chapter 1 introduction - ibfd · chapter 1 introduction in the european union, freedom of capital...

1

Chapter 1

Introduction

In the European Union, freedom of capital transactions is one of the funda-

mental freedoms. Regulation of such transactions concerns capital move-

ments as defined by EU legislation and the case law of the Court of Justice

of the European Union (the European Court of Justice or the Court) on the

free movement of capital, the freedom of establishment and the freedom to

provide services. In addition to its liberalization aspect, regulation of capital

transactions inevitably concerns taxation. Direct taxation,1 only partly har-

monized at the EU level, is of a great relevance to capital regulation due to

its potential to encroach upon the freedom of capital transactions.

The basic premise of this discussion is the existence of the EU regime for capital transactions, which also concerns direct taxation. The regime con-

sists of capital transactions regulation within the European Union as well as

harmonized and non-harmonized regulation of direct taxation. In particular,

regulation of direct taxation at the EU level is inseparable from regulation

of the EU fundamental freedoms and the freedom of capital transactions

specifically and thus aspects of each of them, should one want to appreciate

them properly, must be contextualized with regard to characteristics of the

resulting merger. This regime has developed over the years in legislation and

case law of the European Court of Justice and is endemic.

The European Court of Justice examines direct taxation at the EU level

by using criteria and guidelines primarily developed for promoting trade policy and freedom of movement. Indeed, the concepts that have forged

throughout the years in this subject area are a specific combination of com-mercial and non-commercial elements. In commercial terms, the freedom of capital transactions is promoted either because such transactions represent

1. Direct taxation is levied in accordance with a taxpayer’s ability to pay. Examples of direct taxation are tax on income and tax on capital, the tax payable being calculated on the basis of the assets owned by the taxpayer when it accrues. However, tax on capital is different from tax on income because only some of the Member States apply it. See, among other sources, DE: Opinion of Advocate General Mengozzi, 29 Mar. 2007, Case C-298/05 Columbus Container Services [2007] ECR I-10451, paras. 99-100. In contrast, indirect taxation affects the EU trade of goods and provision of services through value added tax (VAT). See N. Maydell, The Services Sirective and Existing Community Law, in Services Liberalisation in the Internal Market, European Community Studies Association of Austria (ECSA Austria) Publication Series Vol. 6, pp. 21-124 (F. Breuss, G. Fink & S. Griller (eds.), Springer, 2008), at p. 77, at footnote 230.

2

Chapter 1 - Introduction

payments parallel to trade in goods and services or because they concern

trading in financial markets.2 In terms of capital regulation, such commer-

cial approach to capital, depending on the exact definition of capital and

specific policy orientation, is associated with regulator’s objective of liber-

alization of capital transactions or maintaining of capital value.3 In contrast,

taxation perspective on capital is non-commercial and focuses on the value of capital transactions in a given jurisdiction and given time period for the

purpose of calculating tax portions. While capital policy focuses on liberal-

ization of capital and economic efficacy, fiscal policy is concentrated on the

redistribution of resources; the latter is done in accordance with Member

States’ jurisdiction in taxation matters. Since a state may tax its residents

or income paid on its territory in accordance with its fiscal sovereignty,

exercise in parallel of such sovereignty of two or more states may result in

double taxation. Thus, fiscal policy regulates international transactions in

light of the exercise of taxation powers of two or more fiscal sovereigns. In

terms of freedom of capital transactions this means that while capital lib-

eralization policy is focused on elimination of barriers to such movement,

tax policy focuses on the achievement of this objective primarily though

elimination of double taxation.4

The idea of the parallel existence of liberalization and taxation policies that

requires a common appreciation has not been commented in depth; com-

mentators of Community (now EU) regulation have focused on separate

2. In that sense, see K. Suzuki, Endogenous Trade Policies, WTO Rules and International Capital Movement, Discussion paper No. 21, School of Economics, Kwansei Gakuin University, pp. 1-59 (2003), also available at: http://ideas.repec.org/p/kgu/wpaper/21.html, at p. 3. See also WTO Working Group on the Relationship between Trade and Investment, Scope and Definitions: “Investment” and “Investor”, Note by the Secretariat, WT/WGTI/W/108 (2002).3. Liberalization of capital movements on the international level is parametized im-portantly by OECD, Code of Liberalisation of Capital Movements [including Commentary to the Code], OECD Publications (2013), also available at: http://www.oecd.org/daf/inv/investment-policy/CapitalMovements_WebEnglish.pdf; OECD, Code of Liberalisation of Current Invisible Operations, OECD Publications (2013), also available at: http://www.oecd.org/daf/fin/private-pensions/InvisibleOperations_WebEnglish.pdf; and OECD, Measurement of Capital Stocks, Consumption of Fixed Capital and Capital Services, Manual (2001), also available at: http://www.oecd.org/dataoecd/61/57/1876369.pdf. See also OECD, Methods Used by OECD Countries To Measure Stocks of Fixed Capital (2000), also available at: http://www.oecd.org/dataoecd/38/63/2674361.pdf. 4. J.B. Slemrod & R.S. Avi-Yonah, How Should Trade Agreements Deal with Income Tax Issues?, 55 Tax Law Review, pp. 533-554 (2002), at p. 536; C. Singh, Non-Discrimination in Tax Matters in the GATT – National Treatment, in The Relevance of WTO Law for Tax Matters, Schriftenreihe zum Internationalen Steuerrecht Herausgegeben von Univ.-Prof. Dr Michael Lang, Band 45, pp. 49-71 (J. Herdin-Winter & I. Hofbauer (eds.), Linde, 2006), at p. 69.

3

Introduction

aspects of capital transactions and direct taxation.5 Certain authors note

the coexistence at the EU level of fundamental freedoms and taxation but

comment it only in the context of interpretation of case law of the Court.6

Such an approach to the issue is of necessity flawed if one wants to properly

assess current EU policy and its principles taking also in account the fact

that Court’s reasoning is of casuistic nature,7 let alone to build policy ele-

ments on the basis of the existing legislation and premises developed in the

case law of the Court.

Therefore, a parallel analysis of the freedom of capital transactions and

direct taxation as coexisting parts of a single phenomenon especially with

regard to areas of direct taxation addressed by the European Court of Justice

but non-harmonized at the EU level, is necessary since its sets ground for

future policy development specifically tailored to the European Union,8 be

5. However, authors do grasp this duality, for instance by discussing the need to adjust criteria of both freedom of movement and taxation which may require considerable tax reform, see K. Vogel, J. Brands & K. van Raad, Taxation of Cross-Border Income, Harmonization and Tax Neutrality under European Community Law: An Institutional Approach, with com-ments by J. Brands & K. van Raad, pp. 11-34 (EFS Series Vol. 2, Kluwer Law International, 1994); S. Cnossen, How Much Tax Harmonisation in the European Union, in Tax Policy and the Impending Economic and Monetary Union: Generale Bank B.232.1 lectures 1997-1998, pp. 67-70 (F. Abraham, J. Stuyck & F. Vanistendael (eds.), Leuven Law Series, Leuven University Press, 1999), pp. 67-70; C. Peters, Non-Discrimination: The Freedom of Establishment and European Tax Law, in Legal Protection Against Discriminatory Tax Legislation, The Struggle for Equality in European Tax Law, ch. 7, pp. 101-122 (H. L.M. Gribnau (ed.), Kluwer Law International, 2003), pp. 101-122, and P. Farmer, Striking a Proper Balance between the National Fiscal Interests and the Community Interests – A Perpetual Struggle?, in The Influence of European Law on Direct Taxation, Recent and Future Developments, ch. 3, pp. 31-34 (D. Weber (ed.), EUCOTAX Series on European Taxation Vol. 16, Kluwer Law International, 2007), pp. 31-34. Specifically as to allocation of rights to tax, see D. Hohenwarter, The Allocation of Taxing Rights in the Light of the Fundamental Freedoms of EC Law, in Tax Treaty Law and EC Law, Schriftenreihe zum Internationalen Steuerrecht, Band 46, pp. 83-124 (M. Lang, J. Schuch & C. Staringer (eds.), Linde, 2007), pp. 83-124. For criticism of the European Court of Justice, see S. Douma, Optimization of Tax Sovereignty and Free Movement (Doctoral Series Vol. 21, IBFD, 2011), pp. 9-30.6. C. HJI Panayi, Double Taxation, Tax Treaties, Treaty-Shopping and the European Community (EUCOTAX Series on European Taxation Vol. 15, Kluwer Law International, 2007), ch. 4, pp. 131-175, 143-169 & 173-175, commenting on the European Court of Justice case law in comparison with the US regulation in (direct) tax matters, notes, at p. 173, that there are no tax specific tests in the case law of the European Court of Justice and that the provisions of Community (now EU) law are applied in general to the area of taxation. 7. According to Panayi (2007), supra n. 6, at p. 169, decisions of the European Court of Justice concerning allocation of taxation powers in terms of Community (now EU) law seem to be “a matter of impression”. 8. On anti-treaty shopping provisions see Panayi (2007), supra n. 6, pp. 231-250. Panayi also mentions recommendations of the Commission of the European Union (European

4


it the Common Consolidated Corporate Tax Base (CCCTB), the Common

Corporate Tax Base (CCTB),9 or, for purposes of an academic debate, the

EU Tax Treaty Model,10 Community (now EU) multilateral tax treaty,11

Commission or Commission) as one of the possible alternatives for a future EU policy, supra n. 6, pp. 243-245. 9. See Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB), SEC(2011) 315, SEC(2011) 316, COM(2011) 121/4, 2011/0058 (CNS) (2011) also available at: http://ec.europa.eu/taxation_customs/resources/documents/taxa-tion/company_tax/common_tax_base/com_2011_121_en.pdf (CCCTB Directive Proposal 2011). For a discussion on general points as well as requirements for forming a group, tax base, consolidation, on regime for financial institutions and on international and admin-istrative aspects in the context of the CCCTB, see C. Spengel, Concept and Necessity of a Common Tax Base, An Academic Introduction, in A Common Consolidated Corporate Tax Base for Europe – Eine Einheitliche Körperschaftsteuerbemessungsgrundlage für Europa, pp. 1-48 (W. Schön, U. Schreiber & C. Spengel (eds.), Bilingual ed. Springer, 2008), pp. 16-22 (on effective tax burdens); Cussons (2007), C. HJI Panayi, The Common Consolidated Corporate Tax Base and the UK Tax System, Institute for Fiscal Studies Discussion Paper No. 9 (2011), available at: http://ssrn.com/abstract=1809568 (2011), and T. Sanders, Consolidation in the CCCTB Proposal, in CCCTB, the Selected Issues, ch. 1, pp. 1-10 (D. Weber (ed.), EUCOTAX Series on European Taxation Vol. 35, Wolters Kluwer Law & Business, Kluwer Law International, 2012). For a discussion on the United States’ experience with common tax base, see J. Hey, EU Common Consolidated Corporate Tax Base: Guided Variety versus Strict Uniformity – Lessons from the “U.S. States’ Tax Chaos”, Jean Monnet Working Paper 02/08 (2008), also available at: http://www.jeanmonnetprogram.org/papers/08/080201.pdf, and W. Hellerstein, Lessons of US Subnational Experience of EU CCCTB Initiative, in A Common Consolidated Corporate Tax Base for Europe – Eine Einheitliche Körperschaftsteuerbemessungsgrundlage für Europa, pp. 150-154 (W. Schön, U. Schreiber & C. Spengel (eds.), Bilingual ed., Springer, 2008), pp. 150-154. For a discussion on drawbacks of the CCCTB and advantages of an enhanced CCTB, see E. Roeder, Proposal for an Enhanced CCTB as Alternative to a CCCTB with Formulary Apportionment, 4 World Tax J. 2, pp. 125-150 (2012), Journals IBFD; Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2012-01 (2012); also available at SSRN: http://ssrn.com/abstract=2012640 or http://dx.doi.org/10.2139/ssrn.2012640.10. P. Pistone, The Impact of Community Law on Tax Treaties: Issues and Solutions, 1st ed. (EUCOTAX Series on European Taxation Vol. 4, Kluwer Law International, 2002), ch. V, pp. 235-324. Pistone proposes a comprehensive EC Model Tax Convention, a multilateral non-self-executing convention, combining existing provisions of international tax law, as embodied in the OECD Model Tax Convention on Income and on Capital, 2010 Condensed Version and Commentary (22 July 2010), Models IBFD, with the principles of Community (now EU) tax law as enunciated by the European Court of Justice. The author notes that it would be necessary to consider at the same time the body of scholarship. For a period, the European Commission supported such a solution to the conflict between tax treaties and Community (now EU) law by stating, on 23 Oct. 2001 in its document COM(2001) 582 final, at pp. 14-15, that “the most promising way ... is to agree [on] an EU version of the [OECD Model (2010)] (or of certain articles) which meet the specific requirements of EU membership”. Also, in Panayi (2007), supra n. 6, pp. 231-250, pp. 239-243. 11. See Panayi’s opinion, supra n. 6, at p. 245. M. Lang, The Personal Scope of a Multilateral Treaty, in Multilateral Tax Treaties, New Developments in International Tax Law, ch. 7, pp. 119-128 (M. Lang et al. (eds.), Series on International Taxation Vol. 18, Kluwer Law International and Linde, 1998) (1998a), discusses residence as a criterion

5

Introduction

“fractional taxation”,12 enactment of additional direct tax directives and

other instruments,13 a potential international expansion of the EU models

and policies14 or fiscal surveillance measures enacted at the EU level in

response to the Organisation for Economic Co-operation and Development

(OECD) initiative on Base Erosion and Profit Shifting (BEPS).15 With

exception of the CCCTB, the CCTB and the BEPS, the present discussion

will not concentrate specifically on these policy proposals or on the idea of

tax harmonization and/or approximation of laws at the EU level.16 It will

easily incorporated into a multilateral treaty; see also M. Lang, The Concept of Multilateral Treaty, in Multilateral Tax Treaties, New Developments in International Tax Law, ch. 10, pp. 187-196 (M. Lang et al. (eds.), Series on International Taxation Vol. 18, Kluwer Law International and Linde, 1998) (1998b); M. Lang et al., Draft for a Multilateral Tax Treaty, in Multilateral Tax Treaties, New Developments in International Tax Law, ch. 11, pp. 197-245 (M. Lang et al. (eds.), Series on International Taxation Vol. 18, Kluwer Law International and Linde, 1998); H. Loukota, Multilateral Tax Treaty Versus Bilateral Treaty Network, in Multilateral Tax Treaties, New Developments in International Tax Law, ch. 5, pp. 83-103 (M. Lang et al. (eds.), Series on International Taxation Vol. 18, Kluwer Law International and Linde, 1998); J. Schuch, The Methods for the Elimination of Double Taxation in a Multilateral Tax Treaty, in Multilateral Tax Treaties, New Developments in International Tax Law, ch. 8, pp. 129-152 (M. Lang et al. (eds.), Series on International Taxation Vol. 18, Kluwer Law International and Linde, 1998) (1998a), and R. Mason, US Treaty Policy and the European Court of Justice, in Comparative Fiscal Federalism, Comparing the European Court of Justice and the US Supreme Court’s Tax Jurisprudence, ch. 11, pp. 405-464 (R.S. Avi-Yonah, J.R. Hines, Jr. & M. Lang (eds.), EUCOTAX Series on European Taxation Vol. 14, Kluwer Law International, 2007) (2007a), pp. 443-463. S. van Weeghel, The Tie-Breaker Revisited: Towards a Formal Criterion?, in A Vision of Taxes within and outside European Borders, Festschrift in honour of Prof. Dr Frans Vanistendael, pp. 961-969 (L. Hinnekens & P. Hinnekens (eds.), Kluwer Law International, 2008) (2008a), discusses alternatives to the OECD tie-breaker clause. 12. K. van Raad, Fractional Taxation of Multi-State Income of EU Resident Individuals – A Proposal, in Liber Amicorum Sven-Olaf Lodin, K. Andersson, pp. 211-221 (P. Melz & C. Silfverberg (eds.) Kluwer Law International, 2001).13. Panayi (2007), supra n. 6, pp. 245-246. Such instruments should, according to the author, gradually cause tax treaties to become obsolete. According to this approach, not only the state of residence of a taxpayer (the residence state) but also the state of source of taxable income (the source state) should calculate the taxpayer’s worldwide income and the resulting tax, and restrict the tax they effectively levy to the fraction thereof that corresponds with the fraction that the source state income represents of the worldwide income. 14. In this sense, see E. Raingeard de la Blétière, Les relations entre le droit communau-taire et le droit fiscal international: nouvelles perspectives, PhD thesis under supervision of Daniel Gutmann, Université Panthéon-Sorbonne Paris, Paris 1 (2008), who advocates tailoring of international tax law according to the Community (now EU) regulation of taxation, i.e. harmonization at a supranational level paralleled by a tax network at inter-national level. 15. OECD Action Plan for Base Erosion and Profit Sharing (19 July 2013), International Organizations’ Documentation IBFD.16. This position is undertaken in view of a vast literature and academic writing exist-ing on the subject of the Community (now the Union) tax harmonization as well as the current political configuration of the European Union. In that sense, I agree with authors

6


focus on capital and fiscal policy elements as may be discerned from current

law of the European Union; notably, one may not speak of fully developed

EU policies in the area where the analysis of capital transactions coincides

with concepts of direct taxation.17 These elements can be identified from

legal premises found in the case law of the Court and from certain pieces

of EU legislation.

One may discern clear policy elements18 from the current regulation of

capital movements and the Court’s examination of Member States’ direct

such as McLure, who consider that the degree of economic integration implying full tax harmonization (including tax base and tax rates, as well as EU tax administration) would probably require a federal system; in C.E. Jr. McLure, The Long Shadow of History: Sovereignty, Tax Assignment, Legislation, and Judicial Decisions on Corporate Income Taxes in the US and the EU, in Comparative Fiscal Federalism, Comparing the European Court of Justice and the US Supreme Court’s Tax Jurisprudence, ch. 5, pp. 119-190 (R.S. Avi-Yonah, J.R. Hines, Jr. & M. Lang (eds.), EUCOTAX Series on European Taxation Vol. 14, Kluwer Law International, 2007) (2007a), at p. 147. Similarly, P. Pistone, Towards European International Tax Law, 14 EC Tax Review 1, pp. 4-9 (2005) (2005a), at p. 6, speaks in favour of full equality of tax treatment between residents and non-residents in the European Union but adds that such a solution would require a substantial change in the actual international tax law order.17. Certain authors refer to “European tax law” in the sense of compendium of Community (now EU) law in the field of taxation. Inter alia, see H. Sterdyniak et al., Vers une Fiscalité européenne, (Economica, 1991), ch. 2, pp. 31-77, on what may be called the general principles of taxation within the Community (now European Union). See also A.J. Easson, Taxation in the European Communities (European Community Law Series 5, The Athlone Press, 1993); D.W. Williams, EC Tax Law, 1st ed. (European Law Series, Longman, 1998); L.W. Gormley, EU Taxation Law (Richmond Law and Tax Ltd., 2005), and Pistone (2005a), supra n. 16, pp. 4-9. P. Pistone, General Report, in The EU and Third Countries: Direct Taxation, Schriftenreihe zum internationalen Steuerrecht Herausgegeben von Univ.-Prof. Dr Michael Lang, Band 46, pp. 15-55 (M. Lang & P. Pistone (eds.), Linde, 2007) (2007a), at p. 36, underlines that European International Tax Law is a new dimension of international tax law whereby the Member States are bound to comply with the primacy of Community (now EU) law when dealing with cross-border situations. According to the same author, the new system distinguishes itself from international tax law principally with regard to its concept of comparability of residents and non-residents and a different configuration of national sovereignty. See also D.M. Weber, European Direct Taxation, Case Law & Regulations (Wolters Kluwer, 2009); J.F. Avery Jones, Flows of Capital between the EU and Third Countries and the Convergences of Disharmony in European International Tax Law, in Tax Policy and the Impending Economic and Monetary Union, pp. 71-92 (Leuven Law Series, F. Abraham, J. Stuyck & F. Vanistendael (eds.) Leuven University Press, 1999), previously published in 7 EC Tax Review 2, pp. 95-105 (1998), and P. Farmer & R. Lyal, EC Tax Law (Oxford European EU law Library, Clarendon Press, 1995). C. Brokelind, Introduction, in Towards a Homogenous EC Direct Tax Law: Assessment of the Member States’ Responses to ECJ’s Case Law, pp. 1-23 (C. Brokelind, A. Bullen & A. Cordewener (eds.), IBFD, 2007), pp. 15-17, notes that while a more homogeneous approach is evolving through Member States response to case law of the European Court of Justice, there is still no uniformity of Community (now EU) law in direct taxation. 18. With regard to the balances of power, different levels of policymaking and discern-ible regulatory elements in terms of taxation – rather than well-defined tax policies – that

7

Introduction

taxation, in particular, the balance of powers between Member States and the European Union when it comes to direct taxation, the EU concept of discrimination between residents of different Member States and a certain

concern for the protection of assets in capital transactions. Certain premises

of these policy elements form part of the core of the EU law, obligatory for

the Member States, and represent the foundations of what may possibly

become a specific EU tax model or at least a more coherent tax policy in

the future. Such a model would possibly include an eventual adoption of the

CCCTB or the CCTB and potential EU-level measures against fiscal abuse,

coupled with measures of fiscal surveillance.

This discussion builds on the existing legislation of the European Union and

case law of the European Court of Justice and defines the basic character of

the EU regulation of capital transactions and its approach to direct taxation.

It defines and discusses the most important policy elements and points to

difficulties of the EU regulation that need to be addressed independently of

any steps towards future tax policy or tax harmonization. Such difficulties

arise from the current definition of the balance of powers between Member

States and the European Union in direct taxation matters as well as the inter-

play between commercial and non-commercial aspects of capital transaction

liberalization, in the sense that these may contradict international standards

and international obligations of the European Union or are non-sustainable

in light of the possible future development of the EU markets.

For this reason, the book proposes certain policy reorientations, clarifica-

tions concerning interpretation of homonymous terms such as discrimina-

tion in terms of transaction policy and in the context of taxation, and policy

build-ups particularly with regard to premises of non-discrimination and

anti-abuse. Policy build-ups will be commented in the sense of future use of

current policy elements in a CCCTB or CCTB-policy environment, imply-

ing a harmonized system of taxation for companies opting for the CCCTB

or the CCTB, as well as a non-harmonized status quo environment. Since

the coexistence of harmonized and non-harmonized environments implies

coordination between EU and Member States’ jurisdictions, such a dual

system will require strong coordination measures in addition to harmoniza-

tion of substantive law. Proposed changes to anti-abuse measures also take

note of the status quo and potential developments at Member State or EU

level in response to the BEPS. The policy development propositions take

currently exist in EU capital and taxation regulation, I use the term “policy elements” for regulatory premises I discern from EU regulation and case law of the European Court of Justice. For this reason, the term “EU capital and/or taxation policy” is used only with regard to suggested alternatives and innovations I propose in later chapters.

8


into account the fact that whatever the changes in the area of direct taxation

may be, they will affect the current balance of powers between the Member

States and the European Union.

Several prominent academics (Martín Jiménez, Pistone, Wattel, as referred

to later in this book) and practitioners have proposed solutions for the

future EU policy building on separate aspects of the combined appreciation

of the fundamental freedoms and direct taxation. They have tested back-

ground concepts of both sides of this liberalization-taxation regime such

as discrimination (Birk, Banks, Gribnau, Lang, Meussen, Peters, Sánta-

Bárbara Rupérez, Saddiki, Van den Berge, Vanistendael, Van Raad and

Wattel, as referred to later in this book), and commented on the influence

of Community (now EU) law on direct taxation, tax treaties and avoidance

of double taxation (Cordewener, Decoq, Farmer, Hofstätter, Hohenwarter,

Kofler, Lang, Le Gall, Lehner, Loukota, Lyal, Panayi, Pistone, Sánchez

Jiménez, Schneeweiss, Schuch, Soler Roch, Staringer, Teixeira, Van Thiel,

Wattel and Whitehead, as referred to later in this book). However, there is

no coherent examination in the literature of certain underlying elements of

the current EU liberalization-taxation regime and their use in a future EU

policy. This thesis is intended to fill this gap, following up on the existing

groundwork made by legal practice and academia. Proposed developments

respect the logic of existing policy elements as far as possible, but take

inspiration also from sources external to the European Union.

In view of the many legal and non-legal obstacles within the European

Union which define its less-than-optimal approach to all-EU taxation solu-

tions – first, political unwillingness of Member States to proceed towards

decisive tax harmonization, second, lacunae remaining in European regula-

tion of direct tax matters meaning there is no possibility to bridge obstacles

in the sense of juridical double taxation by reference to EU fundamental

freedoms and finally, the nature of legal interpretation by the European

Court of Justice –, it is important to consider a wider context in terms of

EU potential future policy, i.e. the context of current and potential future

activities within the OECD.

Recently, the OECD’s activities with regard to occurrences of gaps exploited

by companies that avoid taxation in their home countries by shifting their

activities abroad to low or no tax jurisdictions increased dramatically.19 The

OECD activities resulted in the Action Plan on Base Erosion and Profit

19. BEPS Action Plan, supra n. 15.

9

Introduction

Sharing (the BEPS Action Plan),20 the organization’s reply to “… a con-

cern [of a number of countries] about how international standards on which

bilateral tax treaties are based allocate taxing rights between source and

residence States”. The BEPS Action Plan promises that the actions defined

in its context “… will restore both source and residence taxation in a number

of cases where cross-border income would otherwise go untaxed or would

be taxed at very low rates, [whereas] these actions are not directly aimed

at changing the existing international standards on the allocation of tax-

ing rights on cross-border income”.21 The BEPS Action Plan addresses the

need for new standards of international taxation, realignment of substance

and form in international taxation and promises to build on transparency,

certainty and predictability.22

In view of the above, discussions and implementation proposals of the

BEPS prove that OECD member countries, and among them EU Member

States that are members thereof, are willing to draw rules for the exercise of

their tax sovereignty in cross-border situations, which is noteworthy in view

of their reticence within the cadre of the European Union. On the example

of hybrid mismatches it may be implied that one jurisdiction will have to

take notice of tax treatment applied in another jurisdiction for the purpose

of determining the tax treatment applicable to a given cross-border situation

at the level of each jurisdiction concerned. Independent of the fact that the

BEPS are intended to address cases of international tax abuse originating

mostly from disparities in international taxation, the BEPS methodology

may lead to jurisdictions no longer exercising their powers in isolation. In

this sense, the BEPS introduce novel methodology on how jurisdictions may

exercise their tax powers in the context of obligatory international anti-tax

abuse coordination. In view of this very modern approach to the exercise of

taxation powers, I also analyse possible application of the BEPS methodol-

ogy in light of the current European law as well with regard to currently

proposed amendments of applicable EU regulations.

Three areas of focus

After a note on its methodology and premises, this book concentrates on

three issues.

Since one is more likely to understand a system and provide for its improve-

ments if one studies its separate elements statically and their interactions

20. Id. 21. Id, at p. 11.22. Id., at pp. 13-14.

10


dynamically, this account will start off by examining the basic characteris-

tics of capital movements in the European Union (chapter 2), and then com-

ment on basic and complex contradictions between such characteristics and

regulation of taxation in EU law (chapter 3). This should help understand

the basic elements and contradiction of the coexistence, at the EU level, of

fundamental freedoms and taxation in terms of a future consolidated capital

policy and development in terms of anti-abuse policy (chapter 4).

In particular, chapter 2 starts by exposing the current EU capital liberaliza-tion regime, its objectives and effects, focusing specifically on the concept of capital, assets and liabilities. Interpretations (definitions) and policy ele-

ments identified are compared to concepts of the International Accounting

Standards and International Financial Reporting Standards including related

interpretations (IAS and IFRS, together referred to as IAS, unless specified

otherwise), adopted also at the EU level. This is necessary due to the fact

that the IAS represent a harmonized regulation of capital transactions at the

EU level in the sense that they provide for uniform definition of capital in

terms of its value as well as methods for evaluation of assets and liabilities.

Therefore, the IAS may be an important element of future EU capital policy.

Next, the EU regime so defined is compared and contrasted with capital

regimes established by the OECD and the World Trade Organization

(WTO). This part builds on the analysis of EU legislation, case law of the

European Court of Justice, and international regulation as elaborated by the

OECD and the WTO, by employing teleological and historical methods of

interpretation.

Chapter 3 analyses case law of the European Court of Justice in order to

discern policy elements of the EU taxation regime. These include premises

developed in the Court’s case law concerning, among others, jurisdiction

of Member States in direct taxation matters, fiscal territoriality, taxation

symmetry, equal treatment in taxation matters, and effective fiscal surveil-

lance. The chapter underlines contradictions between different premises.

In particular, because the Court interprets national taxation regulation by

means of EU law and EU fundamental freedoms, certain policy elements

are shared by both capital liberalization and taxation policies. However, they

may have different effects in the area of capital liberalization as compared

to taxation, due to their different nature.

Having examined the principles that the European Court of Justice uses to

analyse both capital transactions and taxation as defined in earlier chapters,

chapter 4 tests how certain of the common features of the EU regulation

11

Introduction

of capital and taxation are applicable in terms of a future EU policy in the

area of capital transactions and direct taxation. Such a future policy will

be defined by the coexistence of CCCTB or CCTB-harmonized and non-

harmonized environments. The coexistence will have to imply both harmo-

nization measures for balancing out transaction costs occasioned because of

such coexistence and strong coordination tools for securing cooperation and

exchange of information between EU and Member States’ jurisdictions.23

Features of the current EU substantive regulation of capital and taxation that

will be most important in the future are non-restriction and non-discrimi-

nation. These two principles will be decisive as substantive legal elements

in the future EU policy because, first, certain tax areas will remain under

Member State regulation (which corresponds to the status quo in terms of

taxation regulation), while other matters will possibly be harmonized by a

future EU taxation policy in terms of the CCCTB or the CCTB, and, sec-

ond, eventual tax harmonization will necessarily be limited. The principles

of non-restriction and non-discrimination will need to be complemented

by a coordination mechanism and a system of prevention of double taxa-

tion, the latter including measures for prevention of discrimination as well

as abuse and tax evasion, both in relations between Member States and

between those and third countries. Measures of coordination and prevention

of double taxation in the context of the CCCTB or the CCTB will need to

be enacted by the EU legislator on the basis of currently existing coordina-

tion mechanism but will need to take into consideration intricacies of the

CCCTB or the CCTB system.

Once the possible framework of an EU policy is defined, chapter 4 looks

towards the BEPS context. The BEPS initiative is discussed in terms of its

methodological value for the interpretation of balances of taxation powers

of Member States and the premises of coordination, non-discrimination

and abuse, defined in chapter 3 as interpretative pillars of future EU taxa-

tion policy. It is important to note that the BEPS actions may define actual

terms of future international (and thus also EU) taxation policy, whereas

the European Union may develop its own anti-abuse regulation in paral-

lel. Introducing the BEPS methodology into interpretation of the European

Court of Justice may lead to a change in paradigm as to the exercise of tax

23. Tax harmonization would inevitably be of a limited extent. Generally, on the lim-ited nature of tax harmonization, see J.M. de la Villa, La Armonización Comunitaria en el Ámbito de la Imposición Directa, Su Problemática Jurídico-Contable y Su Incidencia en España, (Instituto de Planificación Contable, Fábrica Nacional de Moneda y Timbre, 1988), at para. 2, at p. 11. Coordination mechanism will need to be adopted in line with current EU regulation on information exchange, commented in later chapters.

12


jurisdiction of EU Member States and help provide for an alternative to the

Court’s appreciation of tax matters through lens of EU fundamental free-

doms and entitlement to such freedoms in particular.

1.1. Sphere of EU capital transactions

1.1.1. Scope of the study

Interaction of the EU freedom of capital transactions and direct taxation can

be described by referring to the case law of the European Court of Justice,

interpreting articles 43, 56, 58 and 4924 of the Consolidated version of the

Treaty establishing the European Community (Treaty),25 now (without sub-

stantial modifications) articles 49, 63, 65 and 56 of the Consolidated ver-

sion of the Treaty on the Functioning of the European Union (TFEU),26 EU

legislation in the area of direct taxation, the EU-adopted IAS and proposals

of the European Commission for a future CCCTB regime, or, alternatively,

proposals for a CCTB regime. In order to describe this body of law, I use

the term the “EU capital transactions regime”. To this, one must also add

proposals for directive amendments and future regulation in the area of

fight against fiscal fraud, which are specifically referred to throughout this

account.

The most important source to establish such a capital transactions regime is

the case law of the European Court of Justice which, due to the lack of EU

24. See K. Lenaerts & L. Bernardeau, L’encadrement communautaire de la fiscalité directe, 43 Cahiers de Droit Européen 1/2, pp. 19-109 (2007). The principle of non-discrimination has been given effect in the fundamental freedoms (lex specialis): the right of establishment (see the judgments NL: ECJ, 12 Apr. 1994, Case C-1/93 Halliburton Services/Staatssecretaris van Financiën [1994] ECR I-1137, ECJ Case Law IBFD, at para. 12; DE: ECJ, 29 Feb. 1996, Case C-193/94 Skanavi and Cryssanthakopoulos [1996] ECR I-929, at para. 21; and NL: ECJ, 13 Apr. 2000, Case C-251/98 C. Baars v. Inspecteur der Belastingen Particulieren [2000] ECR I-2787, ECJ Case Law IBFD, at para. 24 and later judgments) and the free movement of capital. With regard to former art. 6 of the Treaty establishing the European Community (Consolidated version), OJ C 224 (1992) (EC Treaty), see the judgments in Halliburton Services (C-1/93), at para. 12; GR: ECJ, 29 Apr. 1999, Case C-311/97 Royal Bank of Scotland [1999] ECR I-2651, ECJ Case Law IBFD, at para. 20; and in Baars (C-251/98), paras. 23 & 25. 25. European Union – Consolidated Versions of the Treaty on European Union and of the Treaty establishing the European Community (Consolidated text), Consolidated Version of the Treaty establishing the European Community, OJ C 321E (2006) (Treaty).26. Consolidated versions of Treaty on European Union and the Treaty on the Functioning of the European Union (Consolidated versions), OJ C 83 (2010) (TFEU). See also the Treaty on the Functioning of the European Union (Consolidated version), OJ C 115 (2008).

13

Sphere of EU capital transactions

legislation with regard to direct taxation,27 interprets the subject area by ana-

lysing interactions between the EU freedoms and direct taxation. It is only

to the extent to which exercise, by Member States, of (non-harmonized)

direct taxation rules may have an impact on the EU fundamental freedoms

that they come within the scope of law of the European Union.28 The Court’s

case law contains references to capital movements, establishment, services

and taxation, where of interest to this discussion are in particular elements

of EU capital transactions regime and direct taxation as discernible through

the Court’s interpretation of the freedom of establishment and the free move-ment of capital.

This discussion concentrates on corporate (non-personal) capital transac-tions including dividends.

1.1.2. Methodology of the study

The European Court of Justice examines capital movements and taxation

from the sole perspective of EU law in general and EU fundamental free-

doms in particular, which means that the Court discusses the freedoms and

their inhibitions due to taxation. Therefore, a conglomerate vision of capital liberalization and taxation as it currently exists will be taken in the exami-

nation of both the EU capital regime and premises developed in the case law

of the Court concerning direct taxation. Such an approach is best presented

graphically.

27. The subject matter of the following directives is harmonized at the European level: Council Directive 2009/133/EC of 19 October 2009 on the Common System of Taxation Applicable to Mergers, Divisions, Partial Divisions, Transfers of Assets and Exchanges of Shares Concerning Companies of Different Member States and to the Transfer of the Registered Office of an SE or SCE between Member States (Codified Version), OJ L310 (2009), EU Law IBFD; Council Directive 2011/96/EU of 30 November 2011 on the com-mon system of taxation applicable in the case of parent companies and subsidiaries of different Member States (Recast), OJ L 345 (2011), EU Law IBFD; Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of transfers of profits between associated undertakings, OJ L 225 (1990), EU Law IBFD; Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of inter-est payments, OJ L 157 (2003), and Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, OJ L 157 (2003), EU Law IBFD. See also J. John, New EU Strategy for “Relaunch of the Single Market” – Fresh Start for the CCCTB?, 22 Journal of International Taxation 3, pp. 16-17 (2011), also available at: http://search.proquest.com; J. J. Tobin, CCCTB or Not To Be?, 40 Tax Management International Journal 5, pp. 292-295, also available at: http://search.proquest.com (2011).28. DE: Opinion of Advocate General Léger, 22 Nov. 1994, Case C-279/93 Finanzamt Köln-Altstadt v. Schumacker [1995] ECR I-225, at para. 25.

14


From a graphical perspective, rights that include the freedom of capital

transactions as a concept would most appropriately be represented in the

form of a sphere. Such a sphere on its own would represent the freedom

of capital transactions in its purest state, that is, the unimpaired freedom of

capital movements as may exist in modern economic societies.

There are obstacles to such a freedom, graphically presented by section of

the sphere with other spheres. The section of spheres vital for this discussion

is the interaction of the freedom of capital transactions and (direct) taxa-

tion.29 In this sense, a graphical representation of the section of the sphere of

capital transactions with the sphere of taxation would correspond to a sphere

of lighter and darker areas (figure 1). Lighter tones indicate the resulting

sphere’s features promoting capital transactions. Darker tones of the sphere

correspond to features (partly or fully) inhibiting such transactions.

Figure 1 Sphere of capital transactions

Such a graphical presentation is essential to understanding the premise of

this discussion, namely that the reality of the freedom of capital movements at the level of the European Union is to be found in its essential connection

29. Such an approach may be considered a type of economic-analysis-of-law approach; on economic analysis of tax harmonization, see D. Dosser, Economic Analysis of Tax Harmonization, in Fiscal Harmonization in Common Markets, Volume I:Theory, pp. 1-145 (C.S. Shoup (ed.), Columbia University Press, 1967).

Freedomof capitalcirculation

Taxation

Sphere ofcapital

transactions

15


to taxation. However, in order to analyse the capital and taxation phenom-

ena existing in the EU market and the underlying policies they imply, it is

crucial to understand both the genesis of the resulting collision as well as

characteristic of the respective spheres prior to such collision. Therefore,

after examining the characteristics of the primary spheres, the resulting

system, this light-dark sphere, will be taken as a whole as a subject of this

study.

1.1.3. Spheres of capital transactions and taxation – The concept of capital and policies revolving around it

An important terminological premise of this thesis that allows for the paral-

lel approach to capital liberalization and taxation is the concept of “capital”

as defined in law of the European Union.

In particular, it is possible to discuss the capital-taxation overlap in law of

the European Union as a whole because its poles, capital movements and

taxation and their policy elements, revolve around this concept. Graphically

speaking, the concept of capital is the core of the black-and-white sphere

as presented above. Other two key concepts are (non-)discrimination and

(non-)restriction, which will be commented on with direct reference to the

European Court of Justice’s interpretation of these terms.

At the EU level, the concept of capital as set out in article 67 of the Treaty

establishing the European Economic Community (EEC Treaty)30 [formerly

article 56 of the Treaty, now article 63 of the TFEU] is further specified in

Directive 88/361.31 Capital in terms of net assets is explained in the IAS.

30. Treaty establishing the European Economic Community (EEC), of 25 Mar. 1957, OJ C 26 (1988), entered into force on 1 Jan.1958 (EEC Treaty). 31. Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the [EEC] Treaty, OJ L 178 (1988). The Directive was adopted on the basis of arts. 69-70, para. 1, of the EEC Treaty, arts. 67-73 of the EEC Treaty having been replaced by arts. 73b-73g of the EC Treaty, arts. 56-60 of the Treaty, and ultimately by arts. 63-66 of the TFEU. The Directive defines capital movements in a non-exhaustive manner; see, inter alia, the judgments AT: ECJ, 16 Mar. 1999, Case C-222/97 Trummer and Mayer [1999] ECR I-1661, at para. 21; NL: ECJ, 23 Feb. 2006, Case C-513/03 van Hilten-van der Heijden, ECJ Case Law IBFD , at para. 39; UK: ECJ, 12 Dec. 2006, Case C-446/04 Test Claimants in the FII Group Litigation [2006] ECR I-11753, ECJ Case Law IBFD, at para. 179; and FI: ECJ, 7 Nov. 2013, Case C-322/11 K ECLI:EU:C:2013:716, ECJ Case Law IBFD, at para. 20. The Directive also regulates capital movements in the European Economic Area (EEA). See Agreement on the European Economic Area (OJ L 1, of 3 Jan. 1994, p. 3) (EEA Agreement). In this sense, see also FR: Opinion of Advocate General Jääskinen, 29 Apr. 2010, Case C-72/09 Rimbaud [2010] ECR I-10659, paras. 7, 8 & 26-28.

16


The concept of capital is put forward in Directives 2009/133 (repealing

Directive 90/434), 2003/48 and 2003/49 in the context of direct corporate

taxation, as well as substantive law defining a system for tax authority

coordination,32 while Directive 2011/96 (repealing Directive 90/435) and

Convention 90/436 concern coordination on the subject of double taxation

with regard to direct taxation in the sense of designation of Member States’

jurisdictions. In the context of indirect taxation, capital is discussed, most

significantly for this discussion, in Directives 69/335 and 77/388.33 This

regulation is complemented by interpretation of the concept of capital and

capital movements in the case law of the European Court of Justice.

1.1.4. The concept of capital

Generally speaking, the concept of capital may be defined in different man-

ners.34 It can be analysed from economic (market), regulatory or tax per-spectives, each of which differ with regard to goals they promote.

The market and regulatory perspectives on capital define it according to

various forms of securities, assets and liabilities in financial markets,35 thus

The provisions of the Directive should, for the purposes of the EEA Agreement, be read in line with Agreement on the European Economic Area - Annex XII - Free movement of capital - List provided for in Art. 40 (OJ L 1, of 3 Jan. 1994, p. 420).32. Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second para. of Art. 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ L 26 (1977), EU Law IBFD, and its amendments, concern capital indirectly; they regulate public limited liability companies by means of a corporate statutory law approach.33. Council Directive 69/335/EEC of 17 July 1969, concerning indirect taxes on the raising of capital, OJ L 249 (1969), Terminated, EU Law IBFD, as amended by Council Directive 74/553/EEC of 7 November 1974 amending Article 5(2) of Directive 69/335/EEC concerning direct taxes on the raising of capital, OJ L 303 (1974), EU Law IBFD. Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes, OJ L 145 (1977), EU Law IBFD. Also, Maydell (2008), supra n. 1, at p. 77, at footnote 230. Although value added taxation is not subject of this debate, it is noteworthy to mention its harmonization at the EU level.34. In economic theory, capital is one of the three factors of production, the others being land and labour. See, for example, on the freedom of capital movements, J.M. Keynes, The Collected Writings of John Maynard Keynes (30 Volumes), (E. Johnson & D.E. Moggridge (eds.), Macmillan & Cambridge University Press (1971-89), 1989), and N. Naldi, Keynes on the Nature of Capital: A Note on the Origin of the General Theory’s Chapter 16, 8 European Journal of the History of Economic Thought 3, Routledge, pp. 391-401 (2001), pp. 391-401.35. For capital in financial markets, for instance, see B. Porteous & P. Tapadar, Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates

17


promoting the commercial aspect of capital, which is associated with the

objective of liberalization of capital transactions or maintaining of capital value.36

If market and regulatory perspectives on capital follow the same basic idea,

the tax perspective on capital is different. It focuses on the value of capital transactions in a particular jurisdiction and during given time periods for

the purposes of tax calculation. Here, the concept of capital depends on

whether the relevant taxation is levied directly on the entities paying or

receiving capital (direct taxation) such as in case of corporate tax or capital

gains tax, or if taxes are collected by an intermediary from the entity who

bears the ultimate economic burden of the tax (indirect taxation) such as

sales tax or value added tax. One may thus describe the concept of capital

for purposes of taxation as looking at taxable value occurring or resulting

from (taxable or tax-relevant) transactions. The concept thus combines the

transaction-based approach to taxable or tax-relevant transactions with the

focus on taxable values. This makes the concept of capital for tax purposes

straightforward in comparison to its many definitions within capital policy,

which is explained by the straightforward economic character of taxes.37

Since this account comments also on the accounting standards, it is useful

to underline that in terms of financial reporting, capital can be divided into

physical38 or financial capital.39 There are two consequential concepts of

capital that an entity may adopt according to its needs and for purposes of

balance sheet compilations.40 Under the financial concept, capital “such as

invested money or invested purchasing power” is “synonymous with the net

assets or equity of the entity”.41 Under the physical concept, capital “such

as operating capability, … is regarded as productivity capacity of the entity

based on, for example, units of output per day”.42 Since the choice of two

(Finance and Capital Markets Series, Palgrave Macmillan, 2005), R.E. Bailey, The Economics of Financial Markets (Cambridge University Press, 2005), and G. Fuller, The Law and Practice of International Capital Markets (Butterworths Law, 2007).36. Id. 37. B. Ardy & A.M. El-Agraa, Tax Harmonization, in The European Union, Economics & Policies, 7th ed., ch. 14, pp. 238-255 (A.M. El-Agraa (ed.), Financial Times Prentice Hall, 2004), pp. 238-239.38. Inter alia in P. Schreyer, Capital Stocks, Capital Services and Multi-Factor Productivity Measures, OECD Economic Studies No. 37, 2003/2, pp. 163-184 (2004), at p. 165.39. Inter alia defined in International Accounting Standards Board, International Financial Reporting Standards IFRS 2012 (Red book) 2 volumes, IFRS Foundation (8 Mar. 2012) (2012) (IFRS).40. IFRS, supra n. 39, paras. F-102-F-103. 41. IFRS, supra n. 39, at para. F-102.42. Id.

18


concepts depends on the need of the user of financial statements, the finan-

cial concept of capital will be adopted if the users of financial statements

are primarily concerned with maintenance of nominal invested capital or

the purchasing power of invested capital.43 Of interest to this discussion is

the financial concept of capital.

Furthermore, the value and activity measures for capital movements for

the purposes of liberalization and capital for purposes of taxation may not

be the same. Should financial reporting and capital evaluation be made for

purposes of screening capital movements (sphere of capital policy), such

reports will be commercially based, engulfing a large spectre of capital

movements. However, financial reporting for purposes of taxation will focus

on the selection of taxable transactions,44 its value depending on complex

(tax) accounting measurements.

1.1.5. Capital policy – Disparities ab initio

The EU capital transactions regime is predominantly based on promoting

capital movements and the freedom of capital transactions rather than focus-

ing on value for commercial or taxation purposes; however, elements of

both such policy poles are present, the elements contradicting in certain

aspects.

Such combined and somewhat contradictory approach to capital at the EU

level is explained by (commercial) capital transaction and taxation rules as

used at the level of the European Union having evolved quite separately,

each focusing around a different perspective on the capital involved. In

contrast to the multilateral nature of trade agreements encompassing capital

in terms of transactions and capital as a factor of production within interna-

tional and EU trade, rules on direct taxation are decided either unilaterally or negotiated bilaterally.45

In addition, while having similar goals and underlying principles such as

reciprocity and non-discrimination, trade agreements are said to be use-

ful to escape the “Prisoner’s Dilemma”, while tax treaties should prevent

43. IFRS, supra n. 39, at para. F-103. The concept of capital maintenance links concepts of capital and profit.44. See in this sense, CCCTB Directive Proposal 2011, supra n. 9, at p. 6. 45. M. Daly, The WTO and Direct Taxation, World Trade Organization Discussion Paper No. 9 (2005), pp. 16-17.

19


aggressive tax planning and tax evasion.46 Thus, while policy on capital transactions and the freedom of capital is concentrated on (different con-

cepts of) capital, its value enhancement and its efficient use (the concept of

which may differ with regard to the underlying capital concept selected),

taxation policy evaluates such movements by defining a value portion

charged as a price for their circulation47 and redistributes monies so col-

lected.48

Building blocks of the EU capital transactions regime are defined in

Directive 88/361, predominantly concentrated around the idea of promo-

tion and liberalization of capital transactions. However, this predominantly

transactions-based system contains a reference to assets and liabilities underlying capital transactions, which urges a reading in combination with

IAS and its concepts of assets and liabilities. The baseline capital policy

if one may call it so thus contains a combination of two very different

approaches to capital which may lead to logical and interpretative incon-

sistencies.

In addition, definitions of capital and capital transactions contained in dif-

ferent EU legislative sources may vary, which mostly corresponds to differ-

ent perspectives from which capital is regulated.

While the EU capital transaction legislation may have enrooted inconsist-

ency and various approaches to capital regulation, the European Court of

Justice will use the very same terminology for purposes of approaching

(very different) questions of (direct) taxation. This makes capital policy at

the EU level quite endemic and very complex.

Such a variety of approaches to capital policy may cause differentiation

between similar types of capital and capital movements, which may result

in different levels of their legal protection. This not only represents a prac-

tical problem in transactions involving third-country elements, but also

46. Daly (2005), supra, at p. 17 & footnote 49. Inter alia J. Gowa, Bipolarity, Multipolarity, and Free Trade, 83 American Political Science Review 4, pp. 1245-1256 (1989), also available at: http://www.jstor.org/pss/1961667, argues that the prisoner’s dilemma repre-sentation does not reflect the most critical aspect of free trade agreements in an anarchic international system, i.e. security externalities. 47. Ardy & El-Agraa (2004), supra n. 37, pp. 238-255.48. According to J. Snell, Non-Discriminatory Tax Obstacles in Community Law, 56 International and Comparative Law Quarterly, pp. 339-370 (2007), at p. 357, the con-cepts of the EU freedom of movement and taxation are essentially different; the former conceptualized to ensure economic efficiency while the latter concentrated on the idea of distribution.

20


inconsistency with the EU principle of equal treatment in circulation as

well as in tax matters.49 In the words of Handoll (2006, at page 11, para-

graph 73), “categorisation of a given movement as ‘capital’, ‘payments’,

‘goods’ or ‘services’ is no mere academic exercise”, since a different clas-

sification results in a “distinct regime with its own personal and substantive

spheres of operation, including possible derogations”,50 even though within

the European Union, the test of whether a national measure is restrictive

and justified will essentially be the same regardless of the freedom that

the European Court of Justice deems to be predominantly concerned.51

Clarification of basic terms and premises in relation to EU capital policy is

necessary also for another reason: certain authors believe that international

tax standards are or should be influenced by the EU law.52 If serious devel-

opments were to be undertaken in that direction, a clear understanding and

a strong systematization within the EU system is essential.

In addition to the contradiction regarding capital policy’s building blocks,

there is a difference, at the EU level, between the two sets of rules also with

regard to jurisdiction in terms of power over the subject matter. Currently,

if policies concerning freedom of capital movements and establishment

are within the jurisdiction of the European Union and interpreted by the

European Court of Justice, jurisdiction with regard to taxation is bifurcated.

While indirect taxation is harmonized at the EU level,53 direct taxation in

49. Capital transactions not categorized under the concepts regulated by EU law will not benefit from the EU regime. Similarly, should transactions involving third states and their residents be classified under the freedom of establishment and the free provision of services, such transactions cannot benefit from the protection under those fundamental freedoms, strictly reserved for intra-European Union transactions. Classification under the freedom of establishment or the free movement of capital is thus very important both for circulation and taxation contexts. See, inter alia, M. Dahlberg, Direct Taxation in Relation to the Freedom of Establishment and the Free Movement of Capital (EUCOTAX Series on European Taxation Vol. 9, Kluwer Law International, 2005). 50. J. Handoll, Capital, Payments and Money Laundering in the European Union (Richmond Law & Tax Ltd, 2006), at p. 11, at para. 73.51. M. O’Brien, Case C-452/04, Fidium Finanz AG v. Bundesanstalt für Finanzdienstleistungsaufsicht, judgment of the Court of Justice (Grand Chamber) of 3 October 2006, [2006] ECR I-9521, 44 Common Market Law Review 5, pp. 1483-1499 (2007) (2007a), at p. 1495.52. For instance, see Raingeard de la Blétière (2008), supra n. 14. Clarification is of great importance in terms of definition of non-discrimination between residents and non-residents; in this sense, M. Lang, Non-Discrimination, What Does History Teach Us?, in Fiscalité et entreprise: Politiques et pratiques, Mélanges en l’honneur de Jean-Pierre Le Gall, pp. 103-108 (Dalloz, 2007) (2007a), at p. 103, believes certain ideas developed throughout the European Court of Justice’s interpretation of Community (now EU) free-doms may influence the interpretation of non-discrimination as per Art. 24 of the OECD Model (2010), supra n. 10, and the arm’s length rule.53. See supra n. 33.

21


principle remains within the jurisdiction of Member States.54 A future adop-

tion of the CCCTB, the CCTB or EU anti-abuse measures may cause a shift

in or at least provide for a new perspective on taxation jurisdiction.

Currently, the Member States have in principle full tax sovereignty55 in

the field of direct taxation; the principle of subsidiarity56 concerning direct

taxation helps establish the most appropriate level for regulation.57 In terms

of the relationship between capital-transaction and taxation regimes, taxa-

tion and the tax jurisdiction of Member States is a certain relaxation of

full market liberalization of capital, which is understandable in light of the

arrangement of EU direct taxation powers. At the EU level, article 58 of

the Treaty (now article 65 of the TFEU), by tolerating diversity in national

tax laws and systems58 while capital markets experience functional inflex-

ibility, even allows to a certain extent for tax competition, which may be

seen as a particular expression of the Member States’ sovereignty in the

direct taxation field. However, forum shopping, which can be perceived

as a market behaviour counterpart of such a policy choice, may be con-

sidered to be an abusive use of the EU freedom of establishment and

capital movement since it may create evasion59 of pertinent national tax

54. Supra n. 27, for EU-harmonized subject matters. 55. On empirically studied impact of the European Court of Justice’s rulings in various Member States see, inter alia, Brokelind (2007), supra n. 17. 56. On erosion of subsidiarity in tax cases, see, inter alia, R. Mason, A Theory of Tax Discrimination, Jean Monet Working Paper 09/06 (2006), pp. 44-46. See also M.J. Gammie, The Role of the European Court of Justice in the Development of Direct Taxation in the European Union, 57 Bull. Intl. Fiscal Docn. 3, pp. 86-98 (2003), pp. 96-97.57. Ardy & El-Agraa (2004), supra n. 37, at p. 238. In this sense, see F. Vanistendael, The Compatibility of the Basic Economic Freedoms with the Sovereign National Tax Systems of the Member States, 12 EC Tax Review 3, pp. 136-143 (2003), and Vanistendael, The ECJ at the Crossroads: Balancing Tax Sovereignty against the Imperatives of the Single Market, 46 Eur. Taxn. 9, pp. 413-420 (2006a), Journals IBFD. 58. P. Martin, The Marks & Spencer EU Group Relief Case – A Rebuttal of the “Taxing Jurisdiction” Argument, 14 EC Tax Review 2, pp. 61-68 (2005), at footnote 2.59. However, exercise of a fundamental right of an entity, taken alone does not justify restrictions in the first Member State or a restriction of freedom of establishment in gen-eral. Judgments DE: ECJ, 26 Oct. 1999, Case C-294/97 Eurowings Luftverkehrs [1999] ECR I-7447, ECJ Case Law IBFD, paras. 43-44; FR: ECJ; 11 Mar. 2004, Case C-9/02 De Lasteyrie du Saillant, ECJ Case Law IBFD, paras. 51 & 60; UK: ECJ, 12 Sept. 2006, Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-7995, ECJ Case Law IBFD, paras. 36-38, and AT: ECJ, 10 Feb. 2011, Joined cases C-436/08 and C-437/08 Haribo and Salinen [2011] ECR I-305, ECJ Case Law IBFD, at para. 89. In that sense, relevant wording of the European Court of Justice may also be found in the judgments DK: ECJ, 9 Mar. 1999, Case C-212/97 Centros [1999] ECR I-1459, ECJ Case Law IBFD, para. 27; NL: ECJ, 30 Sept. 2003, Case C-167/01 Inspire Art [2003] ECR I-10155, ECJ Case Law IBFD, paras. 95-97; and UK: Opinion of Advocate General Poiares Maduro, 7 Apr. 2005, Case C-446/03 Marks & Spencer v. Halsey (Her Majesty’s Inspector of Taxes) [2005] ECR I-10837, ECJ Case Law IBFD, at para. 67. In the context

22


laws.60 In the future, amendments to EU secondary regulation in terms of

anti-abuse and BEPS-inspired regulation may possibly set the definition of

abuse as well as anti-abuse policy.

Despite the above logic of taxation power distribution, from an economic

perspective, taxes are considered a non-tariff distortion of trade, having an

equivalent effect to tariffs,61 which may impede free movement of persons,

services and capital.62 Market anomalies caused by the operation of tax

systems and diversities thereof result in distorted consumer and producer choices, reduced market efficiency and impaired mobility of capital.63

Considering all of the above, the basic relationship between opposite poles

of the capital movement-taxation policy may be summarized by the fol-

lowing premise of the European Court of Justice: once a Member State has exercised its taxation power which lies in its jurisdiction, the exer-cise triggers the application of Community [Union] law.64 Therefore, with

regard to regulation of areas which are a matter for Member States, such

as direct taxation, Member States must exercise their powers in conformity

with law of the European Union,65 namely with respect of the EU freedoms66

and the rules regarding equal treatment, therefore avoiding any overt or

of Directive 90/434 and presumption of fraud, see the judgments DK: ECJ, 5 July 2007, Case C-321/05 Kofoed [2007] ECR I-5795, ECJ Case Law IBFD, paras. 37-47, and DE: ECJ, 11 Dec. 2008, Case C-285/07 A.T. [2008] ECR I-9329, ECJ Case Law IBFD, pa-ras. 31-32; and NL: Opinion of Advocate General Kokott, 16 July 2009, Case C-352/08 Zwijnenburg [2010] ECR I-4303, paras. 44-46. R.S. Avi-Yonah & C. HJI Panayi, Rethinking Treaty-Shopping: Lessons for the European Union, University of Michigan Law School, Empirical Legal Studies Center, Paper No. 7 (2010), also available at: http://law.bepress.com/cgi/viewcontent.cgi?article=1113&context=umichlwps, pp. 24-28, discuss treaty shopping in EU law. 60. A similar idea is also expressed in Directives 2009/133 (repealing Directive 90/434), 2011/96 (repealing Directive 90/435) and 2003/49.61. Ardy & El-Agraa (2004), supra n. 37, at p. 238.62. Id.63. Ardy & El-Agraa (2004), supra n. 37, at p. 239.64. Martin, supra n. 58, at p. 67. D. Gutmann, La fiscalité française des groupes de sociétés à l’épreuve du droit communautaire, réflexion sur l’affaire Marks & Spencer, pendante devant la CJCE, 14 Revue de droit fiscal, pp. 681-685 (2004), at p. 684, at para. 19. Gammie (2003), supra n. 56.65. Inter alia in the judgments DE: ECJ, 14 Feb. 1995, Case C-279/93 Finanzamt Köln-Altstadt v. Schumacker [1995] ECR I-225, ECJ Case Law IBFD, at para. 21; FI: ECJ, 3 Oct. 2002, Case C-136/00 Danner [2002] ECR I-8147, ECJ Case Law IBFD, at para. 28; UK: ECJ, 13 Dec. 2005, Case C-446/03 Marks & Spencer v. Halsey (Her Majesty’s Inspector of Taxes) [2005] ECR I-10837, ECJ Case Law IBFD, at para. 29, and BE: ECJ, 14 Nov. 2006, Case C-513/04 Kerckhaert and Morres [2006] ECR I-10967, ECJ Case Law IBFD, at para. 15. 66. Opinion of Advocate General Léger in Schumacker (C-279/93), at para. 21.

23

EU capital transactions regime concretely – Commercial and non-commercial components

covert discrimination on grounds of nationality,67 as well as respecting the

principle of proportionality.68 The general principle of equal treatment, or

non-discrimination, requires that comparable situations must not be treated

differently and that different situations must not be treated in the same way.69

The principles used to examine such interaction between the freedom of

capital movements and direct taxation, in particular non-discrimination and

non-restriction form an important part of the foundations of the current

and eventual EU capital transactions regime; these principles will be given

special attention in chapter 3, and in terms of an eventual future regime, in

chapter 4.

1.2. EU capital transactions regime concretely – Commercial and non-commercial components

As underlined, one may describe the EU capital transactions regime by its

commercial and non-commercial aspects in view of a direct application

of the EU freedom of movements to direct tax matters. Commercial com-

ponents share the nature of the freedom of movement, whereas non-com-

mercial components take inspiration from international taxation policy as

discernible from international tax law.

67. Inter alia, see the judgments in Schumacker (C-279/93), paras. 21, 24 & 26-30; NL: ECJ, 18 Mar. 2010, Case C-440/08 Gielen [2010] ECR I-2323, ECJ Case Law IBFD, at para. 37 and HU: ECJ, 5 Feb. 2014, Case C-385/12 Hervis Sport, ECLI:EU:C:2014:47, ECJ Case Law IBFD, at para. 30. See in this sense, LU: Opinion of Advocate General Lenz, 5 Nov. 1996, Case C-250/95 Futura Participations and Singer v. Administration des contributions (Futura Participations and Singer) [1997] ECR I-2471, at para. 54. 68. For instance, in the judgments NL: ECJ, 10 Mar. 2005, Case C-96/03 and C-97/03 Tempelman and van Schaijk [2005] ECR I-1895, at para. 46; NL: ECJ, 27 Sept. 2007, Case C-184/05 Twoh International [2007] ECR I-7897, ECJ Case Law IBFD, at para. 25, and DE: ECJ, 27 Jan. 2009, Case C-318/07 Persche [2009] ECR I-359, ECJ Case Law IBFD, at para. 52. See also ES: Opinion of Advocate General Kokott, 4 Sept. 2008, Case C-222/07 Unión de Televisiones Comerciales Asociadas (UTECA) [2009] ECR I-1407, at para. 59.69. Inter alia in the judgments in Schumacker (C-279/93), paras. 26 & 30; in Kerckhaert and Morres (C-513/04), at para. 19; UK: ECJ, 12 Dec. 2006, Case C-374/04 Test Claimants in Class IV of the ACT Group Litigation [2006] ECR I-11673, ECJ Case Law IBFD, at para. 46; ECJ, 11 Sept. 2007, Case C-227/04 P Lindorfer v. Council [2007] ECR I-6767 (fn 69), at para. 63; DE: ECJ, 6 Dec. 2007, Case C-298/05 Columbus Container Services [2007] ECR I-10451, ECJ Case Law IBFD, at para. 41; BE: ECJ, 22 Dec. 2008, Case C-282/07 Truck Center [2008] ECR I-10767, ECJ Case Law IBFD, at para. 37, and in Gielen (C-440/08), at para. 38. See also Opinions of Advocate General Mazák of NL: … 13 Mar. 2008, in C-43/07 Arens-Sikken [2008] ECR I-6887, at para. 74 and references at footnote 30, and of Advocate General Kokott in UTECA (C-222/07), at para. 59.

24


1.2.1. Commercial components of capital transactions regime – A capital policy framework

Generally speaking, a capital policy can be attached to the definition of

capital through either assets, transactions70 or the position of the relevant enterprise.71 Only those capital transactions included in the definition of

capital will benefit from the protective regime of the corresponding capital

policy.

An asset-based approach focuses on capital as the financial wealth used

to start or maintain a business and as resources for investment intended

to generate revenue.72 A transaction-based approach to capital focuses on

capital transactions as such and promotes their liberalization.73 In contrast,

an enterprise-based approach to capital as defined in the Canada-United

States Free Trade Agreement (1988)74 qualifies as capital all types of cor-

porate investments among entities and from them to other entities. While

capital definition according to the transaction-based approach to capital may

include payments, financial services including financial market services and

financial retail services, and an enterprise-based approach to capital quali-

fies capital transactions and relations within (a group of) companies, capital

according to the asset-based approach defines resources in terms of net

assets and corresponding liabilities.75

The principal difference between these three approaches is in their objec-

tives. In particular, capital policy that is premised on an asset-based, trans-

action-based or enterprise-based concept of capital may have its objectives

focused either on the protection of value of capital involved (in the case of

70. See WTO Working Group on the Relationship between Trade and Investment, Communication from the European Community and Its Member States, Concept Paper on the Definition of Investment, WT/WGTI/W/115 (16 Apr. 2002), also available at: http://trade.ec.europa.eu/doclib/docs/2004/july/tradoc_111123.pdf. Transaction-based approach is represented in the OECD Code of Liberalisation of Capital Movements (2013).71. The enterprise-based concept of capital is represented in the Canada-United States Free Trade Agreement (2 Jan. 1988) and the Canada-United States Free Trade Agreement Implementation Act, S.C. 1988, c. 65 (30 Dec. 1988) (Canada-United States Free Trade Agreement). See also WTO Working Group on the Relationship between Trade and Investment, supra n. 70, at p. 2.72. Inter alia in L. Flynn, Coming of Age: The Free Movement of Capital Case Law, 39 Common Market Law Review, pp. 773-805 (2002), at p. 776. 73. See the OECD Code of Liberalisation of Capital Movements (2013). 74. The Canada-United States Free Trade Agreement, supra n. 71. 75. Supra n. 71, n. 72 and n. 73.

25


an asset and enterprise-based definition of capital) or promoting transac-tional freedom (in the case of a transaction-based definition of capital).76

In this sense, an asset-based approach to capital focuses on imposing non-

discrimination with regard to every asset or liability a transaction involves.77

Such a regime focuses on the protection of value of assets regardless of

their origin.78

In contrast to the asset-based approach, a transaction-based capital policy

qualifies as capital entire transactions,79 regardless of accounting premises

such as assets and liabilities. A transaction-based concept of capital focuses

on their liberalization, regardless, for this purpose, of whether net capital

assets, financial services or transfers necessary for capital transactions are

in fact concerned. This distinguishes the scope of protection of the trans-

action-based regime from the asset-based regime, since the former liberal-

izes all capital movements selected by the legislator even though some of

the transactions concerned cannot be interpreted as affecting net capital in

terms of assets and liabilities. The selected capital movements benefit from

the capital regime and the prohibition of discrimination between similar

transactions regardless of their origin or content.

Lastly, an enterprise-based approach establishes a balance between the

asset-based and transaction-based capital policies by focusing on the pro-tection of the value of assets involved in corporate capital transactions and

less on the freedom to transact in general.80

It will be shown that the primary approach to EU capital definition is a par-

ticular combination of the asset and transaction-based definition, the latter

being similar to that of the OECD, while developments of the case law of

the European Court of Justice show also a specific variant of the enterprise-based approach.

76. Flynn (2002), supra n. 72, at p. 776.77. Id. 78. See in this sense, WTO Working Group on the Relationship between Trade and Investment, supra n. 70.79. See WTO Working Group on the Relationship between Trade and Investment, supra n. 70, at p. 2. For the transaction-based approach, see the OECD Code of Liberalisation of Capital Movements (2013).80. See in this sense, the Canada-United States Free Trade Agreement, supra n. 71.

26


1.2.2. Non-commercial elements – Elements of international tax law

Keeping in mind the double (commercial and non-commercial) nature of

the EU current capital transactions regime, it is important to identify cer-

tain mechanisms of (international) tax law undertaken or referred to by

EU regulation and/or the European Court of Justice. The most important

features for purposes of this discussion relate to the concepts of tax jurisdic-tion, discrimination between residents and non-residents and avoiding of double taxation;81 their interpretation at the EU level is discussed in chap-

ter 3. Specific policy developments with regard to anti-abuse and the BEPS

are discussed in chapter 4.

In order to address principles of international tax law,82 I refer to the OECD

Model (2010);83 in the area of international tax, OECD is the most objective

global organization.84 Other international tax standards are those established

by the UN Model (2011),85 the provisions of which are virtually the same

as in the OECD Model (2010).86 The UN Model (2011) is not discussed in

this account.

81. A. Miller & L. Oats, Principles of International Taxation (Tottel Publishing, 2006); K. Sonntag & C.S. Mathur, Principles of International Taxation, 1st ed. (LexisNexis, Butterworths, 2006) refer to these concepts as principles of international tax law.82. The OECD Model (2010) and its Commentary, supra n. 10, are not considered as customary international law per se. In this context, see J. Wouters & M. Vidal, An International Lawyer’s Perspective on the ECJ’s Case Law Concerning the OECD Model Tax Convention and its Commentaries, in A Vision of Taxes within and outside European Borders, Festschrift in honour of Prof. Dr Frans Vanistendael, pp. 989-1006 (L. Hinnekens & P. Hinnekens (eds.), Kluwer Law International, 2008) (2008a), pp. 995 & 1005. However, the European Court of Justice referred to “internationally recognised arm’s length stan-dard”, reflected in art. 9 of the OECD Model (2010), supra n. 10, in its judgment DE: ECJ, 12 Dec. 2002, Case C-324/00 Lankhorst-Hohorst, ECJ Case Law IBFD; similarly, it used the OECD Model (2010) as an indication of certain rules of international tax law, inter alia in the judgments in Schumacker (C-279/93), at para. 32; of 12 May 1998, in C-336/96 Gilly v. Directeur des services fiscaux du Bas-Rhin (Gilly) [1998] ECR I-2793, at para. 31; NL: ECJ, 23 Feb. 2006, Case C-513/03 van Hilten-van der Heijden [2005] ECR I-1957, ECJ Case Law IBFD, at para. 48; NL: ECJ, 7 Sept. 2006, Case C-470/04 N [2006] ECR I-7409, ECJ Case Law IBFD, paras. 45-46, and BE: ECJ, 16 July 2009, Case C-128/08 Damseaux [2009] ECR I-6823, ECJ Case Law IBFD, at para. 33.83. OECD Model (2010), supra n. 10.84. P.J. Ellingsworth, International Tax in the 21th Century: The Role of the OECD, 17 Tax Executive, pp. 273-280 (2009), at p. 279.85. UN United Nations Model Double Taxation Convention between Developed and Developing Countries (1 Jan. 2011), Models IBFD.86. In drafting of the UN Model, supra, the United Nations Secretariat prepared a draft model convention (ST/SG/AC.8/L.29) consisting of articles reproducing guidelines formulated by the Group of Experts, together with Commentaries thereon incorporat-ing the views of members of the Group and also reproducing, where appropriate, the

27


The value of the OECD standards underlined in this discussion can be

described by the words the European Court of Justice habitually uses to

refer to them – namely, they are an indication of international tax rules,87

used by the Court as gap filler in certain cases.88

There is an important similarity between the OECD regime established by

the OECD Model (2010) and the EU direct taxation treatment that enables

such a gap filling function of the OECD Model (2010). Namely, both the

OECD Model (2010) and the body of EU law discussed in the European

Court of Justice’s case law establish a regime of coordination between sov-

ereign national systems of direct taxation as set by their respective Member

States.89 In addition, the OECD Model (2010) and its Commentary can

Commentaries on the Articles of the OECD Tax Model Tax Convention on Income and on Capital (1977), Models IBFD. On the history of the OECD and the United Nations Models, see P. Baker, Double Taxation Conventions and International Tax Law, A Manual on the OECD Model Tax Convention on Income and on Capital of 1992, 2nd ed. (Sweet & Maxwell, 1994), pp. 1-5.87. See case law of the European Court of Justice cited supra n. 82. Although admitting the thesis itself is contradictory, R.S. Avi-Yonah, International Tax as International Law: An Analysis of the International Tax Regime (Cambridge Tax Law Series, Cambridge University Press, 2007) (2007a), believes that a coherent international tax regime exists, that is embodied in both the tax treaty network and in domestic laws, forming a significant part of international law (both treaty based and customary). As a consequence, countries are not free to adopt any international tax rules; country may not violate basic norms of the regime, which are the single tax principle (i.e. that income should be taxed once – not more and not less) and the benefits principle (i.e. that active business income should be taxed primarily at source, and passive investment income primarily at residence). This discussion starts from noting that the EU system is singular within the international context and obligatory in relation to the Member States and takes note of international standards and principles in order to draw a parallel between them and the EU internal system. 88. J. Wouters & M. Vidal, The OECD Model Tax Convention Commentaries and the European Court of Justice: Law, Guidance, Inspiration?, in The Legal Status of the OECD Commentaries, Conflict of Norms, pp. 195-216 (S. Douma & F. Engelen (eds.), International Tax Law Series Vol. 1, IBFD, 2008) (2008b), at p. 207. The European Court of Justice may refer to the OECD Model (2010), supra n. 10, also in the sense of interna-tional rules not reflected in EU law, supra n. 82. Also, in Wouters & Vidal (2008a), supra n. 82, pp. 1005-1006. The same may be implied in case of standards proposed within the context of the BEPS, see chapter 4 in this book.89. Member States are free to set up their taxation systems and determine tax base, tax rate, connecting factors for the allocation of fiscal jurisdiction and the general tax treatment of income subject to tax. Inter alia in the judgments in Kerckhaert and Morres (C-513/04), paras. 15 & 19; in C-374/04 Test Claimants in Class IV of the ACT Group Litigation, at para. 50; C-446/04 Test Claimants in the FII Group Litigation, at para. 47; NL: ECJ, 20 May 2008, Case C-194/06 Orange European Smallcap Fund [2008] ECR I-3747, ECJ Case Law IBFD, at para. 30 and references therein; in Damseaux (C-128/08), at para. 25, and BE: ECJ, 11 Sept. 2014, Case C-489/13 Verest and Gerards, ECLI:EU:C:2014:2210, ECJ Case Law IBFD, at para. 18. See also W. Hellerstein, G.W. Kofler & R. Mason,

28


contribute to the interpretation of Member States’ tax treaties,90 which also

form a background to this discussion,91 since Member States have concluded

many bilateral conventions based, in particular, on the model conventions

on income and wealth tax drawn up by the OECD.92

It must be underlined, however, that even though the objectives of the

European Union and the OECD show similarities, there is no equivalence

between “EU tax language” and “international tax language”.93 This is indi-

cated in view of the fact that the European Court of Justice’s interpretation

of EU fundamental freedoms is transplanted to national direct tax concepts;

the Court sets a type of EU tax policy by interpreting national (direct) tax

rules via EU fundamental freedoms.

Constitutional Restraints on Corporate Tax Integration, 62 Tax Law Review 1, Symposium on Corporate Tax Policy in the European Union, New York University School of Law, pp. 1-66 (2008), at p. 12.90. In that they provide a source from which the courts of different states can seek common interpretation, in K. Vogel et al., Klaus Vogel on Double Taxation Conventions: A Commentary to the OECD-, UN- and US Model Conventions for the Avoidance of Double Taxation on Income and Capital, 3rd ed. (Kluwer Law International, 1996), at para. 79, at p. 43. On the use of OECD Commentaries for interpretation of national DTCs, see L. De Broe, L’usage du commentaire OCDE et autres instruments extrinsèques pour l’interprétation des conventions de double impositions belges, Quelques observations à propos de l’arrêt de la Cour d’Appel de Mons du 17 octobre 2008 concernant l’interprétation de l’Art. 15 § 1 de la Convention belgo-luxembourgeoise, in Promenades sous les portiques de la fiscalité: Liber Amicorum Jacques Autenne, pp. 455-477 (E. Traversa & V. Deckers (eds.), Bruylant, 2010).91. On the necessity to change the current network of bilateral Member State treaties with positive integration and multilateralism at Community (now EU) level, see Panayi (2007), supra n. 6, at p. 245.92. Inter alia in the judgments in Gilly (C-336/96), paras. 24, 30-31 & 47; in Van Hilten-van der Heijden (C-513/03), at para. 48 (it is not unreasonable for Member States to find inspiration in international practice, and, particularly, the model conventions drawn up by the OECD); in N (C-470/04), at para. 45; in Kerckhaert and Morres (C-513/04), at para. 23; UK: ECJ, 13 Mar. 2007, Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I-2107, ECJ Case Law IBFD, at para. 49, and BE: ECJ, 12 Feb. 2009, Case C-138/07 Cobelfret [2009] ECR I-731, ECJ Case Law IBFD, at para. 56. See also BE: Opinion of Advocate General Sharpston, 8 May 2008, Case C-138/07 Cobelfret [2009] ECR I-731, at para. 33. 93. Wouters & Vidal (2008b), supra n. 88, at p. 211. This is acknowledged, for example, by Advocate General Tizzano in his NL: Opinion, 23 Jan. 2003, Case C-58/01 Océ Van der Grinten [2003] ECR I-9809, at para. 28, noting a lack of parallel between art.10 of the OECD Model (1977) and the rationale of Directive 90/435 and its art. 5, para. 1, now art. 5 of Directive 2011/96, in terms of company profit and tax credit.

29


1.2.3. The value of the OECD Model as an external source and benchmark for EU tax policy elements

The OECD Model (2010) deals, as its name states, with taxes on income

and on capital and includes all taxes levied on total income, on total capital,

or on elements of income or of capital, including taxes on gains from the

alienation of movable or immovable property, taxes on the total amounts of

wages or salaries paid by enterprises, as well as taxes on capital apprecia-

tion. Even though OECD member countries have entered reservations to

the majority of the below commented articles of the OECD Model (2010),94

the latter nevertheless represents a codification of international tax law and

can thus be taken as a reference for the current and future EU tax regime.

The OECD Model (2010) does not define the precise meaning of the terms

it employs to refer to the income covered by a particular provision,95 which

leaves considerable room for flexibility with regard to the OECD regime

for taxation of income.

In addition to the below commented concepts, a major preoccupation of the

OECD and the regulation of international taxation in general, is the alloca-

tion of tax jurisdiction,96 international tax evasion97 and improper use of

tax conventions (such as tax abuse and certain forms of tax avoidance).98 In

particular, article 26 of the OECD Model (2010) enables member countries

94. OECD Model (2010), Reservations of certain member countries on some provisions of the Convention, supra n. 10, at para. 31, pp. 14-15.95. K. van Raad, Application of Tax Treaties to Items of Income that Are Covered by More Than One Distributive Provision, in A Vision of Taxes within and outside European Borders, Festschrift in honour of Prof. Dr Frans Vanistendael, pp. 729-736 (L. Hinnekens & P. Hinnekens (eds.), Kluwer Law International, 2008), at p. 730. On tax policy being based on concept of income, see J. Waincymer, International Tax and International Trade Policy Objectives, in A Vision of Taxes within and outside European Borders, Festschrift in honour of Prof. Dr Frans Vanistendael, pp. 877-904 (L. Hinnekens & P. Hinnekens (eds.), Kluwer Law International, 2008), at p. 882.96. According to Panayi (2007), supra n. 6, pp. 29 & 83, allocation of tax jurisdiction is the primary objective of tax treaties and the OECD Model (2010); alleviation of double taxation is in fact incidental to or a corollary to allocation. In this sense, Vogel speaks of classification and assignment rules and distributive rules of a double taxation conven-tion; K. Vogel et al., Klaus Vogel on Double Taxation Conventions: A Commentary to the OECD, UN and U.S. Model Conventions for the Avoidance of Double Taxation of Income and Capital, with Particular Reference to German Treaty Practice, 3rd ed. (Kluwer Law International, 1997), Introduction, at para. 45d, at p. 27.97. Baker (1994), supra n. 86, at B-07, pp. 10-11, mentions avoiding double taxation and international tax evasion as purposes of the OECD Model (2010).98. On the increasing importance of tax avoidance and tax evasion in the context of tax treaties, see Panayi (2007), supra n. 6, at p. 31. Panayi, id., at p. 47, also mentions that the High Court in the United Kingdom held that the object and purposes of the OECD Model (2010) are avoidance of double taxation and the prevention of fiscal evasion and

30


to exchange information to combat these abuses.99 Specific attention to the

BEPS Actions is given in chapter 4 of this book.

While the basic premise of tax jurisdiction in the European Union is that in

the absence of unifying or harmonizing EU measures, the Member States

are competent to determine criteria100 for taxation on income and wealth101

with a view to eliminating double taxation102 by treaty or unilaterally,103

there are certain international tax premises and principles that will gener-

ally be the same throughout the Member States and will thus be included in

the terminology and reasoning of the European Court of Justice. It is thus

crucial to represent such basic premises of international tax law to be able

to contrast them with certain premises of EU law.

Presented below are the concepts of “subject to tax”, “discrimination

between residents and non-residents” and “avoidance of double taxation”.104

avoidance. On current efforts on BEPS, see OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, OECD/G20 Base Erosion and Profit Shifting Project (16 Sept. 2014), International Organizations’ Documentation IBFD. 99. OECD Model (2010), supra n. 10, Introduction, at para. 41, p. 16. 100. In NL: Opinion of Advocate General Kokott, 30 Mar. 2006, Case C-470/04 N [2006] ECR I-7409, at para. 98, and the judgment in N (C-470/04), at para. 46. 101. Apart from Directive 2011/96 (repealing Directive 90/435), Convention 90/436 and Directive 2003/48, no uniform or harmonization measure designed to eliminate double taxation has as yet been adopted at Community (now EU) level, nor have Member States concluded any multilateral convention to that effect under the second indent of article 220 of the EC Treaty (art. 293 of the Treaty, repealed by the TFEU). See, inter alia, the judgments in Gilly (C-336/96), at para. 23; NL: ECJ, 5 July 2005, Case C-376/03 D. [2005] ECR I-5821, ECJ Case Law IBFD, at para. 50; in N (C-470/04), at para. 43; in Kerckhaert and Morres (C-513/04), at para. 22; in Columbus Container Services (C-298/05), at para. 45; in C-194/06 Orange European Smallcap Fund, at para. 32, and DE: ECJ, of 12 Feb. 2009, Case C-67/08 Block [2009] ECR I-883, ECJ Case Law IBFD, at para. 30.102. Inter alia in Verest and Gerards (C-489/13), at para. 18. See also UK: Opinion of Advocate General Geelhoed, 29 June 2006, Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I-2107, at para. 53; the Advocate General established that “… the necessity to divide tax jurisdiction over the income of cross-border economic operators between Member States (dislocation of tax base) is an inevitable consequence of the fact that direct tax systems are national …”. 103. Inter alia in the judgment FI: ECJ, 18 June 2009, Case C-303/07 Aberdeen [2009] ECR I-5145, ECJ Case Law IBFD, at para. 25. In the context of Directive 90/435, now Directive 2011/96, see the judgments in Test Claimants in Class IV of the ACT Group Litigation (C-374/04), at para. 52 and DE: ECJ, 26 June 2008, Case C-284/06 Burda [2008] ECR I-457, ECJ Case Law IBFD, at para. 89. See also the judgment in Truck Center (C-282/07), at para. 22.104. For a general comment on the entire list of concepts see, inter alia, Vogel et al. (1997), supra n. 96, and Baker (1994), supra n. 86.

31


Since European law in principle “borrows” these concepts from interna-

tional tax terminology, their primary source is to be found in international

tax law.

1.2.3.1. Transactions and entities subject to tax

A person or entity subject to tax in a particular state is an individual or an

entity levied in that state.

The OECD Model (2010) links power to tax to the residence of a person

or a company or a permanent establishment (PE) of a company in a state,105

and defines three classes of income and capital, depending on the treatment

applicable to each class in the state of source or situs (location). These are

income and capital that may be taxed without any limitation in the state of

source or situs;106 income that may be subjected to limited taxation in the

state of source, and income and capital that may not be taxed in the state

of source or situs.107

In this context, one can distinguish residence-based and source-based taxa-tion. While residence-based taxation is linked to the concept of tax resi-

dence and worldwide taxation, according to the OECD Model Convention,

the source state has a taxing right if the income is sourced in its jurisdiction

or if the person carries on a business through a PE in this state. But these are

not the only situations where the source state has a taxing right.

In this sense, the concepts of residence and PE are crucial for defining trans-

actions subject to tax in terms of the corporate taxation. The OECD Model

(2010) defines the persons covered in its article 1; it applies to all persons

who are residents of one or both of the contracting states. The OECD Model

(2010) defines in its article 4 “resident of a Contracting State” as “any

105. OECD Model (2010), Commentary on Articles 4 and 5, supra n. 10. On personal scope of the OECD Model, see Baker (1994), supra n. 86, 1-01; 1-29, pp. 75-90. For discussions on alternatives for tax jurisdiction allocation (source or residence) in the context of art. 10 of the OECD Model, see S. van Weeghel, Dividends (Article 10 OECD Model Convention), in Source versus Residence, problems Arising from the Allocation of Taxing Rights in Tax Treaty Law and Possible Alternatives, pp. 63-74 (M. Lang et al. (eds.), EUCOTAX Series on European Taxation Vol. 20, Kluwer Law International, 2008) (2008b). 106. OECD Model (2010), supra n. 10, Introduction, at para. 21, lists classes of income and capital that may be taxed without any limitation in the state of source or situs.107. Examples of items of income or capital which may not be taxed in the state of source or situs, which are, as a rule, taxable only in the state of residence of the taxpayer, are commented in OECD Model (2010), supra n. 10, Introduction, at para. 23.

32


person who, under the laws of that State, is liable to tax therein by reason

of his domicile, residence, place of management or any other criterion of

a similar nature, and also includes that State and any political subdivision

or local authority thereof. This term, however, does not include any person

who is liable to tax in that State in respect only of income from sources in

that State or capital situated therein”.

Article 5 of the OECD Model (2010) defines PE; the term “PE” defines

a fixed place of business through which the business of an enterprise is

wholly or partly carried on; a PE may also be constituted by dependent or

independent agent activity.108

It is by applying the criteria of residence and the source of income or capital that the state of taxation will be identified.109 This corresponds to a require-

ment of a “genuine link” or a sufficient connection with the taxing state.110

In terms of division of tax jurisdiction between contracting states according

to a tax treaty modelled on the OECD Model (2010), there are, according

to the Model, two types of income that are of a particular interest to this

discussion and that may be subject to limited taxation in the state of source,

namely, dividends, provided the holding in respect of which the dividends

are paid is not effectively connected with a PE in the state of source;111 and

interest, subject to the same proviso as in the case of dividends.112 These two

categories demonstrate the importance of connection of income or capital with the state of source.

108. On the term PE including a place of management, see OECD Model (2010), Commentary on Article 5, supra n. 10.109. See, inter alia, OECD Model (2010), Commentary on Articles 23 A and 23 B, Preliminary Remarks, at para. 10.110. Inter alia, see Hohenwarter (2007), supra n. 5, at p. 85.111. According to art. 10 of the OECD Model (2010), supra n. 10, in such a case the state with limited tax jurisdiction must limit its tax to 5% of the gross amount of the dividends, where the beneficial owner is a company that holds directly at least 25% of the capital of the company paying the dividends, and to 15% of their gross amount in other cases.112. According to art. 11 of the OECD Model (2010), supra n. 10, in such a case the state with limited tax jurisdiction must limit its tax to 10% of the gross amount of the interest, except for any interest in excess of a normal amount. Applying this principle ensures that, in general, that the profit is connected to the activity of such a PE will be taxed in the state of source rather than in the state of establishment of the parent company.

33


1.2.3.2. Discrimination between residents and non-residents

In its article 24, the OECD Model (2010) defines non-discrimination of

nationals and company’s PEs of one contracting state in the other contract-

ing state;113 the regime protects nationals of one contracting state who are

residents in the other contracting state.

Paragraph 1 of the said article states that “[n]ationals of a Contracting State

shall not be subjected in the other Contracting State to any taxation or any

requirement connected therewith, which is other or more burdensome than

the taxation and connected requirements to which nationals of that other

State in the same circumstances, in particular with respect to residence,114

are or may be subjected” (emphasis added). According to the Commentary

to this provision, all nationals of a contracting state are entitled to invoke the

benefit of this provision as against the other contracting state.

This provision supplements, in general, non-discrimination rules and equal treatment precepts already existing under domestic or international law115

and it is also aimed at the protection of nationals of the contracting states

who are not residents of either of them but of a third state. However, pro-

tection of nationals who are residents of a third state is contextualized. In

particular, discrimination against foreign persons prevented by this interna-

tional regime concerns different tax treatment solely based on nationality

but only with respect to persons or entities “in the same circumstances, in

113. For a general comment on art. 24 of the OECD Model (2010), supra n. 10, see Baker (1994), supra n. 86, 24-01; 24-47, pp. 383-413. 114. According to Vogel et al. (1996), supra n. 90, art. 24, para. 1, of the OECD Model (2010) prohibits discrimination on grounds of nationality. Such ground is, however, mostly invoked in cases involving legal entities since in case of individuals, the distinction between domestic and foreign is based on residence; supra n. 90, art. 24, at para. 28, pp. 1289-1290. A case of discrimination on grounds of nationality can be taken to exist only where nationality is the decisive criterion for the taxpayer’s being treated less favourably under domestic tax law; supra n. 90, at para. 29, at p. 1290.115. Vogel et al. (1996), supra n. 90, art. 24, at para. 5, at p. 1281. The same authors note however, that for the EU Member States, a rule which is applicable to tax law is derived from the EC Treaty; supra n. 90, at para. 5b, at p. 1282. Nevertheless, it is underlined that several reasons speak against applying the European Court of Justice’s interpretation of discrimination to the interpretation of article 24 of the OECD Model (2010); supra n. 90, art. 24, at para. 5e, at p. 1283 and references within. In this sense, see also Lang (2007a), supra n. 52, at p. 103, discussing problematic features of such convergence of interpretations.

34


particular with respect to residence”,116 and requires that all other relevant

factors, including the residence of the entity, be the same.117

In this context, it is necessary to underline that different treatment of resi-dents and non-residents is a crucial feature of domestic tax systems and tax

treaties.118 In fact, residents and non-residents are usually not considered to be in the same circumstances,119 the residence of the taxpayer being one of

the factors that are relevant in determining whether taxpayers are placed in

similar circumstances.120 Differences in the circumstances of residents and

non-residents will not be established where residence has no relevance with

respect to the different treatment under consideration.121

In addition, entities including PEs must be in comparable circumstances.

The expressions “the same circumstances”, “the same activities” pursuant

to article 24, paragraph 3, of the OECD Model (2010), and “similar enter-

prises” pursuant to article 24, paragraph 5, of the Model, refer to taxpay-

ers placed, from the point of view of the application of taxation laws and

regulations, in substantially similar circumstances both in law and in fact.122

One has to distinguish between the different paragraphs of article 24 of the

Model Convention.

Article 24, paragraph 3, of the OECD Model (2010) establishes an obliga-

tion to apply similar conditions for the taxation on a PE in a contracting

116. Because of the formulation of art. 24, para. 1, of OECD Model (2010), supra n. 10, a different treatment that is solely based on nationality must be differentiated from a dif-ferent treatment that relates to other circumstances and, in particular, residence; supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 17.117. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 17.118. Id. 119. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, paras. 17-18.120. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 7. On possible changes to the Non-Discrimination Art. and the difficult nature of definition of “comparable circumstances”, see B. Santiago, Non-Discrimination Provisions at the Intersection of EC and International Tax Law, 49 Eur. Taxn. 5, pp. 249-262 (2009), Journals IBFD. P. Hinnekens, Non-Discrimination Article in OECD Model Convention Needs Fundamental Review, 17 EC Tax Review 6, pp. 248-249 (2008), at p. 248, underlines the need for a fundamental review of the Non-Discrimination Article, inter alia, because of the lack of its coverage of covert discrimination.121. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 18.122. For commentary on the expression “in the same circumstances”, see OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 7.

35


state of an enterprise of another contracting state in comparison to an enter-

prise of the latter state carrying on the same activities.123 The PE of an

enterprise of the other contracting state should be compared to that of an

enterprise of the first-mentioned state that has a legal structure that is simi-lar to that of the enterprise to which the PE belongs.124 The discrimination

targeted in this paragraph is discrimination based not on nationality but

on the location of an enterprise. It thus affects all residents of a contract-

ing state who have a PE in the other contracting state irrespective of their

nationality,125 with the purpose to “end all discrimination in the treatment of

PEs as compared with resident enterprises belonging to the same sector of activities, as regards taxes based on business activities, and especially taxes

on business profits”.126 Article 24, paragraph 3, of the OECD Model (2010)

only prohibits a more burdensome taxation in form of a higher tax liability,

differences in the assessment of taxes not being covered.

The provisions of article 24, paragraph 5, of the OECD Model (2010)

require that enterprises127 of a contracting state, the capital of which is

wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other contracting state, are not subjected in the first-men-

tioned state to any taxation or a connected requirement which is different

or more burdensome than the taxation and connected requirements to which

other similar enterprises128 of the first-mentioned state are or may be sub-

jected. The provisions thus ensure equal treatment for taxpayers residing

123. The rule is not applicable when an enterprise operates in other states through a separate independent enterprise. In Vogel et al. (1996), supra n. 90, art. 24, at para. 120, at p. 1313. 124. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 37.125. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 33.126. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 35. This test requires a hypothetical comparison with an enterprise engaged in the same activities and located in the state in which the PE is situated. Such a comparison is based on the fictitious assumption that the PE is placed on equal footing for tax purposes with a legally independent enterprise of the state in which the PE is situated. In Vogel et al. (1996), supra n. 90, art. 24, at para. 122, at p. 1314.127. The protection is aimed at enterprises and does not extend to shareholders or partners resident in other contracting states. Therefore, income accruing to such shareholdings can be taxed differently to corresponding income accruing to shareholders or partners resident in the same state as the enterprise. In Vogel et al. (1996), supra n. 90, art. 24, at para. 164, pp. 1330-1331. The provision does not protect against discrimination enterprises in which non-residents participate, when there is no connection between the discrimination and the ownership of capital by foreigners; supra n. 90, art. 24, at para. 165, at p. 1331. 128. “Similar enterprises” describes enterprises primarily operating in the same or com-parable legal form as the enterprise concerned; in Vogel et al. (1996), supra n. 90, art. 24, at para. 166, at p. 1332.

36


in the same state, subjecting foreign capital, in the hands of the partners

or shareholders, to identical treatment to that applied to domestic capital.129

In view of the above, the provisions of article 24 of the OECD Model

(2010) do not cover “indirect” discrimination,130 neither can the provisions

be interpreted to require most-favoured-nation treatment (MFN treatment).131

Nationals or residents of a third state that is not a contracting state of the

treaty may not claim benefits from a bilateral or a multilateral agreement,

by reason of a similar non-discrimination provision in double tax conven-

tions (DTCs) between the third state and the first-mentioned state.132 This is

because tax conventions are based on the principle of reciprocity, therefore

“a tax treatment that is granted by one Contracting State under a bilateral

or a multilateral agreement to a resident or national of another Contracting

State party to that agreement by reason of the specific economic relation-

ship between those Contracting States may not be extended to a resident or

national of a third State under the non-discrimination provision of the tax

convention between the first State and the third State”.133

According to its Commentary, the obligation of equal treatment according

to article 24 the OECD Model (2010), with limitations as stated with regard

to paragraph 3, is good also for the assessment of tax, the structure and rate of tax, withholding tax on dividends, interest and royalties received by a

129. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 76. On interest to resident or non-resident creditors, see Commentary on Article 24, supra n. 10, Concerning Non-Discrimination, at para. 79. In contrast to art. 24, para. 3, of the OECD Model (2010) concerning PEs, art. 24, para. 5, of the OECD Model (2010), like the rule against discrimination based on nationality of art. 24, para. 1, of the OECD Model (2010), refers to the entire relationship between state and taxpayer. Regulation of transfer pricing is, however, specific. In Vogel et al. (1996), supra n. 90, art. 24, at para. 162, at p. 1330.130. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 1.131. On MFN treatment, see comments, inter alia, by A.J. Rädler, Most-Favored Nation Principle and Internal Market – Some Afterthoughts to Case D., in Comparative Fiscal Federalism, Comparing the European Court of Justice and the US Supreme Court’s Tax Jurisprudence, ch. 10, pp. 401-404 (R.S. Avi-Yonah, J.R. Hines, Jr. & M. Lang (eds.), EUCOTAX Series on European Taxation Vol. 14, Kluwer Law International, 2007), at p. 3; M. Matsushita, T.J. Schoenbaum & P.C. Mavroidis, The World Trade Organization, Law, Practice, and Policy, pp. 143-154 (Oxford University Press, 2003), pp. 155-169; P. Van den Bossche, The Law and Policy of the World Trade Organization, Text, Cases and Materials (Cambridge University Press, 2005), pp. 326-369, and J. Wouters & B. De Meester, The World Trade Organization, A Legal and Institutional Analysis, ch. I, Objectives and Basic Principles of the WTO, pp. 19-31 (Intersentia, 2007), pp. 24-27.132. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, at para. 2.133. Id.

37


PE, credit for foreign tax, and the extension to PEs of the benefit of DTCs

concluded with third states, with exception of cases of abuse.134

1.2.3.3. Avoiding double taxation

Receiving income or possessing capital taxable in different territories or

states raises the problem of double taxation. Generally speaking, there are

two types of double taxation that may arise.

International juridical double taxation can generally be defined as the

imposition of comparable taxes in two (or more) states on the same taxpayer

in respect of the same subject matter and for identical periods.135 A second

type of double taxation is economic double taxation, where two different

persons are taxable in respect of the same income or capital. Contracting

states solve problems of double taxation in bilateral negotiations.136

In the system of the OECD Model (2010), in case of double taxation, where

income or capital may be taxed with or without limitation in the state of

source or situs, it is for the state of residence to eliminate double taxa-tion.137 In general, this can be accomplished by one of the following two

methods.138 One is the exemption method, where income or capital that is

taxable in the state of source or situs is exempted in the state of residence,

but may be taken into account in determining the rate of tax applicable to

the taxpayer’s remaining income or capital.139 The other method is the credit method, where income or capital that is taxable in the state of source or situs

134. OECD Model (2010), supra n. 10, Commentary on Article 24, Concerning Non-Discrimination, paras. 40-72. 135. OECD Model (2010), supra n. 10, Introduction, at para. 1. For occasions giving rise to juridical double taxation, see OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, Preliminary Remarks, paras. 3-5. 136. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, Preliminary Remarks, at para. 2, at p. 285; and Commentary on Article 10, Concerning Taxation of Dividends, paras. 41-56 & 59-67. See also Vogel et al. (1996), supra n. 90, Introduction, at para. 3, at p. 10; on economic and juridical double taxation see, inter alia, M.A. Sánchez Jiménez, La doble imposición internacional en la Unión Europea. Especial consideración del Impuesto de Sociedades (La Ley, 1995), at p. 15.137. Customary international tax law does not forbid double taxation as long as each (individual) legislation is consistent with international law. In Vogel et al. (1996), supra n. 90, Introduction, at para. 8, at p. 12; referring to K. Vogel, Der räumliche Anwendungsbereich der Verwaltungsrechtsnorm (Metzner, 1965), at p. 351.138. OECD Model (2010), supra n. 10, Introduction, at para. 25. 139. Id., at p. 14. The principle of exemption is applied by two main methods: “full exemp-tion” and “exemption with progression”. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 14.

38


is subject to tax in the state of residence, but the tax levied in the state of

source or situs is credited against the tax levied by the state of residence on

such income or capital.140 The deduction that the state of residence allows

is restricted to that part of the income tax that is appropriate to the income

derived from the other state (the so-called “maximum deduction”).141 Credit

is allowed for income tax only against income tax and for capital tax only

against capital tax.142

The OECD Model (2010) establishes the rules for eliminating double

taxation by the methods listed in its articles 23 A and 23 B, the difference

between the methods being that the exemption methods look at income,

while the credit methods look at tax.143 The methods proposed by the two

articles of the OECD Model (2010) are the exemption method with progres-

sion (article 23 A), and the ordinary credit method (article 23 B).144

Specific cases of eliminating double taxation pertain to corporate income, in particular to dividends, interest and losses.145

Concerning dividend taxation, the combined effect of article 10 and article

23 of the OECD Model (2010) (articles 23 A and 23 B as appropriate) is

140. OECD Model (2010), supra n. 10, Introduction, at para. 25, at p. 13. The principle of credit is applied by two main methods: “full credit” and “ordinary credit”. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 16, at p. 261. 141. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 62. On the credit method, see comment in Vogel et al. (1996), supra n. 90, art. 23, paras. 148-171. 142. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 70.143. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 17.144. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 29. Art. 23A of the OECD Model Convention provides for exemption and credit, see art. 23A, para. 2.145. Applying the exemption method of art. 23A of the OECD Model (2010) in terms of treatment of losses in the context of avoiding double taxation, several states treat losses incurred in the other state in the same manner as they treat income arising in that state; however, as the state of residence, they do not allow deduction of a loss incurred from immovable property or a PE situated in the other state. In any event, the solution to the problem depends primarily on the domestic laws of the contracting states and bilateral clarifications. No solution is proposed in the OECD Model (2010) itself, it being left to the individual contracting state. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 44. According to the credit method in general, a loss in a given state will be set off against other income from the same state. See also OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, paras. 65-66, in terms of losses in terms of domestic law and as to excess foreign tax credit carry-over. See also Vogel et al. (1996), supra n. 90, paras. 70-75, pp. 1181-1185.

39


that the state of residence of the shareholder is allowed to tax dividends

arising in the other state but must give relief concerning such dividends for

the tax which has been collected by the state where the dividends arise. The

regime applies also in case the recipient of a dividend is a parent company

and the dividend is paid by its subsidiary; in this case, the regime prevents

juridical double taxation.146

In the context of taxation of interest payments, anti-abuse rules connect con-

cepts of interest payments and dividend taxation. In fact, thin capitalization

describes loan relationships between connected companies that consist of

financing a company by way of a loan in preference to equity capital, in

order to benefit from a more advantageous tax treatment.147 The OECD

Model (2010) allows the state of the borrower company, under certain con-

ditions, to treat an interest payment as a distribution of dividends in accord-

ance with its domestic legislation, the essential condition being that the con-

tributor of the loan effectively shares the risks run by the borrower company.

This results in taxation at source of the “interest” at the rate of dividends and

the inclusion of such interest in the taxable profits of the lender company.148

If the relevant conditions are met, the state of residence of the lender is in

principle obliged to give relief for juridical or economic double taxation of

the interest as though the payment were in fact a dividend.149

Losses taxation will be discussed with regard to case law of the European

Court of Justice.

1.2.4. Recapitulation

Capital movements and taxation, like underlined above, although concen-

trated around the concept of capital, have very different purposes and ori-

entation. Outside of the concept of capital’s net worth, their building blocks

and terminology are distinct and should not be mistaken for one another

even though they may be referred to by similar terms.

146. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, pa-ras. 49-50.147. Among other sources, see Advocate General Geelhoed in Test Claimants in the Thin Cap Group Litigation (C-524/04), paras. 3-5; and the judgments in DE: ECJ, 12 Dec. 2002, Case C-324/00 Lankhorst-Hohorst [2002] ECR I-11779, ECJ Case Law IBFD, and in Test Claimants in the Thin Cap Group Litigation (C-524/04).148. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 67.149. OECD Model (2010), supra n. 10, Commentary on Articles 23 A and 23 B, at para. 68.

40


This is all the more relevant if one defines taxation policy in terms of criteria

used to define a capital policy. In this sense, while a position may be taken

that taxation has a transaction-based underlying idea, this does not corre-

spond to the transaction-based orientation of a capital policy. In particular,

while taxation may be considered to focus and intervene when transactions

take place, this has little to do with a capital policy orientation toward lib-

eralization of capital movements.

Therefore, for purposes of this account, taxation policy is not classified as

transaction-based in the sense of a transaction-based capital policy, nor, for

that matter, in the sense of an asset-based capital policy. What is, however,

a premise of this discussion is that a combination of capital policy and

taxation at the EU level must look to the capital worth (net value) of the underlying transactions subject of liberalization. In the sense of a capital

policy, this idea is closer to an asset-based policy looking at the value of

underlying assets, while in terms of a future EU taxation policy, it means

solely that when arbitrating between taxation regimes of Member States

or, in case of harmonization, when operating at the level of the European

Union, a taxation policy should, in view of the nature of the EU conglom-

eration, pursue an idea of maintenance of capital’s worth regardless of mov-ing cross-border.

The baseline of this account is thus to look beyond terminology of both

capital liberalization and national taxation laws in order to define the actual

building blocks of the EU capital transactions regime; this will be done

with an ambition of respecting terminological standards and the underlying

philosophies of capital liberalization and (international or national) taxa-

tion laws.

chapter 1 introduction - ibfd · chapter 1 introduction in the european union, freedom of capital...

Documents