Issue 2011 – nr. 001 November – December 2010

Issue 2011 – nr. 001
November – December 2010
This issue of the EU Tax Newsletter has been prepared by members of PwC’s EU Direct Tax
Group (EUDTG). Should you be interested in receiving this free newsletter automatically in
the future, then please register online via: www.pwc.com/eudtg.
CONTENTS
ECJ CASES
Austria
Germany
Luxemburg
Denmark,
Netherlands & Spain
Italy
Netherlands
United Kingdom
AG opinion on tax treatment of inbound portfolio dividends: joined
cases Haribo et al v. Finanzamt Linz
AG opinion on the deductibility of a perpetual annuity: Schröder case
ECJ judgment on limiting investment tax credit benefits to domestic
investments: Tankreederei I SA case
ECJ referrals regarding company exit tax rules
ECJ referral regarding the abuse of law principle and tax litigation
amnesty procedure
ECJ referral regarding private motor vehicle and motorcycle tax
ECJ referral by Supreme Court in the FII GLO case
NATIONAL DEVELOPMENTS
Austria
Denmark
Denmark
Germany
Germany
PwC EU Tax News
High court questions legality of the tax exemption on income from
plant engineering and construction services
Taxpayer prevails in a case on beneficial ownership of interest
payments made to a Luxembourg parent company
Tax Tribunal decision on Danish exit tax rules
Lower court decision on the conditions for obtaining a refund of
withholding taxes for artists in Germany
Federal court decision on foreign income exemption with progression
1
Germany
Hungary
Luxembourg
Netherlands
Netherlands
Norway
Poland
Portugal
Spain
Sweden
Switzerland
United Kingdom
United Kingdom
United Kingdom
Lower court decision on denial of loss carry-forward in Austria and
final losses
Recent changes to tax law
Administrative tribunal decision on fiscal unity regime
Standstill clause applicable to fictional income rule
Final lower court decision on private motor vehicle and motorcycle
tax
State wins pilot cases on Norwegian taxation of dividends on
outbound and inbound investments outside the ordinary 3 years
deadline
End of discriminatory treatment of foreign investment and pension
funds
Changes to outbound dividend taxation regime
Non-resident income tax law amended to bring Spanish law in line
with EU Law
Supreme Court decision on participation exemption on dividends and
EU Parent-Subsidiary Directive
Introduction of the capital contribution principle
HMRC granted leave to appeal in Marks & Spencer case
ACT Class 2/4 GLO claimants lose again in the Court of Appeal
Supreme Court refuses HMRC permission to appeal in Compound
Interest Project
EU DEVELOPMENTS
EU
EU
EU
Report by PwC, World Bank, and IFC: "Paying Taxes is Getting Easier
Despite Economic Downturn”
Main direct tax related Conclusions of the ECOFIN Council held on 7
December 2010
European Commission Communication on removing cross-border tax
obstacles for EU citizens
CCCTB
EU
Latest developments on the CCCTB
STATE AID
Italy
Netherlands
PwC EU Tax News
Infringement proceeding against Italy regarding interest deduction
made by companies owned by public entities
AG opinion on Dutch emissions trading scheme and State aid
2
ECJ CASES
Austria – AG opinion 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 11 November 2010, AG Kokott gave her opinion in the joined cases of Haribo Lakritzen
Hans Riegel and Österreichische Salinen AG v Finanzamt Linz regarding the tax treatment of
inbound portfolio dividends in paragraph 10 of the Austrian Corporate Income Tax (CIT) Act:

Domestic dividends are generally excluded from the CIT base (no minimum investment).
Furthermore, dividends received from EU/EEA companies are also tax exempt if the
foreign company is subject to a tax similar to the Austrian CIT and if the foreign CIT rate
is not below 15%; and

Dividends received from a foreign company are also tax exempt if the Austrian company
holds at least 10% of the issued share capital for a minimum holding period of one year
(international participation exemption). The participation exemption for dividends is
replaced by a tax credit (switch-over clause) if the foreign subsidiary does not meet an
active trade or business test and is not subject to an effective foreign CIT rate of at least
15%.
On 29 September 2008, the Austrian Fiscal Court of Appeal referred questions for a
preliminary ruling to the ECJ on the compatibility with EU Law of the Austrian tax treatment
of inbound portfolio dividends (see also EU Tax News Issue 2009 – nr. 002). The relevant tax
provision was amended as part of a tax reform in 2009. The participation exemption for
dividends was expanded to EU portfolio dividends provided that inter alia. mutual assistance
has been agreed with the state of origin. In October 2009, the ECJ requested a written
statement from the Austrian Fiscal Court of Appeal on whether the amendments of legislation
had consequences for the preliminary ruling questions. The Austrian Fiscal Court of Appeal
adjusted the preliminary questions subsequently (see: EU Tax News Issue 2010 – nr. 001).
The AG concluded that:

In principle, the application of the credit method – under certain circumstances – to
foreign dividends, as ruled by the Austrian CIT Act, while domestic dividends are always
tax exempt, is in line with EU Law. This conclusion is still valid, if the proof of the foreign
CIT burden (which is necessary for the application of the credit method) is – due to
administrative obstacles – impossible or extremely difficult to be obtained.

As domestic portfolio dividends are always exempt in Austria, it is contrary to the
principle of free movement of capital not to provide for at least a credit of the foreign CIT
with respect to foreign portfolio dividends. Furthermore, if domestic law provides for a
conditional exemption of portfolio dividends from EU/EEA-countries, it is not
proportionate to apply merely the credit method for such dividends from third countries.
PwC EU Tax News
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
Generally, the application of the credit/exemption method can be linked to the existence
of an agreement on mutual assistance and collection of taxes between Austria and the
source country. However, imposing this condition just on portfolio dividends
(investment < 10%) is not in line with EU Law.

Regarding the carrying-forward of creditable foreign CIT, since domestic portfolio
dividends are tax exempt in order to avoid economic double taxation, domestic law has to
provide for the possibility to carry forward any non-creditable foreign CIT (non-creditable
e.g. due to a tax loss position) or to take it into consideration otherwise. These
considerations refer to portfolio dividends received from EU/EEA-countries as well as
from third countries. However, the relief is only required for foreign corporate income
tax.
From the analysis outlined above, if the AG’s opinion is followed by the ECJ, significant
changes will have to be made to the taxation of portfolio dividends in Austria.
-- Richard Jerabek and Ulrike Koller, Austria; [email protected]
Germany – AG opinion on the deductibility of a perpetual annuity: Schröder case
(C-450/09)
On 9 December 2010, AG Bot delivered his opinion in a case concerning the deductibility of a
perpetual annuity.
The claimant, a German national who worked and resided in Belgium, was granted a rental
house located in Germany by way of anticipated succession from his mother who he had to
pay a perpetual annuity for in return. In his German tax return he declared the rental income
as well as his expenses for the annuity. However, the tax authority denied the deduction of the
annuity as this is technically not considered to be an income related expense but a personal
related expense, which cannot be offset by non-residents but only by German residents (Sec.
50 (1) sentence 4 ITA in connection with Sec. 10 No. 1a ITA (2002)).
First, the AG confirmed that acquiring real estate cross-border falls under the free movement
of capital. Secondly, he established whether the perpetual annuity has to be considered as
either personal related or income related expense. He acknowledged that in contrast to
expenses which are directly linked to income, personal related expenses don´t have to be
deductible in the Source State. Due to the fact that the claimant would not have been able to
(i) acquire the real estate and (ii) receive rental income without paying such a perpetual
annuity to his mother, the AG concluded that the annuity is directly linked to the taxable
income. Thus, rejecting the deduction of the annuity constitutes a restriction. As Germany did
not provide for reasons to justify this restriction, the AG considered the provision to infringe
Art. 63 TFEU.
-- Gitta Jorewitz and Juergen Luedicke, Germany; [email protected]
PwC EU Tax News
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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).
In its judgment, the ECJ rules that Article 56 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, Luxemburg; [email protected]
Denmark, The Netherlands and Spain – ECJ referral regarding company exit tax
rules
On 24 November 2010, the European Commission decided to refer Denmark, The
Netherlands and Spain to the ECJ for their provisions which impose an exit tax on businesses
which cease to be tax residents or which transfer assets to a foreign head office or a foreign
permanent establishment. The Commission considers these provisions to be incompatible
with the freedom of establishment as laid down in Article 49 TFEU.
Under national tax law in Denmark, The Netherlands and Spain, a business is taxed on its
unrealised capital gains if it changes its residence, moves its permanent establishment or
transfers its assets to another Member State. However, comparable domestic operations are
not taxed for unrealised capital gains that may arise.
The Commission considers that such taxation serves as a discriminatory penalty on
companies wishing to leave these countries or to transfer assets abroad. The rules in question
are likely to dissuade companies from exercising their right of freedom of establishment and
PwC EU Tax News
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therefore constitute a restriction on the freedom of establishment as laid down in Article 49 of
the TFEU. Immediate taxation of accrued but unrealised capital gains at the moment of exit
amounts to a restriction if there is no similar taxation in comparable domestic situations. It
follows from the case law that the Member States should defer the collection of their taxes
until the moment of actual realisation of the capital gains, the Commission said.
Two other cases on company exit taxation are already pending with the ECJ: National Grid
Indus BV (C-371/10) and Commission v. Portugal (C-38/10). Other infringement proceedings
have been started against Belgium and Norway (by the EFTA Surveillance Authority).
The referral is a marker for the Commission’s determination to move forward in the area of
company exit taxation.
-- Sjoerd Douma, Netherlands; [email protected]
Italy – ECJ referral regarding abuse of law and tax litigation amnesty procedure
On 4 August 2010, the Italian Supreme Court asked the ECJ for a preliminary ruling on 5
questions relating to the abuse of law and the compatibility of the tax litigation amnesty
procedure with EU Law (see also: EU Tax News Issue 2010 – nr. 005). Following this, on 3
November 2010, the same court referred the same five questions to the ECJ.
In particular, the first two questions relate to the abuse of law. The Supreme Court asks
whether the EU’s principle of abuse of law, as interpreted in the cases Halifax and others (C255/02) and Part Service (C-425/06), could be extended to non-harmonised taxes, and
whether there is a general EU law principle of abuse of law that could be applicable also to
non harmonized taxation. Secondly, the Supreme court raises the question whether,
irrespective of the presence of a general principle of abuse of law in the EU law, there is an EU
interest on the basis of which the Member States have to implement adequate measures to
contrast tax avoidance in the matter of non harmonised taxation.
The further three questions relate to the tax amnesty procedure. Law 73/2010, which came
into force on 26 May 2010, and which was introduced in order to reduce the number of
lawsuits pending before the Supreme Court. Through this measure, taxpayers have the
opportunity to stop any proceedings that are pending against them before the Supreme Court
by simply paying 5% of the amount originally assessed by the Italian Tax Authorities.
This measure can be opted for when the case has been pending for more than 10 years from
26 May 2010 and the taxpayer has already won in both first and second instance.
The Supreme Court asks the ECJ whether the fundamental principles governing the Internal
Market bring with them not only a ban on a Member State for introducing such an
extraordinary measure of total renunciation of the power of taxation, but also a ban on
providing for a tax litigation amnesty procedure, limited in its application and in time, which
is, in substance, a complete renunciation of the payment of the tax originally assessed by the
Italian Tax Authorities.
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Moreover, the Supreme Court asks the ECJ whether such a lower payment than the amount
assessed could be considered as State aid, according to the Article 107 TFEU.
Lastly, the Supreme Court asks the ECJ to clarify whether the removal of the power to review
the correct interpretation and application of EU Law from the national court of last instance,
as provided for by the tax litigation amnesty procedure, restricts the principle of effective
application of the EU law, that is the obligation for the Member States to guarantee at their
citizens an adequate protection of their subjective EU rights.
-- Claudio Valz and Luca la Pietra, Italy; [email protected]
Netherlands – ECJ referral regarding private motor vehicle and motorcycle tax
(BPM)
On 12 November 2010, the Dutch Supreme Court referred the following question regarding
the private motor vehicle and motorcycle tax (BPM) to the ECJ for a preliminary ruling
(unofficial translation):
“In light of Article 18 EC (now: Article 21 TFEU), is a case within the ambit of EU Law if
a Member State subjects the commencement of the use of a car on the roads within its
territory to a levy, whilst the car has been registered in another Member State, the car
has been borrowed from a resident of the other Member State and a resident of the first
mentioned Member State uses the car to travel on the territory of the last mentioned
Member State?”
The facts and circumstances giving rise to this question can be summarized as follows. The
litigant, a resident of the Netherlands, borrows a car from her father who resides in Belgium.
The car is registered in Belgium. The litigant uses the car for personal use on Dutch territory.
The Netherlands operates a private motor vehicle and motorcycle tax (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. Until 1 February 2007, the BPM was
payable at once, without the possibility of a refund. In the present case, the litigant is subject
to this tax in respect to the use of the car which she has borrowed from her father.
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 where 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 Supreme Court wishes to clarify through its preliminary question to the ECJ.
-- Anna Gunn and Marius Girolami, The Netherlands, [email protected]
United Kingdom –ECJ referral by Supreme Court in FII GLO case
On 8 November 2010, the UK Supreme Court upheld the Court of Appeal's decision of 23
February 2010 to refer certain issues to the ECJ. The issues being referred back to the ECJ in
FII GLO are the UK taxability of EU/EEA non-UK dividends on shareholdings carrying 10%
or more of voting power, both in respect of freedom of establishment and the free movement
of capital, given that UK to UK dividends were left out of account i.e. effectively exempt; the
so-called "corporate tree" points regarding cross-border dividend franking, where ACT was
PwC EU Tax News
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paid higher up the chain than the immediate water's edge UK resident holding company
and/or where the foreign tax was paid lower than the immediate foreign subsidiary level, e.g.
where there was a Dutch dividend mixer; the issue of the inability of a UK resident company
to surrender ACT to EU non-UK subsidiaries (with no UK PE); and the corporate tree points
as noted above but in relation to Foreign Income Dividends.
The Supreme Court has also deferred leave to take some consequential points until after the
ECJ decision. In addition, it has agreed to hear appeals on all other points, including the
liability points. These points include the retrospective restriction of the limitation period and
whether error or mistake claims can be reconstructed.
In summary:
 All the Court of Appeal decisions to refer issues to the ECJ have been upheld as being
within the scope of the Court of Appeal 's discretion.
 Leave to take some consequential points has been deferred until after the ECJ decision.
 Permission has been given to hear the appeals on all other points, including the liability
points. The Supreme Court has decided that it will hear now the appeals in relation to
retrospective restriction of the limitation period (s107 FA 07 and s320 of FA 04) and
whether statutory error or mistake claims (s33 TMA) can be reconstructed to exclude
restitution claims.
It seems all the key points will be considered by either the Supreme Court or the ECJ.
-- Steph Evans and Peter Cussons, United Kingdom; [email protected]
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NATIONAL DEVELOPMENTS
Austria – High court questions legality of the tax exemption on income from
plant engineering and construction services
Under Austrian income tax law, until the end of 2010, specified services rendered in
connection with plant engineering and construction services were exempt from payroll taxes
at the level of the assigned employee provided the salary for these services was paid by an
Austrian company in connection with services rendered abroad (so called “Montageprivileg”).
This tax exemption aimed to promote export activities.
The Austrian Administrative High Court is of the opinion that the provision is incompatible
with the Constitution and might also not be in line with EU Law since only domestic
companies assigning their employees abroad enjoy this tax benefit. Therefore, the
Administrative High Court decided to file an application with the Constitutional High Court to
have the tax exemption analyzed with regard to its legal compliance.
The Constitutional High Court finally decided that the tax privilege cannot be justified
anymore since it is only granted to a certain group of employees and therefore not in line with
the Austrian constitution.
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In the course of the recent Austrian Tax Reform 2011 (“Budgetbegleitgesetz 2011-2014”), the
decision of the Constitutional High Court was implemented in the following way:
In calendar year 2011, 66% of the income privileged under the former exemption will still be
tax exempt. In calendar year 2012, 33% of the income will still be tax exempt. From calendar
year 2013 onwards, the tax exemption will not apply any more.
Furthermore, although no Austrian High Court has explicitly decided so, the Austrian
legislator considers that the former privilege was not in line with EU law and has therefore
extended the scope of the tax exemption to employees of companies from other EU Member
States, EEA countries and Switzerland as well as from the Azores and Canary Islands located
in those privileged areas of third country companies.
-- Richard Jerabek and Ulrike Koller, Austria; [email protected]
Denmark – Taxpayer prevails in a case on beneficial ownership of interest
payments made to a Luxembourg parent company
On 17 November 2010, the Danish National Tax Tribunal, the highest Danish administrative
tax authority, published its decision in a case concerning beneficial ownership of interest
payments made to a Luxembourg parent company (case reference number
SKM2010.729.LSR). The Tribunal reversed the decision of the Danish tax authorities in which
the authorities had imposed a withholding tax obligation on a Danish taxpayer.
A number of private equity funds had acquired a Danish company (G2 A/S) through a
number of holding companies registered in Luxembourg and a holding company registered in
Denmark (H1 A/S). G2 A/S would acquire the target company (G3 A/S) in Denmark. The two
Luxembourg intermediate companies (G1 S.a.r.l. and G4 S.a.r.l.) had no employees and had
an identical Board. Their daily management was undertaken by one of the administration
companies of the private equity funds.
Upon takeover of G2 A/S by the private equity funds through H1 A/S, H1A/S paid a dividend
to its parent, G4 S.a.r.l. The latter issued two loans to H1 A/S on the same day approximately
equal to the amount of the declared dividend. The same day H1 A/S contributed the received
funds to G2 A/S as a capital expansion. G2 A/S used the received amount to acquire G3 A/S.
One of the loans granted by G4 S.a.r.l. to H1 A/S was a hybrid loan, which at the year-end
together with accrued interest was converted to share capital. In the middle of the following
year another loan with accrued interest was converted into share capital as well.
The tax authorities increased the tax payment of H1 A/S with an amount of 28% withholding
tax on the interest payments on the loans and argued that neither the EU’s Interest and
Royalties Directive nor the Double Tax Treaty between Denmark and Luxembourg prevented
Denmark from imposing the withholding tax on the interest. The tax authorities relied on the
interpretation of the “beneficial ownership” concept in the Commentary to the OECD Model
Tax Convention and argued that G4 S.a.r.l. could not qualify as the “beneficial owner” of the
interest received from H1 A/S. According to the tax authorities it was of no decisive
importance that in the given case the dividend had not been passed upstream by G4 S.a.r.l.
The decisive element was the lack of the right and ability on behalf of G4 S.a.r.l. to dispose of
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the received interest. Even though it was formally the parent company to H1 A/S, in practice,
the authorities argued, it was the ultimate shareholders that had fully determined beforehand
how the received amounts should be used. Based on the fact that G4 S.a.r.l. had no activity of
its own and was an intermediate holding company the tax authorities concluded that the
existence of this company lacked any commercial reasons, and its sole purpose was to avoid
the withholding tax in Denmark, or obtain other tax benefits.
According to the tax authorities the Interest and Royalties Directive does not apply to
structures that lack commercial purpose. In their decision the tax authorities relied on the
interpretation of “wholly artificial arrangements”, and cited the Cadbury-Schweppes (C196/04)and Halifax (C-255/02) rulings as well as the beneficial owner requirement as laid
down in Article 1 of the Directive. The authorities concluded that EU Law could not hinder
Denmark from imposing withholding tax on interest where beneficial owners are of this
income are resident outside EU.
The Tribunal upheld the taxpayer’s claim that there was no legal basis to deny the taxpayer
the tax exemption of interest payments in the given case. In its decision, the National Tax
Tribunal emphasised that G4 S.a.r.l. should not qualify as a “conduit company”, given that the
received interest income had not been paid up to its shareholders but instead had been used
as a loan to its subsidiary. The Tribunal noted that the concept of beneficial owner in the
Interest and Royalties Directive and in the DTA between Denmark and Luxembourg should be
understood identically. Therefore G4 S.a.r.l. should be free of the Danish withholding tax. In
its decision, the Tribunal referred to its earlier decision in a similar case regarding the same
taxpayer, where the Danish tax authorities had imposed a withholding tax obligation on the
dividend payment by H1 A/s to G4 S.a.r.l. also on “beneficial ownership” grounds. The
Tribunal reversed the tax authorities’ decision in that case as well, arguing that G4 S.a.r.l.
could indeed be viewed as a beneficial owner of the received dividend income.
In both cases the Tribunal emphasises “channelling income” as a requirement for qualifying
as a “conduit company”. Furthermore, the reference has been made to the beneficiary
intermediary holding company’s right to dispose over the received dividend/interest income.
The Danish tax authorities have appealed the earlier case regarding dividend payments to the
Danish High Court. It may be expected that the case will ultimately be decided by the
Supreme Court. Furthermore, there are a large number of other cases pending on withholding
taxes on interest and dividends paid to EU parent companies so the situation remains unclear.
-- Natia Adamia and Soren Jesper Hansen, Denmark; [email protected]
Denmark – Tax Tribunal decision on Danish exit tax rules
On 16 December 2010, the Danish National Tax Tribunal published its decision in a case
regarding taxation of a Danish company upon its merging into a foreign company (case
reference number SKM2010.817.LSR). The Tribunal upheld the mandatory ruling of the
Danish tax authorities according to which such a cross border merger would result in
immediate taxation in Denmark to the extent the assets and liabilities of the company that
ceases to exist are not allocated to a permanent establishment (PE) in Denmark.
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The case concerned a Danish bio-tech company, H1 ApS, undertaking research and owning
patents. After the acquisition of H1 ApS by a German global group, H1 ApS only owned
patents; all research activities were undertaken in Germany.
H1 ApS filed a request with the Danish tax authorities regarding the tax consequences on the
tax consequences of a possible cross-border merger with a German group upon which merger
H1 ApS would cease to exist.
The Danish tax authorities based their decision on Article 15 of the Danish Merger Tax Act,
according to which the cross-border merger of a Danish company which ceases to exist upon
merger, and assets and liabilities of which are transferred out of Denmark would result in a
deemed sale at market value at the time of transfer. The Danish tax authorities did not view
such a taxation to violate the freedom of establishment provisions as the aim of such an “exit
taxation” is to ensure the Danish taxation base for the assets, given that the expenses incurred
in building up these assets had already been deducted in the Danish taxable income, while
Denmark would not be able to tax future income generated by the same assets after their
transfer out of Denmark. Citing ECJ’s ruling in Oy AA (C-231/05), the Danish tax authorities
maintained that such a restriction on the right of establishment can be justified. The
authorities referred to the reply of the Danish Government to the European Commission’s
letter of formal notice on the Danish tax rules on exit taxation, in which the Danish
Government held that the Danish tax rules did not go beyond what is necessary to achieve the
purpose of the rules, even though these did not only cover fully artificial arrangements. The
taxpayer argued that such a taxation violated the freedom of establishment as it only applies
to cross-border mergers, a similar merger between two Danish companies would be taxneutral. In their argument, the taxpayer cited Daily Mail (C-81/87) and Lasteyrie (C-9/02)
decisions, as well as referred to the ECJ decision in Sevic Systems (C-411/03).
The Tribunal upheld the mandatory ruling of the Danish tax authorities. In its decision, the
Tribunal relied on the provisions of the Merger Directive (90/434/EEC), as well as on the
ECJ’s judgments in the N-case (C-470/04) (justifiability of pursuing an objective of public
interest) and Marks & Spencer (C-446/03) (protection of balanced allocation of the power to
impose taxes between Member States). The Tribunal concluded that Article 15 of the Merger
Tax Act ensures, in line with the Merger Directive, that on the one hand it is possible to
undertake a tax-neutral cross border merger where there is a full succession in assets and
liabilities between the ceasing and continuing companies, while on the other hand it also
ensures that the capital gains on assets that have been developed in Denmark, and the
expenses in development of which have been previously deducted in Danish taxable income
are also taxed in Denmark upon transfer from its territory. Against this background the
Tribunal did not find a reason to reverse the tax authorities’ ruling and maintained that the
case of a merger between a Danish and a foreign company, where assets and liabilities
following the merger are not allocated to a PE in Denmark, will result in immediate taxation
at market value.
On 25 November 2010, the Commission referred Denmark to the ECJ over exit tax provisions
on unrealised capital gains. Depending on the outcome of this case, the exit tax rules in
Denmark may need to be amended. Click here for more on the Commission’s decision.
-- Natia Adamia and Soren Jesper Hansen, Denmark; [email protected]
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Germany – Lower court decision on the conditions for obtaining a refund of
withholding taxes for artists in Germany
The Lower Fiscal Court of Cologne has published its decision (2 K 1274/06) of 23 June 2010
concerning the conditions for obtaining a refund of withholding tax levied on foreign artists
performing acts in Germany.
In 1994, an Austrian artist’s company received royalties from a German association (debtor)
which withheld income tax but never transferred the tax to the fiscal authority. As according
to the underlying double tax treaty income from art activity was tax exempt in Germany, the
artist’s company applied for a full refund of the withheld taxes. However, the fiscal authority
denied such a refund referring to the wording of Sec. 50d para. 1 German Income Tax Act
according to which a refund requires that the tax is withheld as well as actually transferred to
the tax authority. The artist company appealed against this refusal arguing that the
requirement of an actual transfer of the tax infringes EU Law as such an actual transfer is not
required in purely domestic cases.
The Lower Court decided against the claimant. The Court named one example of a purely
domestic refund procedure where the condition of an actual transfer was required as well. In
other domestic cases such as the refund of withheld wage tax, the Court argued that the
condition of an actual transfer has been waived due to social reasons as employees should not
bear the risk of their employers to be compliant with their tax duties. Moreover, the Court is of
the opinion that in a cross-border case it would be more adequate that the foreign artist
instead of the German State bears the risk of the debtor not having transferred the tax.
Otherwise, the procedure of withholding taxes would not be sufficient and the German tax
revenues would not be ensured.
The case is now pending with the Federal Finance Court (I R 85/10).
-- Gitta Jorewitz and Juergen Luedicke; [email protected]
Germany – Federal court decision on foreign income exemption with
progression
The Federal Fiscal Court (BFH, I B 10/10) published an order of 19 July 2010 in which it held
the exemption of foreign income with a subsequent progression of the domestic tax rate to be
compliant with EU Law. In the court´s view, even where the overall burden of domestic and
foreign income tax would be higher than the tax burden of a purely domestic income, the
progression would not infringe EU Law.
-- Gitta Jorewitz and Juergen Luedicke; [email protected]
Germany – Lower fiscal court decision on denial of loss carry-forward in Austria
and final losses
On 17 September 2010, the Lower Fiscal Court of Münster rendered a judgment on the
deductibility of a loss incurred through participation as a silent partner in an Austrian general
partnership (Offene Erwerbsgesellschaft). The case (docket no. 4 K 5045/03 E) involved a
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12
German resident who had an 80% interest in an Austrian general partnership without
disclosing his participation to the public (so-called silent partnership - Stille Gesellschaft).
In 2001, the general partnership incurred a loss of ATS 1.7 m of which 80% was attributable to
the German silent partner. Under Austrian tax law it was impossible to carry-forward the loss
to tax periods in the future because the carry-forward required that the loss be substantiated
by "proper bookkeeping". This implied that the loss had to be calculated on the basis of a
balance sheet. However, the general partnership did not draw up balance sheets, but rather
calculated its taxable profits according to a cash method.
The German tax authorities denied the deduction of the loss from the silent partner's taxable
income in Germany. They argued that articles 4(1) and 15 (1) of the 1954 German-Austrian
double taxation treaty (similar to Art. 7 and 23 A OECD Model Convention) provided for the
application of the exemption method by Germany to losses from an Austrian permanent
establishment (PE).
The Lower Fiscal Court followed the reasoning of the authorities. Furthermore, it held that the
freedom of establishment under Article 49 TFEU does not require a deduction of the Austrian
loss in Germany. The Court relied on two judgments by Germany's Federal Fiscal Court (BFH)
which had recently decided that a PE loss only qualifies as final in the sense of the ECJ's Lidl
Belgium decision (C-414/06) if it stems from a restriction by factual, not juridical means
(BFH decisions I R 100/09 and I R 107/09, see EU Tax News Issue 2010 - 005). Against this
backdrop the Lower Fiscal Court held that the Austrian law pursuant to which a loss-carry
forward was only granted if the loss was shown in a balance sheet constituted a restriction by
juridical means. Therefore, Germany was not obliged to "import" the Austrian loss. Moreover,
the Court decided that it was unnecessary to bring the matter before the ECJ and ask for a
preliminary ruling because the construction of the freedom of establishment had already been
sufficiently clarified by the ECJ's judgments in Lidl Belgium and Krankenheim Ruhesitz am
Wannsee (C-157/07). The decision of the Lower Fiscal Court is final.
-- Björn Bodewaldt and Juergen Luedicke, Germany; [email protected]
Hungary – Recent changes to tax law
From 1 July 2010, the corporate income tax rate step up rate of 10% without any
preconditions applies to the first HUF 500 m of the tax base (instead of HUF 50 m as in
previous years).
From 1 January 2013, the corporate income tax rate will without any preconditions amount to
10% on the full tax base.
From 1 January 2010, the acquisition of shares of companies that, either directly or indirectly,
own real estate in Hungary is subject to real estate transfer tax if as a result of that acquisition
a shareholding in that company of at least 75% will be held. An exemption will apply to the
transfer of such shares between related parties.
A special tax on financial organisations was introduced as of 1 July 2010 for those financial
organisations, that already ended their financial year before 1 July 2010. This special tax is
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13
only temporary as the Act only prescribes the tax liability for 2010 and 2011 and indicates
further liability only for 2012. Depending on the type of financial organisation, the tax base
and the tax rates may vary.
From 1 January 2011, the 30% withholding tax on interest, royalty and service fee payments to
non-treaty third countries will be abolished.
From 1 January 2011, the exemptions from tax for registered shareholdings (i.e. at least 30%
shareholding and any further acquired shareholding held by companies at least for 1 year; if
reported to the tax authority within 30 days of acquisition) will cover gains realised on
contributions in kind as well.
-- Dóra Máthé, Hungary; [email protected]
Luxembourg – Administrative tribunal decision on the tax unity regime
In 2004, the head of the tax authorities refused the application of the Luxembourg tax unity
regime to several Luxembourg subsidiaries of a Belgian parent company. In the case at hand,
said Luxembourg companies were sister companies i.e. all held directly by the Belgian parent
company.
On 19 April 2007, the Administrative Court confirmed the decision of the tax authorities on
the ground that the condition that the head of the tax unity needs to be a Luxembourg
company (or a Luxembourg permanent establishment of a foreign company) was not fulfilled.
Assessments for years 2004 to 2007 were thus issued, on that basis, in the course of 2009.
A claim against said tax assessments was filed in which it was requested to consider one of the
Luxembourg subsidiaries as the head of the tax unity for the purposes of the establishment of
the aforementioned tax assessments.
The claim has been rejected by the head of the tax authorities. A petition was then introduced
in front of the court arguing that the Luxembourg tax unity regime is discriminatory and not
in accordance with the EU’s rules on the freedom of establishment. It was specifically required
that a request for a preliminary ruling be referred to the ECJ. However, on 1 December 2010,
the Luxembourg Administrative Tribunal rejected the claim (decision n° 26754).
-- Eric Centi and Julien Lammotte, Luxembourg; [email protected]
Netherlands –Standstill clause applicable to fictional income rule
On 17 December 2010, the Dutch Supreme Court held that the rules on fictional income from
substantial shareholdings under Art 4.13, par 1, and 4.14 of the Dutch Individual Income Tax
Act of 2001 (IITA 2001) are covered by the standstill clause under Article 64 TFEU.
In this case, the taxpayer was the sole shareholder in two companies. The activities of these
two companies consisted in (i) investment activities and (ii) the development and exploitation
of property located on the Dutch Antilles. In 2001, the place of effective management of both
of these companies was relocated from the Netherlands to the Dutch Antilles. The Dutch
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Antilles qualify as an overseas territory of the Netherlands, meaning that for purpose of EU
Law they have the special status as one of the 'overseas countries and territories' (OCT's).
Under the rules on fictional income from substantial shareholdings, a substantial shareholder
(who is subject to Dutch individual income tax) is deemed to enjoy an annual income of no
less than 4% of the fair market value of his shares. This rule only applies if the underlying
company is not based in the Netherlands. Consequently it is possible that a substantial
shareholder with a stake in a Dutch company could, for example, have no taxable income from
this shareholder (for example if no dividend was distributed), whereas a substantial
shareholding of an objectively comparable foreign company would be taxable on the 4%
fictional income.
In the present case, the taxpayer had argued inter alia that these fictional income rules were
in breach of the free movement of capital, Article 63 TFEU. The Dutch Supreme Court,
however, confirmed that to the extent that this situation is within the scope of EU Law, the
provisions under discussion fall within the ambit of the so-called “standstill clause”. Under
this clause, the freedom of capital cannot be invoked against any restriction existing prior to
1994 in cases involving Third Countries.
As the current fictional income rules are identical to provisions under the IITA of 1964, which
pre-date 1994, the Dutch Supreme Court concludes that these rules fall within the scope of the
standstill provision. The question of why these rules were initially introduced, and the
circumstance that the rules may today no longer be needed in order to fulfil this objective,
does not alter this conclusion. It is interesting to note that the approach adopted by the Dutch
Supreme Court differs from that of AG Cruz Villálon in his recent Opinion in the case of
Prunus SARL (C-384/09), in which he argues that the standstill provision is not applicable to
OCT's.
-- Anna Gunn, The Netherlands; [email protected]
Netherlands – Final lower court decision on private motor vehicle and
motorcycle tax
On 24 December 2010, the Lower Court of Breda rendered its final decision in the case of VAV
Autovermietung GmbH (C-91/10) regarding the private motor vehicle and motorcycle tax
(BPM).
The Netherlands operates a private motor vehicle and motorcycle tax (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. From 1 February 2007, the BPM is payable
at once upon first use of the vehicle (i.e. up front). If the vehicle is not exclusively used in
Dutch territory, a taxpayer can retrospectively request a refund of part of the BPM taking into
account actual use of the vehicle in the Netherlands. This possibility was introduced in order
to bring the BPM rules in line with the requirement of proportionality applicable under EU
Law. However, the aforementioned refund is only available retrospectively and without any
reimbursement of interest.
In the present case, the litigant has leased a car to a resident of the Netherlands and is, in
accordance with the relevant provisions of Dutch law, thus subject to Dutch BPM. This tax is
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payable upon the first use of the vehicle and does not take into account the duration of the
lease or the extent that the car is used within the territory of the Netherlands. The question
arises whether this constitutes a breach of the fundamental freedoms of EU Law. Despite the
fact that, in this situation, the litigant is eligible for a refund, it is still necessary to pay the
entire amount of tax upfront. Combined with the fact that no interest payment is subsequently
granted, this puts the litigant in a disadvantageous position.
In January 2010, the Lower Court of Breda saw fit to pose preliminary questions to the ECJ
with regard to the question raised above. In line with previous case law, the ECJ held on 29
September 2010 that the free movement of services provisions (Articles 56 - 62 TFEU) indeed
do preclude national legislation which does not take into account the duration of use of a car
on the road network upon first use, notwithstanding the provision of a refund (without
interest), which does take the duration of use into account afterwards. In the judgment of 24
December 2010, the Lower Court of Breda followed the ECJ’s Order and ruled that the full
amount of BPM must be refunded to the litigant. Appeal against this decision is possible.
-- Marius Girolami, The Netherlands; [email protected]
Norway – State wins pilot cases on Norwegian taxation of dividends on outbound
and inbound investments outside the ordinary 3 years deadline
On 7 December 2010, the Supreme Court ruled in favour of the State in the so-called pilot
cases concerning Norwegian taxation of dividends on outbound and inbound investments and
the lawfulness under EEA (EU) law. Several taxpayers wanted repayment of withholding tax
on dividends distributed before 2003 (outside the normal 3 years deadline) based on different
legal bases which resulted in over 100 cases being brought before the courts amounting in
total to over NOK 800 millions. Some cases were united and tried together (pilot cases) and
the rest of the cases were put on hold.
The legal basis except for EEA based liability for damages claims was time-barred according
to a special provision in the Tax Payment Act. This meant that the Supreme Court had to
investigate whether the State had fulfilled the condition under this EEA damage rule in 2003
when the State did not change its discriminatory tax rules taking into account recent
development from the ECJ, especially the Verkooijen case (C-35/98) rendered in 2000.
Firstly, the Court had to decide on the State’s margin of discretion and the Court came to the
conclusion that this should be wide since the taxation is not directly covered by the EEA
Agreement. This is true when it comes to directives where the State may choose between
different implementation alternatives but this is probably not true when it comes to the free
movement of capital and freedom of establishment which is either lawful or unlawful.
Secondly, the Court had to assess if the breach was “sufficiently seriously”. A lot of emphasis
was put on Norwegian and foreign scholars that had stated that the EU rules were unclear in
2003 and that the Verkooijen case also was unclear. It is questionable the weight that was
given to legal literature when the Court assessed EU/EEA law at least when comparing with
similar assessments by the ECJ or EFTA Court. Lastly, the Supreme Court states that practice
from other States is relevant when assessing whether the breach was significantly seriously or
not. It is also questionable how relevant this is and one could have expected that the damages
question was referred to the EFTA Court because there is no clear case law on this issue.
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This decision is important for foreign shareholders in Norwegian companies that have filed or
are considering filing for a refund of withholding tax levied in breach of EEA law. The refund
claim will be based on the rules for reopening of previous tax assessments. Refunds for
previous years (before 2007) will not be possible and cases put on hold concerning claims
going back more than 3 years have to be withdrawn from the courts.
-- Steinar Hareide and Daniel Herde, Norway; [email protected]
Poland – End of discriminatory treatment of foreign investment and pension
funds
The Polish parliament has adopted changes in the law according to which foreign investment
and pension funds would benefit from corporate income tax exemptions on income derived
from Polish sources. The changes are effective from 1 January 2011. PwC Poland successfully
managed to obtain several refunds of withholding tax (“WHT”) suffered on income of foreign
investment and pension funds. In our view, the new amendments in the law may significantly
strengthen the arguments in claiming back WHT suffered in previous years.
According to the new legislation, investment and pension funds will benefit from tax
exemption on income derived in Poland if certain conditions are met.
Most of the requirements are similar for investment funds and pension funds. The exemption
would be applicable to collective investment institutions and entities running pension scheme
programs which:

are located in EU or EEA country with which Poland concluded a double tax treaty and
the treaty provides for an exchange of information clause

are subject to tax in the country of location on their worldwide income

run their business activity under a permission of competent authorities

are supervised by competent authorities

have an asset depositary.
Additionally:
In the case of investment institutions – they are solely engaged in collective investment of
funds gathered in public or non public offers relating to investing in securities, money market
instruments and other property rights. In the case of pension funds - they are solely engaged
in gathering the funds and investing them in order to pay the funds out to the participants of
pension scheme after the participants reach pension age.
Apart from the above – from a formal perspective – the fund should be able to present its tax
residency certificate in the country where the fund is located and submit a statement
confirming that the fund meets the conditions stipulated above and is beneficial owner of
income derived in Poland.
-- Magdalena Zasiewska, Jakub Żak and Agata Oktawiec, Poland;
[email protected]
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Portugal – Changes to Portuguese outbound dividend taxation regime
The Portuguese State Budget Law for 2011 was published on 31 December 2010 and entered
into force on 1 January 2011. As foreseen in the proposed budget, released in October 2010,
the 2011 State Budget Law provides for an amendment of the regime on the taxation of
dividends paid by Portuguese companies to non-resident entities, as well as on the regime of
taxation of dividends received by Portuguese parent companies.
The Portuguese tax law in force in 2010 established that dividends distributed by Portuguese
companies to parent companies resident within the EU or the EEA were exempt from
withholding tax provided that a participation of no less than 10% was held or that the
acquisition cost of such participation was of at least EUR 20 m.
The 2011 State Budget Law provides that such dividends distributed to companies resident
within the EU or the EEA may no longer be exempt from withholding tax in all situations
where the shareholding represents less than 10%, regardless of the acquisition value.
Withholding tax will be levied at the domestic rate of 21.5%, with the possibility of reduction
under the applicable tax treaty.
Additionally, where a Portuguese parent company receives dividends from an EU or EEA
subsidiary, an exemption from corporate income tax no longer applies on such income if the
shareholding represents less than 10%. In 2010, a partial tax exemption of 50% would apply if
such participation requirement was not met.
Regarding this exemption regime, another amendment has been introduced by the 2011 State
Budget Law, for the specific situation of Portuguese holding companies (SGPS). From 2011
onwards, even where the parent company holds a participation in the capital of its EU or EEA
subsidiary, the corporate income tax exemption does not apply if the distributed profits have
not been subject to effective taxation in the hands of the distributing company. This exception
to the exemption regime, which already applied in previous years to regular companies (non
pure holding), was extended by the 2011 State Budget Law to holding companies. The concept
of “effective taxation” is not clearly defined in the Portuguese tax law.
In our view, the referred amendment may be considered to be an infringement to EU Law,
namely to the EU’s Parent-Subsidiary Directive, as the Directive itself does not foreseen the
need for “effective taxation” at the level of the EU subsidiary.
Finally, the 2011 State Budget Law also foresees that, when profits have been distributed by
Portuguese entities to EU or EEA subsidiaries, a refund of the tax withheld in Portugal may be
requested to the extent that it exceeds the tax that would be payable at domestic standard
rates (plus surcharges) on the total income earned by those entities, including from
Portuguese sources. For this purpose, a refund request should be filed with the Portuguese tax
authorities within two years computed from the end of the calendar year to which the income
refers.
-- Leendert Verschoor and Jorge Figueiredo, Portugal; [email protected]
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Spain –Non-resident income tax law amended to bring Spanish law in line with
EU Law
The Spanish Parliament passed the Budget Law for 2011 on 22 December 2010. To ensure
Spanish law is coherent with EU Law, the shareholding percentage requirement envisaged in
the Spanish norm which allows for dividends distributed by a Spanish resident company to its
parent company or its permanent establishment (resident in another EU Member State) to be
exempt is now the same as the shareholding percentage requirement established in the
Spanish Corporate Income Tax Law, which allows for a 100% deduction in order to avoid
internal double taxation in the distribution of dividends.
The minimum shareholding in order for dividends distributed by a Spanish subsidiary to its
EU parent to be exempt of taxation is reduced from 10% to 5%. All other requirements,
including the anti-abuse clause, remain the same.
The withholding tax rate on royalties paid to an associated EU company will be reduced from
10% to 0% as from 1 July 2011, the end of the transitional period granted to Spain in the EU
Interest and Royalties Directive.
-- Miguel Ferre and Antonio Puentes, Spain; [email protected]
Sweden – Supreme administrative court decision on participation exemption on
dividends and EU Parent-Subsidiary Directive
The Swedish participation exemption regime exempts dividends on unquoted shares held by
companies. This applies to foreign unquoted shares too, as long as the distributing entity
could be seen as similar to a Swedish limited liability company. The Swedish tax legislation,
however, has some exceptions and one stipulates that dividends (from Swedish or foreign
companies) in some cases still will be taxable. That would be the case if the Swedish company
purchases shares in another company and when it is not obvious that the purchasing company
has received an asset of "real and genuine value" for its business. A dividend from such a
company is taxable in the hands of the Swedish recipient. The rule is dating back to the 1960s
and aims at deterring companies from entering into shell company transactions. Nowadays it
is very unusual that the rule is applied and there have been several proposals over the years to
abolish the rule, but it still remains in force.
On 30 December 2010, the Swedish Supreme Administrative Court was faced with a case
(case number 1662-09) in which a Swedish company entered into several transactions that
ended up with the Swedish company receiving a dividend from a Dutch subsidiary (BV). The
Swedish Tax Agency decided to tax the dividend under the rule mentioned above. The
Supreme Court concluded that the wording of the Swedish internal tax rule should lead to
taxation of the dividend in Sweden. The Supreme Court continued, however, to say that the
EU’s Parent-Subsidiary Directive (90/435/EEC) had to be taken into account as well.
The Supreme Court stated that the Directive offers two alternative methods to deal with
dividends: one being that no taxation should occur in the recipient jurisdiction (article 4.1). It
is true, the Supreme Court continued, that article 1.2 enables states to enforce national rules if
this is necessary to avoid fraud or abuse, but the wording of the rule in question allows
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19
taxation even in cases where no fraud or abuse has taken place. With reference to Kofoed (C321/05), the Supreme Court continued to state that the Swedish national rule in question
actually could be invoked in a specific case when abuse or fraud had been shown in that
specific case. In the case at hand, however, no fraud or abuse had taken place. This meant that
the dividend in question would be tax exempt in the hands of the Swedish recipient. The
Supreme Court therefore decided that the Dutch dividend was exempt in Sweden under the
Swedish participation exemption rules.
In another case the same day (case number 7960-09), the Supreme Court had to consider if
the same rule was applicable in a purely domestic situation. The Supreme Court concluded
that the Parent-Subsidiary Directive rules could not be invoked in such a case and decided
that the dividend in that case would be taxable.
-- Fredrik Ohlsson and Gunnar Andersson, Sweden; [email protected]
Switzerland – Introduction of the capital contribution principle
On 1 January 2011, the so-called capital contribution principle came into force, which foresees
the exemption from Swiss income and withholding tax of distributions out of capital
contribution reserves. Accordingly, based on the new provisions of the Swiss withholding tax
law and Swiss income tax laws, the repayment to shareholders of capital contributions made
after 31 December 1996 will be dealt with in the same way as the repayment of nominal paidin capital. With regard to withholding tax such repayments are generally tax-free. And with
regard to individuals, where shares are held as private assets, the repayment of capital
contributions made will no longer be considered as taxable income either. A circular letter
providing for the exact details for the qualification under the new principle as well as related
procedural issues was issued by the federal tax administration in December 2010.
-- Armin Marti and Anna-Maria Widrig Giallouraki, Switzerland; [email protected]
United Kingdom –HMRC granted leave to appeal in Marks & Spencer case
On 5 October 2010, the Court of Appeal has granted HMRC leave to appeal the Upper Tier
Tribunal decision in the M&S case.
The Upper Tier Tribunal judgement of 21 June 2010:

upheld the Lower-tier Tribunal decisions in favour of Marks & Spencer Plc regarding
their CTSA cross-border group relief claims/surrenders, and as to the quantum of those
claims (the timing difference point between UK and Belgian / German tax relief); but

allowed HMRC's appeal with regard to the Pay & File claims as being out of time, and the
EU law principle of effectiveness not requiring an extension or disapplication of the
maximum 6 years 3 months time limits under ICTA 1988 Schedule 17A for Pay & File
claims.
HMRC are appealing the decision regarding Marks & Spencer's CTSA cross-border group
relief claims/surrenders. However, as a result of HMRC being granted leave to appeal, Marks
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& Spencer have cross-appealed the decision to disallow their Pay & File claims. The Court of
Appeal hearing is listed for 7 and 8 June 2011.
-- Steph Evans and Peter Cussons, United Kingdom; [email protected]
United Kingdom – ACT Class 2/4 GLO claimants lose again in the Court of
Appeal
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 (Case no: A3/2010/0963). 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 individual
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.
The test claimants in ACT Class 4 had 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
the partial treaty credit plus the income tax deducted from the partial treaty credit. In the
High Court, Judge Henderson, J. held against the taxpayer on both issues, and considered the
position sufficiently clear such that no further reference to the ECJ is required. Henderson, J.
also concluded regarding ACT Class 2 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.
-- Steph Evans and Peter Cussons, United Kingdom; [email protected]
United Kingdom – Supreme Court refuses HMRC permission to appeal in
Compound Interest Project
On 18 November 2010, HMRC has been refused leave to have its appeal heard by the Supreme
Court in the Compound Interest Project case. The application related solely to the preliminary
question of whether the claimants had made their claims within the necessary time limitation
period. The Court of Appeal had on 30 July 2010 allowed the Taxpayers’ appeal on the
preliminary issues of whether their compound interest claims were made in time and whether
HMRC had made appealable decisions. HMRC’s application for leave to appeal the Court of
Appeal’s judgement on the preliminary time limit issue has been refused by the Supreme
Court.
The core issue in dispute remains to be resolved, namely whether compound interest is
required as a matter of EU law and, if so, whether it can be accessed by making a claim under
s78 VAT Act or only by means of a High Court claim. These questions will be dealt with by the
ECJ in the Littlewoods case.
-- Steph Evans and Peter Cussons, United Kingdom; [email protected]
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Back to top
EU DEVELOPMENTS
EU – Report by PwC, World Bank, and IFC: "Paying Taxes is Getting Easier
Despite Economic Downturn”
On 18 November 2010, the Paying Taxes 2011 report by PwC, the World Bank, and the IFC,
entitled: "Paying Taxes is Getting Easier Despite Economic Downturn", was released. Nearly
60 percent of the world’s economies have made significant business regulatory changes to
ease paying taxes, despite the impact of the downturn and the sluggish global recovery,
according to the new report.
The report, which looks at 183 economies, finds that in the past year, 40 economies have
made it easier to pay taxes, with Tunisia improving the most. For economies that are included
in both the 2006 and 2011 Paying Taxes studies, the time needed to comply has declined by a
week, the tax cost has fallen on average by 5 percent, and the number of payments has
dropped by almost four. In all, 90 economies have reduced taxes on corporate profits since
2006.
“Governments have continued to improve and simplify their tax systems for local firms, and
are seeing positive results,” said Neil Gregory, Director of the Global Indicators and Analysis
department at the World Bank Group. “Best practices such as having one tax per tax base and
the use of technology can simplify the compliance burden faced by firms.”
The Paying Taxes 2011 report measures the ease of paying taxes by assessing the
administrative burden for companies to comply with tax regulations, and by calculating
companies’ total tax liability as a percentage of pre-tax profits. According to the study, the
typical company measured pays nearly half of its commercial profit in taxes, spends seven
weeks dealing with its tax affairs and makes a tax payment every 12 days.
"Taxes on company profits have fallen each year as governments around the world have
reduced their corporate tax rates in an effort to encourage business investment and stimulate
growth," said Susan Symons, Total Tax Contribution Leader, PwC UK. “However, easing the
compliance burden is also important for business and there is potential for more focus on this
area”.
The study shows that paying taxes is easiest for business in high-income economies that have
the lowest tax cost and the lowest administrative burden. These economies tend to have more
mature tax systems, a lighter administrative touch, and greater use of the electronic interface
with tax authorities.
For any questions regarding the report, please refer to the PwC colleagues listed at the
beginning of the report. To see the report, visit www.pwc.com/payingtaxes
-- Bob van der Made, Brussels (EU) and Netherlands; [email protected]
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EU – Main direct tax related Conclusions of the ECOFIN Council of 7 December
2010
Political agreement on strengthening administrative cooperation in the area of
direct taxation to better combat tax fraud
On 7 December 2010, the ECOFIN Council reached political agreement on a draft EU
Directive aimed at strengthening administrative cooperation in the field of direct taxation so
as to enable the Member States to better combat tax evasion and tax fraud. The Council will
adopt the Directive without further discussion at a forthcoming meeting, once the text has
been finalised.
In the light of greater taxpayer mobility and a growing volume of cross-border transactions,
the draft Directive sets out to fulfil the Member States' growing need for mutual assistance –
especially via the exchange of information – so as to enable them to better assess taxes due.
One of a number of measures implementing the EU's strategy against tax fraud, launched
in 2006, the text provides for an overhaul of Directive 77/799/EEC, on which administrative
cooperation in the field of taxation has been based since 1977. The Directive will ensure that
the OECD standard for the exchange of information on request is implemented in the EU as
regards the exchange of information on request. It will thus prevent a Member State from
refusing to supply information concerning a taxpayer of another Member State on the sole
grounds that the information is held by a bank or other financial institution.
In addition, the Directive will:
 extend cooperation between Member States to cover taxes of any kind
 establish time limits for the provision of information on request and other administrative
enquiries;
 introduce provisions on the automatic exchange of information (see below)
 allow officials of one Member State to participate in administrative enquiries on the
territory of another Member State
 provide for feedback on the exchange of information
 provide that information exchange be made using standardised forms, formats and
channels of communication.
The ECOFIN discussion focused on two issues:
1. Exchange of information on request.
In order to allay the risk of Member States making imprecise requests aimed at detecting
irregularities ("fishing expeditions"), the Council agreed to identify in the Directive certain
details that must be specified in requests for information, namely the identity of the person
under investigation and the tax purpose for which the information is sought.
2. Automatic exchange of information.
The Council agreed on a step-by-step approach aimed at eventually ensuring unconditional
exchange of information for 8 categories of income and capital: income from employment,
directors' fees, dividends, capital gains, royalties, certain life insurance products, pensions,
and ownership of and income from immovable property. From 2015, Member States will
PwC EU Tax News
23
communicate automatically information for a maximum of five categories, provided that that
information is readily available. By 1 July 2017, the Commission will provide a report and, if
need be, a proposal. When examining that proposal, the Council will examine the possibilities
for removing the condition of availability and extending the number of categories from five to
eight.
Council Conclusions on the Code of Conduct (Business Taxation)
The Council:

welcomed the progress achieved by the Code of Conduct Group (Business Taxation)
during the Belgian Presidency and takes note of the report as set out in doc. 16766/10
FISC 139;

asked the Group to continue monitoring standstill and the implementation of
rollback, as well as to carry on the work under the Work Package agreed by the
Council (ECOFIN) on 5 December 2008 (doc. 16410/08);

in order to facilitate the work of the Group in promotion of the adoption of the
principles of the Code of Conduct in third countries, encouraged the Commission to
continue discussions with Switzerland and Liechtenstein on the application of the
principles and criteria of the Code as requested in the Council conclusions adopted on
8 June 2010 (doc. 10595/10 FISC 57) and to keep the Group regularly informed of the
progress;

took note that the Hungarian Presidency will address the scope of the Code of
Conduct at the Council High Level Working Party and invited the Hungarian
Presidency to report back to the Council by the end of the Hungarian Presidency;

invited the Group to report back on its work to the Council by the end of the
Hungarian Presidency (June 2011).
-- Bob van der Made, Brussels (EU) and Netherlands; [email protected]
EU – European Commission Communication on removing cross-border tax
obstacles for EU citizens
On 20 December 2010, the European Commission released a Communication (policy paper)
which outlines the most serious tax problems that EU citizens face in cross-border situations
and offers suggestions for solutions in areas such as cross-border income, inheritance taxes,
dividend taxes, car registration taxes and e-Commerce. The paper also aims to see where
further action could be taken to make Member States' tax systems more compatible so that
citizens will not be deterred from engaging in cross-border activities.
According to the Commission, every year, cross-border tax issues make up a substantial part
of all complaints and queries that EU citizens send to the Commission. The complaints cover a
whole range of issues from the difficulties caused by complex foreign tax rules, to lack of clear
information for foreigners, to conflicting systems in different Member States. Cross-border
workers face difficulties in getting tax allowances, relief and deductions from foreign tax
authorities, and are frequently subject to double taxation. Citizens buying foreign real estate
often miss out on tax exemptions or must pay higher property taxes than residents, while
those moving or buying cars cross-border face double registration taxes. People with foreign
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investment income find it difficult to claim entitlements to relief from withholding taxes
applied by foreign countries. Many people with foreign pension funds experience problems
with deductions and cross-border transfers, while inheritances from another Member State
are often subject to higher succession duties or double taxation. E-shopping is also severely
hampered by tax obstacles such as complicated VAT rules and reporting requirements, with
the result that only 7% of goods traded within the EU are bought online from another Member
State.
According to the Commission, half of the tax infringement proceedings that the Commission
opens every year in the tax area relate to citizens' complaints. Interestingly, the Commission
states that rather than relying on infringement proceedings, it says that the best way to solve
issues such as double taxation and administrative complexities lies in proper cooperation
between Member States. According to the Communication, Member States should design and
implement their tax measures and practices in a way which does not deter citizens from
engaging in cross-border activities. They should also coordinate more closely with each other
in order to prevent mismatched tax rules from creating obstacles and barriers to the Internal
Market.
The Commission intends to step up its activities to help make Member States' tax systems
more compatible and propose concrete measures to prevent or remove tax problems for EU
citizens:
 A Communication on Double Taxation in 2011, examining the extent and gravity of this
problem across the EU, followed by legislative proposals in 2012, proposing solutions.
 Proposals in mid-2011 to address cross-border inheritance tax problems.
 Measures to resolve the double taxation that can arise when a car that is first registered in
one Member State is then moved to and re-registered in another Member State.
 Extension of a "one-stop-shop" system for e-Commerce, in order to make reporting
obligations for businesses much simpler and easier for them to offer goods and services
online to foreign consumers. Obstacles to e-Commerce will also be addressed within the
review of the EU's VAT System for which a consultation is now open (see IP/10/1633).
 Proposals in 2012 to solve problems related to the taxation of cross-border dividend
payments.
In addition, the Commission intends to promote a wide dialogue amongst national authorities
and stakeholders aimed at simplifying tax measures to the benefit of citizens and the Internal
Market. Ideas include standardised tax claim and declaration forms throughout the EU, single
info-points where workers and investors could get clear and reliable tax information, and
special tax measures at national level to cater for the needs of mobile and border workers.
The Commission will give feedback in the Citizenship report in 2013 (see IP/10/1390).
For more information, see: http://ec.europa.eu/taxation_customs/index_en.htm
-- Bob van der Made, Brussels (EU) and Netherlands; [email protected]
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PwC EU Tax News
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CCCTB
EU – Latest developments on the CCCTB
On 15 December 2010, the European Commission’s Impact Assessment Board assessed DG
TAXUD’s impact assessment with regard to the proposed legislative proposal for a Common
Consolidated Corporate Tax Base (CCCTB). The Impact Assessment was adopted although the
DG pushing this proposal on behalf of the Commission, DG TAXUD, was apparently required
to elaborate further on the assumptions and choices made in order to complete the
Commission’s internal approval process. A positive decision by the Impact Assessment Board
is a precondition for the proposal to enter the EU’s formal legislative process.
The proposal for the CCCTB Directive is therefore still “on track” for adoption by the
Commission somewhere in the first quarter of 2011 after which it will be sent to Council for
final adoption (and the European Parliament for its consent).
Three main hurdles now normally remain for adoption of the proposal in Spring 2011:

green light from the Commission’s internal inter-services consultation steering group
which brings together at cabinet level: DG TAXUD, DG MARKT, DG ECFIN, DG
ENTR and the Secretariat-General and DG COMP (DG EMPL and DG ENV are also
informed;

timely translation of the proposal by the EU's translation services into all 21 EU
languages; and

subsequently, adoption via oral procedure in the College of Commissioners by the end
of March 2011, after which it could be sent to Council in early Spring 2011.
According to the Commission:”The legal and political dimension of possibly progressing via
'enhanced cooperation' will need further analysis if enhanced cooperation is eventually
requested by the requisite number of Member States following a negative vote at the Council.
(...) Given that enhanced cooperation may only function as a 'last resort' pursuant to the
Treaties, this will not form an option under the proposal or Impact Assessment.” Apparently,
informally, discussions have started inside the EU’s Institutions as to how to assess and when
it can be decided that the point of “last resort” has been reached, since it is quite clear from
the start that the CCCTB proposal will not be adopted by all 27 Member States in Council.
-- Bob van der Made, Brussels (EU) and Netherlands; [email protected]
Back to top
STATE AID
Italy – Infringement proceeding against Italy regarding interest deduction made
by companies owned by public entities?
The European Commission is assessing the launch of a new infringement procedure against
Italy regarding its provisions on interest deduction of utility companies. The general rule on
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interest deduction, section no. 96 of the Italian Corporate Income Tax, requires that interest
payable is deductible, in each fiscal year, within the amount of interest receivable. In addition,
it is stated that 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 limitation in the deduction of interest is provided
for by Italian provisions, in particular, when both the following conditions are met:

the capital is mainly and directly held by public entities; and

companies which build or manage plants for the supply of water, energy and district
heating, or plants for waste and sewage disposal.
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 case the Commission will decide
that the specific Italian rule is a 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, Italy; [email protected]
Netherlands – AG opinion on Dutch emissions trading scheme and State aid
On 22 December 2010, AG Mengozzi published his opinion on the question of whether a
Dutch emissions trading scheme constitutes State aid. The opinion contains a number of
interesting insights with regard to the wide application of State aid rules.
The main facts of this case can be summarized thus:
In 2003, the Netherlands requested the European Commission to confirm that a proposed
emissions trading scheme does not constitute State aid. Pursuant to the proposed legislation,
all enterprises in the Netherlands must adhere to certain limits in terms of the amount of
nitrogen oxide (NOx) which they are permitted to emit. For a specific group of large
enterprises, the Netherlands want to introduce an emissions trading scheme on the basis of
so-called “NOx-credits”. One of the main features of this scheme is that each of the enterprises
would be awarded a certain amount of NOx-credits, which can subsequently be traded
between enterprises. The NOx-credits therefore have a monetary value, which means that it is
beneficial for enterprises to receive such credits.
As the NOx-credits are only available to a particular category of enterprises, the Commission
considered that these enterprises should be considered to have received State aid from the
Netherlands, but that this is environmental aid which is compatible with EU Law pursuant.
This position was, however, rejected by the Court of First Instance, on the basis that the Dutch
regime does not fulfil the selectivity requirement. The Commission has appealed this
judgment.
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The AG’s present opinion pertains to the aforementioned appeal. The AG holds the view that
the Dutch emission trading scheme does satisfy the selectivity requirement: although the
limitation on the emission of NOx applies to all enterprises, the emissions trading scheme
(which potentially can be beneficial) is only available to certain enterprises. He further notes
that although there is a quantitative difference between enterprises in terms of the amount of
NOx which can be emitted, the obligations with which all enterprises are confronted are
proportionately the same.
The AG therefore upholds the Commission initial finding that the Dutch emissions trading
scheme does constitute State aid within the meaning of Article 107 (1) TFEU.
-- Anna Gunn and Marius Girolami, The Netherlands; [email protected]
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ABOUT PwC’s EU DIRECT TAX GROUP (EUDTG)
The EUDTG is one of PwC’s Thought Leadership Initiatives and part of the International Tax
Services Network. The EUDTG is a pan-European network of EU tax law experts and provides
assistance to organizations, companies and private persons to help them to fully benefit from
their rights under EU Law. The activities of the EUDTG include organising tailor-made client
conferences and seminars, performing EU tax due diligence on clients’ tax positions, assisting
clients with their (legal) actions against tax authorities and litigation before local courts and the
ECJ. EUDTG client serving teams are in place in all 27 EU Member States, most of the EFTA
countries and Switzerland. See the EUDTG website for more information:
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: Peter Cussons, Bob van der Made and Irma van Scheijndel.
© 2009-2011 PwC. All rights reserved. "PwC" refers to the network of member firms of
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firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of
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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. While every attempt has been
made to ensure that the contents of this newsletter is correct, PwC advises that this newsletter is
provided for general guidance only and does not constitute the provision of legal advice, accounting
services, investment advice, written tax advice or professional advice of any kind. The information
provided should not be used as a substitute for consultation with professional tax, accounting, legal or
other competent advisers.
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PWC EUDTG CONTACTS
EUDTG Chair:
Frank Engelen: [email protected]
EUDTG Secretary:
Bob van der Made: [email protected]
EUDTG Country Leaders:
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Belgium
Bulgaria
Croatia
Cyprus
Czech Rep.
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Estonia
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Friedrich Roedler
Olivier Hermand
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Lana Brlek
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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]
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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
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