entitlement to

deduct VAT. In the following proceedings, Varzim Sol

claimed that even if the amount had to be classified

as a subsidy, it could not affect the deductible amount

because the company applied the method of actual use

for determining the amount of deductible VAT.

The CJ ruled that Varzim Sol was authorized, on the

basis of the national rules implementing Article 17(5)

of the Sixth EU VAT Directive, to deduct input VAT on

the basis of the method of actual use. Considering

that the goods and services were used for VAT taxable

activities only, the company did not have to take the

untaxed ‘subsidy’ into account for determining the

amount of deductible input VAT. According to the CJ, the

application of Article 17(5) of the Sixth EU VAT Directive

precluded the applicability of Article 19 of the Sixth EU

VAT Directive. As a result, the latter provision could not

limit the right for Varzim Sol to make deduction for the

activities in the entertainment and catering sector.

CJ rules that flat-rate method for calculating VAT payable in respect of private use of goods has to be proportional to that actual private use (Van Laarhoven)

On 16 February 2012, the CJ delivered its judgment in

the Van Laarhoven case (C-594/10).

Mr. Van Laarhoven was a tax consultant in the

Netherlands. In 2006 two cars, which were used for

both business and private purposes, formed part of the

business assets. In accordance with Netherlands VAT

law, Mr. Van Laarhoven deducted VAT on the acquisition

of the vehicles as if they were used exclusively for

business purposes. Subsequently, Mr. Van Laarhoven

included a correction in respect of the private use in

the last VAT return of the book year. As prescribed by

possibility to defend their rights, not only before the

administrative authorities but also before the national

courts, the CJ ruled that Member States are not required

on the basis of Articles 17(1), 17(2)(a), 17(3)(a) and

18(1)(a) of the Sixth EU VAT Directive to amend their

domestic procedural rules in such a way as to ensure

that the taxability and liability to VAT of a service are

assessed in a consistent way in relation to the provider

and in relation to the recipient of that service, even

though they fall within the jurisdiction of different tax

authorities.

Those provisions, according to the CJ, do require

Member States to adopt measures that are necessary

to ensure that VAT is collected accurately and that the

principle of fiscal neutrality is respected.

According to the CJ, untaxed ‘subsidy’ does not have to be taken into account when determining the amount of deductible input VAT based on the method of actual use (Varzim Sol)

On 16 February 2012, the CJ delivered its judgment in

the Varzim Sol case (C-25/11).

Varzim Sol operated a casino in Portugal. On the

basis of the contract granting the concession, the

company was required to carry out a number of

artistic and cultural activities, as well as to participate

in the promotion of the area where the casino was

located. Besides these activities, the company carried

out activities in the gaming sector, the catering and

entertainment sector, and the administrative and finance

sector. Under the applicable rules and the concession

contract, Varzim Sol had to pay an annual consideration

to the Portuguese State based on the income gained

from the gaming sector. From this annual consideration,

the company was allowed to deduct a part of the

expenses incurred to fulfil its entertainment and tourism

promotion obligations.

Further to an audit, the tax authorities challenged the

method used by Varzim Sol to calculate the deductible

amount for the catering and entertainment sector

and imposed VAT assessments. According to the

56

as not having been used for the purposes of EON’s

economic activities, the tax authorities refused the

deduction of the incurred VAT. EON brought the case

before the Administrative Court of Varna, which referred

preliminary questions to the CJ.

The CJ ruled that a leased motor vehicle has to be

regarded to be used for the purposes of VAT taxable

transactions if there is a direct and immediate link

between the use of that vehicle and the taxable

transactions. In this regard, the right to deduct arises

and the existence of such a link should be taken into

account, according to the CJ, when the period to which

each payment relates expires.

Moreover, the CJ ruled that the referring court has to

assess whether the vehicle leased under the financial

leasing contract was allocated fully or only partly to the

business assets of the undertaking. According to the

CJ, the referring court can determine the scope of the

right to deduct on the basis of that assessment. In this

regard, the CJ indicated that a motor vehicle leased

under a financial leasing contract and placed in the

category of capital goods, is to be regarded as used

for the purposes of taxable transactions if the vehicle is

allocated entirely to the business assets. Any use of the

vehicle for other than business purposes is in that case

to be regarded as a supply of services carried out for

consideration.

Finally, the CJ ruled that Articles 168 and 176 of the VAT

Directive do not preclude a national provision stipulating

that any right to deduct is excluded where goods and

services are intended to be supplied free of charge or

for activities outside the scope of a taxable person’s

economic activity, provided that it does not concern

capital goods allocated to the business assets of the

undertaking.

national VAT law, this correction was calculated on the

basis of a fixed percentage of a flat-rate amount of

costs which, for income tax purposes, were deemed

not to have been incurred for the business. The flat-rate

amount was itself fixed on the basis of a percentage

of the list price or the value of each vehicle. According

to Mr. Van Laarhoven, such a system was precluded

by EU VAT law. Eventually, the case ended up before

the Netherlands Supreme Court which decided to refer

preliminary questions to the CJ.

According to the CJ, Member States have a certain

margin of discretion which permits them, to a certain

extent, to make use of flat-rate methods for calculating

the amount of VAT payable. Those methods have to

be proportional, however, to the extent of the actual

private use of the goods. As a result, the CJ ruled that

national provisions, which do not take the actual private

use of the goods into account on a proportional basis,

are precluded by Article 6(2)(a) read in conjunction with

Article 11A(1)(c) of the Sixth EU VAT Directive.

Finally, the CJ ruled that the referring court will have

to interpret the national rules in the manner most

consistent with the wording and purpose of Article

11A(1)(c) of the Sixth EU VAT Directive with a view to

achieving the results sought by that provision. According

to the CJ, the referring court should therefore set aside

any contrary provision of national law in order to achieve

an outcome compatible with EU VAT law.

CJ clarifies rules for deduction of incurred input VAT on the lease of vehicles (Eon Aset Menidjmunt OOD)

On 16 February 2012, the CJ delivered its judgment in

the Eon Aset Menidjmunt OOD case (C-118/11).

Eon Aset Menidjmunt (EON), a Bulgarian company,

had entered into two vehicle leasing contracts, one of

which being a financial leasing contract. The leased

vehicles were used to provide its managing director with

transport between his home and his workplace. EON

deducted the VAT incurred in respect of the leases.

Taking the view that the vehicles had to be regarded

57

partnership should be entitled to deduct the VAT in

order to ensure fiscal neutrality. In this regard, the CJ

concluded that Article 169 of the EU VAT Directive

precludes national legislation, which does not permit

the partners nor the partnership to deduct the VAT on

investment costs incurred by the partners before the

creation and VAT identification of a partnership, when

the investments were made for the purposes of and with

the view to economic activities.

In respect of the non-compliance with the formal invoice

requirements, the CJ ruled that the material conditions

for the right to deduct had been fulfilled, because

the stone quarry was acquired with the purpose of

using it for VAT taxable activities. According to the CJ,

compliance with a purely formal obligation could not

be required in the case at hand, because that would

not be in line with the principle of VAT neutrality. The

CJ, therefore, concluded that Articles 168 and 178(a)

of the EU VAT Directive precluded national legislation

that did not allow the deduction of input VAT by a

partnership, when the invoice had been drawn up before

the registration and identification of that partnership for

VAT purposes, and had been issued in the name of the

partners of that partnership.

CJ clarifies rules for deductibility of VAT on immovable property in relation to the intended use of that property (Klub)

On 22 March 2012, the CJ delivered its judgment in

the Klub case (C-153/11). Klub operated a hotel in

Varna, Bulgaria. In 2009, Klub purchased a maisonette

in Sofia. The tax authorities denied the deduction of

VAT incurrerd in respect of the mainsonette on the

grounds that it was used only for residential use and

not for business use. Klub maintained, however, that

the immovable property was intended for business

use, which was use for business meetings with tour

operators. The Administrative Court of Varna considered

that the national case law on such matters was

contradictory. Part of the national case law accepted

that input VAT on immovable property was deductible if

the use of that property for economic activities could be

established after it had been put into use, whereas other

CJ rules that input VAT incurred by partners before formal registration of partnership is deductible (Polski Trawertyn)

On 1 March 2012, the CJ delivered its judgment in the

case Polski Trawertyn (C-280/10). The case concerned

the deductibility of input VAT on costs relating to

the acquisition of an opencast stone quarry, and on

costs relating to services rendered by a notary for the

founding of a partnership. The Polish tax authorities

took the view that the partnership was not allowed to

deduct the VAT on the acquisition of the stone quarry,

because the acquirer was not the partnership itself

but the natural persons who, after the partnership was

founded, contributed the immovable property in kind to

the partnership. In respect of the invoice issued by the

notary, the tax authorities were of the opinion that the

partnership could not deduct the VAT either, because

the invoice had been issued before the date on which

the partnership had formally been registered for VAT

purposes. Eventually the dispute ended up before

the Administrative Court of Naczelny, which referred

preliminary questions to the CJ.

In its preliminary remarks, the CJ concluded that

Polish national legislation prevented the partners from

deducting the VAT on the acquisition of the quarry,

because it was used for the contribution of capital

goods, being a VAT exempt transaction. As a result, the

national legislation prevented not only the partnership

but also the partners from deducting the VAT. In this

regard, the CJ ruled that partners of a partnership,

before registration and identification of that partnership

for VAT, may be considered to be taxable persons

for VAT purposes and are, in principle, entitled to

deduct input VAT on investments necessary for future

exploitation of immovable goods by the partnership.

According to the CJ, the fact that the contribution of the

immovable property was VAT exempt, could not have

the consequence that the partners were confronted

with non-deductibility of the VAT in the context of their

economic activity.

The CJ also ruled that if the partners were unable to

recover the VAT on the basis of national law, that the

58

this was in line with Article 17(2)(b) of the Sixth EU VAT

Directive and decided to refer preliminary questions to

the CJ.

According to the CJ, if import VAT were not reclaimable

before actually having been paid, it would make taxable

persons subject for a certain period to an economic

burden which should not be theirs, and which would

be contrary to the specific aim of the rules governing

deduction. Moreover, the CJ indicated that there is no

heightened risk of tax evasion or abuse in the case of

an importation taking into account that it is a physical

act and can be confirmed by the competent authorities

by the presence of the goods at customs. Consequently,

the CJ ruled that the right to deduct VAT on importation

cannot, in principle, be made conditional upon the actual

prior payment of that VAT.

CJ rules that private use of a building forming part of the business assets may not be qualified as letting when the characteristics of letting are not present (BLM)

On 29 March 2012, the CJ delivered its judgment in the

BLM case (C-436/10).

Mr and Mrs Losfeld had a building constructed, for the

construction of which they opted to be liable to VAT.

Subsequently, they contributed a usufructuary right of 20

years over the building to BLM, a company established

by Messrs Bertrand and Bernard Losfeld. The VAT

charged on the contribution was deducted by BLM. In

view of the fact that the building was only partly used

for the activities of BLM, and that Mr Losfeld and Mrs

Losfeld lived in the building with their children, the tax

authorities claimed that BLM was not entitled to deduct

the VAT insofar as it related to the private use of the

building. The tax authorities imposed a VAT assessment

including a fine and interest.

In the following proceedings, the tax authorities claimed

that BLM had to be considered to render VAT exempt

letting services to Mr Losfeld and Mrs Losfeld. In this

regard, the tax authorities took the view that the Seeling

case (C-269/00), in which the CJ ruled that the private

national case law required that the use for economic

activities was demonstrated before imposition of the

tax assessment. Therefore, the Administrative Court of

Varna decided to refer the matter to the CJ.

According to the CJ, it is for the referring Court to decide

whether Klub acquired the capital goods for the purpose

of its economic activities. In this regard, the CJ ruled

that the referring Court may take into account that active

steps had to be taken on the basis of national law to

carry out alterations and to obtain the authorizations

required for the business use of the asset. Should

the referring Court come to the conclusion that the

capital goods had been acquired for the purpose of the

economic activities, then Klub was entitled to deduct

the incurred input VAT on the acquisition in full, even if it

was not used immediately for those economic activities.

Moreover, the CJ ruled that the tax authorities may claim

with retrospective effect repayment of sums deducted in

situations of fraud or abuse. Whether or not there was

fraudulent practice was, according to the CJ, also for the

referring Court to decide.

CJ rules that deduction of import VAT cannot be made conditional upon actual prior payment (Véléclair)

On 29 March 2012, the CJ delivered its judgment in the

Véléclair case (C-414/10). Véléclair imported bicycles

into France declaring that those bicycles came from

Vietnam. The French customs considered, however, that

the bicycles originated from China. As a result, Véléclair

was held subject to customs duties and anti-dumping

duties. Those duties themselves were liable to VAT.

Véléclair did not pay the VAT to the tax authorities.

The official receiver held that the claim that the tax

authorities held against the company had lapsed,

because it had not been definitively declared within

12 months of the publication of Véléclair’s mandatory

administrative records. Véléclair did, however, apply

for a refund of the VAT, which was denied. The tax

authorities claimed that the deductibility of the VAT on

importation was conditional upon the actual payment

of that VAT. The referring court was not sure whether

59

The second case concerned Provadinvest, a company

that sold two plots of land to be used for greenhouses

to one of its partners and one plot to its representative.

The plots were sold with the structures erected upon

them, and with all the improvements and permanent

crops on them. Provadinvest did not charge VAT on

the sale of the plots. According to the tax authorities,

the sale of the immovable property included both a

VAT exempt supply of land and a taxable supply of

installations, improvements and permanent crops. As

the sales were between connected persons, the tax

authorities established the taxable amount on the basis

of the open market value, which was higher than the

sum actually paid.

In both proceedings, the Administrative Court of

Varna decided to refer preliminary questions to the CJ

regarding the compatibility of the national provisions

with Article 80(1) of the EU VAT Directive, which allows

Member States under certain conditions to determine

the taxable amount of a transaction at its open market

value.

The CJ ruled that the conditions laid down in Article

80(1) of the EU VAT Directive are exhaustive. According

to the CJ, national legislation cannot, therefore, provide

on the basis of that provision that the taxable amount is

the open market value of the transaction in other cases

than those listed in the provision, in particular where

the supplier or acquirer has a full right to deduct input

VAT. Regarding the question whether the provision of

Article 80(1) of the EU VAT Directive has direct effect,

the CJ indicated that if the national rules correspond

to one of the situations set out in Article 80(1) of the

EU VAT Directive, the Member State must be regarded

as having made use of the option provided for in that

provision. Moreover, the CJ ruled that companies have

the right to rely directly on the provision of Article 80(1)

EU VAT Directive, insofar as national provisions are not

in conformity with that provision. Should that situation

arise then, according to the CJ, the national court had to

disapply the national provisions that are contravention of

that provision.

use by a natural person of a building forming part of

the business assets of that person did not qualify as

a VAT exempt letting service when the characteristics

of letting were not present, did not apply. According

to the tax authorities, the Seeling case only applied to

a taxable person that is a natural person and not to

a taxable person that is a legal person. The referring

court decided to ask the CJ whether this was in line

with Articles 6(2)(a) and 13(B)(b) of the Sixth EU VAT

Directive.

The CJ ruled that it cannot be derived from the Seeling

case that the case only applies to the situation where

the taxable person is a natural person. According to

the CJ, the rules derived from that case also apply in

the case where the taxable person is a legal person.

In accordance with the Seeling case the CJ, therefore,

ruled that the Sixth EU VAT Directive precludes a

Member State from treating the private use of a building,

by the staff of a taxable person which is a legal person,

as the leasing or letting of immovable property, when the

characteristics of leasing or letting are not present.

CJ clarifies the circumstances under which the taxable amount of transactions can be set at their open market value (Balkan and Sea Properties)

On 26 April 2012, the CJ delivered its judgment in the

joined cases Balkan and Sea Properties (C-621/10)

and Provadinvest (C-129/11). The first case concerned

the Bulgarian company, Balkan and Sea Properties,

which bought immovable property from an affiliated

company, and deducted the VAT charged on the

immovable property. In view of the fact that it concerned

a transaction between connected persons, the tax

authorities established the taxable amount on the open

market value, which was lower than the actual sales

price. In respect of the VAT calculated on the difference

between the sales price and the open market value,

the tax authorities took the view that the VAT had been

incorrectly invoiced, and that it was not deductible by

Balkan and Sea Properties.

60

out transactions falling within the special scheme for

travel agents in Article 306 of the EU VAT Directive.

CJ rules on VAT treatment of telecommunications services (Lebara)

On 3 May 2012, the CJ delivered a judgment concerning

the VAT treatment of transactions in new technology

sectors, namely telecommunication services, in the

Lebara case (C-520/10). Lebara, a UK company,

provided telecommunications services. In this regard,

the company sold telephone cards through a network of

distributors in various Member States, who in turn, sold

those cards to end users in those Member States. The

end users were able to use the telephone cards to make

calls to third countries at cheap rates.

The telephone cards sold by Lebara displayed the

Lebara brand name, the face value of the card, a local

access number and a PIN code for making a telephone

call. When a user dialled the local access number, the

call would be picked up by a local telecommunications

services operator with whom Lebara had entered

into an agreement. The local telecommunications

services operator routed the telephone call to the

telephone switchboard of Lebara in the UK. After

entering the PIN code, the user would then be able to

dial the international number he wished to call. The

call was subsequently routed to its final destination by

international telecommunications service providers with

whom Lebara had also entered into agreements.

The distributors bought the telephone cards from Lebara

below their face value, and resold those cards to the

end users. When doing so, the distributors acted in

their own name and, therefore, not as agents of Lebara.

The resale price was neither known nor controlled by

Lebara. Lebara did not account for VAT on the sale of

the telephone cards to distributors taking the view that it

concerned a supply of telecommunications services that

took place in the Member State in which the distributor

was established, and that the distributor had to account

for the VAT on the services in accordance with the

reverse charge mechanism. According to Lebara, the

CJ declares that VAT is not due on costs or amounts which could but have not actually been charged (Connoisseur Belgium BVBA)

On 9 December 2011, the CJ issued an Order in the

case of Connoisseur Belgium BVBA (C-69/11).

Connoisseur Belgium BVBA, a Belgian company, hired

out pleasure craft to an Irish company. On the basis

of an agreement between the parties, Connoisseur

Belgium BVBA had the possibility to charge certain

costs to the Irish company. In view of the fact that

some of the costs had not been charged, the Belgian

tax authorities took the view that the contract had not

been applied in the correct manner and issued a VAT

assessment. In the following proceedings, the Belgian

court of first instance in Bruges referred preliminary

questions to the CJ. By its Order, the CJ declared

that VAT is not due on costs or amounts which could

contractually have been charged to the other contracting

party but which had not been so charged.

CJ declares that a transport company which merely carries out the transport of persons does not qualify as a travel agency (Star Coaches)

Star Coaches is engaged in the transport of persons

by coach in the Czech Republic and between Member

States. Its customers are exclusively travel agents

established in the Czech Republic. Apart from the

transport services, Star Couches does not provide

any other tourist services. The tax authorities took the

view, however, that the company should have applied

the special scheme for travel agents. The Supreme

Administrative Court decided to refer preliminary

questions to the CJ.

The CJ considered that the answer to the question

raised by the referring court could be clearly deduced

from existing case law and therefore declared by Order

of the Court of 1 March 2012 (C-220/11) that a transport

company which merely carries out the transport of

persons by providing coach transport to travel agents

and does not provide any other services such as

accommodation, tour guiding or advice does not carry

61

distributor could not be regarded as a transfer of the

remuneration paid by the end user, thereby creating a

direct link between Lebara and the end user.

CJ rules that irregularities by supplier in principle cannot lead to refusal of deducting input VAT (Mahagében and Péter Dávid)

On 21 June 2012, the CJ gave its decision in the joined

cases Mahagében and Dávid (C-80/11 and C-142/11).

In both cases, the CJ had to rule on the right to deduct

input VAT for a receiver of invoices in situations in which

some irregularities occurred from the side of the issuers

of the invoices.

In case C-80/11, Mahagében Kft, a Hungarian taxpayer,

deducted input VAT that was charged to it on invoices

for the supply of acacia logs. The Hungarian tax

authorities refused the right to deduct input VAT arguing

that an audit at the issuer of the invoices, the deemed

supplier of the acacia logs, led to the conclusion that

the issuer of the invoices could not have supplied the

logs, as from the bookkeeping of the supplier it could

not be derived that the supplier had possession of

the logs. Furthermore, the supplier could not produce

further evidence of the supplies and therefore, the actual

existence of the supplies was in doubt. Finally, the tax

authorities also accused Mahagében of not checking

the tax status of the issuer of the invoice and of not

checking whether or not the supplier of the invoices had

complied with its obligations to declare and remit VAT.

In case C-421/11, Péter Dávid, a Hungarian contractor,

carried out several construction works. In order to

be able to perform the activities, Dávid contracted

subcontractors. The VAT invoiced by the subcontractors

was deducted by Dávid. The Hungarian tax authorities

conducted tax audits at the two subcontractors. One

subcontractor seemed to have no employees or

materials to actually perform the invoiced services

and had only copied an invoice from a third party, who

also had no employees or adequate materials. The

other subcontractor seemed to be in liquidation and

there were no persons available to be contacted for

actual use by the telephone cards by the end users did

not entail a supply by Lebara to those end users.

The Commissioners for Her Majesty’s Revenue and

Customs (HMRC) took the view, however, that Lebara

rendered two services. The first being the sale of the

cards to the distributors, and the second being the

actual use by the telephone cards by the end users.

Moreover, HMRC took the view that Member States

were free to tax either of those services, and decided

to tax the actual use by the end users. HMRC therefore

imposed a VAT assessment on Lebara. The UK VAT

due was calculated on the basis of the amounts paid

by the distributors to Lebara. Lebara appealed against

that VAT assessment before the First-Tier Tribunal,

which Court considered that the correct VAT treatment

was dependent on the interpretation of EU VAT law, and

therefore, decided to refer preliminary questions to the

CJ.

According to the CJ, it had to be borne in mind that

Lebara received only one actual payment in the course

of supplying its telecommunication services. As such,

Lebara could not be regarded as having carried out two

supplies of services for consideration, one being to the

distributor and one being to the end user. Moreover, the

CJ decided that the legal relationship existed between

Lebara and the distributors, and that Lebara transferred

the right to make use of the infrastructure for making

international telephone calls to those distributors. As

a result, the CJ ruled that Lebara supplied services

to the distributors, which services qualified as

telecommunications services, given that article 9(2)

(e) of the Sixth EU VAT Directive also covered services

relating to the transmission.

Moreover, the CJ ruled that the payments made by

the distributors to Lebara could not be considered a

payment by the end user to Lebara. This because the

distributor sold the telephone cards in its own name and

on its own behalf, and because the amount that the end

user actually paid was not necessarily the same as the

amount paid by the distributor to Lebara. Moreover, the

identity of the end user was not necessarily known when

the payment by the distributor to Lebara was made. As

a result, the CJ ruled that the payment to Lebara by the

62

on the ground that the taxpayer, reclaiming the input

VAT, had no other document, than the invoice, that could

prove that the issuer acted legitimately while all other

material and formal requirements for a refund for the

taxpayer were met.

Time limit of six months for VAT refund requests by non-established taxpayers is mandatory (Elsacom)

On 21 June 2012, the CJ rendered its judgment in the

Elsacom case (C-294/11).

Elsacom NV, a Dutch taxpayer, submitted a request

for a refund of Italian VAT under the Eighth EU VAT

Directive to the Italian tax authorities. The request

concerned VAT paid to suppliers by Elsacom NV in 1999

and was submitted on 27 July 2000. The Italian tax

authorities denied the request arguing that, based on

Article 7(1) of the Eight EU VAT Directive, the time limit

for submitting such refund requests was six months after

the year in which the VAT was charged to the taxpayer.

Elsacom NV did not agree with this denial and went

to the Provincial Court of Rome. The Provincial Court

agreed with Elsacom NV and decided that the time limit

of six months as mentioned in Article 7(1) of the Eighth

EU VAT Directive was not mandatory but indicative.

In the second appeal of the Italian tax authorities, the

Italian Supreme Court decided to ask the CJ for a

preliminary ruling on the question whether or not the

time limit of six months provided by the Eight EU VAT

Directive was a mandatory limit or not.

Before the CJ, Elsacom NV first argued that the

question referred by the Italian Supreme Court was

inadmissible as the provision to be dealt with in the

main proceeding was a matter of national law and not

EU law. In its judgment, the CJ declared that it is in

principle obliged to answer preliminary questions if the

questions relate to the interpretation of EU law. As the

case at hand deals with the interpretation of Article 7(1)

of the Eighth EU VAT Directive, this criterion is met.

As for the question in the main proceedings, the CJ

considered that an indicative character of the time limit

in the Eighth EU VAT Directive would undermine the

further details, nor could the liquidator provide any

documents proving that the subcontractor had actually

performed services to Dávid. Based on the tax audits

at the subcontractors, the tax authorities doubted if

actual services, and if so which services and for what

price, were supplied to Dávid. Furthermore, the tax

authorities argued that Dávid had not taken the required

precautions. Consequently, the tax authorities denied

the VAT refund.

Mahagében and Dávid went to court and the referring

courts stayed the procedures and decided to ask

preliminary questions of the CJ. The referring courts

inquired if the right to deduct input VAT could be rejected

if the taxpayer did not have any other document, than

the invoice, proving that the issuer of the invoice owned

the goods and supplied or transported the goods to the

taxpayer. Furthermore, the question arose whether or

not the Hungarian VAT legislation was in conformity

with the principle of neutrality and the principle of

proportionality if the taxpayer, in order to effectuate its

right to deduct input VAT, had to prove that the issuer

of an invoice qualified as a taxpayer, that the issuer of

the invoice had handled legitimately, that the issuer had

bought the goods and that the issuer of the invoice had

complied with all its VAT obligations such as filing VAT

returns, declaring VAT and actually remitting VAT due.

In its judgment, the CJ declared that the Hungarian VAT

practice is not in line with the EU VAT Directive when

that practice refuses to taxpayers the right to deduct

input VAT relating to services rendered to them, based

on the argument that the issuer of the invoice, or one

of its subcontractors, committed irregularities while the

tax authorities did not have to prove that the taxpayer,

whose right to deduct input VAT is rejected, knew or had

to know that its incoming services were part of a fraud

by the issuer or another party. Moreover, the CJ ruled

that a national practice rejecting the right to deduct input

VAT on the ground that the taxpayer did not investigate

whether or not the issuer of the invoice actually qualified

as taxpayer, owned the goods, could supply the goods

and fulfilled all its obligations under the VAT legislation,

is not in line with the provisions of the EU VAT Directive.

Also not in line with the EU VAT Directive is a national

practice that rejects the right to deduct input VAT based

63

On the basis of settled case law, the CJ indicated that

the VAT exemption of Article 13(B)(d)(5) of the Sixth EU

VAT Directive refers to transactions which are liable to

create, alter or extinguish parties’ rights and obligations

in respect of shares. In this regard, the CJ ruled that,

irrespective of any intentions, the transactions that

had taken place had to be regarded as transactions

in shares. Moreover, the activities performed by

DTZ Zadelhoff consisted, according to the CJ, of the

‘negotiation’ in shares within the meaning of the VAT

exemption.

Finally, the CJ considered that the exception to the

exemption, as indicated in the second indent of Article

13(B)(d)(5) of the Sixth EU VAT Directive, only applies

if the Member State has made use of the option of

article 5(3)(c) of the Sixth EU VAT Directive to regard

shares, which give the holder the right of ownership or

possession over immovable property or part thereof, as

tangible property. In view of the fact that the Netherlands

did not make use of that option, the CJ ruled that the

exception to the exemption did not apply.

CJ rules on time limits and penalties for belated declaration and deduction of acquisition VAT (EMS-Bulgaria Transport)

On 12 July 2012, the CJ rendered its judgment in the

case EMS-Bulgaria Transport (C-284/11).

On 14 November 2008, the Bulgarian company EMS-

Bulgaria Transport OOD (‘EMS’) purchased second-

hand lorries and traction vehicles from a Spanish

company. The Spanish supplier issued invoices to EMS

and reported intra-Community supplies in its sales

listings. After having applied for a VAT registration on 22

December 2008, which was carried out on 12 January

2009, EMS declared and deducted the VAT on the intra-

Community acquisitions in June 2009.

The tax authorities considered that the settlement

of the VAT on the intra-Community acquisitions had

been accounted for in June 2009 and not in November

2008. Because of the delay, the tax authorities decided

aim of that Directive, which is the harmonization of the

rules for refund of foreign VAT in the EU. If the time limit

were only indicative, the Member States could easily still

determine their own time limits. Furthermore, it would

open the possibility that in Member States that refer in

their national legislation only to the indicative rule of the

Directive effectively no time limit would be applicable.

That would conflict with the principle of legal certainty.

Based on these considerations the CJ ruled that the

time limit of six months has to be interpreted as being

mandatory.

CJ rules on scope of VAT exemption for transactions in shares for services rendered by real estate brokerage (DTZ Zadelhoff)

On 5 July 2012, the CJ delivered its judgment in the

case DTZ Zadelhoff (C-259/11).

DTZ Zadelhoff, a real estate brokerage and consultancy

business, was instructed by clients to find prospective

purchasers for real estate situated in the Netherlands.

The clients indirectly held the shares in the companies

that owned and operated the real estate. Eventually,

DTZ Zadelhoff found purchasers to whom the shares

were sold and transferred.

DTZ Zadelhoff did not charge any VAT on the services

rendered to its clients in respect of the finding of

the buyers of the real estate. It considered that the

services were either covered by the VAT exemption

of Article 13(B)(d)(5) of the Sixth EU VAT Directive for

transactions in shares or not taxable in the Netherlands

if the client was not established in the Netherlands. The

Netherlands tax authorities took the position, however,

that the exemption was not applicable and that the

services, being connected to real estate, were deemed

to have taken place in the Netherlands. As a result, a

VAT assessment was issued to DTZ Zadelhoff. In the

following proceedings, the case ended up before the

Netherlands Supreme Court, which decided to refer

preliminary questions to the CJ regarding the scope of

the VAT exemption for transactions in shares.

64

Komen’), which had acquired apartment rights to

retail premises in a shopping mall. With a view to the

transformation of the immovable property into a new

building, various demolition works had already been

carried out at the request and for the account of the

vendor prior to the sale of the retail premises to J.J.

Komen. The renovation and transformation work was

subsequently continued by J.J. Komen, which eventually

resulted in the construction of a new building.

Taking the view that the immovable property did not

concern a new building at the time of the supply, the

Netherlands tax authorities imposed an assessment for

real estate transfer tax to J.J. Komen on account of the

acquisition of the immovable property. J.J. Komen was

of the view, however, that no real estate transfer tax was

due because the transfer of the immovable property was

subject to VAT. Eventually the case ended up before

the Netherlands Supreme Court, which decided to refer

preliminary questions to the CJ. In the light of the recent

case Don Bosco Onroerend Goed (C-461/08), the

Supreme Court wanted to ascertain whether a supply

of immovable property such as in the case at hand is

subject to VAT.

According to the CJ, it appeared from the order for

reference and the findings of fact of the decisions of

the national courts, that the demolition work carried

out by the vendor only related to partial demolition of

the building, and that the old building was still being

used at the time of supply (the shopping mall was still

accessible and at least one shop was operational).

Under such circumstances and taking into account

that the construction work was entirely carried out by

the purchaser, the CJ ruled that the supply cannot be

classified as a VAT taxable supply of a new building.

CJ rules that it is for the national law to determine what type of interest is calculated on a repayment on unduly paid VAT (Littlewoods Retail)

On 19 July 2012, the CJ delivered its judgment in the

case Littlewoods Retail Ltd (C-591/10).

to levy default interest. Moreover, the tax authorities

refused EMS to deduct the VAT on the acquisitions on

the grounds that EMS had not effected that right within

the limitation period, which for EMS effectively ended

one month after its VAT registration. The Supreme

Administrative Court was not sure whether the short

limitation period was precluded by EU VAT law.

Moreover, it inquired whether a penalty consisting of

the refusal to the right to deduct and the levy of default

interest was allowed.

According to the CJ, Articles 179, 180 and 273 of the EU

VAT Directive do not preclude a limitation period for the

right to deduction of VAT to the extent that it does not

render the exercise of that right excessively difficult or

impossible in practice. The CJ ruled that it was for the

national court to determine whether or not this was the

case. In this regard, the CJ indicated that the referring

court could take into account that the limitation period

had in the meantime been extended considerably

and that EMS had to go through the VAT registration

process within the same limitation period before it could

effectively deduct the VAT.

In respect of the penalty of the refusal of the right

to deduct, the CJ ruled that such a penalty is

disproportionate if the VAT is accounted for belatedly,

when there is no evasion or detriment to the budget of

the Member State concerned. According to the CJ, the

principle of fiscal neutrality does not, however, preclude

the payment of default interest, provided that that

penalty complies with the principle of proportionality,

which is also for the national court to determine.

CJ rules that the supply of an old building undergoing transformation into a new building is VAT exempt if the building was only partly demolished and still in use (J.J. Komen)

On 12 July 2012, the CJ delivered its judgment in the

case J.J. Komen (C-326/11).

The case concerned the Netherlands company, J.J.

Komen en Zonen Beheer Heerhugowaard BV (‘J.J.

65

The VAT on the costs for the alterations was fully

deducted by the partnership. The Netherlands tax

authorities were of the opinion, however, that the VAT

had incorrectly been deducted insofar as it concerned

the dormer windows and the vestibule, because the

partnership had not demonstrated that the installation

of those facilities also served the business purposes.

The partnership went to court. Eventually, the cases

ended up before the Netherlands Supreme Court, which

decided to refer preliminary questions to the CJ. In

these questions, the court inquired whether a taxable

person who makes temporary use for private purposes

of part of a capital item forming part of the assets of

his business is entitled, under the provision of Article

6(2), first paragraph, (a) and (b), Article 11A(1)(c) and

Article 17(2) of the Sixth EU VAT Directive, to deduct

the input VAT on the costs of the alterations even when

the alterations were carried out in view of use for private

purposes. Moreover, the court wanted to know if it was

relevant in this regard whether or not the partnership

was charged VAT and had deducted VAT upon the

acquisition of the warehouse.

According to the CJ, the national court should determine

whether, at the time when the alterations were made,

it was intended to exclusively use the adapted attic

for private purposes, or if it was also intended that

the adapted attic would subsequently be used for

business purposes. If the partnership did not intend to

subsequently use the attic for business purposes, then

the partnership was not entitled to deduct VAT relating to

the alterations. However, if subsequent use for business

was intended then, according to the CJ, the VAT on the

alterations was deductible irrespective of whether the

partnership had deducted VAT on the acquisition of the

capital item. On the basis of Article 6(2), first paragraph,

(a) of the Sixth EU VAT Directive, the CJ ruled that

the use for private purposes had in that case to be

treated as a supply of services for consideration by the

partnership to the partners.

Littlewoods carried out catalogue-based home shopping

businesses. In this regard, Littlewoods distributed

catalogues and sold goods through agents. The agents

earned commission on sales made by or through them

(‘third party purchases’). From 1973 to October 2004,

the commission on third party purchases was mistakenly

treated as a consideration for services provided by the

agents to Littlewoods. Instead, it should have been

treated as a discount against the consideration paid for

the purchases by the agents. As a result, Littlewoods

overpaid VAT. For the period as of October 2004,

the Commissioners for Her Majesty’s Revenue and

Customs repaid VAT as well as simple interest on that

payment. However, Littlewoods claimed further sums

taking the position that compound interest should have

been calculated on the principal amounts.

The High Court of Justice of England and Wales wanted

to know whether it was in line with EU law if national law

only provided for ‘simple interest’ to be paid, and desired

to refer preliminary questions to the CJ. In this regard,

the CJ ruled that it is for the national law to determine,

in compliance with the principles of effectiveness and

equivalence, whether the principal sum must bear

simple interest, compound interest or another type of

interest.

CJ holds that VAT on alteration of capital good for temporary use for private purposes is deductible (X)

On 19 July 2012, the CJ delivered its judgment in case

X (C-334/10).

The applicant in the proceedings, a partnership

without legal personality composed of two natural

persons, ran a wholesale undertaking dealing in car

paint. The partnership had acquired a commercial

warehouse which they used for their economic activities.

Subsequently, part of the attic of the warehouse was

adapted for temporary occupation by the two partners

and their children. In this regard two dormer windows, a

vestibule, a bathroom and toilet were installed. After the

temporary private use of the attic, it was used again for

business purposes.

66

aircraft for the purposes of exclusive use thereof by

such an airline. Finally, the CJ ruled that it is in principle

irrelevant that the aircraft were used essentially for the

business and/or private purposes of the shareholder,

since the exemption only required that the aircraft were

used by an airline that operated for reward chiefly

on international routes. According to the CJ, the VAT

exemption could be disapplied, however, if the national

court should find that abusive practice had taken place

in the case at hand.

CJ rules that supplies resulting from a force majeure can qualify as economic activities (Ainārs Rēdlihs)

On 19 July 2012, the CJ delivered its judgment in the

case Ainārs Rēdlihs (C-263/11).

During an inspection, the Latvian tax authorities found

that Mr. Rēdlihs had made supplies of timber, while

the company was not VAT registered and had not

declared any economic activity. Consequently, the

Latvian tax authorities penalized the failure to register

by imposing a fine of 18% of the value of the supplies,

which corresponded with the applicable VAT rate. Mr.

Rēdlihs claimed, however, that he had not carried out

any economic activity for VAT purposes as the supplies

were neither systematic nor carried out independently.

According to Mr. Rēdlihs the supplies, which consisted

of trees that had been felled during a storm, were not

carried out for profit and only alleviated the damage

caused by the storm. Therefore, Mr. Rēdlihs took

the view that it concerned a case of force majeure.

Moreover, in view of the fact that the purchaser of

the timber was liable for the VAT on the basis of

domestic law, Mr. Rēdlihs claimed that the fine was

disproportionate insofar as the supplies did concern an

economic activity.

According to the CJ, the fact that the supplies by Mr.

Rēdlihs were carried out to alleviate the consequences

of an alleged case of force majeure did not have

an effect on the question whether it concerned an

economic activity. The CJ ruled that the supplies had

to be regarded as an economic activity, if the referring

CJ rules on scope of VAT exemption for supply of aircraft to airlines operating chiefly on international routes (A Oy)

On 19 July 2012, the CJ delivered its judgment in case

A Oy (C-33/11).

A Finnish company, A Oy, acquired two aircraft from

a French manufacturer. The French manufacturer

declared intra-Community supplies in France. However,

A Oy did not declare any intra-Community acquisitions

of the aircraft in Finland. Subsequently, A Oy leased

the aircraft to B Oy, a company that operated an

international charter airline. Under the contract, B Oy

was entitled to lease the aircraft from A Oy for its own

commercial purposes and to invoice the latter company

for maintenance work on the aircraft and for flights. The

tax authorities found that the invoices issued in this

regard by B Oy to A Oy for use of the aircraft had been

passed on virtually unchanged to X, the shareholder of

A Oy. As a result, the tax authorities took the view that

A Oy should have declared VAT on the intra-Community

acquisition of the aircraft, and that this VAT was not

deductible.

On appeal, A Oy claimed that it was not required to pay

VAT on the intra-Community acquisition of the aircraft

because those aircraft were used by B Oy, an airline

which operated for reward chiefly on international

routes. The tax authorities claimed, however, that this

was of no relevance since A Oy and not B Oy had

acquired the aircraft. Eventually the case ended up

before the Supreme Administrative Court of Finland,

which decided to refer preliminary questions to the CJ

regarding the scope of the VAT exemption for the supply

of aircraft to be used by airlines chiefly operating for

reward on international routes.

According to the CJ, the wording ‘operating for reward

on international routes’ as indicated in Article 15(6)

of the Sixth EU VAT Directive, also encompasses

international charter flights for undertakings and private

persons. Moreover, the CJ ruled that the exemption

also applies to the supply of aircraft to an operator

which in itself is not an airline that operates for reward

chiefly on international routes, but which acquires the

67

in the denominator of the fraction referred to in Article

19(1) of the Sixth EU VAT Directive.

CJ rules that portfolio management services are VAT taxable (Deutsche Bank AG) On 19 July 2012, the CJ delivered its judgment in case

Deutsche Bank AG (C-44/11).

Deutsche Bank AG provided portfolio management

services to investors. The investors instructed the

bank to manage security holdings for them at its

own discretion and without prior instruction, but in

accordance with a strategy chosen by the investor, and

to take all appropriate measures in managing those

holdings. The services were rendered for an annual fee

of 1.8% of the assets managed, which consisted of a

management fee (1.2%) and a fee for buying and selling

of the securities (0.6%). The fee also covered account

and portfolio administration and a commission on the

acquisition of investment fund units.

Deutsche Bank AG took the view that the portfolio

management services were VAT exempt when rendered

to investors in the EU, and out of the scope of EU VAT

when rendered to non-EU investors. However, the

German tax authorities disagreed. Eventually, the matter

ended up before the Federal Finance Court that decided

to refer preliminary questions to the CJ regarding the

VAT treatment of the portfolio management services.

The CJ ruled that the portfolio management consisted of

a combination of a service of analyzing and monitoring

the assets on the one hand, and of a service of actually

purchasing and selling securities on the other. According

to the CJ, those elements were inseparable and should

be placed on the same footing. As a result, the CJ ruled

that it was not possible to take into account one principal

service and one ancillary service. Instead, the CJ found

those elements so closely linked that they formed a

single supply for VAT purposes.

With respect to this single supply, the CJ ruled that it

was not covered by the VAT exemption of Article 135(1)

(f) of the EU VAT Directive. Moreover, the service did not

court should find that the supplies were carried out to

obtain income therefrom on a continuing basis.

Regarding the imposed fine, the CJ pointed out that the

penalty only sanctioned the failure to register for VAT

(as the purchaser of the timber was liable for VAT on the

supplies). According to the CJ, a penalty which is fixed

at the level of the VAT rate normally applicable for the

value to the supplies made, can be disproportionate if

the amount of the penalty goes further than necessary

to ensure the correct levying and collection of VAT and

the prevention of VAT fraud.

CJ rules that the winnings that have to be returned to players of bingo games should not be included for calculation of the taxable amount (International Bingo Technology SA)

On 19 July 2012, the CJ delivered its judgment in the

case International Bingo Technology SA (C-377/11).

The Spanish company International Bingo Technology

SA (‘International Bingo’) organized bingo games,

which activities were VAT exempt. International Bingo

also performed some VAT taxable activities, such

as collection services and the operation of a bar or

restaurant. In view of the fact that both VAT exempt and

VAT taxable activities were performed, International

Bingo had to apply a pro rata for determining the

amount of deductible input VAT under Article 17(5) of the

Sixth EU VAT Directive. For the purposes of calculating

the deductible portion, International Bingo deducted

the amounts that it had to distribute to its winners from

its turnover. The Spanish tax authorities took the view,

however, that the winnings should be included for the

calculation of the deductible portion.

In answer to the preliminary questions of the court of

Cataluña, the CJ ruled that the taxable amount for VAT

purposes does not include the portion of the card price,

fixed by legislation, which had to be paid as winnings to

players. Furthermore, Member States may not provide,

according to the CJ, that the amounts that have to be

returned as winnings to the players, have to be included

68

Court that decided to refer preliminary questions to the

CJ.

According to the CJ, Article 314 of the EU VAT Directive

exhaustively lists the taxable persons carrying out

supplies of goods to which the profit margin scheme

may be applied by the taxable dealer in the next

marketing stage. Taking into account that the facts at

issue did not fall within any of the cases referred to in

that provision, the CJ concluded on the basis of Articles

313(1) and 314 of the EU VAT Directive in connection

with Articles 135 and 315 of the EU VAT Directive,

that a taxable dealer is not eligible to apply the profit

margin scheme where it supplies second-hand vehicles,

which it has previously acquired exempt from VAT from

another taxable person that had a partial right to deduct

input VAT on the purchase of the vehicles.

CJ rules on deduction of VAT on costs on-charged by holding company (Portugal Telecom)

On 6 September 2012, the CJ delivered its judgment

in the Portugal Telecom case (C-496/11). Portugal

Telecom SGPS SA, a holding company, provided

technical administrative and management services to its

subsidiaries. In the course of its business the company

acquired certain consultancy services. Portugal Telecom

on-charged those services to its subsidiaries for the

same price plus VAT.

Portugal Telecom deducted all VAT paid on the acquired

services on the grounds that the taxed transactions,

being the technical administration and management

services, were in fact covered by the use of the

corresponding services acquired. The Portuguese

tax authorities took the view, however, that a pro rata

method had to be applied for calculating the amount

of deductible VAT, because of the fact that the main

purpose of the company was the management of

shareholdings in other companies. In the proceedings

which followed, preliminary questions were referred to

the CJ.

The CJ ruled that the national court should establish

whether the services acquired had a direct and

qualify, according to the CJ, as a service in respect of

the management of special investment funds within the

meaning of Article 135(1)(g) of the EU VAT Directive. As

a result, the CJ ruled that the service was taxable with

VAT.

Finally, the CJ ruled that the place of supply of the

portfolio management service had to be established

on the basis of Article 56(1)(e) of the EU VAT Directive.

According to the CJ, that provision does not only cover

the services referred to in Article 135(1)(a) to (g) of

the EU VAT Directive, but also portfolio management

services.

CJ rules that the margin scheme is not applicable in the case of second-hand vehicles acquired from a person with a partial right to deduct VAT (Bawaria Motors)

On 19 July 2012, the CJ delivered its judgment in the

case Bawaria Motors (C-160/11).

Bawaria Motors Sp. z o.o. (‘Bawaria’) acquired and

sold new and second-hand passenger vehicles. In the

course of its business, Bawaria sometimes acquired

second-hand vehicles from economic operators that had

partially deducted VAT on the acquisition of the vehicles.

Those operators did not charge VAT on the supplies

of the second-hand vehicles to Bawaria, because the

supplies were VAT exempt on the basis of a national

provision.

Bawaria took the view that it was entitled to also apply

the profit margin scheme where it had acquired the

second-hand vehicles from an economic operator that

had partially deducted VAT on the acquisition of the

vehicles, and asked the Polish Minister of Finance for

a written interpretation on the relevant provisions. The

Minister of Finance concluded, however, that the profit

margin scheme was only applicable in situations where

the second-hand vehicles had been acquired from a

taxable person that did not have a right to deduct input

VAT on the purchase of those vehicles. Eventually, the

matter ended up before the Supreme Administrative

69

authorization or licence granted by the authorities.

Moreover, based on settled case law, the right to deduct,

according to the CJ, cannot be limited if the service

provider is not registered for VAT purposes as long as

the invoice issued contains all the information required

for by Article 226 of the EU VAT Directive. Consequently,

the CJ ruled that the tax authorities could not refuse

the right to deduct on the ground that the issuer of the

invoice no longer had the required licence and no longer

had the right to use its VAT number, when the invoice

requirements were met.

Moreover, the CJ ruled that the tax authorities were

also not allowed to refuse the right to deduct VAT on

the ground that M.L. had not declared the workers he

employed, if it could not be established that Mr. Tóth

knew or ought have known that the transaction relied

on as a basis for the right to deduct was connected

with fraud committed by the issuer of the invoice or by

another trader acting earlier in the chain of supply.

The CJ applied the same reasoning with respect to

the argument of the tax authorities, that the economic

transaction did not in fact take place between the

persons specified on the invoice. As long as it could

not be established that Mr. Tóth knew or ought to

have known that he was participating in a fraudulent

transaction, the CJ ruled that right to deduct could not

be limited. According to the CJ, the fact that Mr. Tóth

had not verified whether a legal relationship existed

between the workers employed on the work site and the

issuer of the invoice or whether the latter had declared

those workers did not in this regard constitute an

objective factor which demonstrated that Mr. Tóth knew

or ought to have known that he was participating in a

fraudulent transaction, if Mr. Tóth was not in possession

of any material justifying the suspicion that irregularities

or fraud had been committed.

CJ elaborates on evidence required for application of VAT exemption for intra-Community supplies (Mecsek-Gabona)

On 6 September 2012, the CJ delivered its judgment in

the case Mecsek-Gabona (C-273/11).

immediate link with the taxable output transactions

that gave a right to deduct. If that were the case, then

Portugal Telecom would, according to the CJ, be

entitled to deduct all input VAT on the acquired services.

Moreover, the CJ ruled that the right to deduct could

in that case not be limited because of the fact that the

national legislation treated the taxed transactions as

ancillary to the holding of the shares.

On the other hand, if the national court should establish

that the acquired services were used for taxable

transactions that gave a right to deduct as well as

taxable transactions without a right to deduct, the CJ

ruled that a pro rata had to be applied in accordance

with Article 17 (5) of the Sixth EU VAT Directive.

According to the CJ, Article 17 (5) of the Sixth EU VAT

Directive would not apply, however, if the acquired

services were used for both economic and non-

economic activities. In that case, the CJ ruled that the

Member State should lay down a method of calculation

that objectively reflected the input expenditure actually

attributed to each of those two activities.

CJ elaborates on deductibility of VAT on invoices issued by fraudulent supplier (Tóth)

On 6 September 2012, the CJ delivered its judgment in

the Tóth case (C-234/11).

Mr. Tóth undertook building work for taxable persons

for which he, inter alia, made use of subcontractor M.L.

It appeared, however, that M.L. had not complied with

his tax obligations as a result of which, his licence to

operate as an individual contractor was revoked as

of June 2007. The Hungarian tax authorities claimed

that Mr. Tóth was not allowed to deduct the VAT on the

invoices issued by M.L. because the latter had no longer

qualified as a VAT entrepreneur since June 2007 and

could, therefore, no longer issue valid invoices. Mr. Tóth

went to court and eventually preliminary questions were

referred to the CJ.

The CJ ruled that the concept of a ‘taxable person’

is defined widely and does not depend on any

70

number with retroactive effect from the register after the

goods have been supplied.

CJ rules that the VAT exemption for intra-Community supplies may also apply when supplier is not in possession of the VAT number of the customer (VSTR)

On 27 September 2012, the CJ delivered its judgment in

the VSTR case (C-587/10).

A German branch of Vogtländische Straßen-, Tief- und

Rohrleitungsbau GmbH Rodewisch (‘VSTR’) sold stone-

crushing machines to Atlantic International Trading Co.

(‘Atlantic’), a company established in the US. Atlantic

in turn sold the machines to a Finnish company. A

transport company contracted by Atlantic picked up

the goods at the premises of VSTR in Germany and

transported the goods to Finland.

Atlantic was not registered for VAT purposes in any

Member State of the EU. When VSTR requested

Atlantic to provide its VAT number, Atlantic indicated

that the goods were sold to the Finnish company and

provided VSTR with the VAT number of the Finnish

company. VSTR issued an invoice without VAT for an

intra-Community supply of goods and indicated the

Finnish VAT number of the company to which the goods

were sold by Atlantic on the invoice.

The German tax authorities took the view that the supply

by VSTR to Atlantic could not be VAT exempt as VSTR

was not in the possession of a VAT number of Atlantic.

In the ensuing proceedings, the Federal Finance Court

decided to refer preliminary questions to the CJ in which

it inquired whether a Member State is allowed only to

allow the VAT exemption for intra-Community supplies if

the taxable person provides evidence in the accounts of

the VAT number of the person acquiring the goods.

As a preliminary remark, the CJ observed that the

supply by VSTR to Atlantic can only qualify as an intra-

Community supply if the transportation of the goods

can be attributed to that supply. According to the CJ,

Mecsek-Gabona Kft is a Hungarian company engaged

in the wholesale supply of cereals, tobacco, seeds

and fodder. The company sold rapeseed to the Italian

company Agro-Trade, which company arranged for

the transportation of the goods out of Hungary to Italy.

Following a request for information, the Hungarian tax

authorities were informed by the Italian tax authorities

that Agro-Trade could not be found and that there was

only a private home at the address of its registered

office. The Italian tax authorities therefore removed

Agro-Trade’s VAT number retroactively.

Subsequently, the Hungarian tax authorities took

the view that Mecsek-Gabona had not been able to

prove that the transactions were VAT exempted intra-

Community supplies and imposed VAT assessments for

the supplies. In the following proceedings, the Baranya

County Court decided to refer preliminary questions

to the CJ in order to find out what can be accepted as

satisfactory evidence proving that VAT exempt intra-

Community supplies have taken place.

The CJ ruled that it is for the Member State to lay down,

in accordance with the principles of legal certainty and

proportionality, the conditions in which intra-Community

supplies of goods will be VAT exempt with a view of

ensuring the correct application of the exemption and

to prevent possible evasion, avoidance or abuse.

According to the CJ, the national court had to determine

whether the evidence provided by Mecsek-Gabona

was sufficient in the light of the conditions laid down by

national law and in accordance with the general practice

established in respect of similar transactions.

Moreover, the CJ ruled that Member States may refuse

the VAT exemption for intra-Community supplies if the

vendor knew or should have known that the transaction

which it carried out was part of tax fraud committed

by the purchaser, and that it had not taken every

reasonable step within its power to prevent its own

participation in that fraud.

Finally, the CJ ruled that a vendor may not be refused

the VAT exemption for an intra-Community supply solely

on the ground that the tax authority of another Member

State has removed the purchaser’s VAT identification

71

Taking the view that the latter supply of the services

were VAT taxable, FFW made at application to the

Commissioners for Her Majesty’s Revenue and

Customs (HMRC) to reclaim VAT paid in respect of

those services. HMRC rejected this application, taking

the view that the lease of the building and the services

constituted a single supply which was exempt from

VAT. Eventually the case ended up before the First-

tier Tribunal (Tax Chamber), which decided to refer

preliminary questions to the CJ in order to obtain more

clarity in this matter.

The CJ ruled that the leasing of immovable property

and the supplies of services linked to that leasing may

constitute a single supply for VAT purposes. According

to the CJ, the fact that the landlord may terminate the

lease agreement if FFW fails to pay the service charges

supports the view that there is a single supply, but does

not necessarily constitute the decisive element for the

purpose of assessing whether there is such a supply.

Moreover, the CJ ruled that the fact that the services for

which the services charges were paid could, in principle,

be supplied by a third party does not mean that they

cannot constitute a single supply. The CJ indicated

that it is for the referring court to decide whether based

on the factual circumstances, the transactions are so

closely linked that they must be regarded as constituting

a single supply of leasing of immovable property.

CJ rules on Bulgarian provision that allows an adjustment to the VAT deducted on goods that have been stolen (PIGI – Pavleta Dimova ET)

On 4 October 2012, the CJ rendered its judgement in

the PIGI – Pavleta Dimova ET case (C-550/11).

PIGI – Pavleta Dimova ET (‘PIGI’) is a trader

established in Bulgaria. Following an inspection, the

Bulgarian tax authorities imposed a VAT assessment

because there was a shortfall in the goods (packaged

products and cigarettes) due to theft. On the basis of

national provisions, the tax authorities claimed that

PIGI was required to make an adjustment in respect

of the input VAT that had been deducted on the stolen

this is not the case when the ownership of the goods

has been transferred by Atlantic to the Finnish company

before the transportation of the goods to Finland. The

CJ indicated that it is for the referring court to determine

whether the transport of the goods can be attributed to

the supply by VSTR to Atlantic and whether that supply,

therefore, qualifies as an intra-Community supply.

In case of an intra-Community supply by VSTR to

Atlantic, the CJ ruled that Member States may require a

supplier of goods to provide evidence that the purchaser

is a taxable person in the Member State of acquisition of

the goods. According to the CJ, a VAT number provides

proof of the tax status of a taxable person, but it is not

the only evidence on the basis of which that tax status

can be proved. More specifically, the CJ ruled that the

VAT exemption for intra-Community supplies may not be

refused only because the supplier is not in possession

of the VAT number of the customer, where the supplier

acting in good faith and having taken all measures

which can reasonably be required of him, is unable to

provide that number but provides other information that

demonstrates sufficiently that the person acquiring the

goods acts as a taxable person in the transaction.

CJ rules that service charges may form part of a single supply consisting in the lease of immovable property (Field Fisher Waterhouse LLP)

On 27 September 2012, the CJ delivered its judgement

in the Field Fisher Waterhouse LLP case (C-392/11).

Field Fisher Waterhouse LLP (‘FFW’) is a firm of

solicitors that leases offices in London. In the lease

agreements, FFW concluded with the landlord that

three ‘rents’ were to be paid. These rents related to the

occupation of the premises, FFW’s share of the cost of

insuring the building and the supply of services (such as

the supply of water, heating and lift maintenance) which

the landlord was obliged to provide under the lease. In

default payment of the rents the landlord was entitled to

terminate the lease.

72

had afterwards been transferred to TETS Haskovo as

a non-capital contribution. In the light of those findings

and taking into account that the buildings had in the

meantime been demolished, the tax authorities took

the view that there were grounds for adjustment of the

input VAT deducted by Finans inzhenering. Therefore,

the tax authorities imposed a VAT assessment on TETS

Haskovo, which was the legal successor of Finans

inzhenering. TETS Haskovo claimed, however, that

no adjustment should be made as the buildings had

been demolished with the sole aim of creating new

buildings in their place, which would be used for taxable

transactions.

The CJ ruled that the replacement of the old buildings

with more modern buildings, which fulfilled the same

purpose and were used for the same taxable output

transactions, did in no way break the direct link between

the input acquisition of the buildings at issue and the

economic activities carried out thereafter. According

to the CJ, the acquisition of the buildings and their

subsequent destruction with a view to modernizing

them can, therefore, be regarded as a series of linked

transactions for the purposes of subsequent taxable

transactions in the same way as the acquisition of new

buildings and their direct use. The CJ ruled that this also

applies where buildings were only partially destroyed,

new buildings were built on the same land, and certain

waste from the demolition of the old buildings was sold

subject to VAT. Consequently, the CJ ruled that Article

185 (1) of the EU VAT Directive did not lead to an

obligation to adjust the earlier deduction of input VAT.

CJ rules that Latvian provision on refund of excess VAT does not comply with the EU VAT Directive (Mednis SIA)

On 18 October 2012, the CJ issued its judgement in the

Mednis SIA case (C-525/11).

Mednis SIA (‘Mednis’), a Latvian company, applied for

a VAT refund. On the basis of a national provision, the

Latvian tax authorities refused part of the refund on the

grounds that that part was over 18% of the total value

of the taxable transactions carried out in the months at

goods. PIGI claimed that since the shortfall in the goods

was the result of theft, the shortfall had been caused

by a force majeure and that therefore no adjustment

should be made. In the following proceedings,

the Administrative Court of Varna decided to refer

preliminary questions to the CJ.

The CJ indicated that theft in principle gives rise to

an adjustment of the input VAT deduction due to the

fact that the goods can no longer be used for taxable

transactions. According to the CJ, Member States do,

however, have the option on the basis of Article 185 (2)

of the EU VAT Directive to provide that no adjustment

is to be made in the event of theft. Since it concerns an

optional derogation, the CJ ruled that national legislation

may require that an adjustment be made to the

deduction of input VAT at the time of acquisition of those

goods, where a shortfall in the goods subject to VAT has

been established due to theft of those goods and the

perpetrator has not been identified.

CJ rules that no input VAT adjustment is necessary in respect of modernization of a building (TETS Haskovo)

On 18 October 2012, the CJ delivered its judgement in

the TETS Haskovo AD case (C-234/11).

TETS Haskovo operates a thermal power station in

Haskovo (Bulgaria). In 2008, TETS Haskovo increased

its share capital in the form of a non-cash contribution.

This non-cash contribution included a transfer of three

buildings (a cooling tower, a chimney and a production

building) by Finans inzhenering to TETS Haskovo.

The tax authorities did not consider the transfer of the

buildings as a supply of goods because it concerned

the transfer of a set of assets. In 2009, TETS Haskovo

modernized the thermal power station. In this regard,

the buildings transferred by Finans inzhenering to TETS

Haskovo were demolished and the scrap metal was sold

subject to VAT.

In the course of an inspection, the tax authorities

considered that Finans inzhenering had deducted input

VAT in respect of the acquisition of the buildings that

73

The testing staff and advanced technical equipment

used for the testing were flown in for the test periods. A

subsidiary of Daimler in Sweden provided Daimler with

premises, test tracks and services connected with the

test activities. The winter testing activities of Daimler

were necessary for its car sales activities in Germany.

Daimler did not carry out any VAT taxable activities in

Sweden. In the context of the car testing, Daimler made

acquisitions on which Swedish VAT was charged. On

the basis of the rules for the refund of VAT to foreign

companies, Daimler applied for a refund of this VAT.

Widex, a Danish company, had a research division

in Stockholm. It acquired goods and services for the

research activity which it carried out in the division. On

the basis of the rules for the refund of VAT to foreign

companies, Widex applied for a refund of the Swedish

VAT paid on its purchases.

For both Daimler and Widex, the Swedish tax authorities

denied the VAT refunds on the ground that the

companies had a fixed establishment in Sweden. In this

regard, the tax authorities did not claim that Daimler

or Widex had made any supplies of goods or services

in Sweden. Daimler and Widex both went to court. In

the ensuing proceedings, preliminary questions were

referred to the CJ.

The referring court wished to know whether a taxable

person established for VAT purposes in another Member

State and carrying out technical testing or research

work, not including taxable transactions, can be

regarded as having a ‘fixed establishment from which

business transactions are effected’ within the meaning

of the refund procedure for foreign companies of Article

1 of the Eighth EU VAT Directive and Article 3a of

Directive 2008/9.

The CJ ruled that the right to a refund based on the

refund procedure for foreign companies can only be

excluded if taxable transactions are actually carried out

by the fixed establishment in the Member State where

the application for the refund is made (in which case

the fixed establishment should apply for the refund).

According to the CJ, the mere ability to carry out

such transactions does not suffice. The CJ, therefore,

ruled that a refund must be granted when the taxable

issue. In such case, the national law provided that the

excess part was not to be repaid until the tax authorities

had examined the taxable person’s annual tax return. As

a consequence, the taxable person could be required to

wait for over a year for a refund of excess VAT. Mednis

did not agree with this and went to court. The Latvian

court dealing with the case was not sure whether the

national provision was precluded by EU VAT law and

decided to refer preliminary questions to the CJ.

The CJ ruled that Article 183 of the EU VAT Directive

does not allow Member States, pending the examination

by that authority of the taxable person’s annual tax

return, to defer the refund of part of the excess VAT

which has arisen during a one-month tax period without

undertaking a specific analysis and solely on the basis

of an arithmetical calculation.

Moreover, following a request by the Latvian

government to limit the temporal effects of the judgment,

the CJ ruled that the Latvian government did not

provide any data which would enable the CJ to assess

whether the judgement posed a risk of serious economic

repercussions for Latvia. In addition, the CJ considered

that it was already clear from case law in accordance

with the principle of fiscal neutrality that the national

conditions for the refund of excess VAT must enable the

taxable person, in appropriate circumstances and within

a reasonable period, to recover the entire amount of the

excess VAT without entailing any financial risk for that

taxable person. As a consequence, the CJ denied the

request to limit the temporal effects of the judgement.

CJ rules that refund of VAT to foreign taxable person cannot be refused on the ground that it has a fixed establishment without taxable transactions (Daimler and Widex)

On 25 October 2012, the CJ delivered its judgements

in the Joined cases of Daimler (C-318/11) and Widex

(C-319/11).

Daimler, a German company, carried out winter testing

of cars at testing installations in Northern Sweden.

74

According to the CJ, the concept of supply of a ‘single

service’ referred to in Articles 307 and 308 of the EU

VAT Directive covers only services which were bought in

from a third party. Consequently, the CJ ruled that where

a travel agent provides an in-house transport service

which forms part of a tourist service, the supply of in-

house transport service is subject to the normal VAT

regime and not to the travel agent scheme within the

meaning of Articles 306 to 310 of the EU VAT Directive.

CJ rules that sale of goods under a customs suspension arrangement is in principle VAT taxable (Profitube)

On 8 November 2012, the CJ delivered its judgment in

the case Profitube (C-165/11).

Profitube, a company established in Slovakia, imported

semi-finished steel products from the Ukraine into

Slovakia. The goods were first placed under a customs

warehousing arrangement, and subsequently under

an inward processing arrangement in order to be

processed into structural steel. Profitube sold the goods

to another Slovakian company. The goods stayed in

the customs warehouse and were once again placed

under the customs warehousing arrangement. The

Slovakian tax authorities considered that the sale

concerned a normal supply of goods subject to VAT,

and therefore requested payment of that VAT. Profitube

claimed, on the other hand, that due to the suspension

arrangements, the goods in question could not yet be

regarded as Community goods under Customs Law, and

that the supply was therefore outside the scope of EU

VAT. In the following proceedings, the Supreme Court

of Slovakia decided to refer preliminary questions to the

CJ.

The CJ ruled that the customs warehouse is located

in Slovakia and that the sale of the goods in such a

customs warehouse is therefore, in principle, subject

to VAT. According to the CJ, this is only different if the

Member State concerned has made use of the facility

of Article 16(1) of the Sixth EU VAT Directive to exempt

such sales from VAT, which is for the national court to

verify.

person does not carry out such transactions in the

Member State concerned without it being necessary

to examine whether those companies actually have a

fixed establishment, since the two conditions forming the

criterion of a ‘fixed establishment from which business

transactions are affected’ are cumulative.

Moreover, with respect to the Daimler case, the CJ ruled

that this interpretation is not called into question in the

situation where the taxable person has a wholly owned

subsidiary, of which the purpose is almost exclusively to

supply the company with various services in respect of

its technical testing activities in the Member State where

it has applied for a refund.

CJ rules that travel operator scheme does not apply to in-house transport services (Maria Kozak)

On 25 October 2012, the CJ delivered its judgement in

the Maria Kozak case (C-557/11).

Ms Kozak had a travel agency in Poland. She sold

all-inclusive packages comprising accommodation and

meals to tourists, for which she used the services of

other suppliers, and transport, for which she used her

own fleet of coaches. In accordance with the travel

agent scheme of Article 308 of the EU VAT Directive,

Ms Kozak applied the standard VAT rate of 22% on the

margin with respect to the all-inclusive packages for

which services were bought in from third parties. With

respect to the in-house passenger transport services,

she applied the reduced VAT rate of 7%.

The Polish tax authorities took the view that the

transport services were an essential part of the tourist

services as a whole and should be regarded as an

integral part thereof. Therefore, the tax authorities

claimed that Ms Kozak should also have applied the

standard VAT rate of 22% to the transport services.

In the ensuing proceedings, the Polish Supreme

Administrative Court had doubts as to what VAT rate

had to be applied and decided to refer preliminary

questions to the CJ.

75

exempt from VAT. In 2003, Gemeente Vlaardingen

instructed contractors to replace grass pitches with

korfball pitches and football pitches with an artificial

grass structure, and with handball pitches with an

asphalt structure. After that, the pitches were rented out

again to the same sport associations.

The Netherlands tax authorities regarded the renting

out of the pitches as the use for business purposes

of goods produced to order within in the meaning of

Article 5(7) of the Sixth EU VAT Directive. On the basis

of the Netherlands implementation of that provision,

the value of the ground that Gemeente Vlaardingen

already owned (the old playing fields) had to be included

in order to calculate the amount of VAT due on this

deemed supply. The Netherlands Supreme Court had

doubts, however, whether it was in line with EU VAT law

to include the value of the ground already owned and

decided to refer preliminary questions to the CJ.

In a situation such as in the case at hand, where a

taxable person has had a third party transform sports

pitches which he already owned for the purposes of an

economic activity exempt from VAT, the CJ ruled that

Article 5(7) of the Sixth EU VAT Directive in principle

allows Member States to calculate the VAT due on

the basis of the aggregate of the transformation costs

and the value of the ground on which the pitches lie.

However, according to the CJ, this only applies insofar

as the taxable person has not already paid VAT on the

ground and provided that the pitches are not covered

by the exemption provided for in Article 13(B)(h) of the

Sixth EU VAT Directive.

CJ clarifies the type of conditions to which the exemption for out-patient care services may be subject (Ines Zimmermann)

On 15 November 2012, the CJ delivered its judgment in

the case Ines Zimmermann (C-174/11).

Ms Zimmermann is a registered nurse who had

previously worked at a welfare centre as a staff nurse.

She started working on a freelance basis and registered

CJ rules that Member States may apply an alternative method than the turnover method for calculating the deductible proportion (BLC Baumarkt)

On 8 November 2012, the CJ delivered its judgement in

the case BLC Baumarkt (C-511/10).

BLC Baumarkt constructed a residential and commercial

building, which it leased subject to VAT as far as the

commercial premises were concerned and exempt from

VAT as far as the apartments were concerned. In its

VAT return, BLC Baumarkt deducted VAT based on a

deductible proportion (pro rata), which was calculated

on the basis of the turnover from the commercial letting

and from the turnover from the letting of the apartments

(‘the turnover method’). The tax authorities claimed,

however, that the pro rata had to be determined

on the basis of the respective surface areas of the

commercial premises and the apartments (‘the surface

area method’). The Federal Finance Court in Germany

was not sure whether Member States were allowed

to prescribe primarily an apportionment criterion other

than the turnover method for a mixed-use building, and

decided to refer preliminary questions to the CJ.

According to the CJ, Article 17(5) of the Sixth EU VAT

Directive does allow Member States to apply a different

method than the turnover method for calculating the

deductible amount of input VAT for a given operation,

such as the construction of a mixed-use building, on

the condition that the method used guarantees a more

precise determination of the deductible proportion.

CJ rules on inclusion of ground already owned for calculation of VAT on deemed supply (Gemeente Vlaardingen)

On 8 November 2012, the CJ delivered its judgment in

the case Gemeente Vlaardingen (C-299/11).

A Netherlands Municipality, Gemeente Vlaardingen,

owned sports complexes including a number of playing

fields. It rented out those fields to sports associations

76

different conditions for profit-making entities, on the one

hand, and non-profit making legal persons on the other.

Such distinction would be contrary to the principle of

fiscal neutrality, as the same services would be treated

differently. As a consequence, the CJ ruled that Article

13A(1)(g) of the Sixth EU VAT Directive interpreted in

the light of the principle of fiscal neutrality, precludes

a threshold such as the two thirds threshold in so far

as, in relation to supplies of goods and services which

are essentially the same, that threshold is applied –

for recognition as charitable for the purposes of that

provision – to some taxable persons governed by

private law but not to others.

CJ rules that letting of houseboat and adjacent land constitutes a single VAT exempt supply of immovable property (Susanne Leichenich)

Mrs. Leichenich concluded an agreement with the

German State for the occupation of a parcel of land

situated on the left bank of the Rhine, as well as an

area of water adjacent to that land, for the purposes

of operating a houseboat with a landing stage as a

restaurant. The houseboat had been moored in place

for many years, was immobilized by ropes, chains and

anchors, had no engine or system of propulsion, was

connected to the water and electricity networks and had

an address, a telephone line and a septic tank.

The houseboat, landing stage, and adjoining area were

let to a company, which used the boat exclusively as a

restaurant and later as a discotheque. Mrs. Leichenich

did not charge any VAT on the rent, because her tax

advisers considered that it concerned a VAT exempt

lease of immovable property in accordance with Article

13B(b) of the Sixth EU VAT Directive. The German tax

authorities took the view, however, that VAT should have

been charged on the letting of the houseboat, because it

concerned movable property.

Mrs. Leichenich brought a civil action against the tax

advisors. In the following proceedings, the Higher

Regional Court observed that the contract was not

limited to the letting of the houseboat and landing stage,

an out-patient care service. Ms Zimmermann was

authorised by the health insurance schemes for home

nursing services. In her VAT returns, Ms Zimmermann

declared her services as exempt from VAT.

The German Finanzamt partly denied the VAT

exemption, however, on the grounds that Ms

Zimmermann together with her staff had treated a total

of 76 people in 1993, 52 of whom (68%) were private

patients. According to a national provision, the VAT

exemption only applied if the costs were borne in at

least two-thirds of the cases in full or mainly by the

statutory social security or social welfare authorities

based on the circumstances of the preceding calendar

year.

Ms Zimmermann did not agree with the part denial of

the VAT exemption because she rendered the same

services as the welfare centres whose services were

completely VAT exempt. Moreover, Ms Zimmermann

argued that her business had been recognized for

the purposes of social security law as a charitable

organization. In the following proceedings, the case

ended up before the Federal Finance Court, which

decided to refer preliminary questions to the CJ. The

referring court wanted to find out whether Article 13A(1)

(g) and Article 13A(2)(a) of the Sixth EU VAT Directive

construed in the light of the principle of fiscal neutrality

allow Member States to make the VAT exemption for

out-patient services supplied by commercial service

providers subject to a condition that requires that in at

least two-thirds of the cases the costs relating to those

treatments must, during the preceding calendar year,

have been borne in full or partly by the statutory social

security or social welfare authorities, in particular where

that condition does not apply to all providers of the type

of service mentioned.

According to the CJ, Member States in principle have

a margin of discretion to specify the conditions and

procedures in respect to the application of the VAT

exemption. In this regard, the two-thirds threshold as

such is, according to the CJ, allowed for meeting the

need to recognize certain organizations as ‘charitable’ in

order to apply that provision. However, the CJ also ruled

that national legislation may not lay down materially

77

had unlawfully deducted VAT for the purchase of the

demolished buildings, because it had not purchased

them for the purposes of tax transactions, it had

only done so in order to demolish them. Eventually,

the matter ended up before the Court of Appeals of

Bucharest, which decided to refer preliminary questions

to the CJ in order to find out whether the VAT paid on

the buildings by GVM is deductible.

According to the CJ, it is clear that GVM purchased

the land and the buildings with the intention of the

construction of the residential complex on the land in the

course of GVM’s property development activities. The

CJ ruled that in such circumstances a company has the

right to deduct VAT on the acquisition of the buildings

on the basis of Articles 167 and 168 of the EU VAT

Directive.

Moreover, the fact that the buildings had been

demolished with a view to developing the residential

complex in place of those buildings does not, according

to the CJ, result in an obligation to adjust the initial

deduction of VAT relating to the acquisition of the

buildings on the basis of Article 185 of the EU VAT

Directive.

CJ rules that right to deduction may be denied if the taxable person knew of should have known that he was involved in VAT fraud (Bonik)

On 6 December 2012, the CJ delivered its judgment

in the Bonik case (C-284/11). Bonik EEOD (‘Bonik’) is

a Bulgarian company that declared intra-Community

supplies of wheat and sunflower. Following a tax

investigation, the Bulgarian tax authorities found that

there was no evidence of these intra-Community

supplies. Considering that the quantities of wheat and

sunflower quoted on the invoices issued by Bonik had

been taken out of its stock and were not there at the

time of the investigation, the Bulgarian tax authorities

concluded that taxable supplies of those quantities had

been made on Bulgarian territory.

but also included the area of water and the adjoining

plot of land. Moreover, the court considered that the use

of the houseboat and landing stage was inextricably

linked to the occupation of the area of water and

adjoining river bank. Based on the contract, the boat

could also not be moved or used for other purposes.

The Higher Regional Court, therefore, decided to refer

preliminary questions to the CJ to find out whether the

letting could be regarded as a single supply for VAT

purposes, which would fall under the VAT exemption

for the letting of immovable property within the meaning

of Article 13B(b) of the Sixth EU VAT Directive. On

15 November 2012, the CJ delivered its judgment in this

case (C-532/11).

Taking into account the elements that link the houseboat

to the site and the fact that the contract allocated the

houseboat exclusively and permanently to the operation

on that site, the CJ ruled that the whole (constituted by

the houseboat and the elements which compose the

site where it is moored) must be regarded as immovable

property for the purposes of applying the VAT exemption

of Article 13B(b) of the Sixth EU VAT Directive.

Moreover, the CJ ruled that this concerned a single

supply. Finally, based on the factual circumstances, a

houseboat such as the one let by Mrs. Leichenich is,

according to the CJ, not considered a vehicle within the

meaning of Article 13B(b) of the Sixth EU VAT Directive.

CJ rules that VAT on acquired buildings that are demolished with a view to construction of a residential complex is deductible (SC Gran Via Moineşti)

On 29 November 2012, the CJ delivered its judgment in

the SC Gran Via Moineşti case (C-257/11).

SC Gran Via Moineşti SRL (‘GVM’) acquired a plot of

land and the buildings constructed on it in Bulgaria.

In the contract of sale a demolition permit for those

buildings was also transferred to GVM. GVM carried

out the demolition works with a view to developing a

residential complex on the land. GVM deducted the VAT

relating to all of the land and buildings purchased. The

Romanian tax authorities decided, however, that GVM

78

supply, the supply is considered not to have actually

taken place, when it has not been established on the

basis of objective evidence that the taxable person knew

or should have known that the transaction relied on as a

basis for the right of deduction was connected with VAT

fraud committed upstream or downstream in the chain

of supply.

CJ clarifies meaning of the term ‘construction work’ in derogating measure (BLV)

On 13 December 2012, the CJ delivered its judgment in

the BLV case (C-395/11).

BLV Wohn- und Gewerbebau GmbH (‘BLV’) engaged

a contractor to build a residential block of six flats at a

fixed price on land owned by BLV. The contractor issued

an invoice to BLV without VAT and referred to BLV as

liable for the VAT as recipient for the supply. BLV paid

the VAT to the tax authorities. Subsequently, BLV asked

for reimbursement of the VAT taking the position that

Germany was not permitted under EU VAT law to apply

the reverse charge mechanism to such a supply.

The application of the reverse charge mechanism was

based on a measure derogating from Article 21(1)(a) of

the Sixth EU VAT Directive, which allowed Germany to

apply the reverse charge mechanism amongst others

to the supply of construction work to a taxable person.

The Federal Finance Court was not sure, however,

whether the reverse charge mechanism should have

been applied and decided to refer preliminary questions

to the CJ.

The main question in the proceedings was whether

the term ‘construction work’ within the meaning of the

derogating measure encompassed not only the supply

of services but also the supply of goods. According to

the CJ, the Sixth EU VAT Directive is silent as to the

meaning of the term ‘works of construction’ and that

the meaning and scope of that term must, therefore, be

determined by reference to the general context in which

it is used and its usual meaning in everyday language.

In this regard the CJ indicated that the objectives and

Moreover, the tax authorities also carried out checks in

connection with Bonik’s wheat purchases. In this regard

it found that Bonik’s suppliers did not have a sufficient

quantity of goods to make the supplies to Bonik and

that no actual supplies had been made by those

suppliers. Consequently, the tax authorities issued a

VAT assessment in which they denied Bonik the right to

deduct VAT on the purchases of the wheat.

Bonik contested the VAT assessment before the

Administrative Court of Varna. This court noted that

the Bulgarian tax authorities did not dispute that Bonik

carried out supplies of goods of the same type and

in the same quantity, nor that Bonik acquired those

goods from other suppliers. Furthermore, the court

noted that there was some evidence that direct supplies

were carried out and that the lack of evidence of the

preceding supplies could not support the conclusion that

those direct supplies were not carried out. Under those

circumstances the court decided to refer preliminary

questions to the CJ in order to find out whether Bonik

was entitled to deduct the VAT.

According to the CJ, it is necessary to check whether

the supplies by Bonik had actually been carried out and

whether the goods in questions were used by Bonik for

the purposes of taxed transactions in order to be able

to establish whether there is a right to deduction. In this

regard the CJ indicated that it is for the national court

to check and establish the factual circumstances of the

case. In the event the national court should find that

the supplies had actually been carried out and that the

goods were used for Bonik’s taxed transactions, the CJ

ruled that Bonik cannot, in principle, be refused the right

to deduction.

In the case it would concern fraudulent transactions,

the CJ reminded the referring court that the prevention

of tax evasion, avoidance and abuse is an objective

recognized and encouraged by the EU VAT Directive.

According to the CJ, it is for national courts and judicial

authorities to refuse the right of deduction if that right

is being relied on for fraudulent or abusive ends. In

this regard the CJ ruled that the right to deduct may

not be refused on the ground that, in view of fraud or

irregularities committed upstream or downstream of that

79

made by the mail order company to the agents and,

therefore, that the mail order companies overpaid VAT.

Article 8(a) of the Second EU VAT Directive, which was

in force at the time of the supplies, did not permit for

alteration of the taxable amount, or the output tax, after

the supply had taken place. Therefore, the CJ ruled

that taxable persons are not entitled on the basis of

this provision to treat the taxable amount of a supply

of goods as retrospectively reduced where, after the

time of that supply, an agent received a credit from the

supplier which the agent elected to take either as a

payment of money or as a credit against amounts owed

to the supplier in respect of supplies of goods that had

already taken place. According to the CJ, the principle of

fiscal neutrality and the continuation of the VAT system

(the Sixth EU VAT Directive does contain a provision

that in principle requires Member States to reduce the

taxable amount in case all or part of the consideration

has not been received) do not change this conclusion.

CJ rules on chargeable event in the case of supply of construction services where consideration is provided in kind in the form of building right (Orfey)

On 19 December 2012, the CJ delivered its judgment

in the Orfey case (C-549/11). The case concerns a

Bulgarian company, Orfey Balgaria EOOD (‘Orfey’),

which had obtained a building right from four natural

persons (‘the owners’). In this regard Orfey was entitled

to construct a building on the land belonging to the

owners and become sole owner of some of the real

property it had built. By way of consideration for the

building right, Orfey undertook to design the plans for

the building, to build it entirely at its own cost and to

deliver certain real property in that building on a turn-key

basis to the owners without any payments being made

by the owners. For its activities Orfey sent an invoice

with VAT to each of the owners.

In the course of a tax audit, the Bulgarian tax authorities

found that the taxable amount of the transaction

had been determined based on the tax value of the

building right and not on the open market value of the

effectiveness of the legislation in question should be

taken into account. The CJ concluded that, on the basis

of these factors, the term ‘construction work’ should be

interpreted as covering not only the supply of services

but also the supply of goods.

Finally, the CJ ruled that Germany was allowed to

avail itself only partially of the authorization granted

by the derogating measure by using it only for certain

subcategories (such as particular types of construction

work) and in respect of supplies to certain recipients.

According to the CJ, Germany was required in this

regard to respect the principle of fiscal neutrality and

the general principles of EU law and, in particular, the

principles of proportionality and legal certainty when

establishing those subcategories. The CJ ruled that it

is for the referring court to determine whether those

principles have been respected in this case.

CJ rules on retrospective reduction of taxable amount under the Second VAT Directive (Grattan)

On 19 December 2012, the CJ delivered its judgment in

the Grattan case (C-310/11).

Grattan, a UK company, put forward claims against the

UK tax authorities for repayment of VAT relating to the

years 1973 to 1977 in respect of the activities of several

mail order companies. The mail order companies

operated a special sales system that included ‘agents’

who held an account with the mail order company. The

agents received a credit amount of 10% in relation

to their own purchases of goods from the mail order

catalogue and in relation to purchases made by third

parties through them. The agents could claim the credit

amounts as a cheque payment or offset those amounts

against their outstanding debts to the mail order

companies.

The UK tax authorities treated the amounts credited

for third-party customers as payment for the agent’s

services in managing third-party customers. Grattan

objected to this VAT treatment on the ground that it

merely reduced the taxable amount for the supplies

80

Advocate General opines on scope of exemption for management of special investment funds (GfKb)

On 8 November 2012, Advocate General Cruz Villalón

delivered his Opinion in the case GfKb (C-275/11).

Gesellschaft für Börsenkommunikation mbH (‘GfKb’)

is a German company that provides information and

advice relating to the stock market and advice and

marketing relating to financial assets. It rendered

services to an investment fund company. In particular,

GfBk advised the investment fund company on the

management of the fund, constantly monitored the fund

and made recommendations for the purchase or sale

of assets. Moreover, GfBk was required to pay heed to

risk diversification, statutory investment restrictions and

investment conditions. For these services, GfBk was

paid a remuneration calculated as a percentage of the

value of the special investment fund.

The German tax authorities took the position that

the services rendered by GfBk did not constitute the

‘management of special investment funds’ within

the meaning of Article 13(B)(d)(6) of the Sixth EU

VAT Directive. GfBk did not agree and went to court.

Eventually the case ended up before the Federal

Finance Court which decided to refer preliminary

questions to the CJ.

According to the Advocate General, advisory and

information services relating to the management of a

special investment fund as well as the purchase and

sale of assets, constitute an activity of ‘management’

specific and distinct in nature that is covered by the

exemption of Article 13(B)(d)(6) of the Sixth EU VAT

Directive, provided that the service is found to be

autonomous and continuous in respect of the activities

actually performed by the recipient of the service. The

Advocate General Opined that this conclusion is not

contrary to the principle of fiscal neutrality.

real property granted to the owners. Taking the view

that Orfey was supplying construction services to the

owners, the tax authorities issued a VAT assessment to

Orfey in which the open market value of the construction

services of the building was taken into account as

taxable amount. In this respect the Bulgarian tax

authorities concluded on the basis of a provision in

national VAT law that the taxable event had taken place

on the date the building right was obtained even though,

at that date, the construction of the building had not

been completed and the building had not been put into

use.

Eventually the matter ended up before the Bulgarian

Supreme Administrative Court which decided to refer

preliminary questions to the CJ. In particular the

referring court inquired whether the national provision,

on the basis of which the chargeable event is regarded

to take place before completion of the transaction, is

compatible with the EU VAT Directive and whether the

open market value of the construction services should

be used to determine the taxable amount.

According to the CJ, Article 65 of the EU VAT Directive

makes clear that VAT on services becomes chargeable

at the time a payment on account is made provided

that, at that time, all the relevant information concerning

that future supply of services is already known and,

therefore, the services in question are precisely

identified. In this regard the CJ ruled that, based on

the principle of equal treatment, this also applies if the

payment on account is made in kind as long as that

payment on account may be expressed in monetary

terms, which is for the referring court to identify.

Furthermore, the CJ ruled that Article 80(1) of the EU

VAT Directive, which allows Member States under

certain circumstances to take the open market value

into account as taxable amount, may only be applied

in the case of supplies involving family or other close

personal, management, ownership, membership or legal

ties. According to the CJ, Member States are therefore

not permitted to apply the open market value as basis of

assessment if transactions are not completed between

parties having such ties.

81

and insurance institutions, and to introduce a cost-

sharing group which allows financial and insurance

institutions to cooperate without incurring additional

non-recoverable VAT.

Commission publishes annual report on fight against fraud

On 3 July 2012, the Commission published the Fight

against fraud Annual Report 2011. The purpose of the

report is to assess the extent to which EU funds or

revenue of the EU budget are at risk of misuse because

of fraudulent or non-fraudulent irregularities and to

explain what is being done to address the issue.

The report shows that progress had been made in 2011

with the adoption, by the Commission and the Member

States, of policy measures that will provide stronger

protection for the EU’s financial interests. There has

been an overall decrease in reported irregularities

and there have been improvements in the results of

recovery of EU resources unduly paid. According to the

Commission, further efforts are still needed in every

sector covered by the budget in order to maintain

progress and to address potential adverse effects that

the current financial crisis could have in the form of

an increase in fraudulent acts against the EU budget.

Finally, the Commission indicates that further progress

still has to be achieved especially in the area of recovery

where procedures are still relatively long.

Commission publishes proposal for a procedure to take immediate measures against VAT fraud

The VAT fraud schemes evolve rapidly and sometimes

the EU Member States are confronted with situations

whereby EU VAT law does not provide a legal basis for

the counteractions that they wish to take. On 31 July

2012, the Commission therefore published a proposal

for a Council Directive (COM(2012) 428 final) that seeks

to amend the EU VAT Directive such that there is a legal

basis for Member States to take immediate measures

in very specific situations. The scope of the proposal

Advocate General opines that non-taxable persons may be a member of a VAT group (Commission v Ireland)

On 27 November 2012, Advocate General Jääskinen

delivered his Opinion in the case of Commission v

Ireland (C-85/11). The case concerns an infringement

procedure that the Commission has instituted against

Ireland. According to the Commission, Ireland incorrectly

permits non-taxable persons to be members of a VAT

group. Ireland, on the other hand, claims that non-

taxable persons may be members of a VAT group.

The Advocate General has indicated that the wording of

Article 11 of the EU VAT Directive, as has been pointed

out by Ireland, refers to a ‘person’ and not to a ‘taxable

person’. This contrary to other provisions in the EU

VAT Directive which clearly refer to a ‘taxable person’.

Consequently, the Advocate General has opined that

based on the wording of Article 11 of the EU VAT

Directive non-taxable persons may be a member of a

VAT group as long as they meet the requirements of

having a financial, economic and organizational link with

the other members of the VAT group.

Finally, according to the Advocate General the purpose

of VAT grouping within the VAT regime and the principle

of fiscal neutrality do not support the position that non-

taxable person cannot be included in a VAT group. As a

result, the Advocate General has proposed that the CJ

should dismiss the action brought by the Commission

against Ireland.

Presidency progress report regarding VAT treatment of

insurance and financial services

On 14 December 2011, the Working Party on Tax

Questions (Indirect Taxation) discussed the draft

Presidency progress report on the proposals for a

Council Directive and a Regulation as regards the VAT

treatment of insurance and financial services. The aim

of the proposals is to clarify and update definitions of

the exempt insurance and financial services in order to

ensure consistent interpretation throughout the EU, to

broaden the existing option for taxation by transferring

the right to opt from the Member States to the financial

82

company (‘BV’) purchased medical equipment and

leased this equipment to a hospital. The decisions in

respect of the purchase of the medical equipment were

made by the hospital. After the hospital had come to

an agreement with the supplier about the conditions,

specifications and price of the equipment it would

place an order with the BV and thereafter the BV would

order the equipment from the supplier. The equipment

was delivered directly to the hospital. The input VAT

incurred on the purchase of the medical equipment was

deducted by BV. Moreover, BV declared and paid the

VAT due on the leasing terms.

In the Weald Leasing case (C-103/09) the CJ ruled that

taxpayers may, in principle, choose to either purchase

goods directly or to get the disposal of those goods

by means of lease. In this regard the CJ ruled that

obtaining a VAT pre-financing advantage in itself does

not constitute abuse of law. The Netherlands Supreme

Court, nevertheless, ruled that the lease scheme in

the case at hand constituted abuse of law. According

to the Court, it was clear for all parties involved in

the transactions that the intention was to form a VAT

fiscal unity between the BV and the hospital after the

revision period of 5 years would have ended. As a

result, the lease terms would as of that moment no

longer be subject to VAT. This would, in turn, have as a

consequence that the hospital would incur significantly

less non-deductible VAT compared to the situation in

which it would have directly purchased the medical

equipment. Moreover, the Supreme Court ruled that

the conditions for abuse of law were already fulfilled

at the time the medical equipment was purchased,

even though the forming of the VAT fiscal unity would

only take place in the future and was therefore not yet

completely certain at that time.

Finally, the Supreme Court concluded that the tax

authorities were allowed to deny the deduction of input

VAT by the BV. In this regard the Court ruled that it was

not relevant which of the parties’ action constituted

abusive practice, and which party profited (the most) of

the tax advantages obtained.

is limited to massive and sudden fraud situations in

specific economic sectors which cannot be stopped via

traditional control and enforcement means and which

would lead to irreparable losses.

Commission requests France and Luxemburg to amend their VAT rates on e-books

On 24 October 2012, the Commission asked France

and Luxemburg to amend their VAT rates on electronic

books (e-books). The Commission considers that

France and Luxembourg have applied a reduced

VAT rate on e-books since 1 January 2012, which it

considers to be incompatible with the VAT Directive, as

e-books constitute electronically supplied services for

which the reduced VAT rate does not apply.

According to the Commission, it creates a serious

distortion to the disadvantage of operators in 25 other

Member States of the EU, due to the fact that e-books

can easily be purchased in a Member State other than

that in which the consumer resides. The Commission,

therefore, has issued reasoned opinions to the two

Member States. France and Luxembourg have one

month to bring their legislation in compliance with EU

law, otherwise the Commission may refer the matter to

the CJ.

Finally, the Commission has indicated that it is aware

of the different treatment being applied to e-books and

printed books, and notes the importance of e-books.

Therefore, it has opened a debate with the Member

States and should put forward proposals on this matter

before the end of 2013.

Developments in the Netherlands: Netherlands Supreme Court delivers judgment concerning abuse in a hospital equipment leasing scheme

On 10 February 2012, the Netherlands Supreme Court

delivered its judgment in a case about a hospital leasing

scheme (No. 08/05317). A Netherlands limited liability

83

World Bank as high-income or upper middle-income

countries and which are not sufficiently diversified in

their exports;

- The first special incentive, ‘GSP+’, provides for

further tariff reductions for developing countries

joining the ‘flagship’ for promoting human rights

that sign, ratify and effectively implement a set of

27 core UN and International Labour Organisation

conventions on human and labour rights,

environmental protection and good governance;

- The second special incentive, ‘Everything But

Arms’ (EBA), provides for full duty-free and quota-

free imports of all goods from the least developed

countries with the exception of arms. Under the new

regulation, the EBA arrangement is not changed.

The changes introduced by the regulation fall into five

main areas: country coverage; preference margins

and product coverage; product graduation; ‘GSP+’ and

special safeguards.

On 31 October 2012, the EU published the revised

GSP, which will take effect from 1 January 2014. The

publication contains the specific tariff preferences

granted under the GSP in the form of reduced or zero

tariff rates and the final criteria for which developing

countries will benefit. The new scheme will be focused

on fewer beneficiaries (89 countries) to ensure more

impact on countries most in need.

At the same time, more support will be provided to

countries which are serious about implementing

international human rights, labour rights and

environment and good governance conventions.

The current GSP scheme will remain valid until 1

January 2014, thus giving economic operators time to

adapt to the revised regime.

The Council and the European Parliament built on the

Commission’s proposal by introducing a wider though

limited expansion of products and preferences, a longer

transition period for the application of the new GSP, and

by expanding specific safeguards to include ethanol and

plain textiles.

Customs Duties, Excises and other Indirect Taxes

Revised scheme for tariff preferences for developing countries

On 4 October 2012, the Council adopted a Regulation

amending the EU’s scheme of generalised tariff

preferences (GSP) for developing countries. Adoption of

the regulation follows an agreement with the European

Parliament; the Parliament adopted its position at the

first reading on 13 June 2012.

The EU’s GSP has been in force since 1971. Trade

preferences granted to developing countries contribute

to their integration into the global trade system and to

their sustainable development, whilst those provided

under the EU’s ‘GSP+’ arrangement are used as an

incentive to improving governance, the quality of life and

the protection of human rights.

The reform of the GSP is aimed at adapting the system

to the changed global landscape and making it more

transparent and predictable, and more generous

to the countries in greatest need. Preferences will

now be concentrated on the least developed, low

income and lower middle-income countries, taking

account of changing economic and trade patterns and

acknowledging that the economic crisis and preference

erosion have hit the poorest countries hard. The

selection of beneficiaries will henceforth be largely

income-based. Countries that already enjoy preferences

under free trade agreements with the EU, or under

autonomous arrangements, will be excluded from the

scheme.

The EU GSP consists of a general arrangement and two

special incentives:

- The general arrangement provides for tariff

reductions or suspensions for goods imported from

developing countries which are not classified by the

84

What countries will no longer benefit?

The main country categories which will no longer benefit

from the GSP scheme are as follows:

33 overseas countries and territories. These are mainly

EU territories which have their own market access

regulation—and thus do not use GSP to enter the EU.

Reform in general will be neutral for them. This is the

case for:

• Anguilla, Netherlands Antilles, Antarctica, American

Samoa, Aruba, Bermuda, Bouvet Island, Cocos

Islands, Christmas Islands, Falkland Islands,

Gibraltar, Greenland, South Georgia and South

Sandwich Islands, Guam, Heard Island and

McDonald Islands, British Indian Ocean Territory,

Cayman Islands, Northern Mariana Islands,

Montserrat, New Caledonia, Norfolk Island, French

Polynesia, St Pierre and Miquelon, Pitcairn, Saint

Helena, Turks and Caicos Islands, French Southern

Territories, Tokelau, United States Minor Outlying

Islands, Virgin Islands – British, Virgin Islands- US,

Wallis and Futuna, Mayotte.

• 34 countries which enjoy another trade arrangement

with the EU which provides substantially equivalent

coverage as compared to GSP. This includes

countries with a Free Trade Agreement or with

autonomous arrangements (such as the Market

Access Regulation for countries with an Economic

Partnership Agreement (EPA) or the special regime

for Western Balkan countries). Given that use of

GSP is marginal for these countries, reform will in

general be neutral for them. This is the case for:

• Euromed (6): Algeria, Egypt, Jordan, Lebanon,

Morocco, Tunisia

• Cariforum (14): Belize, St. Kitts and Nevis,

Bahamas, Dominican Republic, Antigua and

Barbuda, Dominica, Jamaica, Saint Lucia, Saint-

Vincent and the Grenadines, Barbados, Trinidad and

Tobago, Grenada, Guyana, Surinam

• Eastern Southern Africa (3): Seychelles, Mauritius,

Zimbabwe

• Pacific (1): Papua New Guinea

What partners are beneficiaries in the reformed GSP?

The new scheme is expected to start with 89

beneficiaries: 49 least developed countries in the

Everything But Arms scheme, and 40 other low and

lower-middle income partners:

Everything But Arms (49):

• 33 in Africa (Angola, Burkina Faso, Burundi, Benin,

Chad, Congo (Democratic Republic of), Central

African Republic, Djibouti, Eritrea, Ethiopia, Gambia,

Guinea, Equatorial Guinea, Guinea-Bissau,

Comoros Islands, Liberia, Lesotho, Madagascar,

Mali, Mauritania, Malawi, Mozambique, Niger,

Rwanda, Sudan, Sierra Leone, Senegal, Somalia,

Sao Tome and Principe, Togo, Tanzania, Uganda,

Zambia);

• 10 in Asia (Afghanistan, Bangladesh, Bhutan,

Cambodia, Lao (People’s Democratic Republic),

Maldives (until end 2013 as they have exited the

UN Least Developed Country list), Myanmar/Burma

(preferences currently withdrawn), Nepal, Timor-

Leste, Yemen);

• 5 in Australia and Pacific (Kiribati, Samoa, Solomon

Islands, Tuvalu, Vanuatu)

• 1 in the Caribbean (Haiti).

These partners will enjoy more opportunities to export

as competitors exit the scheme.

Low and lower middle income partners (40):

• Armenia, Azerbaijan, Bolivia, China, Cape Verde,

Colombia, Cook Islands, Costa Rica, Ecuador,

Georgia, Guatemala, Honduras, India, Indonesia,

Iran (Islamic Republic of), Iraq, Kirghizia, Marshall

(islands), Micronesia (federate States of), Mongolia,

Nauru, Nicaragua, Nigeria, Niue, Pakistan, Panama,

Paraguay, Peru, the Philippines, El Salvador, Sri

Lanka, Syrian (Arab Republic), Tajikistan, Thailand,

Congo (Republic of), Tonga, Turkmenistan, the

Ukraine, Uzbekistan, Vietnam.

These partners will also enjoy more opportunities to

export as competitors exit the scheme.

85

in another Member State that were borrowed free-of-

charge and used on the Netherlands road network by

private persons Van Putten, Mook and Frank.

Mrs van Putten and Mr Mook are Dutch nationals. Mrs

Frank is a German national. They were all resident in

the Netherlands at the time of the facts at issue in the

main proceedings.

In the course of checks, officers of the Netherlands Tax

Authority established that these persons were using cars

registered in other Member States on the Netherlands

public roads without having paid car registration tax.

Accordingly, they were advised that, at a subsequent

check, they might be issued with an assessment notice

for the payment of that tax. At a subsequent check, the

defendants in the main proceedings were stopped and

found to be in the same situation again.

Tax assessments, therefore, were sent to them,

amounting to EUR 5,955 for Mrs van Putten, EUR 1,859

for Mr Mook and EUR 6,709 for Mrs Frank. The Tax

Authority rejected the appeal by the persons concerned

maintaining that, in accordance with Netherlands law, on

the first use of vehicles in the Netherlands registration

tax was due at the full rate and on the full basis of

assessment. Thus, the length of use of those vehicles

was not taken into account in the assessment.

On appeal, the cases reached the Netherlands Supreme

Court, which referred questions for preliminary ruling

to the CJ. The referring court points out that the CJ

has already had occasion to rule on the compatibility of

vehicle tax with European Union law, but in connection

with situations in which the freedoms relied on were

the freedom of movement for workers, freedom of

establishment or freedom to provide services. However,

the disputes in the main proceedings concern natural

persons resident in the Netherlands who used, in the

Netherlands and for private purposes, a car registered in

another Member State which was made available for no

consideration by natural persons resident in that other

Member State who were family members or friends.

First, the CJ held that – contrary to the Supreme Court’s

reference to the right of freedom of movement and

residence of EU citizens (Article 21 TFEU) – the cases

• Economic Partnership Agreement Market Access

Regulation (8): Côte d’Ivoire, Ghana, Cameroon,

Kenya, Namibia, Botswana, Swaziland, Fiji

• Other (2): Mexico, South Africa

Countries which have been listed by the World Bank

as high or upper middle income economies for the past

three years, based on Gross National Income (GNI) per

capita. These are:

• 8 high-income partners (Saudi Arabia, Kuwait,

Bahrain, Qatar, United Arab Emirates, Oman, Brunei

Darussalam; Macao) and

• 12 upper-middle income partners (Argentina,

Brazil, Cuba, Uruguay, Venezuela; Belarus, Russia,

Kazakhstan; Gabon, Libya, Malaysia, Palau).

Some limited drops in exports (typically in the 1% range)

are expected for many of these partners. Even marginal

drops in exports by more advanced, bigger economies,

can potentially provide significant opportunities for the

poorest, whose exports are very small in comparison.

To give an idea of the order or magnitude, a drop of 1%

in, say, Brazilian exports, is equivalent to more than 16

times Burkina Faso’s total exports to the EU.

Countries in the second and third category remain

‘eligible’, but are no longer ‘beneficiaries’ of the GSP

scheme. This means that if their situation changes

(if they are no longer listed as high or middle upper

income countries by the World Bank or if their

trade arrangement expires) they will again become

beneficiaries of the scheme.

CJ rules on the levy of Netherlands car registration tax in the case of borrowing of cars registered in another Member State (Van Putten and Others)

On 26 April 2012, the CJ delivered its judgement in

the joint cases Van Putten and Others (C-578/10

to C-580/10). The cases concern the levy of car

registration tax in the Netherlands on cars registered

86

normally due on registration of a vehicle in the first

Member State, without taking account of the duration of

the use of that vehicle on that road network and without

that person being able to invoke a right to exemption or

reimbursement where that vehicle is neither intended

to be used essentially in the first Member State on a

permanent basis nor, in fact, used in that way.

CJ rules on the correction of export documents after the goods have been released and the effects on export refunds (Südzucker AG and Others)

On 12 July 2012, the CJ delivered its judgement in the

Joint Cases Südzucker AG, WEGO Landwirtschaftliche

Schlachtstsellen GmbH and Fleischkontor Moksel

GmbH (C-608/10, C-10/11 and C-23/11). The cases

concern the question whether the exporters are entitled

to export refunds in the situation that incorrect exporters

were mentioned on export documents and these

documents were corrected by Customs.

The CJ ruled as follows:

1. ‘Article 5(7) of Commission Regulation (EC) No

800/1999 of 15 April 1999 laying down common

detailed rules for the application of the system of

export refunds on agricultural products, as amended

by Commission Regulation (EC) No 90/2001 of

17 January 2001, must be interpreted as meaning

that, in principle, the holder of an export licence is

entitled to an export refund only if he is registered

as exporter in box 2 of the export declaration lodged

with the competent customs office.

2. Article 78(1) and (3) of Council Regulation (EEC)

No 2913/92 of 12 October 1992 establishing the

Community Customs Code must be interpreted as

allowing a post-clearance revision of the export

declaration for the purpose of refunds, in order to

change the name of the exporter featuring in the box

provided for that purpose, and as meaning that the

customs authorities are required:

had to be decided in the light of the free movement of

capital (Article 63 TFEU).

The CJ then pointed out that the Netherlands legislation

imposes a vehicle tax in the case of a loan free-of-

charge for cross-border use of a vehicle not registered

in the Netherlands whereas that type of loan is not

subject to that tax if the vehicle is registered in the

Netherlands. This apparent difference in treatment

according to the State where the loaned vehicle is

registered makes cross border loans of vehicles free

of charge less attractive and therefore, constitutes a

restriction on the free movement of capital.

The CJ then examined whether there was actually a

difference in treatment in the situations at hand.

It is settled case law that a Member State may impose a

registration tax on a motor vehicle registered in another

Member State where that vehicle is intended to be used

essentially in the first Member State on a permanent

basis or where it is, in fact, used in that manner. In the

case of a domestic loan of a vehicle, the owners of

vehicles registered in the Netherlands have already paid

vehicle tax when the vehicle was entered on the vehicle

register in the Netherlands; those vehicles, however, are

intended to be used essentially in that Member State on

a permanent basis or are, in fact, used in

that way. The case of a cross-border loan of a vehicle

is comparable to a domestic loan where the vehicle

registered in another Member State is intended to be

used essentially in the Netherlands on a permanent

basis or is, in fact, used in that way. In such case, the

levy of the vehicle tax at the full rate and on the full

basis does not constitute discrimination (provided that

the tax takes account of the depreciation of the vehicle

at the time of that first use, as required by previous case

law). It follows that the purpose and duration of the use

of the vehicle in the Netherlands must be taken into

account when taxing cross-border free-of-charge loans

of vehicles.

Consequently, EU law precludes legislation of a Member

State which requires residents who have borrowed

a vehicle registered in another Member State from a

resident of that State to pay, on first use of that vehicle

on the national road network, the full amount of a tax

87

the reference in box 2 of the export declaration and

to refuse an application for an export refund on

the ground that the party making that application

is not the exporter of the goods covered by that

application. By contrast, if the competent customs

office grants the application for amendment and

validly rectifies the exporter’s name, the customs

office responsible for paying the export refund is

bound by that decision.’

CJ rules on the repayment of anti-dumping duty that was not legally owed (CIVAD)

On 14 June 2012, the CJ delivered its judgement in

the case Compagnie internationale pour la vente à

distance (CIVAD) SA (C-533/10). The case concerns the

repayment of anti-dumping duty that was levied upon

importation of cotton-type bed linen originating in Egypt,

India and Pakistan. The anti-dumping duty was not

legally owed since the regulation on the basis of which

the duty was levied was declared invalid.

CIVAD is established in France and its business is the

sale of goods by mail order, marketed for that purpose

as cotton-type bed linen originating in Pakistan. By

letters of 26 July and 28 October 2002, CIVAD sought

from the Administration des douanes the repayment

of anti-dumping duties which it had paid in respect of

import declarations lodged, pursuant to Regulation

No 2398/97, for the periods between 15 December

1997 and 25 January 1999, between 1 February

and 23 July 1999 and between 29 July 1999 and 25

January 2002 respectively. By letter of 17 March 2008,

the Administration des douanes granted CIVAD’s

application for the import declarations lodged during

the period between 29 July 1999 and 25 January

2002. However, it dismissed the application for the

import declarations lodged during the two other periods

referred to above, on the ground that it was submitted

after the expiration of the three-year time limit laid

down by the first subparagraph of Article 236(2) of

the Customs Code. By letter of 24 April 2008, CIVAD

requested the Administration des douanes to reconsider

its decision claiming that it had not been possible for it to

- firstly, to examine whether a revision of that

declaration must be considered to be possible in

that, in particular, the objectives of the European

Union legislation as regards export refunds have not

been threatened and the goods in question have

in fact been exported, this being a matter for the

applicant to establish, as well as ;

- secondly, where relevant, to take the measures

necessary to regularise the situation, taking account

of the new information available to them.

3. Article 5(7) of Regulation No 800/1999, as

amended by Regulation No 90/2001, and the

customs legislation of the European Union must be

interpreted as meaning that, in a case such as Case

C-608/10, in which the holder of an export licence is

not registered as the exporter in box 2 of the export

declaration, the customs authorities cannot grant

that holder the export refund without prior correction

of the export declaration.

4. In a case such as those in Cases C-10/11 and

C-23/11, the customs legislation of the European

Union the customs legislation of the European Union

must be interpreted as meaning that the customs

office responsible for paying the export refund is

bound by a post-clearance revision, by the customs

office of export, of the reference in box 2 of the

export declaration, or, as the case may be, of the

T5 control copy, if the amending decision fulfils all

the formal and substantive conditions of a ‘decision’

provided for both by Article 4(5) of Regulation

No 2913/92 and by the relevant provisions of the

national law concerned. It is for the referring court

to determine whether those conditions have been

satisfied in the disputes in the main proceedings.

5. Article 5(7) of Regulation No 800/1999, as

amended by Regulation No 90/2001, and the

customs legislation of the European Union must

be interpreted as meaning that the customs office

responsible for paying the export refund is not

entitled, in a case such as Case C-23/11, and if it is

not bound under national law by the revision made

by the customs office of export, to take at face value

88

its competence, of the agreements reached in the

Uruguay Round multilateral negotiations (1986-

1994).’

CJ rules on the customs debt incurred by the delayed entry in warehouse stock records (Eurogate Distribution)

On 6 September 2012, the CJ delivered its judgement

in the case Eurogate Distribution GmbH (C-28/11).

The case concerns a customs debt incurred through

non-fulfilment of an obligation, being the delayed

entry in stock records of information concerning the

removal of goods from a customs warehouse. Eurogate

has been authorised to operate a private customs

warehouse since 2006. The stock records for that

customs warehouse are kept, in accordance with the

authorisation, with the aid of a computer program.

As warehousekeeper, Eurogate took into its private

customs warehouse non-Community goods from its

customers with a view to forwarding them outside

the territory of the European Union. At the time of the

removal of the goods from the customs warehouse,

customs declarations for their re-exportation were drawn

up.

During a customs inspection on 31 January 2007, it was

established that removals of the goods at issue were not

entered in the stock records until 11 to 126 days after

the removals took place, and were thus recorded late for

the purposes of the first paragraph of Article 105 of the

Customs Code, read in conjunction with Articles 529(1)

and 530(3) of the Implementing Regulation.

By notice of 1 July 2008, the German Main Customs

Office (Hauptzollamt) imposed import duties on

the goods which had been recorded late. Eurogate

challenged that notice.

Following remission of a portion of the duties,

granted by notice of 11 August 2009, by a decision of

8 December 2009, the Hauptzollamt dismissed the

remainder of Eurogate’s challenge as unfounded, on

the ground that the delayed entries in the stock records

submit its applications for repayment before Regulation

No 160/2002 on the termination of the anti-dumping

proceeding with regard to imports originating in Pakistan

was published in the Official Journal of the European

Union. By letter of 14 August 2008, the Administration

des douanes rejected that request.

By summons of 2 July 2009, CIVAD initiated

proceedings before the District Court of Roubaix against

the customs authorities pursuant to Article 234 of the

Customs Code.

In those circumstances, the District Court of Roubaix

taking the view that the outcome of the proceedings

before it depended on the interpretation of Article 236(2)

of the Customs Code, decided to refer questions to the

Court for a preliminary ruling.

The CJ ruled as follows:

‘1. The second subparagraph of Article 236(2) of

Council Regulation (EEC) No 2913/92 of 12 October

1992 establishing the Community Customs Code,

as amended by Regulation (EC) No 2700/2000 of

the European Parliament and of the Council of 16

November 2000 must be interpreted as meaning

that the unlawfulness of a regulation is not a case of

force majeure within the meaning of that provision,

allowing an extension of the three-year time limit

during which an importer can request the repayment

of import duties paid pursuant to that regulation.

2. The third subparagraph of Article 236(2) of

Regulation (EEC) No 2913/92, as amended by

Regulation (EC) No 2700/2000, must be interpreted

as not allowing national customs authorities to

repay, on their own initiative, anti-dumping duties

collected pursuant to a European Union regulation,

on the basis of a finding by the Disputes Settlement

Body that that regulation was not in accordance

with the Agreement on Implementation of Article

VI of the General Agreement on Tariffs and Trade

1994, set out in Annex 1A of the Agreement

establishing the World Trade Organisation (WTO),

signed in Marrakech on 15 April 1994 and approved

by Council Decision 94/800/EC of 22 December

1994 concerning the conclusion on behalf of the

European Community, as regards matters within

89

the Finance Court in Hamburg decided to stay the

proceedings and to refer the following question to the

Court for a preliminary ruling:

‘On a proper interpretation of Article 204(1)(a) of the

Customs Code, does infringement of the obligation,

in the case of non-Community goods which were in

the customs warehousing procedure and have been

assigned a new customs-approved treatment or use

upon discharge of that procedure, to record the removal

of the goods from the customs warehouse in the

appropriate computer program forthwith upon discharge

of the customs warehousing procedure – rather than

considerably later – cause a customs debt to arise in

respect of the goods?’

The CJ ruled as follows:

Article 204(1)(a) of Council Regulation (EEC) No

2913/92 of 12 October 1992 establishing the Community

Customs Code, as amended by Regulation (EC) No

648/2005 of the European Parliament and of the Council

of 13 April 2005, must be interpreted as meaning that,

in the case of non-Community goods, non-fulfilment

of the obligation to enter the removal of the goods

from the customs warehouse in the appropriate stock

records, at the latest when the goods leave the customs

warehouse, gives rise to a customs debt in respect of

those goods, even if they have been re-exported.

CJ rules on the customs debt incurred by non-fulfilment of obligations related to Inward Processing relief (Döhler Neuenkirchen)

On 6 September 2012, the CJ delivered its judgement in

the case Döhler Neuenkirchen GmbH (C-262/10). The

case concerns a customs debt that results from the non-

fulfilment of an obligation to supply the bill of discharge

for products processed under the Inward Processing

relief within the prescribed period.

During the first quarter of 2006, Döhler imported

concentrated fruit juice which it processed under the

inward processing procedure in the form of the system

of suspension, as permitted by the authorisation issued

to it. According to that authorisation, the period for

were to be regarded as constituting a failure on the part

of Eurogate to meet its obligations under the customs

warehousing procedure and that, consequently, that

failure had given rise to a customs debt on the basis of

Article 204(1) of the Customs Code. In that respect, the

referring court points out that the obvious negligence

on the part of Eurogate precludes the conclusion that

that infringement had no effect on the correct operation

of the customs procedure with the result that, in the

present case, the requirements of Article 859 of the

Implementing Regulation had not been met.

Eurogate subsequently brought an action before the

Finance Court in Hamburg for annulment of the notice of

assessment of 1 July 2008, as amended by the notice

of 11 August 2009 and confirmed by the decision of

8 December 2009, claiming, inter alia, that the delayed

entries of the removals from the customs warehouse

in the stock records do not constitute a failure to fulfil

its obligations within the meaning of Article 204(1)(a)

of the Customs Code inasmuch as, in accordance with

Article 105 of the Customs Code and Article 530(3)

of the Implementing Regulation, the obligation to

record removals in the stock records has to be fulfilled

only after the discharge of the customs warehousing

procedure.

The Hauptzollamt responded to that argument that the

keeping of the stock records is not an obligation that

can be fulfilled after the discharge of the procedure.

On the contrary, it argued, entries in the stock records

must be made during the customs warehousing

procedure, or at the same time as the discharge of

the procedure. According to the Hauptzollamt, the

customs warehousing procedure was not terminated,

in the present case, until after the removal of the non-

Community goods upon their release for the transit

procedure as a new customs-approved treatment or

use.

The referring court has doubts concerning the

interpretation according to which the non-fulfilment of

the obligation to immediately enter the removal of goods

in the stock records gives rise to a customs debt.

Considering that the resolution of the dispute before

it required the interpretation of European Union law,

90

Challenging the dismissal of its action, Döhler then

brought an appeal on a point of law before the Federal

Finance Court, claiming that the customs procedure

had been discharged on 31 March 2007 and that any

non-fulfilment of obligations after that date, such as the

late submission of the bill of discharge, could not have

an impact on the procedure or, still less, give rise to a

customs debt.

The referring court, having analysed the interpretation

of the Customs Code put forward by Döhler, examined

the issue of the incurrence of a customs debt in

circumstances such as those of the present case.

Furthermore, it stressed the risk of a double customs

debt being incurred by goods which are not re-exported;

firstly, upon the expiry of the time-limit for discharge

of the relevant customs procedure, and secondly, on

the expiry of the time-limit for submission of the bill of

discharge.

It is against that background that the Federal Finance

Court, taking the view that the resolution of the dispute

before it required the interpretation of the Customs

Code, decided to stay the proceedings and to refer the

following question to the Court for a preliminary ruling:

‘Is Article 204(1)(a) of the Customs Code to be

interpreted as meaning that it also applies to non-

fulfilment of those obligations which are to be fulfilled

only after discharge of the relevant customs procedure

which has been used, so that where goods imported

under an inward processing procedure in the form of

a system of suspension have been partly re-exported

within the time-limit the failure to fulfil the obligation

to supply the bill of discharge to the supervising

office within 30 days of the expiry of the time-limit for

discharging the procedure gives rise to a customs debt

in respect of the entire quantity of the imported goods

covered by the bill of discharge if the requirements of

Article 859(9) of the Implementing Regulation are not

fulfilled?’

The CJ ruled as follows:

Article 204(1)(a) of Council Regulation (EEC) No

2913/92 of 12 October 1992 establishing the Community

Customs Code, as amended by Regulation (EC) No

648/2005 of the European Parliament and of the Council

discharge of the inward processing procedure expired

in the following fourth calendar quarter, that is to say, on

31 March 2007. It is also apparent from the documents

before the Court that the authorisation permitted Döhler

to release compensating products or goods in the

unaltered state for free circulation without customs

declaration.

Although the bill of discharge should have been supplied

within 30 days of the expiry of the period for discharge,

that is, in the main proceedings, no later than 30 April

2007, Döhler failed to do, and ignored the warning from

the Hauptzollamt requiring the bill of discharge to be

supplied by 20 June 2007.

In the absence of that bill of discharge, the Hauptzollamt

imposed import duty on all the imported goods in

respect of which the period for discharge had expired

on 31 March 2007, for the full amount, namely

EUR 1,403,188.49.

On 10 July 2007, Döhler finally supplied the bill

of discharge for the goods at issue in the main

proceedings, which showed a lesser amount of import

duty, namely EUR 217,338.39, corresponding to a

significantly lower quantity of the imported goods which

had not been re-exported within the time-limit, that is to

say before 31 March 2007.

Döhler challenged the difference between the amount

of the import duty determined by the Hauptzollamt and

that resulting from its bill of discharge. Following the

dismissal of its claim, it brought an action before the

Finance Court in Hamburg seeking the rebate of those

duties which it did not consider to be due.

The Finance Court in Hamburg dismissed the action

before it, holding that, by exceeding the period allowed

for submission of the bill of discharge, Döhler had not

fulfilled its obligations and had thus incurred a customs

debt pursuant to Article 204(1)(a) of the Customs Code.

That court also held that the late submission of the bill

of discharge could not be considered a failure having no

significant effect on the correct operation of the customs

procedure within the meaning of Article 859(9) of the

Implementing Regulation.

91

certificates in accordance with Article 94 of Regulation

No 2454/93, as amended by Regulation No 1602/2000.

In the course of that verification, the Macao authorities

confirmed that they had issued the certificates of origin

for the goods in question but they were unable to verify

the accuracy of the content of those certificates, as the

companies who provided the information as exporters

had ceased production and therefore, had been closed

down. Nevertheless, the Macao authorities did not

invalidate the certificates of origin.

As the subsequent verification had not confirmed the

origin of the goods, the Main Customs Office held that

they were of unknown origin. Accordingly, by three

import duty notices respectively dated 21, 22 and 25

August 2008, the Main Customs Office claimed, on the

basis of Article 220(1) of the Community Customs Code,

recovery of the difference between the customs duties

calculated on the basis of the preferential rate of duty

(3.5%) and those calculated on the basis of the normal

rate of duty (7%).

After unsuccessfully challenging that post-clearance

recovery of import duties, Lagura brought proceedings

before the Finance Court of Hamburg, the referring

court, in which it invoked, inter alia, the principle of the

protection of legitimate expectations, in accordance with

Article 220(2)(b) of the Customs Code.

The Finance Court of Hamburg is uncertain as to which

party must bear the burden of proving that the certificate

of origin was based on a correct or incorrect account

of the facts by the exporter. In that regard, it points

out that, in Case C-293/04 Beemsterboer Coldstore

Services, the Court of Justice had ruled that the burden

of proving that the certificate issued by the authorities

of the non-member country was based on a correct

account of the facts lies with the person liable for the

duty, notwithstanding generally accepted rules on the

allocation of the burden of proof according to which

that burden rests with the customs authorities which

wish to rely on the third subparagraph of Article 220(2)

(b) of the Customs Code. Referring to paragraph 43

of the judgment in Beemsterboer Coldstore Services,

according to which the European Union cannot be made

to bear the adverse consequences of the wrongful acts

of 13 April 2005, must be interpreted as meaning

that the non-fulfilment of the obligation to submit the

bill of discharge to the supervising office within 30

days of the expiry of the period for discharging the

relevant procedure set down in the first indent of the

first subparagraph of Article 521(1) of Commission

Regulation (EEC) No 2454/93 laying down provisions

for the implementation of Council Regulation (EEC)

No 2913/92, as amended by Commission Regulation

(EC) No 214/2007 of 28 February 2007, gives rise

to a customs debt in respect of the entire quantity of

the imported goods covered by the bill of discharge,

including goods re-exported outside the territory of the

European Union, where the conditions set out in Article

859(9) of Regulation No 2452/93 are not considered to

be fulfilled.

CJ rules on the burden of proof for certificates of origin (Lagura)

On 8 November 2012, the CJ delivered its judgement

in case Lagura (C-438/11). The case concerns the post

clearance of import duties in a situation where it is not

possible to verify the accuracy of certificates of origin

Form A.

Lagura imported shoes into the European Union in

2007. Between the months of February and September

of that year, Lagura made a number of customs

declarations for the purposes of the release of the

goods for free circulation within the European Union.

By way of documents attesting to the origin of the

goods, certificates of origin Form A were attached to

the customs declarations, showing that the goods came

from Macao. On the basis of those documents, the duty

charged by the German Main Customs Office on the

shoe imports was applied, on each occasion, only at the

preferential rate of 3.5%.

After receiving information according to which certain

goods originating in China had been wrongly declared

as coming from Macao in order to avoid payment of a

non-preferential import duty, the Main Customs Office

arranged for an application to be made to the competent

Macao authorities for subsequent verification of the

92

have a corrective effect, and, if so, does that principle

then have the effect that one or both of the Member

States is/are required to restrict the exercise of their

powers of taxation, and how should any such restriction

be manifested?’

Authorised Economic Operator Programme and Customs-Trade Partnership Against Terrorism Program of the US – Proposal

A proposal for a Council Decision on a Union position

within the EU-US Joint Customs Cooperation Committee

regarding mutual recognition of the Authorised

Economic Operator Programme of the European Union

and the Customs-Trade Partnership Against Terrorism

Program of the United States has been published. The

context of the proposal is set out below.

CONTEXT OF THE PROPOSAL

EU legislation on the Authorised Economic Operator

(AEO) was introduced by an amendment to the

European Union’s Community Customs Code

(Regulation 648/2005 adopted in April 2005). The

objective of trade partnership programmes such as

the AEO is to provide facilitation to traders which

demonstrate compliant efforts to secure their part of the

international supply chain.

The AEO legislation came into force in January 2008.

By October 2011, more than 4,300 EU companies had

been certified for security.

Mutual recognition of trade partnership programmes

enhances end-to-end supply chain security and

facilitates trade. It consolidates internationally the

approach agreed in the World Customs Organization

(WCO) Framework of Standards to Secure and

Facilitate Trade (‘SAFE Framework’). It also addresses

the concerns of the business community to avoid

proliferation of requirements and to standardise customs

security procedures.

of the suppliers of importers, the referring court asks

whether the burden of proof must perhaps be borne by

the person liable for payment only in cases where the

exporter has done something wrong.

In those circumstances, the Finance Court of Hamburg

decided to stay the proceedings and to refer a question

to the CJ for a preliminary ruling.

The CJ ruled as follows:

‘Article 220(2)(b) of Council Regulation (EEC) No

2913/92 of 12 October 1992 establishing the Community

Customs Code, as amended by Regulation (EC) No

2700/2000 of the European Parliament and of the

Council of 16 November 2000, must be interpreted as

meaning that if, owing to the fact that the exporter has

ceased production, the competent authorities of the

non-member country are unable, through a subsequent

verification, to determine whether the certificate of origin

Form A that they issued is based on a correct account of

the facts by the exporter, the burden of proving that the

certificate was based on a correct account of the facts

by the exporter rests with the person liable for payment.’

Netherlands Supreme Court refers preliminary question to the CJ regarding the imposition of double car registration tax (X case)

On 20 June 2012, the Netherlands Supreme Court

referred a question for a preliminary ruling to the CJ in

the X case (C-302/12) regarding the limits of powers of

Member States to levy car registration tax in situations

when a taxpayer uses a car in two Member States

simultaneously. In particular, the Supreme Court asks:

‘Is the exercise of powers of taxation by two Member

States, in particular the imposition of a registration tax

on a motor vehicle, unlimited in circumstances in which

a citizen of the European Union lives, according to

national laws, in two Member States, and in which that

citizen actually uses - in both Member States and on

a permanent basis - a motor vehicle that belongs to her?

If the first question is answered in the negative, can

the principle of proportionality in the context of the

imposition of a registration tax in a case such as this

93

joint validation visits in the US were completed by 4

November 2011.

Mutual recognition of the EU and US trade partnership

programmes has been highlighted as a key cooperation

project by the Transatlantic Economic Council; at

its meeting of 29 November 2011, the Transatlantic

Economic Council welcomed that the EU and the

US have completed the preparatory work on mutual

recognition of their trade partnership programmes.

Anti-Counterfeiting Trade Agreement – ACTA

On 22 February 2012, EU Commissioner De Gucht

issued a statement announcing that the ACTA

text will be passed on to the CJ for assessment.

Europe’s highest court is to examine whether ACTA is

incompatible - in any way - with the EU’s fundamental

rights and freedoms, such as freedom of expression and

information or data protection and intellectual property

rights. The Commission has taken this step to ensure

that the public debate on ACTA is based upon actual

facts and not upon misinformation or rumours.

EU challenges United States’ failure to remove illegal subsidies in Aircraft Trade Dispute

On 11 October 2012, the EU requested the

establishment of a World Trade Organization (WTO)

compliance panel to address the failure of the United

States to remove WTO-inconsistent subsidies to Boeing

in the DS 353 case, as it was required to do following

the decision by the WTO in March 2012.

Last month, the US claimed to have removed the WTO

inconsistencies, but provided no detailed evidence

to support its claims. Rather, it is now clear to the EU

that the US has not only failed to properly implement

the decision of the WTO but it has even provided

new subsidies to Boeing. The recent consultations

held between the EU and the US failed to resolve this

dispute.

EU-US relations in the area of customs are based on

the Agreement on Customs Cooperation and Mutual

Assistance in Customs Matters (‘CMAA’), signed on

28 May 1997. According to the CMAA, the respective

customs authorities undertake to develop customs

cooperation covering all matters relating to the

application of customs legislation.

Customs cooperation under the CMAA was expanded

by the Agreement on intensifying and broadening the

CMAA to include cooperation on container security and

related matters, signed on 28 April 2004. Two expert

working groups were then formed to focus on furthering

joint efforts in security standards and comparing trade

partnership programmes respectively.

In 2006, the EU and US agreed to assess the feasibility

of establishing mutual recognition of their respective

trade partnership programs.

In 2007, an in-depth comparison of both the US and EU

trade partnership programmes, namely the EU AEO and

the US Customs-Trade Partnership Against Terrorism

(C-TPAT) programmes, was completed. A pilot program

was launched in which the US Customs and Border

Protection (CBP) observed security components of the

EU’s AEO audit process.

Following the in-depth comparison of the EU and US

trade partnership programmes, a Roadmap towards

mutual recognition was adopted in March 2008, setting

key performance-based stages required to reach mutual

recognition. In January 2009, an abridged version of the

Roadmap was made public.

On 25 June 2010, the Commission’s DG Taxation and

Customs Union (‘DG TAXUD’) and the U.S. CBP agreed

on the Final Steps Towards the Implementation of

Mutual Recognition Between the United States and the

European Union, setting down the steps necessary and

the timetable for completing mutual recognition.

A work programme was established in September

2010, and amended in September 2011, covering the

process of joint validation and data exchange. A total of

twenty-seven joint validation visits in the EU and four

94

complaints related to cross-border car taxation that the

Commission receives year by year.

The Commission had already tried to address the

problem when, in 2005, it put forward a proposal

aimed at abolishing registration taxes and replacing

them with annual ‘green’ circulation taxes. The

Member States, however, could not reach unanimous

agreement on this proposal. As a result, EU law

related to car taxation is mainly derived from the CJ’s

judgments. The Commission has also launched over

300 infringement procedures against Member States

related to discrimination in national car registration rules

and circulation taxes. Despite the case law of the CJ

and legal proceedings against the Member States, the

fragmentation of national tax schemes, discrimination

and double taxation of cars transferred between

Member States persist.

As a short-term solution, in this Communication, the

Commission identifies and proposes to the Member

States to apply the following best practices:

• to ensure that taxpayers know their rights and

obligations when moving to another Member State,

Member States should provide adequate information

on their application of registration and circulation

taxes on vehicles in cross-border situations,

including information on how they have implemented

the EU legal framework described in the

Communication and the Staff Working Document. To

this end, a central contact point for taxpayers should

be designated, to which a link can be provided on

the website of the Commission

• to avoid double taxation and ‘over-taxation’ where

citizens move a car permanently from one Member

State to another, Member States that initially applied

a registration tax should as a minimum grant a

partial refund of the tax taking into account the

depreciation of the car independently of whether

or not the Member State of destination provides an

exemption from registration tax, if any

• Member States should make full use of the flexibility

offered by Directive 83/182/EEC to apply more

The panel will consider Europe’s assertion that the US

has not met its obligations to the WTO to remove the

illegal subsidies to Boeing or their adverse effects.

EU and Latin American countries formally end banana disputes

On 8 November 2012, the EU and ten Latin-American

countries signed, in the presence of WTO Director

General Pascal Lamy, a Mutually Agreed Solution

through which they agree to end eight pending banana

dispute settlement proceedings. The Mutually Agreed

Solution was notified to the chair of the Dispute

Settlement Body, Ambassador Shahid Bashir of

Pakistan. The signature follows the certification by the

WTO of reductions in EU banana tariffs, agreed as part

of the ‘Geneva Agreement on Trade in Bananas’ (GATB)

which the EU had concluded with Latin American

countries in December 2009.

Commission adopts Communication clarifying EU rules on car taxes

On 14 December 2012, the Commission presented a

Communication (COM(2012) 756) clarifying EU rules on

car taxation and recommending measures to strengthen

the Single Market in this area. The Communication is

accompanied by a Commission Staff Working Document

(SWD(2012) 429) giving an overview of the main legal

issues that arise in the field of vehicle taxation and

the level of protection available to EU citizens and

businesses that can be derived from EU law and the

CJ case law. This initiative is aimed at minimizing the

problems encountered by citizens and businesses

moving cars between Member States and removing

obstacles to cross-border rentals.

Car registration taxes and circulation taxes are not

harmonised in the EU. This can result in double taxation

in certain situations and cause the fragmentation of the

Single Market for passenger cars. The magnitude of

the problem is shown by the numerous questions and

95

security risks, they also help to enforce other policies

such as public health, consumer protection, intellectual

property rights, environment and agriculture.

A growing set of responsibilities and intensifying global

challenges such as greater trade flows, increasingly

complex supply chains, an ever faster pace of business

and the globalisation of terrorist risks have put a

mounting strain on customs. Meanwhile, the economic

crisis has squeezed public resources available to

perform these tasks. The Customs Union must do

increasingly more with increasingly less.

Therefore, Commission’s Communication sets out

a course of action to modernise, strengthen and

rationalise the Customs Union in the years ahead.

First, the modernisation of the Customs Union, which

was started in 2003, must be completed as a priority.

The Commission calls on the Council and Parliament to

adopt and implement the Union Customs Code, which

will make procedures simpler, more efficient and better

fitted for modern trade needs.

Second, work to address identified gaps must be

accelerated. In January 2013, the Commission is to

publish a Communication outlining how to improve

customs risk management and security of the supply

chain. Other measures foreseen for 2013 include a

proposal on approximation of customs penalties, a

review of tariff suspensions/quota rules, implementing a

crisis management action plan and developing a toolbox

of procedures to improve the efficiency of customs in

enforcing health, safety and environment rules.

Finally, a review of governance of how the Customs

Union functions internally will be initiated. The review,

to be undertaken in close collaboration with Member

States, should address how to work better together, in a

more harmonised way, to provide high quality customs

services and improve resource efficiency across the EU.

liberal arrangements allowing for the temporary use

of vehicles in Member States without application

of registration and circulation tax. This relates,

in particular, to rental cars registered in another

Member State, but also to other situations of

temporary or occasional use by a resident of a car

registered in another Member State.

• to take action to reduce the fragmentation of the EU

car market caused by the divergent application by

Member States of car registration and circulation

taxes. The upcoming Guidelines on financial

incentives for clean and energy-efficient vehicles

also need to be taken into account.

The Communication will be discussed by the European

Parliament, the Economic and Social Committee

and the Council. The Commission aims to use these

discussions, and the technical discussions with the

Member States, to give new momentum to its 2005

proposal on car taxation.

Commission adopts Communication on Customs Union: boosting EU competitiveness, protecting EU citizens in the 21st century

On 21 December 2012, the Commission adopted a

Communication on the State of Customs Union. The

Communication takes stock of the current state of the

EU Customs Union, identifies the challenges that it

currently faces, and sets out priority actions for ensuring

its future evolution. The aim is to ensure that the EU

Customs Union is as modern, effective and efficient as

possible in the coming years, to continue its work in

ensuring a safe and competitive Europe.

Every year, EU customs process 2 billion tonnes of

goods worth EUR 3,300 billion, and collects EUR 16.6

billion in customs duties. Yet, EU customs today are

far more than simply revenue collectors. Over the past

four decades, the Customs Union has evolved into a

multi-functional service provider, delivering both for

businesses and for society as a whole. Customs not

only ensure smooth trade flows and protect against

96

The Polish Naczelny Administrative Court referred the

following questions to the CJ:

1. In interpreting Article 7(1) of the Capital Duty

Directive, must a national court take account of

the provisions of amending directives, in particular

Directives 73/79/EEC and 73/80/EEC, even though

those directives were no longer in force when

Poland acceded to the EU?

2. If the answer to the first question is in the negative,

does the exclusion of the assets of a capital

company from the amount on which capital duty

is charged, as laid down in the first indent of

Article 5(3) of the Capital Duty Directive, concern

only the assets of a capital company which has had

an increase in capital?

The CJ considered, inter alia, that the date of 1 July

1984, which is taken as the relevant date under Article

7(1) of the Capital Duty, as amended, is equally

applicable to Poland. In the case of accession to the

EU, a reference to a date laid down in EU law, in the

absence of a provision to the contrary in the Act of

Accession or any other EU document, applies equally to

the State which is acceding, even if that date is earlier

than the date of its accession. With regard to Poland,

no provision which differs on that point could be found

either in the Act of Accession of that State or in any

other EU document. The CJ therefore ruled that in the

case of Poland, which acceded to the EU on 1 May

2004, and in the absence of provisions to the contrary,

the mandatory exemption of Article 7(1) of the Capital

Duty Directive applies only to those transactions coming

within the scope of that directive, as amended, which,

on 1 July 1984, were exempted, in that State, from

capital duty or were subject to that duty at a reduced

rate of 0.50% or less.

According to the CJ, Article 5(3), first indent, of the

Capital Duty Directive does not refer exclusively to

the assets of the capital company which has had an

increase in capital. With regard to the second question,

the CJ therefore ruled that the first indent of Article

5(3) of the Capital Duty Directive applies irrespective

of whether the assets in question are assets of the

Capital Duty

CJ rules on compatibility of Polish tax on civil law transactions with Capital Duty Directive (Pak-Holdco)

On 16 February 2012, the CJ delivered its judgment in

the Pak-Holdco case (C-372/10).

The facts of the case were as follows. In August 2005,

Elektrownia Pątnów II sp. z o.o. (‘EP II’) and Pak-Holdco

sp. z o.o. (‘Pak-Holdco’) were two subsidiaries of Zespół

Elektrowni Pątnów Adamów Konin SA (‘ZEPAK’). On

17 August 2005, ZEPAK transferred all of its shares

in EP II to Pak-Holdco as a contribution in kind to that

company. Pak-Holdco then increased its share capital

by the value of that contribution in kind, increasing

the value of ZEPAK’s shares in Pak-Holdco by the

amount of those previously held by ZEPAK in EP II. This

transaction was subject to the Polish tax on civil law

transactions at a rate of 0.50%.

Pak-Holdco took the position that the Polish tax on

civil-law transactions was at odds with Article 7(1) of

Directive 69/335/EEC, as amended by later directives,

including Directive 85/303/EEC (‘the Capital Duty

Directive’). In addition, Pak-Holdco argued that

Article 5(3), first indent, of the Capital Duty Directive

excludes from the amount which is subject to duty the

contribution, by another company, of assets which have

already been subjected to capital duty.

Article 7(1) of the Capital Duty Directive, as amended,

provides that Member States are obliged to ‘exempt

from capital duty transactions, other than those referred

to in Article 9, which were, as at 1 July 1984, exempted

or taxed at a rate of 0.50% or less’. Article 5(3), first

indent, of the Capital Duty Directive, excludes ‘the

amount of the assets belonging to the capital company

which are allocated to the increase in capital and which

have already been subjected to capital duty’ from the

amount on which duty is charged.

97

company is currently in liquidation). According to the

CJ, the annual contribution at issue is acceptable even

if the duty is also payable by companies for the period

during which they only carry on activities preparatory to

operating a business.

In conclusion, the CJ held that the Capital Duty

Directive does not preclude a duty payable annually

by all enterprises on account of their registration in the

trade register, even if that registration has constituent

effect for capital companies, and even if the duty is also

payable by those companies for the period during which

they only carry on activities preparatory to operating a

business.

company which has had an increase in capital or assets

coming from another company which have increased

that capital.

CJ rules that Italian contribution to chamber of commerce is compatible with Capital Duty Directive (Grillo Star Srl Fallimento)

On 19 April 2012, the CJ delivered its judgment in the

case of Grillo Star Srl Fallimento (C-443/09). This case

concerns the annual contribution to the Italian chambers

of commerce. This contribution is due by all enterprises

which are registered in the trade register that is kept by

the chambers of commerce. The question referred to

the CJ, in brief, is whether this contribution is compatible

with Directive 2008/7/EC (the ‘Capital Duty Directive’).

The Capital Duty Directive prohibits EU Member States

from subjecting capital companies to any form of indirect

tax in respect of, inter alia, the ‘registration or any

other formality required before the commencement of

business to which a capital company may be subject

by reason of its legal form’. The CJ examined whether

the duty at issue was one of the taxes prohibited by the

Capital Duty Directive. According to the CJ, the duty was

not related to the legal form of the entity that owns the

enterprise, since it is due by all enterprises regardless

of their legal form (e.g. also by individuals who carry on

an enterprise). Therefore, the duty was not considered

to be linked to formalities to which capital companies

may be subject by reason of their legal form. The CJ

continued that this conclusion was not affected by the

circumstance that the registration of capital companies

in the trade register, and consequently, the payment

of the annual duty had constituent effect for capital

companies as defined in Italian legislation, unlike in the

case of other enterprises.

In this case, the additional question was referred to

the CJ whether it was relevant that the company in

question, Grillo Star, had never become an active

company (the activities of the company were limited

to preparations for starting up its intended business

– however, the business was never started and the

98

Correspondents● PeterAdriaansen(Loyens&LoeffLuxembourg)

● SéverineBaranger(Loyens&LoeffParis)

● GerardBlokland(Loyens&LoeffAmsterdam)

● AlexanderBosman(Loyens&LoeffRotterdam)

● KeesBouwmeester(Loyens&LoeffAmsterdam)

● AlmutBreuer(Loyens&LoeffAmsterdam)

● MarkvandenHonert(Loyens&LoeffAmsterdam)

● LeenKetels(Loyens&LoeffBrussel)

● SarahVanLeynseele(Loyens&LoeffBrussel)

● RaymondLuja(Loyens&LoeffAmsterdam;

MaastrichtUniversity)

● ArjanOosterheert(Loyens&LoeffAmsterdam)

● LodewijkReijs(Loyens&LoeffEindhoven)

● BrunodaSilva(Loyens&LoeffAmsterdam)

● RitaSzudoczky(Loyens&LoeffAmsterdam)

● PatrickVettenburg(Loyens&LoeffEindhoven)

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EditorialboardForcontact,mail:eutaxalert@loyensloeff.com:

● RenévanderPaardt(Loyens&LoeffRotterdam)

● ThiesSanders(Loyens&LoeffAmsterdam)

● DennisWeber(Loyens&LoeffAmsterdam;

UniversityofAmsterdam)

Editors● PatriciavanZwet

● RitaSzudoczky

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