eu tax alert - microsoft · 2015-10-14 · eu tax alert edition 89 february 2011 3 attorneys tax...

● Top News● State Aid / WTO● Direct taxation● VAT● Customs Duties, Excises

and other Indirect Taxes

Edition 89 ● February 2011

EU Tax Alert

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

Spain requested to abolish goodwill amortization scheme also in respect of non-EU countries On 12 January 2011, the Commission closed its State aid investigation into a Spanish goodwill scheme allowing for the amortisation of financial goodwill resulting from acquiring a shareholding of more than 5% in foreign companies. The Commission concluded that the tax measure provided for illegal State aid to Spanish companies taking over foreign companies also in the case where those foreign companies are established in a third-country.

Commission requests Ireland to change exit tax provisions for companies On 27 January 2011, the Commission formally requested Ireland to amend its provisions which impose an exit tax on companies when they cease to be tax residents in Ireland.

Commission launches public consultation on taxing cross-border dividends On 28 January 2011, the Commission launched a public consultation, calling for feedback on taxation problems that arise when dividends are distributed across borders to portfolio and individual investors in the EU.

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E U Ta x A l e r t Edition 89 ● February 2011 2

attorneys ● tax lawyers ● civil law notaries

• Developments in the Netherlands: Supreme Court rules Netherlands thin capitalization provisions are not incompatible with freedom of establishment and non-discrimination principles in human rights Treaties

VAT• Council agrees on draft regulation which clarifies

elements of the VAT Directive • UK may continue to restrict right of input VAT deduction

on hire or lease of passenger cars used not entirely for business purposes

• Belgian derogation measure for trade in tobacco in line with provisions of the Sixth EU VAT Directive (Vandoorne)

• Advocate General considers hiring out of stands at fairs and expositions do not qualify as a service related to advertisement (Inter‑Mark)

• Eight Member States referred to CJ for failing to properly implement VAT rules for travel agents

Customs Duties, Excises and other Indirect Taxes• Extension of EU agreement with Andorra • Advocate General’s Opinion on Romanian pollution

tax on second-hand imported cars (Tatu)• Commission requests Cyprus to amend discriminatory

rules on car taxation

ContentsTop News• Spain requested to abolish goodwill amortization

scheme also in respect of non-EU countries • Commission requests Ireland to change exit tax

provisions for companies • Commission launches public consultation on taxing

cross-border dividends

State Aid / WTO• Italy and Slovakia fail to recover fiscal aid due to

domestic court decisions • Commission orders Germany to recover aid in the

form of carry forward of losses for restructuring of ailing companies

Direct taxation• CJ holds Portuguese tax legislation on outbound

dividends incompatible with free movement of capital (Secilpar)

• CJ holds Greek rules on exemption from tax on the first purchase of residential property incompatible with fundamental freedoms (Commission v Greece)

• Advocate General delivers Opinion on former French equalization tax (Accor)

• Advocate General delivers Opinion in the Meilicke II case concerning German rules regarding imputation credit on foreign-source dividends

• Reference for preliminary ruling from the Italian Supreme Court on the scope of the abuse of rights principle in taxation matters (Safilo)

• Second meeting of the Tax Policy Group • Mandate of the Joint Transfer Pricing Forum extended • Results of public consultation on double taxation

published • Developments in the Netherlands: Netherlands

Supreme Court issues final judgment in X Holding case



of such legal basis, this decision may well be appealed by competitors of those Spanish companies which are allowed to keep their aid.

Commission requests Ireland to change exit tax provisions for companies On 27 January 2011, the Commission formally requested Ireland to amend its provisions which impose an exit tax on companies when they cease to be tax residents in Ireland. Specifically, under Irish law, a company is taxed on its unrealised capital gains when it transfers its place of central management or control to another Member State. However, comparable transfers within Ireland are not taxed for unrealised capital gains.

The Commission considers that the rules in question are likely to dissuade companies from exercising their right of freedom of establishment and therefore, constitute a restriction to the freedom of establishment as laid down in Article 49 of the Treaty on the Functioning of the European Union (‘TFEU’) and Article 4 of the Agreement on the European Economic Area (‘EEA’).

The Commission sent a letter of formal notice to the Irish authorities in November 2009. The current request takes the form of a ‘reasoned opinion’. In the absence of a satisfactory response within two months, the Commission may refer Ireland to the CJ.

It is noteworthy that the Commission had already decided to refer Portugal, Denmark, the Netherlands and Spain to the CJ for similar exit tax rules (EU Tax Alert edition no. 71, October 2009 and EU Tax Alert edition no. 86, December 2010) and sent a reasoned opinion to Belgium (EU Tax Alert edition no. 78, April 2010).

Top NewsSpain requested to abolish goodwill amortization scheme also in respect of non-EU countries On 12 January 2011, the Commission closed its investigation into a Spanish goodwill scheme, allowing for the amortisation of financial goodwill resulting from acquiring a shareholding of more than 5% in foreign companies. In 2009, the Commission already decided that this benefit amounted to illegal aid with respect to acquisitions of companies of other Member States by Spanish companies, as it stimulated EU takeovers as opposed to domestic ones, the latter being excluded from the benefit (except in the case of full merger).

The Commission continued the investigation, however, in respect of the impact of this rule on third country takeovers. Spain argued that the measure was necessary in order to offset tax and legal obstacles faced by acquiring companies in respect of third country takeovers. As it could not confirm the existence of such obstacles in respect of most third countries, the Commission concluded that the tax measure provided for an unjustified advantage. The Commission therefore requested Spain to repeal the provision and to recover the aid granted via the provision in respect of third country takeovers as from the start of the investigation in 2007. It should be noted that the Commission has allowed Spain to continue the measure and not to recover the aid granted to date in respect of those third countries where obstacles to cross-border takeovers have been or could be demonstrated, mentioning in particular India and China. The latter is a rather interesting development as the Commission now approves aid in respect of a limited number of third countries as a means of compensating particular business expenses. The press release does not indicate on what legal basis such ‘compensation’ could be authorised as compatible aid or qualify as non-aid, which is for the final decision to clarify. In the absence



despite the government’s attempt to have the decision set aside by legislation. It was therefore held that Italy failed to secure the immediate and effective recovery of the aid.

On the same day, the CJ also ruled that Slovakia had failed to recover aid that resulted from agreeing to a creditor arrangement by the tax authorities, which resulted in a lower payment of taxes compared to the amount the tax authorities would have received as a preferential creditor in case of filing for bankruptcy (C-507/08). For the General Court’s decision in respect of the aid recipient, Frucona, see EU Tax Alert edition no. 88, January 2011. In this case, the CJ pointed out that Slovakia had failed to recover the aid, as it seems to have had the opportunity to file an extraordinary appeal in respect of a decision by its domestic courts to uphold the creditor arrangement. These courts did not allow an infringement of this previously court-sanctioned agreement by a recovery order as it would violate the principle of res judicata. By not using this possibility of appeal, the domestic court’s decision resulted in non-recovery for which Slovakia, having been ordered to secure effective and immediate recovery, was held accountable. The CJ drew particular attention to the importance of the principle of res judicata and pointed out that national courts would not always be required to infringe upon this principle in order to allow for the recovery of State aid, but this consideration must be placed in the context of it being possible to secure recovery by other means in the case at hand.

Commission orders Germany to recover aid in the form of carry forward of losses for restructuring of ailing companies On 26 January 2011, the Commission ordered Germany to recover the benefits arising from the application of its reorganisation clause (‘Sanierungsklausel’). German corporate tax law normally disallows the carry forward of losses after a change in the shareholding structure of an entity, for instance, as a result of a takeover. This aims at preventing tax avoidance by taking over shell companies in order to use the carry-forward opportunities they are left with. An exemption to this rule was introduced retroactively as of 2008 allowing companies in serious financial

Commission launches public consultation on taxing cross-border dividends On 28 January 2011, the Commission launched a public consultation, calling for feedback on taxation problems that arise when dividends are distributed across borders to portfolio and individual investors in the EU. The withholding tax regimes currently used to tax cross-border dividend payments may cause double taxation and discriminatory treatment, both being detrimental to the Internal Market.

The public consultation is open for contributions until 30 April 2011. On the basis of the feedback, the Commission will decide how best to proceed on this issue.

State Aid/WTOItaly and Slovakia fail to recover fiscal aid due to domestic court decisions On 22 December 2010, the Court of Justice ruled that Italy had failed to recover aid granted in the form of tax incentives for companies listed on a regulated European stock exchange (C-304/09). Benefits consisted of a 20% reduction in the corporate income tax rate and lowering of the tax base to that of a previous year (2004). Facing difficulties in the legislative process for adopting a law to effectuate recovery, Italy decided to go through administrative channels and have its revenue authority require reimbursement of the illegal aid. In one case, the latter order was stayed by the domestic court awaiting the outcome of an EU appeal (although a negative judgment had already been published). The CJ pointed out that the domestic court had failed to indicate its reasons for holding that the Commission’s decision would be invalid, as well as the basis for urgency (weighing the need to avoid serious and irreparable harm against EU interests). Due to this and the fact that an appeal of a recovery decision at the EU courts does not normally lead to suspension, Italy is to be held accountable for the actions of its court



provided that a participation of at least 10% (or EUR 20 million of acquisition cost) was held uninterruptedly for at least one year. In contrast, if the payments had been made to companies resident in another Member State, the withholding tax exemption in Portugal was dependent on meeting the conditions set forth in Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (the ‘Parent-Subsidiary Directive’), i.e., at the time of the case (and amongst other requirements) a participation threshold of 25% held uninterruptedly for at least 2 years, otherwise a withholding tax of 25% applied (eventually reduced to 15% under the Double Tax Convention (‘DTC’) between Portugal and Spain).

In the case at hand, Secilpar did not meet the Parent-Subsidiary Directive’s participation threshold. Therefore, it was subject to Portuguese withholding tax of 15% in accordance with the reduced rate provided in the applicable DTC. Secilpar appealed this assessment arguing that the different treatment provided for domestic and cross-border payments was in breach of the free movement of capital.

The CJ ruled, by order, referring to the reasoning in cases Commission v Italy (C-540/07) and Commission v Spain (C-487/08). In that regard, it considered that by providing a different tax treatment between domestic and cross-border outbound dividend payments (exemption v. 15% withholding tax), the Portuguese tax legislation did indeed constitute a restriction of the free movement of capital. The only case where this does not hold true is when, by the application of the DTC Portugal/Spain, the Portuguese withholding tax at source can be set off against the tax due in Spain in the full amount that constitutes the difference in treatment arising under Portuguese tax law.

difficulties to maintain the carry forward of their losses in order to facilitate their reorganisation. The exemption was conditional upon preserving jobs or preserving significant business assets with financial injections for a certain period of time. In addition, the company could neither change its sector of activities for five years nor cease to operate.

In the Commission’s view, this exception is selective as healthy companies running an annual loss would still be precluded from carrying losses forward after a substantial change in their shareholding structure. Germany was ordered to provide a list of those who applied the exemption and the amount of (net) benefit arising from the continued carry forward of their losses within two months as a first step in the recovery process (that should normally be completed within four months). It is for the final decision to clarify whether this benefit would also have been deemed selective if there had not been additional requirements in respect of saving jobs and securing investment, as this decision may well result in a number of tax benefits in EU Member States for companies in financial distress amounting to State aid which to date have been deemed ‘general’.

Direct TaxationCJ holds Portuguese tax legislation on outbound dividends incompatible with free movement of capital (Secilpar)On 22 November 2010, the CJ ruled, by order, in the Secilpar case (C-199/10) that the Portuguese tax rules applicable to inter-company outbound dividends payments are in breach of the free movement of capital laid down in Article 63 TFEU (formerly Article 56 EC). The case concerns dividend distributions made by a Portuguese company to one of its shareholders, a Spanish company (‘Secilpar’). According to the Portuguese rules then in force in 2003, dividend distributions made to domestic companies were exempt from withholding tax,



as their right of establishment. The CJ rejected the first justification put forward by Greece, based on the need to prevent property speculation, tax evasion and abuse, on the grounds that the provision does not ensure that the property purchased by a resident is actually used as a dwelling by the purchaser instead of being rented out. The provision is therefore not suitable to achieve the alleged objective. Second, the provision goes beyond what is necessary to prevent the speculation with immovable property by non-residents. For the latter purpose, it would be sufficient to ensure that the purchaser does not own other properties in Greece, for instance, by maintaining a land register where information about resident and non-resident property owners is recorded. The CJ also rejected the second justification whereby Greece argued that the provision is part of the general context of social policy. As the exemption is granted irrespective of the income level of the purchaser, the CJ considered the provision inappropriate to attain that objective as well.

The CJ then considered the condition for the exemption based on the nationality or the origin of the purchaser of a first home in Greece. Agreeing with the Commission, the CJ observed that a tax advantage afforded only to Greek nationals and to individuals of Greek origin, such as the exemption at issue, entails a direct discrimination of EU citizens, not being Greek nationals, intending to settle in Greece. The CJ held that such discriminatory treatment could not be justified either as an incentive to Greek nationals who have emigrated abroad to return to Greece or as a social tool aimed at maintaining the link between Greek emigrants and their country of origin, as these considerations do not relate to objective circumstances capable of justifying that discrimination.

Advocate General delivers Opinion on former French equalization tax (Accor)On 22 December 2010, Advocate General Cruz Villalón delivered his opinion in the Accor case (C-310/09). The case concerns the former French imputation credit system and more specifically, the equalization tax (‘précompte’). Under this regime, French companies distributing

CJ holds Greek rules on exemption from tax on the first purchase of residential property incompatible with fundamental freedoms (Commission v Greece)On 20 January 2011, the CJ held in the Commission v Greece case (C-155/09) that the Greek rules, which make the exemption from the tax payable on the purchase of a first residential property in Greece conditional upon the residency or the nationality of the purchaser, are contrary to the fundamental freedoms.

In particular, the provisions at issue constitute a prohibited discrimination on grounds of nationality (Article 18 TFEU and Article 4 EEA) and a breach of the free movement of EU citizens (Article 21 TFEU), of workers (Article 45 TFEU and Article 28 EEA) and of the right of establishment (Article 49 TFEU and Article 31 EEA).

According to Greek law, the purchase of the first home of a family unit in Greece is exempt from transfer tax provided that the purchaser is either (i) a permanent resident of Greece, or (ii) a Greek national or a person of Greek origin entered in a municipal registry in Greece, who has worked abroad for at least six years.

In 2007 and in 2008, the Commission sent the Greek Government a letter of formal notice and a reasoned opinion respectively, in which it held that this regime discriminates against individuals who are neither a permanent resident in Greece nor Greek nationals. In 2009, as the Commission did not find the explanations put forward by Greece in reply to its inquiries convincing, it referred Greece to the CJ.

The CJ analysed the two conditions required for the exemption separately. First, it observed that the requirement that the purchaser be resident in Greece in order to benefit from the tax exemption places at a disadvantage non-residents considering settling in Greece, thereby covertly discriminating purchasers who are not Greek nationals and hindering their exercise of the right of movement as workers or EU citizens as well



3) The principles of equivalence and effectiveness do not preclude that the reimbursement of the equalization tax made by the parent company pursuant to the principles set out in indent 1) above be subject to evidence of e.g. the effective tax rate applied on profits derived from subsidiaries established in another Member State with respect to each dividend concerned, whereas such requirement is not required from dividends derived from French resident subsidiaries. However, such evidence should not be impossible to provide in practice (proportionality test).

Advocate General delivers Opinion in the Meilicke II case concerning German rules regarding imputation credit on foreign-source dividends On 13 January 2011, Advocate General Trstenjak of the CJ gave her opinion in the Meilicke II case (C-262/09). This case originates from a second referral to the CJ following the CJ’s judgment of 6 March 2007 in the first Meilicke case (C-292/04). The first Meilicke case involved the material question whether an imputation credit which is granted with respect to domestic dividends, must also be granted with regard to foreign-source dividends.

In that regard, the CJ ruled:

‘Articles 56 EC and 58 EC [now Articles 63 and 65 TFEU] are to be interpreted as precluding tax legislation under which, on a distribution of dividends by a capital company, a shareholder who is fully taxable in a Member State is entitled to a tax credit, calculated by reference to the corporation tax rate on the distributed profits, if the dividend-paying company is established in that same Member State but not if it is established in another Member State.’

dividends were transferring to their shareholders a tax credit that could be offset against their income tax liability. Dividend distributions, which had not been previously subject to French corporate income tax, were subject in the hands of the distributing company to an equalization tax equal to 50% of the dividends. Consequently, the redistribution by a French parent company of dividends received from its resident and non-resident subsidiaries, which benefitted from the French participation exemption regime, gave rise to the payment of the equalization tax. However, dividends derived from French resident subsidiaries carried an imputation credit, which could be offset against the equalization tax, whereas dividends derived from non-resident subsidiaries did not carry such credit. The French Supreme Administrative Court referred the case to the CJ, raising a series of questions. The answers to these questions as proposed by the Advocate General are summarized below:

1) The freedom of capital movement precludes a tax provision which intends to eliminate double taxation on dividends by allowing a parent company to set off against the equalization tax, for which it is liable when it redistributes to its shareholders dividends paid by its subsidiaries, the tax credit applied to the distribution of those dividends derived from a French resident subsidiary, but does not offer such possibility for dividends derived from an EU-resident subsidiary.

2) A Member State may deny the reimbursement of the sums received in violation of EU Law on the ground that such reimbursement would lead to the unjust enrichment of the taxpayer. In the case at hand, the referring Court should examine in detail, taking into consideration the distribution policy of the parent company, whether the equalization tax on the dividend distributions constituted a tax charge for the parent company which has to be reimbursed by the Member State or whether such tax charge was passed on to the shareholders.



cross-border dividend. However, such obligation does exist on the basis of the principle of equivalence, when a referring court would be obliged to make such calculation in a purely domestic situation. If earlier indirect levies of corporate income tax on domestic dividends influence the amount of the credit to be granted to the shareholders, then earlier indirect levies of corporate income tax on dividends from other Member States must also be taken into account.

4) Domestic legislation is in breach of the principle of effectiveness, when a formally binding and definitive income tax assessment, can only be revised when a corporate income tax certificate in the meaning of the German Corporate Income Tax Act is provided, if that makes a revision of taxation on dividends derived from other Member States impossible or excessively difficult in practice. It is for the referring court to determine this.

5) An amendment to national legislation, which disallows the revision of income tax assessments on dividends received from companies of other Member States following the delivery of evidence of the corporate income tax levied on these dividends, with retroactive effect and without a transitional period, entailing the denial of credit for the past, is in breach of the principle of effectiveness and the principle of good faith. These two principles require a reasonable transitional period, which may not be shorter than twelve months as from the date of publication of the amended legislation.

Reference for preliminary ruling from the Italian Supreme Court on the scope of the abuse of rights principle in taxation matters (Safilo) On 16 November 2010, the Italian Supreme Court referred in the Safilo case (C-529/10) the following questions to the CJ on the scope of application of the abuse of rights principle:

The case went back to the Financial Court at Köln, which, although it had received an answer to the material question, it still had doubts as to the formal and practical aspects of the case. Those aspects concerned, for instance, the question of how the corporate income tax paid in the foreign jurisdiction should be calculated and proved in the case of dividends distributed by companies of other Member States.

Due to these uncertainties, on 14 May 2009, the Financial Court at Köln referred new questions for a preliminary ruling to the CJ. Advocate General Trstenjak’s conclusions in the case are as follows:

1) The (former) Articles 56 and 58 EC must be interpreted in a way that corporate income tax levied on dividends derived in another Member State must be credited against the income tax due in the home State, which credit is to be calculated on the basis of the corporate income tax which has actually been levied on the amount of the dividends in the other Member State. This credit, however, does not need to exceed the amount which results from the corporate tax rate applicable to domestic dividends.

2) A domestic rule which requires providing a certificate, which evidences the corporate income tax paid, is in breach of the principle of effectiveness, if this requirement makes the provision of a credit for the foreign tax levied impossible or excessively difficult in practice. Whether this is the case, is for the referring court to establish.

3) In the absence of harmonised rules within the EU, it is for the Member States to determine the allocation of the burden of proof and the judicial valuation of proof in respect of the calculation of the corporate income tax levied on the foreign-source dividends, they must, however, respect the principles of equivalence and effectiveness. The principle of effectiveness does not per se create an obligation for the referring court to calculate the corporate income tax levied on the



Of note is that the same questions are at issue in the 3M Italia case already pending before the CJ, as referred by the same court (see EU Tax Alert edition no. 85, November 2010).

Second meeting of the Tax Policy Group On 19 January 2011, the second meeting of the re-launched Tax Policy Group (TPG) took place. The TPG, which was re-launched by Commissioner Šemeta in October 2010, brings together personal representatives of EU Finance Ministers to discuss key tax policy issues (see EU Tax Alert edition no. 85, November 2010). Among the topics discussed were Financial Sector Taxation (see EU Tax Alert edition no. 85, November 2010), the recent VAT Green Paper (see EU Tax Alert edition no. 88, January 2011) and the Code of Conduct for Business Taxation.

Mandate of the Joint Transfer Pricing Forum extended On 25 January 2011, the Commission decided to extend the mandate of the EU Joint Transfer Pricing Forum (JTPF) until March 2015. The JTPF is made up of national tax administrations and business representatives. It was set up in 2002 to find pragmatic solutions to problems linked to the taxation of cross-border transactions between associated companies within the EU, such as double taxation caused by the differences between Member States’ transfer pricing rules and heavy administrative burdens for businesses.

On the same day, the Commission adopted a Communication (COM/2011/16 final) setting out guidelines on some technical issues related to transfer pricing, such as low value adding intra-group services and potential approaches to non-EU triangular cases.

Results of public consultation on double taxation published On 25 January 2011, the Commission published a summary report on a public consultation regarding double taxation problems in the EU (see EU Tax Alert edition no. 79, May 2010).

‘Does the abuse of rights principle in taxation matters, as defined in cases C-255/02 Halifax and Others [2006] ECR I-1609 and C-425/06 Part Service [2008] ECR I-897, constitute a fundamental principle of Community law only in the field of harmonised taxes and in matters governed by secondary Community law provisions, or does it extend, as a category of abuse of fundamental freedoms, to matters involving non harmonised taxes, such as direct taxes, where the tax relates to cross-border financial matters, such as the acquisition by a company of rights of usufruct over the shares of a second company established in another Member State or in a non-Member State?

Irrespective of the answer to the first question, is there a Community interest in provision being made by the Member States for adequate anti-avoidance measures in the field of non-harmonised taxes, and is such an interest thwarted by the failure to apply - in the context of a tax amnesty measure - the abuse of rights principle which is also recognised as a rule of national law and, if so, are the principles that may be inferred from Article 4(3) of the Treaty on European Union infringed?

Do the principles governing the single market impliedly preclude not only extraordinary measures in the form of a total waiver of a tax claim, but also a special measure for concluding tax disputes, the application of which is limited in time and conditional upon payment of only part of the tax due, which is considerably less than the full amount?

Do the principle of non-discrimination and the rules governing State aid preclude the system for concluding tax disputes at issue in the present case?

Does the principle of the effective application of Community law preclude extraordinary procedural rules of limited duration which remove the power to review legality (in particular concerning the correct interpretation and application of Community law) from the court of last instance, which is under an obligation to refer questions of validity and interpretation requiring a preliminary ruling to the Court of Justice of the European Union?’



Developments in the Netherlands: Netherlands Supreme Court issues final judgment in X Holding case On 7 January 2011, the Netherlands Supreme Court issued its final judgment in the X Holding case in accordance with the judgment of the CJ of 25 February 2010 (C-337/08), in which the CJ held that the Netherlands rules disallowing cross-border group taxation are compatible with the freedom of establishment under Article 49 TFEU in conjunction with Article 54 TFEU (see EU Tax Alert edition no. 77, March 2010). Previously, Advocate General Wattel of the Netherlands Supreme Court, agreed with the outcome of the CJ’s judgment, however, for reasons very different to those relied on by the CJ (see EU Tax Alert edition no. 82, August 2010). In the final judgment, the Netherlands Supreme Court has simply confirmed the judgment of the CJ without providing any additional reasoning.

Developments in the Netherlands: Supreme Court rules Netherlands thin capitalization provisions are not incompatible with freedom of establishment and non-discrimination principles in human rights Treaties On 7 January 2011, the Netherlands Supreme Court gave its judgment in a case concerning the compatibility of the Netherlands thin capitalization rules with the freedom of establishment of the TFEU and the non-discrimination provisions of Article 26 of the International Convention on Civil and Political Rights (‘ICCPR’) and Article 14 of the European Convention on Human Rights (‘ECHR’).

The Interested Party was a company resident in the Netherlands, which had purchased the shares of another Netherlands company. Interested Party tried to deduct its interest expenses, which was rejected by the Netherlands tax inspector based on article 10d of the Corporate Income Tax Act, which provides for a 3:1 debt to equity ratio. The Interested party argued that sound business reasons were

The Commission highlighted that transfer pricing is the most frequent reason for disputes according to corporate taxpayers, while conflicts of qualification of income and withholding taxes are common problems to corporate and individual taxpayers. As far as individual taxpayers are concerned, tax residence related conflicts and inheritance taxes are serious concerns.

Amongst the insufficiencies of the existing instruments designed to address double taxation the Commission mentioned that:

• the scope of the Interest and Royalties Directive does not cover indirect holdings;

• the MAP provided for by the Arbitration Convention and double tax conventions does not allow a timely resolution of disputes;

• double tax conventions do not cover triangular situations;

• the scope of double tax conventions is too narrow (e.g. inheritance and gift taxes are not covered);

The Commission also pointed out that the existing instruments function improperly due to:

• the lack of a consistent interpretation of double tax conventions between Member States which results in conflicts of qualification (mainly, the concept of royalties, business income, dividends, permanent establishments);

• the implementation at Member States’ level of double tax conventions may lead to the adoption of procedural requirements which, in practice, are inconsistent and deprive the taxpayers of the rights provided by the conventions.

Finally, the Commission indicated that it plans to issue a Communication during the second quarter of 2011, taking into account the results of the consultation.



basis of which the UK is allowed to restrict the right of deduction of VAT for the hire or lease of a passenger car where the car is not used entirely for business purposes. The decision entered into force on 1 January 2011 and will expire either on the date of entry into force of new EU rules regarding this subject, or on 31 December 2013.

Belgian derogation measure for trade in tobacco in line with provisions of the Sixth EU VAT Directive (Vandoorne) On 27 January 2011, the CJ gave its judgment in the Vandoorne case (C-489/09). Vandoorne NV (‘Vandoorne’) is a wholesaler in the trade of tobacco. In its VAT return for the first quarter of 2006, Vandoorne requested the tax authorities for a refund of VAT relating to supplies of tobacco to Capitol BVBA, which company had become insolvent in 2005. The Belgian tax authorities refused to grant the refund on the ground that no VAT had been charged on the supplies on the basis of a provision in the national VAT law. This provision, which was already applicable when the Sixth EU VAT Directive entered into force, stipulates that the manufacturer or importer of tobacco has to pay VAT in full based on the retail price of the tobacco at the same time the excise duties are paid. Furthermore, on the following supplies, including the supplies made to and by wholesalers such as Vandoorne, no VAT should be charged separately and no VAT is deductible.

The Court of Appeal at Gent wondered whether the simplification measure of Article 27 of the Sixth EU VAT Directive allowed for a national provision such as that in the Belgian VAT law, because it deprived Vandoorne from the possibility of deducting the VAT which was undeniably included in the purchase price of the tobacco, whereas Vandoorne had not been able to pass on this VAT to its customer due to the insolvency of the customer. Therefore, that Court decided to refer preliminary questions to the CJ.

present (a counter-evidence rule, which is accepted for another general interest deduction limitation but not the thin cap rules).

The Supreme Court ruled in favour of the tax inspector. The Court held first that the thin cap rules were not incompatible with the non-discrimination principle of the ECHR and the ICCPR. It is not incompatible with the non-discrimination principle if the same taxpayer could be covered by more than one provision (both the general interest deduction limitation and the thin cap rules), resulting in a different outcome for that taxpayer under each provision.

Furthermore, the Supreme Court considered the thin cap rules in line with the freedom of establishment. It was of the view that it is not forbidden to introduce legislation which hinders domestic investments more than cross-border ones, or to create the same restrictions for both domestic and cross border investments.

VAT Council agrees on draft regulation which clarifies elements of the VAT Directive On 18 January 2011, the Council, meeting in the formation of Economic and Financial Ministers, agreed on a draft regulation laying down new implementing measures for the EU VAT Directive. The draft regulation, which recasts Regulation 1777/2005, clarifies certain aspects of the VAT Directive, amongst others, with regard to the place of supply of services.

UK may continue to restrict right of input VAT deduction on hire or lease of passenger cars used not entirely for business purposes On 18 January 2011, the Council, meeting in the formation of Economic and Financial Ministers, decided to authorise the UK to extend an existing derogating measure on the



be. In its decision, the Polish tax authorities indicated that the place of services would be the country where the fairs and expositions took place. Inter-Mark, being of the opinion that the activities would qualify as a service relating to advertisement, objected to this decision which eventually led to preliminary questions being referred to the CJ.

According to the Advocate General, the provision of Article 52 a) of the EU VAT Directive (before the entry into force of Directive 2008/8/EG on 1 January 2010) is applicable not only to the organizers, but also to the service suppliers that do not organize the fairs and expositions themselves. It is the nature of the services that should be decisive, and not the capacity of the service supplier. Therefore, the Advocate General is of the opinion that the place of services has to be determined on the basis of the place where the fairs and expositions will take place.

The fact that Inter-Mark will design the stands taking into account the wishes of the individual exhibitors with regard to the exterior appearance and functionality does not, according to the Advocate General, deprive the intended activities of their qualification as services rendered with regard to fairs and expositions even though it may boost the sale of the products or services.

Eight Member States referred to CJ for failing to properly implement VAT rules for travel agents Under the VAT rules for travel agents, travel agents benefit from a special margin scheme when they sell travel packages to travellers. However, the scheme does not apply to travel agents who sell travel packages to other travel agents for resale. In this regard, on 27 January 2011, the Commission decided to refer the Czech Republic, Finland, France, Greece, Italy, Poland, Portugal and Spain to the CJ for failing to implement the VAT rules for travel agents correctly, often by allowing the scheme to be applied also to sales between travel agents.

The CJ indicated that the purpose and effect of the derogation scheme contained in the national provision is to prevent tax evasion and to simplify the levying of the VAT. The scheme under certain circumstances, for example, in the case of the loss of goods or insolvency of a customer, may result in higher amount of VAT being paid than what it would have been under the normal rules. According to the CJ, this is a consequence of the nature of the simplification measure because it implies, by definition, a more general approach than that of the rule which it replaces. Consequently, according to the CJ, the national provision does not disregard the criteria of Article 27 of the Sixth EU VAT Directive, and does not go beyond what is necessary in order to simplify the procedure for charging VAT and to combat tax evasion or avoidance.

Finally, the CJ indicated that reimbursement of VAT to a middle supplier of tobacco in the event of insolvency of the purchaser could have the result of the amount of VAT due at the final stage of consumption becoming lower, which would be to the detriment of the VAT revenue of Belgium. This would be the case in particular, when the representative of the insolvent purchaser would sell the tobacco. Consequently, the CJ concluded that the national provision is in line with the provisions of the Sixth EU VAT Directive.

Advocate General considers hiring out of stands at fairs and expositions do not qualify as a service related to advertisement (Inter‑Mark) On 13 January 2011, Advocate General Bot rendered his Opinion in the Inter‑Mark case (C-530/09). Inter-Mark Group sp. z o.o. (‘Inter-Mark’) is a company whose intended activities would consist of the temporary hiring out of stands at fairs and expositions in several countries. Most customers are foreign exhibitors that want to demonstrate their products and services. For the design of the exterior appearance and functionality of the stands, Inter-Mark will take the wishes of the individual exhibitors into account. Inter-Mark asked the Polish tax authorities what the place of taxation of the intended activities would



particular, he argued that the tax at issue discriminated against used vehicles imported from other Member States, since, in the case of imported vehicles, the tax is charged in full on first registration in Romania, whereas, for those that were registered in Romania prior to the introduction of the tax, the charge to the tax is, effectively, zero.

The Regional Court, Sibiu referred a question on the matter to the CJ for a preliminary ruling, which the Advocate General proposed to answer as follows:

(1) National legislation introducing a new tax which is imposed on the first registration of second-hand motor vehicles introduced from another Member State does not infringe Article 110 TFEU on the sole ground that equivalent vehicles already on the national market before the introduction of the tax do not bear the tax.

(2) Such a tax is, however, prohibited by Article 110 TFEU if the amount of the tax imposed on an imported second-hand vehicle exceeds the residual amount of the tax included in the sale price of an equivalent second-hand vehicle which bore the tax when first registered as new.

(3) In order to ensure that there is no such excess charge, the amount of the tax levied on vehicles first registered as second-hand must diminish, as closely as possible, in parallel with the depreciation of the price of the vehicle as new. Any fixed scale of depreciation which is based solely on the age of the vehicle, without taking account of mileage or other factors affecting depreciation, is likely to be insufficient for that purpose.

Commission requests Cyprus to amend discriminatory rules on car taxation On 27 January 2011, the Commission formally requested Cyprus to amend its legislation which gives more favourable tax conditions to Cypriot citizens, nationals and descendants than to other EU citizens when it comes to import and excise duties for imported new passenger cars. Under Cypriot legislation, EU nationals who set up

In 2006, when the Commission analysed the application of the special margin scheme across the EU, it found 13 Member States were implementing it incorrectly. In the meantime, Cyprus, Hungary, Latvia, the Netherlands and the UK have brought their legislation in line with the EU rules.

Customs Duties, Excises and other Indirect TaxesExtension of EU agreement with Andorra On 18 January 2011, the Council, meeting in the formation of Economic and Financial Ministers, authorised the signing and provisional application of a protocol extending the scope of the EU’s agreement with Andorra to cover custom security measures.

Advocate General’s Opinion on Romanian pollution tax on second-hand imported cars (Tatu)On 27 January 2011, Advocate General Sharpston rendered her Opinion in the Tatu case (C-402/09). The case concerns the compatibility of the Romanian pollution tax on second-hand imported cars with Article 110 TFEU.

Mr Tatu acquired a second-hand Mercedes Benz motor car in Germany in July 2008. The car was manufactured in 1997. It fell within category M1, had an engine size of 2155 cc and satisfied the Euro 2 emissions standard. The purchase price was EUR 6,600. In accordance with the national legislation, Mr Tatu paid a pollution tax of RON 7,595 (approximately EUR 2,054) to the Romanian authorities. As he considered that the tax in question was contrary to, inter alia, Article 90 EC (now Article 110 TFEU), Mr Tatu brought proceedings before the Regional Court, Sibiu, seeking an order for repayment of the tax paid. In



permanent residence in Cyprus may only benefit from an exemption from import and excise duty when they import a new car if they are not practising any profession in Cyprus. Such a condition, however, does not apply to Cypriot citizens, nationals and descendants who return to live permanently in Cyprus.

Therefore, the Commission is of the opinion that the rule discriminates against non-Cypriot EU citizens and is contrary to Article 18 TFEU. Moreover, it violates the free movement of workers (Article 45 (1) and (2) TFEU) and the freedom of establishment (Article 49 TFEU).

The request takes the form of a ‘reasoned opinion’. If Cyprus does not give a satisfactory response within two months, the Commission may decide to refer the matter to the CJ.


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Editorial boardFor contact, mail: [email protected]:● René van der Paardt (Loyens & Loeff Rotterdam)● Thies Sanders (Loyens & Loeff Amsterdam)● Dennis Weber (Loyens & Loeff Amsterdam; University of Amsterdam)

Although great care has been taken when compiling this newsletter, Loyens & Loeff N.V. does not accept any responsibility whatsoever for any consequences arising from the information in this publication being used without its consent. The information provided in the publication is intended for general informational purposes and can not be considered as advice.

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Editors● Patricia van Zwet

Correspondents● Peter Adriaansen (Loyens & Loeff Tokyo)● Séverine Baranger (Loyens & Loeff Luxembourg)● Gerard Blokland (Loyens & Loeff Amsterdam)● Alexander Bosman (Loyens & Loeff Rotterdam)● Kees Bouwmeester (Loyens & Loeff Amsterdam)● Joke Brabants (Loyens & Loeff Brussels)● Alexander Fortuin (Loyens & Loeff Frankfurt am Main)● Raymond Luja (Loyens & Loeff Amsterdam; Maastricht University)● Bruno da Silva (Loyens & Loeff Amsterdam)● Rita Szudoczky (Loyens & Loeff Amsterdam)● Patrick Vettenburg (Loyens & Loeff Eindhoven)

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