European Union Tax Law

With judgment issued on December 22, 2008 in Les Vergers du Vieux Tauves (C-48/07) the European Court of Justice (ECJ) held that Directive 90/435/EEC of July 23, 1990 (the EU parent-subsidiary directive), which exempts dividends paid by a EU subsidiary to its EU parent from withholding tax, does not apply to dividends paid to the holder of a right of usufruct on the shares for which the dividends are paid.

In the case decided by the Court, a Belgian company held a usufruct in the shares of another Belgian company, while a different Belgian company held legal title to the shares.

The usufruct conferred to the holder the right to receive the dividends paid on the shares, but it did not confer full legal title on the shares or the status of shareholder.

Article 3, paragraph 1 of the EU parent-subsidiary directive requires that, for the benefits of the directive to apply (exemption from withholding), the dividend recipient have a minimum holding of 25 per cent of the capital of the dividen payer (reduced to 15 per cent for dividends distributed from 1.1.07 and to 10 per cent for dividends distributed from 1.1.09).

The usufruct does not represent a participation to the capital of the company, and does not confer the status and rights of shareholder. As a result, the parent-subsidiary directive does apply to dividends paid to the holder of the usufruct on the shares.  





Continue Reading EU Parent-Subsidiary Directive Does Not Apply to Dividends on Shares Held in Usufruct, ECJ Ruled

On December 19, 2008, the Attorney General (AG) at the European Court of Justice (ECJ) filed his opinion in Aberdeen Property Fininvest Alpha (C-303/07).

The case concern Finnish taxation of dividends paid by a Finnish company to a Luxembourg SICAV investment fund owning 100 percent of the stock of the Finnish company.

Under Finnish law, the dividends paid to the Luxembourg fund are subject to Finnish withholding tax. The Luxembourg fund does not qualify for the dividend withholding tax exemption granted under the EU parent subsidiary directive, because it is not organized according to one of the corporate forms enumerated in the directive and is not subject to corporate tax in Luxembourg. 

Dividends paid to a Finnish company or investment fund are exempt from withholding tax to eliminate double taxation of corporate profits.

The Attorney General in his opinion took the position that the Finnish withholding tax violates the EC treaty.

According to the AG, the EC treaty still applies to inter-company dividends that fall outside the scope of the parent-subsidiary directive. The treaty freedom of establishment and free movement of capital prohibit member states from taxing outbound dividends less favorably than domestic dividends. The position of a Luxembourg investment fund Sicav is comparable to that of domestic company or fund, even though the Luxembourg fund Sicav is not subject to tax in Luxembourg.

The opinion is not binding on the ECJ, even though the Court tends to rule according to AG opinions in most of the cases. If the ECJ accepts the AG opinion, the case would be a major step ahead towards the elimination of dividend withholding tax in the EU.

Continue Reading Withholding Tax on Outbound Dividends to a Luxemburg Investment SICAV Illegal, AG of the ECJ Says

On December 3, 2008 Italy’s tax administration issued ruling n. 470/E, by which it clarified that cross-border mergers between non-EU companies with permanent establishments in Italy can be carried out tax free.

Italian law provides for nonrecognition treatment of mergers between domestic companies, in which all of the assets of the target company are transferred to the acquiring company in a statutory merger, and the target company’s shareholders exchange their stock in the target company for stock of the acquiring company. No boot can be exchanged in the transaction. The acquiring company takes a carryover basis in the assets of the target company, and the target company’s shareholders get an transferred basis in the stock of the acquiring company received in the transaction.

The EU directive 90/434/CEE (the mergers directive) provides for a tax deferral treatment of mergers that are carried out between companies resident in two different EU member states. In this case, ten per cent of the consideration can be cash.

In the ruling, the tax administration clarifies that the Tax Code non recognition treatment of domestic mergers can apply also to cross border mergers that fall outside the scope of application of the EU mergers directive.

The ruling is extremely important because it facilitates the possibility to carry out cross-border reorganizations involving Italian assets or Italian companies without immediate recognition of gain.

Continue Reading Italy’s Tax Administration Rules on Cross-Border Tax Free Mergers

On November 27, 2008 the European Court of Justice ("ECJ") issued its judgment in Ministry of Finance v. Société Papillon (C-418/07). The questions referred to the Court was whether the French national tax laws, which do not allow a French parent company to form a French consolidated tax group with its French subsidiaries (and reduce its tax liability by offsetting its profits with the losses of other members of the group and disregarding intra-group transactions), when the French subsidiaries are owned indirectly through an EU holding company (in the case, a Dutch BV) not subject to tax in France, violates  Article 43 of the EC Treaty.  

The Court ruled that such restriction is discriminatory and constitutes a violation of the freedom of establishment, because a French parent company that exercises its freedom of establishment by incorporating a holding company in another EU Member State through which it owns stock in its French subsidiaries is subject to a less favorable tax treatment in France than a French parent company that owns stock in its French subsidiaries directly or through other French intermediate holding companies. Indeed, the latter is able to offset its profits with the losses of the French subsidiaries while the former is not.

Contrary to the Advocate General’s opinion, the Court refused to apply the coherence of tax system  justification to sustain the restriction, on the ground that the restriction goes beyond what is strictly necessary for that purposes and fails the proportionality test.

Société Papillon provides legal support to taxpayers who intend to challenge national tax laws that restrict access to consolidated tax regimes in EU cross border situations.

Italy permits consolidation of foreign subsidiaries, but sets more restrictive requirements that those that apply to consolidation of domestic subsidiaries. The ECJ ruling in Société Papillon puts in doubt the validity of those restrictions under EU Law.

Continue Reading ECJ Ruled That Restrictions to Tax Consolidation Violate EC Treaty