Issue 2011 – nr. 002 January – February 2011

Issue 2011 – nr. 002
January – February 2011
The EU Tax Newsletter is prepared by members of PwC’s EU Direct Tax Group (EUDTG). If
you would like to receive future editions of this newsletter, please register online at:
www.pwc.com/eudtg.
Contents
ECJ cases
Austria
Austria
Germany
Germany
Italy
Luxembourg
Netherlands
Slovenia
United Kingdom
ECJ judgment on tax treatment of inbound portfolio dividends:
joined cases Haribo et al v. Finanzamt Linz
AG opinion on tax treatment of donations to science and research
institutions: Commission v. Austria case
AG opinion on imputation credit for inbound portfolio dividends:
Meilicke II case
ECJ referral on inheritance tax on Third State participations
ECJ referral on administrative charge due to the registration of
companies
ECJ judgment on limiting the benefits of the investment tax credit to
domestic investments: Tankreederei case
ECJ referral on private motor vehicle and motorcycle tax
ECJ referral on anti-abuse provision in case of demerger facility
ECJ referral in compound interest case: Littlewoods Retail Ltd and
others
National developments
Denmark
Germany
PwC EU Tax News
Highest adminstrative tax authority decision on “beneficial
ownership” of interest
Lower court decision on exit taxation upon emigration of a SE to
Austria
1
Germany
Germany
Hungary
Ireland
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Norway
Switzerland
United Kingdom
United Kingdom
Lower court decision on gross taxation of cross-border royalties
Lower court decision on deduction of capital losses despite
participation exemption regime
Lower court decision on withholding tax on dividends distributed by
Hungarian companies
Lower court decision on cross-border surrender of operational losses
Final decision in the case of X Holding
Publication of Dutch tax treaty policy
Final decision in the case of Modehuis Zwijnenburg
Non-deductibility of group interest not in breach of Article 49 TFEU
Extended recovery period is not unlimited
EFTA Surveillance Authority opinion on Norwegian exit tax rules
Federal Council decision on identification rules for administrative
assistance
Thin Cap GLO: Claimants lose in Court of Appeal
ACT Class 2/4 GLO claimants lose in the Court of Appeal
EU developments
EU
EU
EU
EU
EU
Ireland
Italy
United Kingdom
United Kingdom
Main direct tax related Conclusions of the ECOFIN Council held on 15
February 2011
European Commission announces public consultation on dividend
withholding tax regimes and financial sector taxation
European Commission publishes summary report on 2010 EC public
consultation on double taxation problems in the EU
European
Commission
announces
Decisions
concerning
infringement procedures against five EU countries
Second meeting of EU Tax Policy Group held on: VAT, Financial
Sector Tax and Code of Conduct on Business Taxation
European Commission requests Ireland to amend restrictive exit tax
provisions for companies
European Commission requests Italy to modify its “golden shares”
rules
European Commission requests UK to amend two anti-abuse tax
regimes
Complaint made to the European Commission over UK's "Marks &
Spencer" legislation in CTA 2010 ss111-128
CCCTB
EU
PwC EU Tax News
European Commission proposes directive on the CCCTB
2
State aid
Germany
Hungary
Italy
Spain
Spain
PwC EU Tax News
European Commission decision on loss carry forward for ailing
companies (“Sanierungsklausel”)
Hungarian intra-group interest regime withdrawn
European Commission infringement regarding interest deductions by
companies owned by public entities?
European Commission requires Spain to abolish Spanish tax
amortisation of financial goodwill scheme favouring acquisitions in
non-EU countries
European Commission Decision on Spanish tax amortisation of
financial goodwill for foreign shareholding acquisitions for intra-EU
acquisitions published
3
ECJ cases
Austria – ECJ judgment on tax treatment of inbound portfolio dividends: joined
cases: Haribo Lakritzen Hans Riegel and Österreichische Salinen AG v.
Finanzamt Linz (C-436/08 and C-437/08)
On 10 February 2011, the ECJ decided in this case that:

As domestic portfolio dividends are generally tax exempt in Austria, it is contrary to the
principle of free movement of capital not to provide for an exemption or at least a credit
of the foreign corporate income tax with respect to third country portfolio dividends.

Linking the application of the credit method for portfolio dividends from EEA- or third
countries to the existence of an agreement on mutual assistance is in line with EU law.
However, it is contrary to EU law to link the relief mechanism (exemption or credit
method) to the existence of an agreement on the collection of taxes.

The application of the credit method to certain groups of foreign dividends, while
domestic dividends are generally tax exempt, is in line with EU law. Tax authorities may
demand documentation regarding the foreign CIT actually imposed as a requirement for
the application of the credit method. The responsibility of obtaining the appropriate
documentation – even if difficult from an administrative perspective – is with the
domestic shareholder.

In order not to discriminate against domestic portfolio dividends, Austrian law has – in
case of EU/EEA/third country portfolio dividends – to provide for the possibility of
carrying forward any non-creditable foreign corporate income tax (non-creditable due to
a tax loss position). However, the relief is only required regarding the foreign corporate
income tax but not concerning any foreign withholding tax.
Due to the ECJ decision it is expected that the existing Austrian taxation scheme will be
adjusted in the following areas:

Elimination of the requirement of the existence of an agreement on the collection of taxes
as a precondition for the application of the conditional exemption for EEA-portfolio
dividends.

Implementation of the credit method for third country portfolio dividends (linked to the
condition of the existence of an agreement on mutual assistance with the source state).

Implementation of the possibility to carry forward foreign non-creditable CIT (not for
foreign WHT).
For the questions referred to the ECJ, see EU Tax News Issue 2010 – nr.001. The Opinion of
AG Kokott was outlined in EU Tax Newsflash 2010 - 037.
-Rudolf
Krickl,
Richard
[email protected]
PwC EU Tax News
Jerabek
and
Ulrike
Koller,
PwC
Austria;
4
Austria – AG opinion on tax treatment of donations to science and research
institutions: Commission v. Austria case (C-10/10)
Under the Austrian Income Tax Act, donations to certain public Austrian institutions such as
universities, art colleges or the academy of science, and to non-profit organisations
performing research and educational activities mainly for the benefit of the Austrian science
or economy may be deducted as operating expenses (up to the limit of 10% of the former years
profit).
The European Commission is of the opinion that this regulation is not in line with the
principle of free movement of capital (Article 63 TFEU and Article 40 EEA Agreement) since
the donations to comparable foreign institutions are not deductible even if these institutions
pursue similar goals. In January 2010, the Commission decided to bring proceedings for
failure to fulfil obligations under the Treaty before the ECJ.
The Austrian Government justifies the regulation in question with the argument that foreign
institutions are not comparable to the privileged domestic institutions because the latter are
mainly public institutions. Therefore, the legislator can control the responsibilities of these
institutions in accordance with domestic public interest. Furthermore, the financing of the
public institutions by donations from private parties shall be supported to disburden the state
from its financing obligations. Finally, the qualification of Austria as a location for science and
education shall be promoted.
On 8 March 2011, the opinion of AG Trstenjak was released. The AG concluded that Austria
has violated the principle of free movement of capital by allowing donations to certain
institutions to be treated as tax-deductible expenses by the donors only if the institutions were
established in Austria respectively their activities are mainly for the benefit of the Austrian
science or economy. In her opinion, the justifications brought forward by the Austrian
government are insufficient and unfounded.
Due to the clear statement of the AG and the ECJ’s case law (e.g. Persche C 318-07), it is
expected that the ECJ decision will lead to an amendment of the regulation in question,
resulting in an expansion of the privilege to comparable non-Austrian EU and EEA
institutions.
-- Richard Jerabek and Ulrike Koller, PwC Austria; [email protected]
Germany − AG opinion on imputation credit for inbound portfolio dividends:
Meilicke II case (C-262/09)
On 13 January 2011, AG Trstenjak delivered her opinion in the Meilicke II case concerning the
former German corporate tax imputation system.
According to former German tax laws, income of resident corporations was subject to
corporate income tax at a rate of 30%. Resident taxpayers receiving dividends from domestic
corporations could apply for an imputation credit of 3/7 to avoid an economic double
taxation. The imputation credit required the submission of a special tax certificate as of Sec.
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5
44 and 45 CIT. In 2007, the ECJ ruled in the first Meilicke case (C-292/04) that Germany has
to give the imputation credit also to residents receiving dividends distributed by non-resident
corporations. In 2009, the Lower Fiscal Court of Cologne referred new questions to the ECJ
regarding the application of the imputation credit on inbound dividends.
In its first question, the court asks whether Germany only has to give a credit of 3/7, although
the foreign corporate tax might be higher than 30% or is hard to assess. According to AG
Trstenjak, Germany is obliged to credit the corporate income tax actually paid, but not more
than 3/7. If the foreign corporate income tax rate is higher than 30%, the remaining economic
double taxation is the result of the disparity of the different corporate tax rates of the two
member states. This is in line with the FII Group Litigation case (C-446/04, paragraphs 48
ff.). In the AG's opinion, the taxpayer has to prove the corporate tax actually paid. The
practical impossibility of the proof does not matter, because it is the result of the disparity of
the different corporate tax systems of two Member States.
Second, it is questionable whether Germany may insist on the special tax certificate as of Sec.
44 and 45 CIT requiring information which might be impossible to receive from the foreign
distributing company. According to AG Trstenjak, it is very likely that Sec. 44 and 45 CIT are
against the principle of effectiveness, since there should be ways of proving the tax actually
paid that are less burdensome for the taxpayer. However, it is the task of the national court to
establish its conformity with the effet utile principle.
The last question concerns the retroactive change of a procedural law (Sec. 175 (2) German
Tax Code) in 2004 without a transitional period. According to this rule, the later submission
of a tax certificate no longer allows a change to an already closed tax assessment. The
provision would prevent the beneficiaries of Mr. Meilicke fron receiving a retroactive
imputation credit for dividends received in 1997. The AG is of the opinion that a law
disallowing a taxpayer to make use of its rights granted by the TFEU infringes the principles
of effet utile and legitimate expectations. The change of such a procedural law would require
an adequate transitional period of about 12 months.
-- Moritz Glahe and Juergen Luedicke, PwC Germany; [email protected]
Germany – ECJ referral on inheritance tax on Third State participations (C31/11)
By referral of 15 December 2010, the German Federal Fiscal Court (BFH, II R 63/09) asked
the ECJ whether the (former) Inheritance Tax Act is in line with the free movement of capital.
In the case at hand a German resident inherited a majority shareholding of a Canadian
corporation. The former Inheritance Tax Act provided for a tax allowance but only for
domestic participations. After the ECJ judgment in the Jäger case (C-256/06), the tax
allowance was extended to participations of EU/EEA companies but not to paricipations of
Third State companies. The plaintiff applied for an extension of the tax allowance based on
EU Law principles.
The preceding lower court rejected the claim arguing that in this case only the freedom of
establishment was applicable which does not encompass Third States. In contrast to this, the
PwC EU Tax News
6
court of appeal (BFH) would consider the free movement of capital to be applicable and would
assess an infringement.
Although the ECJ decided lately in the Mattner case (C-510/08), concerning real estate, that
irrespective of the kind of assets the act of inheritance falls under the free movement of
capital, it must actually be considered unclear which freedom is applicable in case of
inheriting a majority shareholding. This is mainly due to a former decision in the case Geurts
and Vogten (C-464/05) where the ECJ only considered the freedom of establishment being
applicable for inheriting participations which provide for a definite influence.
-- Gitta Jorewitz and Juergen Luedicke, PwC Germany; [email protected]
Italy – Referral to the ECJ on administrative charge due to registration of
companies
The Provincial Tax Court of Benevento (first instance), with the order no. 473/01/10 of 24
November 2010, made a referral to the ECJ in the matter of the annual administrative
charge due on the registration of companies in the Italian Mercantile Register. The
registration is mandatory for each undertaking in order to operate in Italy.
With its referral, the court wants to know whether such registration charge, in particular the
fact that the charge is due annually, is in line with the Directive no. 69/335/EEC, concerning
indirect taxes on the raising of capital.
In the meantime, Italian companies could submit “protective claims” for the refund of the
administrative charge potentially in breach of EU Law.
-- Claudio Valz and Luca la Pietra, PwC Italy; [email protected]
Luxembourg – ECJ judgment on limiting the benefits of the investment tax
credit to domestic investments: Tankreederei I SA v. Directeur de
l’Administration des Contributions Directes (C-287/10)
On 10 June 2010, a reference for a preliminary ruling was filed by the Administrative Tribunal
of Luxembourg in Tankreederei I SA v. Directeur de l’Administration des Contributions
Directes. The tax authorities disallowed the deduction of a tax credit for investment against
corporate income tax to a Luxembourg company, which owns shipping vessels used in the
ports of Antwerp and Amsterdam. According to the Income Tax Law (article 152bis), it is
required that the investment is physically operated in Luxembourg in order to be eligible for
the incentive, unless the investment consists of shipping vessels operating in international
waters (which was not the case here). In addition, the benefit of the tax credit is limited to
investments that are made within a Luxembourg business establishment and that are
intended to be used permanently in Luxembourg. The Administrative Tribunal decided to ask
the ECJ whether the above-mentioned conditions can be considered to be in breach of the free
movement of capital (Article 65 TFEU) and the freedom to provide services (Article 56 TFEU).
PwC EU Tax News
7
In its judgment, the ECJ rules that Article 65 TFEU is to be interpreted as precluding a
provision of a Member State pursuant to which the benefit of a tax credit for investments is
denied to an undertaking which is established in that Member State on the sole ground that
the capital goods, in respect of which that credit is claimed, are physically used in the territory
of another Member State. Therefore, the requirement that the asset entitling the taxpayer to
an investment tax credit in Luxembourg be physically used in Luxembourg should be
extended to any Member State. The ECJ considers that, due to this conclusion, there is no
need to examine the request under the free movement of capital.
The decision is in line with the Jobra Vermögensverwaltungs-Gesellschaft mbH (C-330/07)
case law
-- Wim Piot and Julien Lamotte, PwC Luxembourg; [email protected]
Netherlands – ECJ referral on private motor vehicle and motorcycle tax (BPM)
On 4 February 2011, the Dutch Supreme Court referred a preliminary question on the Dutch
private motor vehicle tax (‘Belasting op personenauto’s en motorrijwielen’; hereinafter: BPM)
to the ECJ.
In 2002, the litigant, who has the German nationality and lives in Germany, bought a car with
a German licence plate. Afterwards, the litigant moved to the Netherlands, but continued to
work in Germany. From that moment, the litigant used the car to drive between her home in
the Netherlands and her work in Germany. For the use of the Dutch public road, the
Netherlands levies BPM. The question before the Dutch Supreme Court is whether this tax is
compatible with EU Law.
The Netherlands operates BPM inter alia on (i) cars which are registered in the Netherlands
and (ii) unregistered cars which are used in the Netherlands, by a Dutch resident on Dutch
roads. The ECJ has accepted that this type of legislation is in principle compatible with EU
Law, providing the requirement of proportionality has been met. In the case at hand, the
litigant seeks to challenge whether this criterion is satisfied. This appeal, however, relies on
the assumption that the present fact pattern is within the ambit of EU Law, and it is this point
which the Dutch Supreme Court wishes to clarify through its preliminary question to the ECJ.
-- Frank Emmerink, PwC Netherlands; [email protected]
Slovenia – ECJ referral on anti-abuse provision in case of demerger
The Upravno sodišče (Administrative Court of the Republic of Slovenia) lodged a reference for
a preliminary ruling on 21 December 2010 in the case Pelati d.o.o. v Republic of Slovenia. The
Registrar of the ECJ allotted number C-603/10 to the case.
The question concerns whether a provision under domestic law which makes tax relief upon a
demerger subject to submission, within time-limits, of a request for authorisation of tax
deferral, is compatible with Article 11 (anti-abuse provision) of Council Directive 90/434/EEC
(Merger Directive).
-- Nana Sumrada, PwC Slovenia; [email protected]
PwC EU Tax News
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United Kingdom – ECJ referral in compound interest case: Littlewoods Retail
Ltd and ors [2010] All ER (D) 47 (Nov) – Case No: HC08C03780
The High Court has finalised the questions to be referred to the ECJ concerning the
availability of compound interest in the event of overpayments of tax and stayed a possible
appeal to the Court of Appeal. The outcome of this case will be of interest to all businesses
pursuing claims for compound interest.
On 4 November 2011, the High Court declared that the Taxpayers' claims for compound
interest are excluded by sections 78 and 80 of the VAT Act 1994, i.e. holding that the VAT Act
1994 is an exhaustive statutory regime. The High Court therefore seeks the ECJ's view as to
whether there should be an EU law remedy outside of the UK's exhaustive statutory regime
with a right to compound interest or some other EU law remedy and, in that event, whether
the entitlement to such a remedy should be regarded as a general right or determined on a
case-by-case basis.
The High Court has referred four questions for a preliminary ruling, in respect of the remedy
for overpaid VAT that is contrary to the EU VAT legislation.
Questions 1 to 3 are regarding whether the remedy should provide for reimbursement of the
principal sums overpaid, and whether simple interest (in accordance with national legislation,
such as s 78 of the Value Added Tax Act 1994) or compound interest should be paid.
Question 4 asks whether, if the reimbursement of the principal sum overpaid with simple
interest was contrary to EU Law, the national law restrictions (such as ss 78 and 80 of the
1994 Act) should be disapplied on any domestic claims or remedies that would otherwise be
available to vindicate the EU Law right established in the ECJ’s answer to the first three
questions, or whether the national court could disapply only such restrictions in respect of one
of those domestic claims or remedies.
-- Peter Cussons and Stephanie Evans, PwC UK; [email protected]
Back to top
National developments
Denmark – Highest adminstrative tax authority decision on “beneficial
ownership” of interest
On 27 January 2011, the Danish National Tax Tribunal, the highest Danish administrative tax
authority upheld the decision of the tax authorities to impose a withholding tax obligation on
a Danish taxpayer on the interest payments made to a Swedish parent company (case
reference number SKM2011.57.LSR).
The tax authorities maintained that neither the EU Interest and Royalty Directive nor the
Nordic Double Tax Treaty prevented Denmark from imposing withholding tax as the Swedish
PwC EU Tax News
9
parent company could not qualify as the “beneficial owner” of the received interest income.
The authorities asserted that the Swedish company and its parent, another Swedish holding
company constituted “conduit companies” through which the interest payments were
channeled to the ultimate parent company resident in Jersey. It is noteworthy that there was
no debt between the two Swedish companies, only debt between the Danish company and its
immediate Swedish parent and between the top Swedish parent and the Jersey company.
We expect that the decision will be appealed to High Court.
Danish entities are required to withhold and pay tax on behalf of non-resident recipients and
are directly liable for any non-paid tax, unless evidence can be shown that the taxpayer did
not demonstrate negligence with regard to its withholding tax obligations. The National Tax
Tribunal issued a separate decision in the present case on this matter (case reference number
SKM2011.59.LSR). The Danish taxpayer was found liable for withholding tax as the taxpayer’s
non-negligence could not be considered to be proven. In its decision, the Tribunal indirectly
supported the standpoint of the tax authorities that it is in fact the taxpayer that bears the
burden of proof to demonstrate that there has not been negligent behaviour on its part.
-- Natia Adamia and Soren Jesper Hansen, PwC Denmark; [email protected]
Germany – Lower court decision on exit taxation upon emigration of a SE to
Austria
In an order of 7 January 2011 (1 V 1217/10), the Lower Fiscal Court of Rhineland-Palatinate
granted preliminary suspension of tax enforcement of the exit taxation upon emigration of a
Societas Europaea (SE) to Austria, the appeal in the main proceeding is still pending.
In 2007, the SE (holding) moved its statutory seat and its place of management from
Germany to Austria. According to Sec. 12, 8b CIT, the tax authority wanted to tax the
unrealised capital gains of a shareholding in a Dutch BV at the time of emigration. The SE did
not deny Germany's right to tax these gains, but applied for a deferred taxation until the
actual realisation. The appellant argued that the immediate taxation at the time of emigration
violated its freedom of establishment.
With its order, the court granted the suspension of tax enforcement, because it had
considerable doubts that the immediate taxation upon emigration is in line with the freedom
of establishment. Since the Council Regulation on the statute of the SE (EC 2157/2001) grants
a SE a right of emigration without losing its identity, Germany would not be allowed to hinder
the emigration of a SE by an exit taxation. Thus, the case of a moving SE would be different to
the cases of Daily Mail (81/87) and Cartesio (C-210/06). Instead, the court refers to the ECJ
judgments in the de Lasteyrie du Saillant (C-9/02) and N (C-470/04) cases concerning the
exit taxation of individuals. As the ECJ in these judgments, the court holds that an immediate
taxation upon emigration is not proportionate. Instead, the taxation may be suspended until
realisation of the capital gains. The court had no doubts that the mutual assistance directive
(77/799/EEC) and the recovery directive (76/308/EEC) would allow Germany to enforce the
later taxation at the time of realisation − at least in this case with only one asset. The provision
of a security would not be necessary.
-- Moritz Glahe and Gitta Jorewitz, PwC Germany; [email protected]
PwC EU Tax News
10
Germany – Lower court decision on gross taxation of cross-border royalties
On 19 July 2010, the Lower Fiscal Court of Munich (7 K 1154/09) decided on a case which is
now pending with the Federal Fiscal Court (BFH, I R 76/10). The case concerns the question
whether expenses linked with royalties could be deducted when assessing the withholding tax.
In the case at hand, a German company paid royalties for a broadcasting right to a
Luxembourg company which in turn owed royalties (=expenses) to the grantors of the licence.
According to the German Income Tax Act and the underlying double tax treaty, royalties to
foreign residents are subject to a 5% withholding tax without the possibility to deduct
expenses. Thus, the gross amount of the royalties paid to the Luxembourg company was
subject to a 5% withholding tax. However, royalties to resident companies would be subject to
a tax assessment (15% cit) on a net basis.
After the ECJ decisions in the cases Gerritse (C-234/01), Scorpio (C-290/04) and Centro
Equestre (C-345/04), Germany amended its withholding tax provisions for payments for
artists but not for licences. Nowadays, only the net income of non-resident artists is subject to
a withholding tax and they can opt for a subsequent tax assessment.
Based on the above mentioned decisions, the Luxembourg company applied for a deduction of
its expenses when assessing the withholding tax, but the court rejected the claim stating that
the provision would not infringe the freedom to provide services. The main argument of the
court was that the treatment of non-residents could not be considered to be disadvantageous
as the German withholding tax is (i) limited to only 5% according to the underlying double tax
treaty and (ii) could be credited against the Luxembourg corporate income tax. Moreover, the
expenses for the licence were not directly linked to the royalty income.
In our view, the conclusions of the court could be doubted. First, the fact that the withholding
tax rate is lower than the regular tax rate does not necessarily lead to an equal treatment.
Secondly, only a full tax credit in the home State can neutralise discrimination in the host
State (see Amurta C-379/05 or COM vs. Italy C-540/07).
-- Gitta Jorewitz and Juergen Luedicke, PwC Germany; [email protected]
Germany – Lower fiscal court decision on deduction of capital losses despite
participation exemption regime
On 18 May 2010, the Lower Fiscal Court of Cologne (13 K 4828/06) decided that capital losses
(here due to liquidation) of a foreign qualifying participation are deductible in the fiscal years
1999 and 2000. Thus, the Court declared sec. 8b para. 2 s. 2 CIT to be not applicable as it
infringes EU Law.
The claimant, a German resident company, held a qualifying participation in a Scottish
company which generated losses and was liquidated. Subsequently, the claimant suffered a
loss. According to the former tax law, Germany applied a participation exemption scheme for
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11
foreign participations of less than 10%, meaning that dividends/capital gains were not taxable
and capital losses were not deductible. However, the non-deductibility of capital losses was
only introduced in 1999. As a matter of inconsistency, write-downs were still deductible. This
exemption scheme was not applicable to domestic shareholdings with the effect that
dividends/capital gains were taxable, but capital losses and write-downs were deductible.
When comparing only the treatment of capital losses, the claimant holding a foreign
participation suffered a higher tax burden than a taxpayer with a domestic participation.
The court considered this different treatment as incompatible with both the free movement of
capital as well as the freedom of establishment and based its decision mainly on the reasons
found in the ECJ decision of the cases STEKO (C-377/07) and Rewe (C-347/04). Especially,
the court denied a justification by reference to the principle of coherence (or symmetry) of the
whole participation exemption scheme, as the fact of receiving dividends and that of suffering
capital losses would concern two different situations which are not directly linked with each
other. As the non-deductibility of capital losses was only introduced in 1999, so several years
after the exemption of dividends/capital gains, Germany had deliberately accepted an
incoherent system which indicates that there was no justification by the public interest. The
fact that write-downs on foreign participations were still deductible would emphasise this
inconsistency.
-- Gitta Jorewitz and Juergen Luedicke, PwC Germany; [email protected]
Hungary – Lower court decision on withholding tax on dividends distributed by
Hungarian companies
On 5 January 2011, the Hungarian Metropolitan Court of Budapest (first-instance) decided
that between 1 May 2004 and 1 January 2006 dividend tax withheld on dividend distributions
by Hungarian companies to an Austrian investment fund (minority shareholder)
discriminated against the free movement of capital because when distributing to Hungarian
corporate shareholders, including Hungarian investment funds, such dividends would be
exempt from dividend withholding tax. .
Although both the first- and second-instance Tax Authorities rejected the claim, the
Metropolitan Court of Budapest decided in favour (and referred the case back to the Tax
Authority), based on the following reasoning:
 The articles of the Treaty on the Functioning of the European Union referred to in the
petition (concerning the free movement of capital) are directly applicable in Hungary;
 Administrative bodies such as the Tax Authority have to take these rules into account when
applying the effective Hungarian laws and have to examine whether a particular
Hungarian legal provision is contrary to directly applicable EU Law;
 The Hungarian Corporate Income Tax Act effective at the time of deduction was contrary
to the articles referred to above and therefore should have been disregarded by the
Hungarian Tax Authority.
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The judgement is final and non-appealable, and the Tax Authority must initiate a new
procedure even if it files an extraordinary appeal to the Supreme Court.
The Austrian fund was represented by PwC Hungary in the Tax Authority procedure, and by
RAM Landwell in Court procedures.
Please note that, according to the Tax Authority, the right to claim refunds on 2005 payments
expired on 31 December 2010, although we are currently working on an argument confirming
that the right to claim refunds on 2005 payments will not expire until 31 December 2011.
-- Dóra Máthé and Virag Liptak, PwC Hungary; [email protected]
Ireland – Decision on cross border surrender of operational losses
A case regarding the cross border surrender of operational losses was recently referred to the
Irish Circuit Court. The case involved the surrender of a UK company's tax losses to an Irish
'sister' company (i.e. the companies have a common UK parent). The companies sought to
apply (and extend) the Marks & Spencer ECJ judgment which permitted a parent to claim
group relief from a subsidiary, where there was no other possibility of the losses being used.
The court held against the claimants arguing that the Irish domestic legislation is confined to
parent-subsidiary relationships as well as that the "no possibility" test had not been met
sufficiently. The company is considering appealing the issue further. '
-- Margaret Mastersson, PwC Ireland; [email protected]
Netherlands – Final decision in the case of X Holding (C-337/08)
On 7 January 2011, the Dutch Supreme Court rendered its final decision in the case of X
Holding. The key issue in this case was whether the rejection of a cross-border fiscal unity
under the Dutch fiscal unity regime infringes freedom of establishment. Under Dutch law, a
fiscal unity is only available to entities which are established in the Netherlands or to entities
established outside the Netherlands insofar as they have a permanent establishment in the
Netherlands.
X Holding BV, a company resident in the Netherlands, is the sole shareholder of its subsidiary
F NV, set up under Belgian law and resident in Belgium. F NV is not liable to corporate
income tax in the Netherlands. X Holding and its subsidiary F NV applied for a fiscal unity
under Dutch law. The Dutch tax authorities rejected that application.
On 25 February 2010, the ECJ held that the Dutch fiscal unity regime is not in breach of the
freedom of establishment under EU Law insofar as it disallows a cross-border fiscal unity.
In line with the ECJ’s decision, the Dutch Supreme Court has now decided that the rejection
of the application for a cross-border fiscal unity is not in breach of EU Law.
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Importantly, the Dutch Supreme Court has left open the question to what extent other aspects
of a fiscal unity, such as the possibilities to avoid thin capitalisation rules and to transfer
assets within a group of companies without immediate taxation, infringe freedom of
establishment. Also, the Dutch Supreme Court has not decided whether ‘final’ losses of EU
subsidiaries should be recognised by the Netherlands. It is anticipated that the Dutch
Supreme Court will decide those questions in another pending case (Case No. 09/05115).
The decision in the case of X Holding does not jeopardise the application for a fiscal unity in
the Netherlands on the basis of Case C-418/07 Papillon (a fiscal unity between Netherlands
resident companies which are related through non-resident group companies). After all, these
applications do not concern a cross-border fiscal unity.
-- Sjoerd Douma and Marius Girolami, PwC the Netherlands; [email protected]
Netherlands – Publication of Dutch tax treaty policy
On 11 February 2011, the Dutch Ministry of Finance published a memorandum outlining
present Dutch tax treaty policy (‘Notitie Fiscaal Verdragsbeleid 2011’). This document
provides an interesting insight into the approach adopted by the Netherlands in respect of
treaty negotiation. It also addresses the impact of EU Law on tax treaty policy, and announces
a new policy objective with regard to ensuring treaty protection to permanent establishments
(PE).
The Dutch Ministry of Finance notes that - in absentio unification or harmonisation
measures - Member States are in principle free to allocate taxation rights between themselves
as they see fit. However, Member States must subsequently exercise their taxation rights in
accordance with EU Law.
It is settled European case law that when applying a tax treaty, a Member State should not
treat a PE of a different Member State any worse than one of its own resident companies (St
Gobain, C-307/97). In triangular cases this approach can prove problematic (e.g. where the
Source State is a third country and does not grant treaty benefits to a PE of a different State,
located within the territory of a treaty partner). To remedy this problem, the Netherlands has
announced that in future, it will seek to include a new treaty provision ensuring treaty
protection in this situation.
-- Anna Gunn, PwC Netherlands; [email protected]
Netherlands – Final decision in the case of Modehuis Zwijnenburg (C-352/08)
On 11 February 2011 the Dutch Supreme Court rendered its final decision in the case of
Modehuis Zwijnenburg (C-352/08).
The key issue in this case was the refusal by the Dutch tax authorities to grant prior certainty
on the use of a facility under Dutch law for a company merger. This facility was adopted by the
PwC EU Tax News
14
Netherlands, in the context of the incorporation into Dutch law of the EU Merger Directive
(Council Directive 90/434/EEC).
The Dutch clothing company Modehuis A Zwijnenburg BV (“Zwijnenburg”) operated a shop
in two premises. Zwijnenburg was the owner of one premise. Zwijnenburg Beheer BV
(“Beheer”) owned the other premise and had as its sole activity the management of real
property. The shares in Beheer were held by the parents of the son who held the shares in
Zwijnenburg. In order to complete the transfer of the parents’ business to the son it had been
envisaged that Zwijnenburg would transfer its clothes business and premise in return for
shares in Beheer. As a result the business and both premises would be in one single legal
entity (Beheer).
Pursuant to Dutch law incorporating the Merger Directive, that company merger was to be
exempt from tax. At a subsequent stage, Zwijnenburg was to purchase the remaining shares in
Beheer, which belonged to the parents and were accompanied by a purchase option. The
Dutch Tax Authorities held the view that the choice of a company merger to bring the business
and both premises together was not motivated by commercial reasons within the meaning of
Article 11, par 1, a, of the Merger Directive, since Zwijnenburg was to transfer its business to
Beheer and was subsequently to acquire the shares issued by Beheer, with the sole purpose of
avoiding transfer tax. As a consequence, the Dutch tax authorities refused to apply the
benefits of the Merger Directive.
On 20 May 2010, the ECJ held that the avoidance of a tax to which the Merger Directive does
not apply does not in itself constitute sufficient reason for a Member State to refuse the
benefits of the Merger Directive. The Merger Directive’s anti-abuse provision could not be
applied.
In line with the ECJ’s decision, the Dutch Supreme Court held that the Dutch tax authorities
could not refuse to grant prior certainty on the ground that the aim of the company-merger
was the avoidance of the real estate transfer tax, as this tax does not come within the scope of
the Merger Directive.
-- Marius Girolami, PwC Netherlands; [email protected]
Netherlands – Non-deductibility of group interest not in breach of Article 49
TFEU
On 6 January 2011, the Amsterdam Court of Appeal held that the non-deductibility of group
interest is not in breach of the freedom of establishment under Article 49 TFEU, in a case
involving a Belgian co-ordination centre.
X BV is the indirect shareholder of a Belgian co-ordination centre. The Belgian co-ordination
centre has a debt claim on X BV, whereby X BV pays interest to the Belgian co-ordination
centre.
According to Dutch tax law, deduction of interest is not not allowed if that interest relates to
intra-group debt related to certain transactions, such as distribution of dividends, which is the
PwC EU Tax News
15
case in this proceeding. However, if taxpayers are able to demonstrate that there are
commercial reasons for the group transaction and their financing, deduction of the interest is
permitted.
Moreover, deduction is allowed if the interest income is subject to a levy of tax that is
reasonable tax according to Dutch standards. The litigant argues that the non-deductibility is
in casu in breach with Article 49 TFEU.
The court held the non-deductibility of group interest a prima facie restriction of the
freedom of establishment, however, justified by anti-abuse reasons. In addition, the measure
is proportionate to its aim as the taxpayer has the possibility to prove that the transaction is
not a purely artificial construction.
-- Marius Girolami and Anna Gunn, PwC Netherlands; [email protected]
Netherlands – Supreme Court decision on extended recovery period
On 18 February 2011, the Dutch Supreme Court passed a judgment on the use of the extended
recovery period. Under Dutch law, the Dutch tax authorities may recover unpaid taxes within
a five years period. An extended recovery period of 12 years applies in respect of income held
or arisen abroad.
In the case Passenheim-van Schoot (C-155/08 and C-157/08), the European Court of Justice
held that the Dutch extended recovery period, which only applies in cross-border situations,
can be compatible with EU Law. In the wake of this judgment, the Dutch Supreme Court
formulated criteria for the application of the extended recovery period. These criteria take into
account the application of the European principle of proportionality.
Pursuant to these criteria, the extended recovery period is considered acceptable providing
the time taken by the Dutch tax authorities does not exceed the time reasonably required for
(i) obtaining the information needed to determine the taxable amount, and (ii) preparing the
tax assessment based on the information provided to the Dutch tax authorities.
The litigant held a foreign bank account undisclosed for Dutch tax purposes. In the beginning
of 2002, he informed the Dutch tax authorities of the existence of the foreign account, and
provided exact information about the account in October of that year.
Having received the notification, the Dutch tax authorities opted for the use of the extended
recovery period. After receiving the exact information of the foreign account, the Dutch tax
authorities immediately issued an additional tax assessment for the year 1990 (12 years before
2002) to the litigant. However, with regard to the years after 1990 (i.e. 1991 – 1999), the
Dutch tax authorities decided to await the outcome of the proceeding in relation to the
assessment of the year 1990, before issuing the additional tax assessments for these
subsequent years.
On 12 November 2004, the Lower Court of Leeuwarden ruled in favour of the Dutch tax
authorities as to the 1990 assessment. The Dutch tax authorities then sought to impose the
PwC EU Tax News
16
additional tax assessments for the years 1991 – 1999. The question arose whether this course
of action was in line with the criteria set out by the Dutch Supreme Court.
Except for the tax assessment regarding 1999, the Dutch Supreme Court ruled that the time
taken by the Dutch tax authorities to impose the additional tax assessments was not
consistent with the European principle of proportionality. The fact that no further
investigation was needed and the additional assessments were not based on any other data
then the data provided by the litigant, is considered relevant in this respect.
-- Frank Emmerink and Anna Gunn, PwC Netherlands; [email protected]
Norway – EFTA Surveillance Authority opinion on Norwegian exit tax rules
In a reasoned opinion delivered on 2 March 2011, the EFTA Surveillance Authority (“ESA”)
concludes that Norwegian taxes imposed on companies exiting Norway and their shareholders
are incompatible with the EEA Agreement. The reasoned opinion also covered the Norwegian
rules regarding mergers between Norwegian limited liability companies merging with SEcompanies as well as outbound cross-border mergers.
Under Norwegian law, immediate tax is levied on the unrealised gains on assets of companies
that exit Norway in a relocation or a cross-border merger. Furthermore, these transactions
also entail a full taxation at the level of the shareholders. Comparable situations within
Norway are not subject to immediate taxation.
On 10 March 2010, ESA issued a formal notice on the exit tax rules to the Norwegian
government. On 10 May 2010, the Norwegian government responded that, in their opinion,
the exit tax rules are compatible with the EEA Agreement. The ECJ’s judgement in Case C210/06 Cartesio was cited in support of the relocation of a company not being covered by the
four freedoms.
On 2 March 2011, ESA delivered a reasoned opinion, the second step in the infringement
procedure.
In the opinion, ESA dismisses the Cartesio argument put forward by the Norwegian
government. ESA finds that cross-border mergers and transfers of companies, as well as
shareholdings in such companies, are indeed covered by Articles 31, 34 and 40 EEA. Further,
ESA holds that imposing immediate exit taxation is a disproportionate measure, which
constitutes a restriction that cannot be justified. The taxation of shareholders, for which ESA
finds no relevant reason at all, is considered particularly disproportionate. ESA consequently
concludes that the Norwegian exit tax rules are in breach of the EEA Agreement.
If Norway does not comply within two months, the matter will likely be brought before the
EFTA Court.
-- Ståle Wangen, Daniel Herde and Eyvind Sandvik, PwC Norway; [email protected]
PwC EU Tax News
17
Switzerland – Federal Council decision on identification rules for administrative
assistance
On 15 February 2011, the Swiss Federal Council announced that a revision in the requirements
for administrative assistance in tax matters is necessary. So far administrative assistance is
basically permissible if the name and address of the person and information holder are
indicated in the administrative assistance request. The Federal Council now decided that
other means of identification should also be admissible in the future, while fishing expeditions
would still be not permitted.
This revision should enable Switzerland to pass the first phase of the peer review carried out
by the Global Forum on Transparency and Exchange of Information for Tax Purposes, which
examines compliance with the administrative assistance standard in its member countries.
During the first phase of this review it was discovered that the above mentioned Swiss
requirements are too restrictive. Although the identification will generally continue to be by
indicating the name and address of the taxpayer and holder of information, the revision would
also allow other identification means, in order to prevent a non-application of administrative
assistance due to formalistic arguments. Identification by way of a bank account may
therefore be an appropriate means, although care has to be taken that no "fishing expedition"
exists.
Although this revision is rather of a technically detailed nature, it gave rise to several political
debates within Switzerland and the Federal Council is aware that the wish expressed so far in
the parliamentary debates was that administrative assistance be permitted only if the name
and address of the person and information holder are indicated in the request. Due to the
amended rule of interpretation, the Swiss Federal Council submitted the revision to the Swiss
Parliament which will have the final word.
If the revision is approved by the Parliament, the exact legal process to be followed so that
Swiss double tax treaties reflect this revision depends on each particular treaty, meaning the
exact wording and/or the stage of the treaty. It is noteworthy that the approximately 30 new
tax treaties signed so far since March 2009 to reflect the OECD standard to administrative
assistance do not have always the same text in this respect.
This revision aims to underline that Switzerland is now undoubtedly in line with the globally
applicable standard (without going beyond it) for an effective information exchange. In terms
of transactions/capital movements from and to EU Member States, this effective information
exchange becomes increasingly relevant from the aspect of the Freedom of Movement of
Capital available to third countries.
-Armin
Marti
and
[email protected]
Anna-Maria
Widrig
Giallouraki,
PwC
Switzerland;
United Kingdom – Thin Cap GLO: Claimants lose in Court of Appeal (Case Nos:
A3/2010/0214 & 0215)
On 18 February 2011, the Test Claimants in the Thin Cap Group Litigation (Thin Cap GLO)
lost their appeal in the Court of Appeal 2:1. Both Lord Justice Burnton and Lord Justice Rimer
PwC EU Tax News
18
found for HMRC. Lady Justice Arden found for the taxpayer. The case concerned the
compatibility of pre-FA 2004 UK thin cap rules with the EC Treaty, but the judgement will be
of broader interest as it touches upon the meaning of a number of terms (such as "wholly
artificial" and "commercial justification") which are relevant in other contexts, including in
relation to CFCs. The judgment deals only with the liability and not the remedy or limitation
points.
On 17 November 2009 the High Court decision in Test Claimants in the Thin Cap Group
Litigation v HMRC (the "Thin Cap GLO") was published. This case had been referred back to
the UK courts following a preliminary ruling by the European Court of Justice (ECJ) on 13
March 2007 (C-524/04). The case was appealed to the Court of Appeal.
Judgement of 18 February 2011
The claimants lost 2:1 in the Court of Appeal, with Lady Justice Mary Arden finding for the
taxpayer. Lord Justice Burnton found for the Revenue and rejected the Test Claimants
contingent cross-appeal. Lord Justice Rimer agreed with all of Lord Justice Burnton's
conclusions on all issues. Lady Justice Arden disagreed with Lord Justice Burnton's and Lord
Justice Rimer's conclusion. Lady Justice Arden comments: "I respectfully disagree with his
conclusion and that of Lord Justice Rimer that the application of an arm's length test is
sufficient justification for discriminating against non-resident parent companies in the EU. It
follows that in my judgement the cross-appeal does not arise." and "...I would allow the appeal
in part only, namely with respect to the burden of proof and sufficiently serious breach points,
and dismiss both the remainder of the appeal and the whole of the respondents' contingent
cross-appeal".
It is likely that the Claimants will seek permission to appeal to the Supreme Court.
-- Peter Cussons and Stephanie Evans, PwC UK; [email protected]
United Kingdom – ACT Class 2/4 GLO claimants lose in the Court of Appeal
(Case No: A3/2010/0963)
On 21 December 2010, the Court of Appeal upheld in full the High Court's 26 February 2010
judgment for HMRC in the case of Test Claimants in Classes 2 and 4 of the ACT Group
Litigation v HMRC. The claimants in this ACT GLO case are parent companies resident in EU
Member States (Netherlands and Italy) whose treaties with the UK gave entitlement to a
payment equal to half the tax credit to which a UK resident parent would be entitled, less 5%
income tax on the half tax credit plus the dividend. Where such a dividend was paid outside a
group income election, the UK subsidiary was required to account for ACT on the dividend.
High Court Judgement – 26 February 2010
In the High Court, the test claimants argued that in these circumstances: 1) the levy of ACT in
excess of the partial treaty credit was in breach of EU Law and sought restitution for the
excess; or alternatively, 2) assuming that ACT is required to be paid in full and is not
recoverable, they should be entitled to restitution for the difference between the full credit and
PwC EU Tax News
19
the partial treaty credit and the income tax deducted from the partial treaty credit. Henderson
J held against the taxpayer on both issues, and declined to refer the matter to the ECJ.
Henderson J also concluded that the claimants would not have made group income elections,
even if it had been possible to do so, such that their claims for restitution of ACT should also
be dismissed.
Court of Appeal judgement – 21 December 2010
In the Court of Appeal judgement, the appeals were dismissed and the decision of Henderson
J was upheld.
-- Peter Cussons and Stephanie Evans, PwC UK; [email protected]
Back to top
EU developments
EU – Main direct tax related Conclusions of the ECOFIN Council held on 15
February 2011
New EU Directive on administrative cooperation in the field of direct taxation
On 15 February 2011, the Council adopted a directive on administrative cooperation in the
field of direct taxation, aimed at strengthening mutual assistance between the member states
and ensuring that OECD standards for information exchange on request are implemented in
the EU, so as to better combat tax evasion and tax fraud. For details, see press release
6554/11.
Code of conduct on business taxation
The Council took note of a report from the Presidency on the scope of the EU's code of
conduct on business taxation, and adopted the following conclusions.
"The High Level Working Party (HLWP) discussed the current scope of the Code of Conduct
on business taxation in line with ECOFIN conclusions of 7 December 2010 (doc. 17380/10
FISC 149). The HLWP took the view that personal income taxation falls, as a general rule,
outside the scope of the Code. However, certain aspects of such taxation may be taken into
account in specific circumstances. The regimes of the Isle of Man and Jersey (doc. 16766/10
FISC 139 point 12) fall under the scope of the Code of Conduct due to the following reasons:
1.
Shareholders are not taxed exclusively on actual distributions, but also on deemed
distributions. The combination of both ensures current taxation of business profits at
shareholder level.
2. Current business profits are effectively taxed at shareholder level via deemed
distribution or attribution provisions. The mechanism is designed as a system based
PwC EU Tax News
20
on shareholder and company taxation to ensure combined taxation of business
profits.
3. The mechanism, whereby current business profits are taxed at shareholder level via
deemed distribution or attribution provisions, only applies to resident shareholders
thus creating an instrument to protect the national tax revenues and to attract nonresident shareholders.
4. The mechanism is an alternative means of taxing domestic business profits rather than
an anti-avoidance measure.
These conclusions are without prejudice to any further clarification of the scope of the Code of
Conduct made necessary by examination of other regimes with potentially damaging effects."
-- Bob van der Made, PwC Netherlands; [email protected]
EU – European Commission announces public consultations on dividend
withholding tax regimes and financial sector taxation
The Commission issued two public consultations in February 2011, one on taxation problems
that arise when dividends are distributed across borders to portfolio and individual investors
in the EU (deadline for submission: 30 April 2011; click here for more information) and
another on the taxation of the financial sector (deadline for submission: 19 April 2011; click
here for more information).
-- Bob van der Made, PwC Netherlands; [email protected]
EU – European Commission publishes summary report on 2010 EC public
consultation on double taxation problems in the EU
The Commission published a summary report of the responses received on its public
consultation on double taxation problems in the EU held in 2010. Click here for the summary
report.
-- Bob van der Made, PwC Netherlands; [email protected]
EU – European Commission announces Decisions concerning infringement
procedures against five EU countries
On 16 February 2011, the Commission announced the following infringement procedures:
 Belgium, taxation of gifts of real estate (IP/11/159);
 France, investments in residential property to let (IP/11/160);
 Greece, tax amnesty and funds held abroad (IP/11/161);
 Spain; inheritance and gift tax provisions (IP/11/162);
 United Kingdom, anti-abuse tax regimes (IP/11/158) – click here to see our item below.
-- Bob van der Made, PwC Netherlands; [email protected]
PwC EU Tax News
21
EU – Second meeting of the EU Tax Policy Group held on: VAT, Financial
Sector Tax and Code of Conduct on Business Taxation
On 19 January 2011, the European Commission announced that Algirdas Šemeta,
Commissioner for Taxation, Customs, Anti-Fraud and Audit, chaired the second meeting of
the re-launched Tax Policy Group (TPG). The TPG brings together personal representatives of
EU Finance Ministers to discuss key tax policy issues. Among the topics for discussion at
today's meeting are Financial Sector Taxation (see IP/10/1298), the recent VAT Green Paper
(see IP/10/1633) and the Code of Conduct for Business Taxation. The TPG was re-launched by
Commissioner Šemeta in October 2010 and provides a forum for high-level discussions on the
scope and priorities for EU tax policy. No TPG meeting notes are published.
-- Bob van der Made, PwC Netherlands; [email protected]
Ireland – European Commission requests Ireland to amend restrictive exit tax
provisions for companies
Following the issue of a letter of formal notice to the Irish Revenue Commissioners in
November 2009, the European Commission has now formally requested (through a 'reasoned
opinion') that Ireland amend its exit tax provisions.
Currently under Irish tax law where a company ceases to be tax resident in Ireland it is subject
to an exit tax in respect of unrealised gains in respect of chargeable assets held by it at the date
of transfer. For this purpose, immediately before the company ceases to be Irish resident it is
deemed to dispose and reacquire the assets held by it at market value. These provisions do
not apply to:
 A company, 90% at least of the issued share capital of which is owned by foreign
company/companies (i.e. a company which is not Irish tax resident, is controlled by
persons tax resident in a country with which Ireland has a double taxation agreement, and
are not under the control of Irish tax resident persons) or by persons directly or indirectly
controlled by a foreign company.
 Any assets of a company which are used for the purpose of a trade carried on in Ireland
through a branch or agency, which immediately post transfer of the company’s residency,
are situated in Ireland and are used in or for the purposes of the trade, or held for the
purpose of the branch or agency.
It is also possible to postpone the exit tax arising where the company transferring its residence
is a 75% subsidiary of an Irish resident company and both companies elect in writing to do so.
In these circumstances the exit tax will only crystallise if within ten years the assets are
actually disposed of, the company ceases to be a 75% subsidiary of the Irish parent company,
or the Irish parent company transfers its tax residence.
The impact of the ruling is therefore principally on companies which transfer residence to
another country but who are not controlled by a treaty country or who are ultimately
controlled by Irish resident persons.
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22
The Commission considers that the exit tax imposed serves as a discriminatory penalty on
companies wishing to transfer their place of central management abroad on the basis that the
rules in question are likely to dissuade companies from exercising their right of freedom of
establishment and therefore constitute a restriction to the freedom of establishment as laid
down in Article 49 TFEU and Article 31 of the EEA Agreement.
In the absence of a satisfactory response within two months the Commission may refer
Ireland to the ECJ.
-- Carmel O'Connor and Margaret Masterson, PwC Ireland; [email protected]
Italy – European Commission requests Italy to modify its “golden shares” rules
On 16 February 2011, the European Commission sent a reasoned opinion to Italy requesting
Italy to modify its “golden shares” rules. Such provisions grant to the Italian State special
powers to intervene in ownership and management decisions in privatised companies
operating in strategic sectors such as the telecommunication, energy, petroleum and security
sectors.
In particular, the Italian State has the power to oppose both acquisitions of shares and the
conclusion of pacts by shareholders representing a certain proportion of voting rights (5% or a
lower percentage if so established). Moreover, the State can also veto certain company
decisions, such as a merger or a company split.
In the Commission’s view, the Italian provisions do not adequately define the criteria for the
exercising of the powers by Italy. In fact, for the Commission the “golden shares” rules could
grant to the Italian State an excessive discretion in the application of its powers creating, in
this way, an unjustified restriction on the free movement of capital and the right of
establishment (Article 63 and 49 respectively of the TFEU).
For the Commission, in fact, restrictions on the acquisition of shares in specified companies
and the other special powers granted to the Italian State make direct investment and portfolio
investment in those companies less attractive and may discourage potential investors from
other EU Member States.
The Italian legislator has two months for implementing measures to remedy EU Law
infringement otherwise the Commission could decide to refer the case directly to the ECJ.
It is interesting to point out that the Italian golden share rules are applicable to both EU
investors and Italian investors. As a consequence, the infringement procedure is based on the
restriction approach and not on the discrimination approach. The restriction approach,
already used in the past by the ECJ in its decisions, could have interesting developments in
the matter of direct taxation.
-- Claudio Valz and Luca la Pietra, PwC Italy; [email protected]
PwC EU Tax News
23
United Kingdom – European Commission requests UK to amend two anti-abuse
tax regimes
On 16 February 2011, the European Commission requested the UK to amend discriminatory
anti-abuse tax regimes which concern the transfer of assets abroad by UK resident individuals
and attribution of gains to UK resident members of non-UK resident companies.
Both of these Commission infringement actions (i.e. regarding s720 ITA07 and s13 TCGA
1992) are as a result of complaints made by a representative body.
The first infringement relates to the UK's “transfer of assets abroad” legislation (s720 ITA
2007), whereby if a UK resident individual invests in a company incorporated and managed in
another Member State by transferring assets to it, the investor is subject to tax on the income
generated by the recipient company. If the investor had invested the assets in a UK company,
they would not be liable for tax (as only the company itself would be taxable).
The second infringement relates to the attribution of gains to members of non-UK resident
companies regime (s13 TCGA 1992). Under this legislation, if a UK-resident company or UK
resident individual acquires more than a 10% share of a company in another Member State,
and this non-resident company realises capital gains from the sale of an asset, the gains are
immediately attributed to the UK company or individual, which becomes liable for
corporation tax or capital gains tax on these capital gains. However, if the UK company or
individual had invested in another UK resident company, only the latter company would be
taxable on its capital gains.
In both cases, the Commission considers there to be discrimination, seeing as investments
outside the UK are taxed more heavily than domestic investments. These are therefore
contrary to the EU’s freedom of establishment (Article 49 TFEU) and free movement of
capital (Article 63 TFEU).
The requests are the second stage of the infringement procedure and take the form of
Reasoned Opinions. If the Commission do not receive a satisfactory response, within two
months, it may refer the UK to the ECJ.
-- Peter Cussons and Stephanie Evans, PwC UK; [email protected]
United Kingdom – Complaint made to the European Commission over UK's
"Marks & Spencer" legislation in CTA 2010 ss111-128
We understand that a UK representative body has made a complaint to the European
Commission (EC) over the UK's legislation on group relief surrenders made by non-UK
resident companies resident or trading in the EU or EEA (CTA 2010 ss111-128).
This legislation is perceived as being in breach of the Treaty on the Functioning of the
European Union (TFEU)/ EC Treaty by failing to deal properly with timing differences (such
as provisions) that may be dealt with differently for tax purposes in the UK and in other
Member States.
PwC EU Tax News
24
This point is probably best illustrated where a provision is allowed for tax locally (in EU
countries other than the UK) when it is booked in the company’s accounts, but the provision is
only allowed in the UK when utilised. As s111-128 effectively operate on a strict year-by-year
comparison basis, such a provision/ utilisation is not allowed either locally (because losses are
"final"), or in the UK as part of the M&S "final" loss relief.
On 21 June 2010 the Upper Tribunal upheld the Lower-Tier Tribunal decisions in favour of
Marks & Spencer Plc (ECJ Case C-446/03, Upper Tier Tribunal Appeal numbers:
FTC/04/2009, FTC/05/2009, FTC/28/2009 and FTC/32/2009) regarding cross-border
group relief claims/surrenders, and as to the quantum of those claims (including the timing
difference point between UK and Belgium/ Germany tax relief). It was held that the above
timing differences should be allowed to form part of the “final” loss relief.
HMRC now has leave to appeal to the Court of Appeal, and may seek to challenge the Upper
Tribunal decision on this point. The Court of Appeal hearing is listed for 7-10 June 2011.
-- Peter Cussons and Stephanie Evans, PwC UK; [email protected]
Back to top
CCCTB
EU – European Commission proposes EU Directive on the CCCTB
On 16 March 2011, the European Commission proposed a directive for a common system for
calculating the tax base of businesses operating in the EU: the Common Consolidated
Corporate Tax Base (CCCTB). This is a single set of rules which companies operating within
the EU could opt to use to calculate their taxable profits. In other words, a company, or group
of companies, would have to comply with just one EU system to compute its taxable income,
rather than with different rules in each of the Member States in which it operates. Under the
CCCTB, companies active in more than one EU Member State would only have to file a single
tax return for all their activities in the EU (i.e. a ‘one-stop-shop’). Cross-border loss relief
would be possible and there would be no transfer pricing rules in the CCCTB area. After the
tax base has been calculated, it would subsequently be redistributed or apportioned to the
relevant Member States participating in CCCTB, according to an agreed pre-set formula. The
tax rates which are applied to the allocated tax base are not covered by the proposal, as they
would continue to be determined at a national level.
If the proposal is adopted by the Member States in Council – either by all of them or by at
least nine Member States under a special procedure – multinational companies would need to
rethink their EU tax strategy. Companies would have to consider under what circumstances
they would wish to opt-in and use the common tax base. This requires a proactive approach
and a possible change in their EU tax strategy.
PwC EU Tax News
25
The CCCTB has been identified as an important initiative of the Barroso II Commission in the
context of the Europe 2020 Strategy. It has also been mentioned in a series of major EU policy
documents that aim to remove obstacles to the Single Market and stimulate growth and job
creation within the EU (Single Market Act and Annual Growth Survey). In the “Pact for the
Euro” of 11 March 2011, the 17 Heads of State or Government of the Euro area (who are also
EU Member States) said that developing a common corporate tax base could be a revenue
neutral way forward to ensure consistency among national tax systems, while respecting
national tax strategies, and to contribute to fiscal sustainability and the competitiveness of
European businesses.
Following the Commission’s adoption of the proposal, EU procedural next steps include:
 The Commission must ask the EU Council Presidency to add the proposal to its formal
work agenda. Once added, the formal negotiations between 27 EU Member States can be
initiated in the Council’s Working Party on Tax Questions.
 The Commission proposal must be sent to the European Parliament and the Economic and
Social Committee (ECOSOC) for their consultative (non-binding) opinions to Council.
 Finally, the 27 national parliaments in the EU must also be notified of the Commission’s
proposal, under the new Lisbon Treaty rules, for an EU “subsidiarity and proporiionality”
test to be carried out to ensure the CCCTB can only be dealt with at EU supranational level.
Technically, a one-third minority of national parliaments could stop and delay the
legislative process at EU level.
 If the Council’s Working Party on Tax Questions can reach agreement with regard to the
technical and planning aspects, the proposal will be moved up to the Council’s standing
political voting assembly (“COREPER”) composed of the permanent representatives of the
27 EU Member States. If political agreement can not be reached here, the proposal moves
up to the Finance Ministers (ECOFIN Council).
 The ECOFIN Council can adopt the proposed directive only if it’s acting unanimously. If
there is no unanimous support among the 27 EU Member States, CCCTB may be discussed
under enhanced cooperation “as a last resort”.
There is some parallel political pressure from Eurozone EU Member States led by Germany
through the Euro Plus Pact adopted on 25 March 2010: whilst taking note of the
Commission’s CCCTB proposal the Pact states that “developing a common corporate tax base
(CCTB) could be a revenue neutral way forward (…)”.
It should be stressed, however, that it’s hard to assess how much support there really is among
the 27 Member States for CCCTB. This makes it difficult to predict the likelihood and timing
of the CCCTB being adopted. Companies need to be aware that although the political process
may take at least another year or so, a smaller group of Member States may want to
implement CCCTB as a last resort via enhanced cooperation possibly in 2013/2014.
For more technical background on the Commission’s draft proposal and what you should
know about the CCCTB, click here to see PwC’s special newsletter on CCCTB.
PwC is particularly well-positioned to advise multinational groups on the impact of CCCTB:
PwC EU Tax News
26
 We have a PwC CCCTB working group which has been dedicated to the CCCTB for the past
three years, and which is also part of PwC’s EU Direct Tax Group of EU tax law experts,
and have carried out 3 studies on CCCTB at the request of the Commission:
o A PwC impact assessment study on CCTB and CCCTB concerning the effective tax
rate and compliance costs, with the participation of more than 20 multinational
groups in several industries; and
o Two other studies on CCCTB and possible adjustments for financial institutions.
 We can provide multinational groups with in-depth analysis of the proposed directive and
model the effect of CCCTB or CCTB on their EU corporate tax position using our
proprietary software tool.
 We have closely followed the development of the Commission’s proposal through the
CCCTB Working Group and will continue to closely monitor all EU political developments
of importance to business.
 Given the above, PwC can enable companies to act proactively in redesigning their
European tax strategy for the years ahead and engage in the public debate on the CCCTB.
-- Peter Cussons, Sjoerd
[email protected]
Douma,
Bob
van
der
Made,
and
Marc
Kanter;
Back to top
State aid
Germany – European Commission decision on
companies (C 7/2010)
loss carry forward for ailing
According to the German change of control rule (Sec. 8c CITA), a loss carry forward of a
German corporation will be forfeited partially/wholly when more than 25%/50% of the
ownership of a German corporation is acquired by one acquirer/group of acquirers within a
period of five years. As an exception to this rule, the loss can be carried forward in cases where
the change of ownership pursues a financial restructuring (Sanierungsklausel). Such a
financial restructuring has to fulfill several requirements like clearing or avoiding insolvency
while maintaining the substantial business organisation which in turn underlies a specific
definition. The Sanierungsklausel has been adopted by the German legislator in 2009 with
retroactive effect for restructurings (transfer of shares) conducted after 31 December 2007.
At the beginning of last year, the Commission opened an in-depth investigation as it doubted
whether this exception is in line with the European principles of state aid. On 26 January
2011, the Commission declared the provision to be unlawful state aid and ordered Germany to
recover all already assessed tax reliefs based on this provision.
In the Commission´s view, the measure is selective, as it differentiates between ailing
companies and healthy companies. Indeed, both companies could be loss making, but only the
former are eligible for the carry forward of such losses under the Sanierungsklausel. Thus, the
provision favours ailing companies and distorts competition. The Commission rejected the
PwC EU Tax News
27
argument brought forward by the German government that the Sanierungklausel would be
justified by the nature and general scheme of the German tax system and would fall under one
of the block exemption regulations.
The German government announced on 9 March 2011 that it will take action for annulment of
this decision before the Court of First Instance.
-- Gitta Jorewitz and Juergen Luedicke, PwC Germany; [email protected]
Hungary – Hungarian intra-group interest regime withdrawn
The Hungarian intra-group interest regime in place since 1 January 2010 and which was
not notified to the Commission was withdrawn by Hungary in December 2010.
-- Bob van der Made, PwC Netherlands; [email protected]
Italy – Infringement proceeding against Italy regarding interest deduction made
by companies owned by public entities?
The European Commission is assessing action against Italy regarding its provisions on
interest deduction of utility companies. The general rule on interest deduction, section no. 96
of the Italian corporate income tax, requires that, in each fiscal year, interest payable is
deductible from interest receivable. Any surplus of interest payable is deductible up to 30 per
cent of the EBITDA. The general limitation in the deduction does not apply to banks,
insurance companies, financial holdings and companies owned by public entities.
For companies owned by public entities no restriction to deduction of interest applies,
provided certain conditions (shareholders / activities) are met.
In December 2010, the Commission requested Italy to clarify the aim of the above mentioned
different treatment and, if Italy is not able to give a persuasive response, the Commission
could open a new infringement procedure in order to identify if such a rule could be
considered as State aid (Article 107, TFEU). Moreover, in the event that the Commission were
to decide that the specific Italian rule is State aid, it is important to point out that the latter
could require Italy to recover the illegal State aid granted to companies owned by public
entities.
-- Claudio Valz and Luca la Pietra, PwC Italy; [email protected]
Spain – European Commission requires Spain to abolish Spanish tax
amortisation of financial goodwill scheme favouring acquisitions in non-EU
countries
On 12 January 2011 the European Commission announced that it has requested Spain, under
EU state aid rules, to abolish a 2002 provision in its corporate tax that allows Spanish
companies to amortise 'financial goodwill' deriving from acquisitions of shareholdings in
companies in third countries. The Commission also asks for the recovery of any aid granted
PwC EU Tax News
28
under this provision since 21 December 2007 where concrete legal obstacles to investment
could not be demonstrated. This follows and closes an investigation which had already
resulted in a decision, in 2009, concluding that the scheme amounted to illegal aid as regards
acquisitions of shareholdings in other EU Member States.
In October 2007, the Commission started a formal investigation into a provision of the
Spanish Corporate Tax Law over concerns that it provided an advantage for Spanish
companies acquiring foreign ones (see IP/07/1469). Article 12(5) of the law provides that a
Spanish company may amortise the 'financial goodwill' resulting from the acquisition of a
shareholding of more than 5% in a foreign company during the 20 years following the
acquisition.
Amortising goodwill is generally allowed in full mergers and cannot discriminate between
national and foreign firms. It consists in the write off, over a period of time, of the 'excess'
price paid for the acquisition of a business compared with the market value of the assets
composing it.
The Spanish provision allowed for the amortisation of the financial goodwill (difference
between the cost of the shares and the market value of the target company's assets) in the
acquisition of shareholdings in foreign companies. This is a clear exception from the general
Spanish tax system in that it allows the amortisation of goodwill even where the acquiring and
the acquired companies are not combined into a single business entity. The provision was the
subject of complaints and questions from Members of the European Parliament.
In 2009 the Commission concluded that the scheme amounted to state aid in that it treated
more favourably Spanish acquisitions in other Member States than Spanish-Spanish
transactions without any objective reason. The Commission kept the investigation open with
regard to acquisitions in non-EU countries (see IP/09/161) in order to examine alleged
evidence of obstacles to cross-border business combinations that Spain committed to provide.
As a result Spain no longer applied the measure regarding acquisitions in other EU countries.
Spain argued that the measure was needed to offset fiscal and other legal obstacles allegedly
faced by acquirers in the non-EU countries. However, the Commission could not identify any
such explicit obstacles in the vast majority of the more relevant third countries whose
legislation it examined. Therefore today's decision concludes that the tax provision also
amounts to a clear and unjustified advantage in the case of acquisitions in third countries.
As a consequence, the Commission asks Spain to repeal the provision also for acquisitions
outside the EU and to recover any aid granted in this fashion since the start of the EU
investigation, in 2007, with the exception of the countries where such obstacles (e.g. ban on
cross-border legal combinations) have been or can be demonstrated (India and China).
The non-confidential version of the decision will be made available under the case number C
45/2007 in the State Aid Register on the DG Competition website once any confidentiality
issues have been resolved.
-Miguel
Ferre,
PwC
Spain
[email protected]
PwC EU Tax News
and
Sjoerd
Douma,
PwC
Netherlands;
29
Spain – European Commission publishes Decision on Spanish tax amortisation
of financial goodwill for foreign shareholding acquisitions for intra-EU
acquisitions
The European Commission Decision of 28 October 2009 on the tax amortisation of financial
goodwill for foreign shareholding acquisitions implemented by Spain (intra-EU acquisitions)
was published in the OJ L7/48 of 11 January 2011.
-- Bob van der Made, PwC Netherlands; [email protected]
PwC EU Tax News
30
About PwC’s EU Direct Tax Group (EUDTG)
The EU Direct Tax Group (EUDTG) is a pan-European team of EU tax law specialists and part
of PwC’s International Tax Services network. The EUDTG has dedicated client servicing teams
in place in all 27 EU Member States, most of the EFTA (European Free Trade Agreement)
countries and Switzerland. The EUDTG has assisted numerous clients in understanding their
EU Law rights and in coordinating, filing and obtaining substantial refunds of tax unlawfully
exacted in various EU or EEA territories. Our EUDTG is playing a leading role in actively
developing new original and cutting-edge EU arguments and solutions that help our clients in
the best way possible.
For more information, please visit: www.pwc.com/eudtg.
For further information about this newsletter or the EUDTG, please contact Bob van der Made
(email: [email protected]; or Tel.: + 31 6 130 96 2 96).
EU Tax News editors: Irma van Scheijndel. Peter Cussons and Bob van der Made.
This publication has been prepared for general guidance on matters of interest only, and does not constitute
professional advice. You should not act upon the information contained in this publication without obtaining specific
professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of
the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not
accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or
refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the
network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires,
individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of
PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable
for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or
bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor
can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in
any way.
PwC EU Tax News
31
PwC EUDTG contacts
EUDTG Chair:
Frank Engelen: [email protected]
EUDTG Secretary:
Bob van der Made: [email protected]
EUDTG country leaders:
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Rep.
Denmark
Estonia
Finland
France
Germany
Greece
Gibraltar
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
Switzerland
UK
Friedrich Roedler
Olivier Hermand
Krasimir Merdzhov
Lana Brlek
Marios Andreou
Zenon Folwarczny
Soren Jesper Hansen
Erki Uustalu
Jarno Laaksonen
Emmanuel Raingeard
Juergen Luedicke
Vassilios Vizas
Robert Guest
Gabriella Erdos
Fridgeir Sigurdsson
Carmel O’Connor
Claudio Valz
Zlata Elksnina
Kristina Krisciunaite
Eric Centi
Kevin Valenzia
Sjoerd Douma
Steinar Hareide
Camiel van der Meij
Jorge Figueiredo
Mihaela Mitroi
Todd Bradshaw
Clare Moger
Miguel Ferre
Gunnar Andersson
Armin Marti
Peter Cussons
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
kristina. [email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
EUDTG CCCTB contact:
Peter Cussons: [email protected]
EUDTG State aid contact:
Sjoerd Douma: [email protected]
EUDTG EU Public Affairs contact:
Bob van der Made: [email protected]
PwC EU Tax News
32