Integrantes da Mesa:
Dr. Paulo Celso B. Bonilha
Dr.
Dr.
Dr.
Dr.
Dr. Fernando Zilveti
Dr. Michael Lang
Sr. Presidente Dr.
Sem mais delongas, portanto, passo a palavra ao professor para sua aula.
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DR. LANG:
Chairman, ladies and gentlemen:
Thank you very much for inviting me here to Sao Palo. It's my pleasure to be here. And I remember, I think it was three years
ago that I already had the pleasure and honor to give a presentation here exactly
at this venue here. So, there's some
nice memories for me because I remember an interesting and lively
discussion.
Yes, I had been asked to talk about recent developments. I have prepared some slides, and I would like
to go through the slides together with you.
Of course, you will find a lot of references to such a court decision,
and I'll try to not to go too much into detail.
I will try to discuss the main issues and the main topics but, of
course, maybe the court judgments I've made reference to could serve as kind of
a help for you. If you want to take a
closer look into the case law of the European Court of Justice, then you see
and you know the names of the important judgments. What's nice, I think, about
the judgments of the European Court of Justice that they are all over the
Internet and in all the European languages.
Since Portuguese is also one of the European languages, you can read all
of the judgments for most of the opinions of the Attorney General in Portuguese
as well. This is very accessible at the
website of the European Court of Justice.
I'm also very happy that I have been invited to talk about developments
at the European Court of Justice.
Because what I'm going to do is talk about the freedoms because the
freedoms, the economic freedoms we have in the European Treaty, or I should say
in the Union Treaty nowadays, those freedoms I think are the most relevant
provisions at least in the concept of tax law because most of the judgments of
the European Court of Justice in the area of tax law deal with the
freedoms.
So, I think the freedoms are probably most important. Second, I think it might be interesting
especially from a non‑European background because the freedoms, in
substance, are principles of equality.
If
I understand your system correctly, of course, I'm not at all an expert of the
Brazilian system, but first of all, you have a constitution with the principle
of equality and, therefore, my impression or my experience is that whenever you
have a principle of equality, then you have more or less the same topics, how
to interpret such rules, such principles of equality and that's what we're
doing in Europe or what the European Court of Justice is doing, more or less,
is trying to interpret the freedoms and trying develop some ideas on the lines
of the principle of equality. So, therefore it might also be a kind of
reflexion of your own system. Because I
think that's what I always find nice about comparative tax law, that you're not
only doing something about the foreign system, but you learn even more about
your own system because you reflect automatically on your own system and your
own provisions. So, therefore, maybe the
topic is a good one selected for this session.
Yes, talking about the freedoms, thank you. So, what I would like to do is to discuss the
developments of the Court, and you see already on this slide here that I'm
going to distinguish between two different periods, between the period started
in 1986 to 2005 and then the second period. Because the theory, the thesis I would like
to submit here is that there is at least, to a certain extent, a slight change
in the case law of the European Court of Justice which took place in 2005,
but I'll come back later to that issue.
Why do I start with 1986? Because
as you're probably aware, we have the Treaty of Rome, European law goes back to
the '50s. So, why does it start in
1986? Well, because this is the year ‑‑
or the first time the European Court of Justice has to decide on a tax
case. Before that, we didn't have any
tax cases, at least in the not in the area of the freedoms. That, of course, has something to do with the
system of the European Court of Justice, because the European Court of Justice
has ‑‑ or it's workload, to a certain extent, depends very much on
the references it gets from the member states.
Because, basically, there are two ways how one can approach the European
Court of Justice. One is that either a
member state, but that's in the area of tax law happens only occasionally, but
mainly the Commission, the European Commission, a kind of government in Europe,
takes legal action against one member state because the Commission thinks that
one member state has not implemented European law properly or there's an
infringement on the European law, an infringement on the freedoms in the
domestic tax system. So, that's one way
how the European Court of Justice can be approached. That is the member state is not willing to do
a change in tax system, and then the Commission will take legal action against
the member state, that's one way.
The second way, which is more common I would say, is that the reference
is made by the domestic courts to the European Court of Justice, because
according to our system it's not possible for individual citizens to approach
the European Court of Justice. So, the
European Court of Justice is not a kind of supreme Supreme Court of the member
states. It's not possible that you can
appeal, for example, a domestic judgment at the level of the European Court of
Justice.
There is a system of shared responsibilities. The Supreme Court and all the courts of the
member states are still responsible and competent for the interpretation of
domestic law and for the application of their constitutions, whereas the
European Court of Justice only gives judgement on the interpretation of
European law. So, therefore, whenever a
court, a domestic court, has some doubts about the interpretation of European
law, then this domestic court may approach the European Court of Justice, ask
for what is called a preliminary ruling on the interpretation of European law
and then the European Court of Justice delivers its judgement. But the European Court of Justice does not
decide individual cases, only gives spec and answer to the domestic court and
gives interpretation on European law.
Then the case comes back to the domestic court, and then the domestic
court has to decide on the individual case and has to apply the judgement of
the European Court of Justice in the individual case. So, it's a system of shared responsibilities.
So, therefore, more or less the workload of the European Court of
Justice depends on all the questions it gets from the domestic courts of the
member states. When there are no
questions, then there is no work to do.
When there are a lot of questions, then there is a lot of work to do.
Before 1986, there had not been any questions referred to the European
Court of Justice because in the early days of European law, nobody thought that
freedoms would have any impact on tax law.
Everybody thought that tax law would not be touched by the freedom. So, therefore, there was no domestic judge in
the any of the European member states who had the idea that tax provisions
could be challenged against European law.
So, therefore, there were no references to the European Court of
Justice, and that's the reason why before 1986 we don't have any cases in the
area of tax law in the European Court of Justice.
But in 1986 it started the first case is of (unintelligible). This is the leading case, and this was for
the first time that not the domestic courts, but the Commission took action
against France, one of the member states.
Then the whole thing started.
Because then, of course, a big discussion in economic literature started,
we had articles in all the text journals and other journals, and, of course,
tax advisors also started to think about those issues and try to develop the
judgement of the European Court of Justice further, and that's how it's
happened.
More and more cases had been referred to the European Court of
Justice. Now we have every year, I would
say 50 ‑‑ 40, 50 tax cases probably decided by the European Court
of Justice. I think it is also important
to understand the system, that the European Court of Justice is not an in a
position to reject any cases. So, the
European Court of Justice has to deal with all the questions it gets.
Sometimes, of course, the answer is short, and not so elaborate. So, if the court thinks that this is not
interesting enough or it has already decided the case in another judgement or
answered the question in another judgement, yes, that might happen. But in principal, all the cases which are
referred to the European Court of Justice are decided by the European Court of
Justice.
I think that's important because nowadays lots of people act like
critics on the Court because there are a lot of tensions between different
judgements of the European Court of Justice.
Of course, it's true that there are tensions even contradictions between
different judgements, and I will come back to that later on.
But on the other hand, I think we should understand that this is almost
unavoidable. Because if the Court
decides some hundred cases, well, then it's very difficult to be consistent
because it's also very realistic and also probable that there are tensions
between different cases. For example,
like the U.S. Supreme Court, they have a tax case every five years or so, then
it's because they can reject and refuse to take the cases and the principles. Then it's quite easy to not have tensions
between the different cases if you decide to take cases every five years.
But if you have so many cases, of course, then it's much more difficult
at the end of the day. So, I'm saying
that because people are critical to the European Court of Justice, and myself,
I'm also quite critical, but I think that does not necessarily mean that the
Court is completely wrong or that everything what the Court does is completely
out of the picture. I think, more or
less, the Court is doing a good job but, of course, it is also the task for
(unintelligible) and the task of the observers and the application of the
observers to be critical to the judgements of the European Court of
Justice.
What you see here on this slide is the kind of structure, how the Court
deals with the freedoms. So, when we
talk about the freedoms, then in tax law, we talk about, more or less, the
freedom of establishment, we talk about the freedom to provide services, we
talk about the free movement of workers and we talk about the free movement of
capital and payments. These are, more or
less, the four so‑called economic freedoms which are relevant and which
are enshrined in the European and the Union Treaty, the EU Treaty. They are supported by a general
nondiscrimination clause and also a chain of free movement operation.
So, the system is that the Court either applies one of the freedoms, one
of the four economic freedoms. But if
the Court thinks that is a case which is not covered under the economic
freedoms because; for example, it's a case about alimony payments, so no
economic activity is involved, then the Court would apply this provision, this
general free movement provision or this general nondiscrimination clause.
So, at the end of the day all the intra‑community situation are,
more or less, covered under one of the freedoms or the general
nondiscrimination clause. But, of
course, it's necessary that there is an intra‑community situation. Only if there is an intra‑community
situation, so a cross‑border situation between at least two different
member states, then the freedoms come into play.
So, therefore the Court is not examining the domestic systems of the
member states for domestic situations.
As far as domestic situations are concerned, the member states are
completely free. So, they can
discriminate their own people, for example, that's not the European issue. But if member states start to discriminate
foreigners, members of other European union members then the freedoms come into
play.
In general, it has to be a intra‑community situation. So, therefore, extra‑community
situations, third country situations, are not covered under the freedoms. However, there is one big exception, and
that's the free movement of capital and payments. Because this is the only freedom which is
applicable in relation to third countries.
Of course, if you look at recent cases of the European Court of Justice,
this is a big issue now because the now the Court starts to develop its case
law under this freedom. The big question
is, does this really mean that everything that the Court developed for intra‑community
situations is also relevant for third country situations under the free
movement of capital and payment?
I think it's probably too soon to give a final answer to that
question. But I think the impression so
far is that the Court is willing to develop different kinds of case law, which
in my field makes sense, at least to a certain extent. Because the object and purpose of the
freedoms is to implement the internal market.
We have an internal market within the European Union, but we do not have
a general market outside of the European Union.
So, therefore, if we apply the free movement of capital and payments in
relation to third countries, we are not talking about implementation of an
internal market and, therefore, it could be the case that even the provision,
even if the burden is exactly the same, which is true for the free movement of
capital payments because under the burden, there is no distinctions between
intra‑community situations and third country situations. However, the purpose of the freedoms could be
different. But, of course, that's the
big discussion and a big debate in (unintelligible) nowadays and people might
have positions on that.
How the Court applies all the freedoms, and I think there is a basic
concept for all the freedoms, which all the freedoms have in common. First, the Court looks at the scope of the
freedoms, which freedom is applicable?
That's the first question, which is for intra‑community situations
is not so relevant. So, therefore, the
Court, at least in the old case law ‑‑ there are slight changes
which I'm going to discuss later on. But
at least in the old case law, the Court is quite relaxed about that, because it
doesn't really matter which of the freedoms is applicable.
If we talk about freedom of establishment or free movement of capital
because for intra‑community situations the Court applies exactly the same
standards. However, whenever we talk
about third country relations, then, of course, this really matters because
only freedom ‑‑ free movement of capital and payment is
applicable in relation to a third country.
Therefore, it matters if this freedom is applicable or if we are under
the freedom of establishment, because the freedom of establishment is not applicable
in relation to third countries.
So, that's usually the first step of the analysis, the scope of the
freedom. The second step of the analysis
is question of comparability. So, what
the Court is doing is looking for comparable situations. This is also a big debate, but not so much in
the tax area, more outside of taxation if the freedoms have to be seen as kind
of nondiscrimination clauses or general restriction clauses.
There is a big debate, more or less, outside of tax law because whenever
we talking about taxes, then it's quite obvious that you always need a
comparator. Because if you would take the position that every restriction is
prevented, is forbidden under the freedoms, Well, this would mean that you
couldn't tax any cross‑border situation because tax rules as such, of
course, are restrictions. That's clear.
But it's not the case and cannot be the case that all, that every
country has to restrict its tax law in domestic situations, and then foreign
taxpayers or non‑resident and foreign income would not be tax at
all? That cannot be the case, and the
Court has never held that. So,
therefore, the Court applies the freedoms, at least in the area of taxation, and
this is my thesis would also be that is even be to outside taxation, but that's
probably a different issue.
But for the area of taxation, the Court applies the freedom as
nondiscrimination clauses. So,
therefore, the Court always looks for a comparable situation. And we'll come back to that.
The standard situations is, is
there a difference between domestic treatment and cross‑border
treatment? Is there a difference between
domestic income and cross‑border income?
Is there a difference between resident, the taxation of residents the
taxation of nonresidents?
If there is, and then the Court usually asks the question is the
resident and the nonresident taxpayers, are they in a comparable
situation? So, that's usually the second
step of the analysis. Is there a
comparable situation?
Then the third step of the analysis is, is there a justification? So, if there is a comparable situation, if
there is a different treatment because the cross‑border situation gets
adverse treatment from the domestic situation, then there is a need for a
justification. The Court has developed a
set of justifications which are accepted and other justifications which have
been rejected. But this is the level of
justifications.
Then the last step of the analysis usually is the level of
proportionality. So, therefore, if the
Court takes the few that assert adverse treatment for cross‑border
situations, this in principle is justified.
This is not necessarily the end of the story, because then the question
comes up, is the measure proportionate?
So, not ‑‑ if there is a justification, that does not necessarily
mean that the case is old that this is the end of the story, because then the
Court takes another look into the issue of proportionality.
I think, of course, I have no idea about Brazilian principle of equality
discussions, but in my experiences from other countries that in most instances
you have very similar discussion when you talk about principle of equality,
because principle of equality under most systems is looking for a comparable
situation, is looking for a justification and then the issue of proportionality
comes into play. So, what the European
Court of Justice has developed here is nothing completely new, nothing
completely innovative. I think it's one
of the standard schemes courts usually develop when they have to apply
principle of equality provisions.
Yes, I've already mentioned, and here you'll find in some of the cases
and some ‑‑ of course, it's always a question of taste, which cases
you would discuss as landmark decisions really.
But the first case is that of (unintelligible) which was a French case
which has been decided. It's official
name is Commission vs.
That was an issue about (unintelligible), therefore, the case is usually
referred to (unintelligible), which was kind of tax credit, which was granted
if French subsidiaries distributed the dividends to their French parent
companies. Then this (unintelligible)
was granted, but it was not granted if French subsidiaries distributed
dividends to a domestic permanent establishment or to a foreign corporation. So, there was a different treatment of French
parent companies versus French permanent establishments to foreign
corporations. Here the courts held that
this is infringement of freedom of establishment, and this different treatment
is not justified. I'll come back later
to the case because the arguments I think are still relevant.
Here you'll find some other landmark decisions, which had been decided
until 2005. What I would like to do
now is to discuss the scope of the freedoms, the issue of comparability, the
issue of justifications and the issue of proportionality. So, that is the kind of the four step
analysis I just made reference to just a minute ago, and discuss the issues for
the period 1986 to 2005. Then in
the second part, I would like to discuss the issues for the period 2005
to 2010 because as I've mentioned in the beginning of my presentation that
my thesis, which I would like to submit here, is that there are slight changes
between the two different periods. I
would like to make them visible when I talk about those four steps of the
analysis.
As far as the freedoms are concerned, we will not find much in the court
decisions of the first period. Because
as I mentioned before, at least in this first period, the Court as quite
relaxed about the scope of the freedoms.
So, it left it, more or less, completely to the domestic court.
So, when the domestic court took the view, the domestic court which
referred the question to European Court of Justice, when the domestic court
took the view, that for example, the freedom of establishment is applicable,
then the European Court of Justice did not challenge that and said, okay, if
the domestic court takes the view that this is a case under the freedom of
establishment, it is up to the domestic courts to decide that and apply that
then we will give an answer under the freedom of establishment.
If the domestic court takes the view that is this is a case under free
movement of capital and payment, of course, we assume it's free movement of
capital and payments. We will give an
answer under this provision.
So, the Court was not going to examine that or so the Court took that
for granted what it got, the question it got from the domestic court. Of course, as an example there is also an
exception to around the case, but I think it would be too far if I would go to
the examples and exceptions, because as lawyers we know that there is no rule
without exception. So, therefore, there
is no underlying case law where you wouldn't find any exception. But I think the rule is, in general, quite
clear.
The second step of the analysis is the question of comparability. I've already mentioned that outside tax law,
we have the question restriction versus nondiscrimination approach, which is in
my view not really a contradiction.
Because I think that even outside tax law, you could explain all the so‑called
restriction cases also as nondiscrimination cases. It's only the question that sometimes it's
more difficult to find the comparable situation. Sometimes, the comparable situation is the
rest of the remaining legal order. So,
we've had that discussion in many countries also under the principle of
equality.
So, in my view, this is not the basic difference, but in tax law it is,
more or less, theoretically sure, because in tax law I think it's quite common
sense and common understanding among all the scholars that you can explain all
the tax cases under the nondiscrimination approach. So, therefore, the Court is always looking
for a comparable situation and which there are comparisons we had so far.
We've had two standard situations I would say. The comparison between resident and non‑resident
taxpayers. Quite often the Court has
looked at this pair of comparison. So,
if there is adverse treatment for nonresident taxpayer, and if the Court took
the view ‑‑ or takes the view that the situation are comparable,
then the Court asks for a justification.
So, that's one step.
The second step is the comparison of two resident taxpayers, one who is
in an internal situation and the other one who is in a cross‑border situation. So, for example, if there is different
treatment for cross‑border dividends, if, for example, which is the case
in my own country many years ago, that foreign dividends were taxed the rate of
50 percent and domestic dividends were taxed the rate of 25 percent, Then that
was clear case which my country lost the European Court of Justice. But it was kind of obvious because the Court
held that the two taxpayers are in a comparable situation. The one who was receiving domestic dividends
and the other one who was receiving foreign dividends from
There is a different treatment.
There is adverse of treatment of the cross‑boarder situation so,
therefore, there is a need for justification.
The Court did not accept any of the justifications which had been
brought forward. So, therefore, there
was an infringement of the free movement of capital and payment. So,
But there are lots of cases where the Court compared two different
domestic taxpayers, one in a cross‑boarder situation, the other in an
internal situation. But more
controversial is that sometimes the Court is also comparing two nonresident
taxpayers in two different cross‑border situations.
So, I made references to some of the judgements where in my view this
plays a role but, of course, one has to admit it is not so obvious, and this is
why it's controversial. So, in, for
example Shumacker (phonetic), which is a quite famous judgement of the European
Court of Justice, This was a case, first of all, different treatment resident
taxpayers and nonresident taxpayers.
Mr. Shumacker was Belgian resident who worked in
But on the other hand, it was also, in my view, a case of comparison
between two nonresident taxpayers, because the Court explicitly referred to a
specific treaty between
So, this was also an argument for the Court, that the Court at least in
one paragraph said, well, a Dutch taxpayer who would received 90 percent or all
of his income in
But of course, in most of these cases you have in academic literature, a
quite controversial discussion how crucial, how decisive this comparison
was. I don't want to ignore that.
What's also quite interesting is that we have some cases where the Court
made, what I would call, a legal comparison in order to determine if the
comparable situation is fair or not, and in other cases where the Court made
what I would call a factual comparison.
So, to give you one example, an example for the legal comparison is for
example, the case of (unintelligible) I've already mentioned. Because the reason why the Court held that
the French parent company and the French permanent establishment of the foreign
company were comparable was that exactly all the same rules were applicable in
French parent companies and permanent establishments, with the one exception,
namely the (unintelligible). This tax
credit was not granted.
So, in order to determine comparability, the Court looked at all the
rules which were applicable to both taxpayers and found out which one was
identical and therefore, they are in a comparable situation with the small
exception. So, therefore, that was a
case of legal comparability, because the Court didn't look at the factual
situation, it only looked at the rules which were applicable for both
taxpayers.
On the other hand, Shoemaker, for example, is a case of factual
comparison. Because in Shoemaker the
Court held that taxpayers ‑‑ the Court said, resident taxpayers and
nonresident taxpayers are in general not in comparable situation. But if the nonresident taxpayer receives 90
percent or more than 90 percent of his income in the other state, then he or
she becomes comparable. So, it really
depends on the factual situation.
The Court said it didn't look so much on the rules which were applicable
in Mr. Shoemaker and on German resident taxpayers, It looked at the
factual situations. It said, as long as
Mr. Shoemaker receives less than 90 percent of his income in
So, that's an approach or an example that the Court applied the system
of factual comparability. That's, I
think, one of the interesting things also in the case law of the Court that at
least for me, but I think for other people it's difficult as well.
I can never predict if the Court will apply the factual approach or the
legal approach in order to determine comparability. Sometimes the Court applies the factual
approach, sometimes the Court applies the legal approach. So, in my field that's the case where you
have tensions, where you have contradictions between the different lines of
case law.
What was also quite interesting is that from time to time the Court has
mentioned that it's an infringement of the freedoms, not only if there is a
different treatment of comparable situations, but the Court has also has held
that there could be an infringement of the freedoms if there is an identical
treatment of non‑comparable situations, which I think ‑‑ of
course, I have no idea about the Brazilian discussion, but we find also in many
systems when we talk about the principle of equality that this is considered to
be the other side of the coin.
On the one hand, you're prevented from treating comparable situations
differently without any justifications, but you're also prevented from treating
non‑comparable situations equally without any justification, and the
European Court of Justice is on the same line.
So, you find a lot of judgements where the Court has repeatedly
mentioned that sentence. However, it's
more or less a lip service.
So, there are just a few cases which could serve as an example where the
Court has really gone so far to apply this sentence. But at least in theory or in general the
Court takes also the view that this is the other side of the coin, and this is
also relevant. But there are not so many
cases which can serve as an example for that.
Yes, coming to the next step of the analysis, this is the
justifications. So, what the Court has
started to develop is a set of possible justifications, so criteria which could
justify different treatment. In the
first period of the case law, the Court has been very restrictive on that.
So, the Court has discussed, for example ‑‑ because, yes,
one, I think, also has to bear in mind that justifications are usually brought
forward by the governments of the member states. Because the governments of the member states,
they want to defend their tax systems so, they can come up with the arguments
and they try to find possible justification.
For example, one of the possible justifications was that in the area of
tax law, there is no harmonization under European law or almost no
harmonization under European law. So,
therefore, this lack of harmonization could serve as the justification for
different treatment.
Here already, (unintelligible) said, no way. It's true that there is no harmonization in
tax law, that's true. But still, member
states are free to have their own tax systems.
However, they have take into account the freedoms. So, whatever the tax system is, they must not
discriminate between resident and nonresident taxpayers foreign and domestic
income and so on. So, that has been
rejected.
The second justification which has been rejected as well is the loss of
tax revenues, which is quite obvious because if the Court would have accepted
the possible loss of tax revenues as possible justifications, well, this would
have served as a comped lunch at the end of the day in the area of tax
law. Because that would have meant that
in the area of tax law that the freedoms wouldn't play any role. So, therefore it's quite obvious that the
Court has rejected this justification as well.
Another interesting justification, which at least in the old era, and
I'm talking about the period between 1986 and 2005, so the Stone Age in
tax law is quite recent. Still, but one
justification which had also been rejected was reciprocity. Because already (unintelligible). The French government tried to defend its
system and took the position and said, well, of course, in the first step, we
only grant this (unintelligible) to our own corporations.
But whenever, for example, countries like
In theory (unintelligible) already in 1986 the Court said, no way. The freedoms are unconditional. So, the idea behind that is that in a legal
order, reciprocity should not play a role.
So, if every member state has to have a system which is in conformity
with the freedom. So, you can't can
defend your own system under the argument of reciprocity that you are only
treating the other taxpayers in a friendly way, if your taxpayers are also
treated in a friendly way.
The idea behind that is that the Court expressly mentioned it, but I
think that's the idea that if
What's also interesting is that the prevention of tax evasion. That was also an argument in
(unintelligible), already that the French government took the position and
said, well it's so difficult with foreign taxpayers, we never know if they use
our system. We don't have the full
information, the whole picture. So, in
order to make our system evasion‑proof or so, we have to discriminate
them.
Here the Court said, no way, this is not justified. The Court went so far to say that the
prevention of tax evasion can never serve as a justification, and that has been
reversed afterwards.
So, already ICI, the Imperial Chemical Industries, a case which had been
decided in 1998, so ten years later or so, the Court took another position and
said, well, in principle, the principal of tax evasion could serve as a
justification, but, of course, the measure has to be proportionate. But, in principle, it accepted this argument
as justification. (Unintelligible) the
Court took a different position.
Then the compensation of disadvantages had also been rejected. I think it's also interesting because my
feeling is that we had the discussion under many systems when we talk about
principle of equality. Because what the
French government (unintelligible) said, that yes, it's true, that those
permanent establishments of German companies or Italian companies, they don't
get the same benefits as French companies, but they get other benefits,
different benefits. So, there is kind of
a compensation of disadvantages by granting other advantages.
Here the Court said, no way. You
can't justify a disadvantage by granting any other advantage. You have to look at each role separately,
which I think is interesting because in my own system, when my own Supreme
Court applies the principle of equality, my Court would take a different view, and
many Court is sometimes willing to take into account other advantages in order
which could compensate a certain disadvantage.
Here, at least in this case, the Court had a very strict approach
here. But, of course, already mentioned
is Bachmann there are mention there are some tensions also in the case of the
European Court of Justice where you can have doubts if the Court was always
consistent and never accepted other advantages as a possible compensation for a
disadvantage.
What's also interesting is that the Court dealt with the need for fiscal
supervision, that has something to do that whenever a cross‑border
situation, then it's quite difficult to assess the facts and the whole picture
because you can send your tax inspectors abroad. In
Within
So, therefore, the need for fiscal supervision, I would say has been
accepted as a justification in principle, but at the level of proportionality
it has been restricted, again, only because there is no mutual assistance
applicable.
Yes, proportionality, if you remember that's the last step, the fourth
step of the analysis. If you look at the
first period of the case law, then there is little discussion of
proportionality. Why? Because the Court has almost rejected almost
all the justifications which have been brought forward. So, therefore, if you reject all of the
justifications, well, then there is no need to go one step further and look
into proportionality. So, therefore,
there is very little discussion on proportionality.
I mentioned already that ICI, Imperial Chemical Industries, in 1998, the
prevention of abuse and evasion have been accepted as a possible justification,
but it was only conceded either to be proportionate if the domestic measure was
limited to what the Court called wholly artificial arrangements. So, therefore, it's only possible to
discriminate cross‑border situations because of the danger or the
justification to prevent abusive and evasion if this measure is limited to
wholly artificial arrangement. That has
for a long time has been the big secret of the Court, what wholly artificial
arrangement really means.
In 2005, 2006 now we have Cadbury Schweppes ‑‑ and I'll
come back to that ‑‑ where the Court had been forced to explain
what it meant on the wholly artificial arrangements. But, in general, there's a very limited scope
of where it's possible to discriminate under this justification.
The coherence has also been accepted, that's one of the critical
arguments, coherence has also been accepted as a possible justification. So, the Court has held in Bachmann already
that a court may treat a foreign or cross‑border situations worse than
domestic situations if this is necessary in order to maintain the coherence of
the tax system. Yes, so, in general, it
has been accepted as a possible justification and many orders have criticized
that a lot because you never what the coherence of the tax system means. In the end, it's probably something like
accepting other disadvantages or other advantages in compensation for a
disadvantage.
So, therefore, if you remember this the slide before, I mentioned
already that Bachmann is a kind of tensions through the other case law. So, nobody really knows what coherence
means. And in Bilox (phonetic), the
Court of Justice restricted that approach because it said that coherence could
only play a role if the coherence is not taken away by other roles. And Bilox was a case about the creation of a
pension reserve, and the resident tax payers could deduct certain items of
their income if they established a pension reserve. For nonresident tax payers that was not
possible.
The government argued that that is necessary in order to maintain the
coherence of the tax system. Because if
you established such a pension reserve, then on the one hand, the payment was
deductible, but on the other hand, when you dissolve the reserve at the end of
the day, when you retire, then the payment or the money you get from the
pension reserve is taxable as well.
Whereas, if you are a nonresident taxpayer, it is not deductible because
you can't establish, you can't build up such a pension reserve. But, of course, there is no tax liability at
the end of the day either. So,
therefore, it's a system of coherence.
But here the Court said, well, you can't defend the system under the
justification of coherence. Because if
you have concluded a tax treaty and the reached pensions may only be taxed in
the state of residence, then this member state is taking away it's own
coherence by having concluded such a tax treaty. So, it's the fault of the member states, and
can't justify this different treatment because of the argument of the
coherence.
But I think these are the rare cases and very controversial cases where
proportionality played a role. So, in
the first period of the case law, we have very, very few case on the
proportionality, for the obvious reasons, because justifications have been rejected.
So, therefore, summing up the first period of the case law, I think the
Court usually was very quick on comparability.
So, the Court didn't spend much effort on explaining why the situation
is comparable. So, we can accept the
comparability. When comparability was
accepted, that was almost the end of case because then there was almost a
certainty that there is an infringement because the Court has rejected almost
all possible justifications.
So, therefore, in the first era of the case law in the Court of Justice,
taxpayers were enthusiastic about the Court because there has almost never as
been any case where the taxpayers had lost in the European Court of
Justice. Whenever a domestic court
referred a case to the European Court of Justice, I think 90 or 95 percent of
all the cases had been decided in the favor of the taxpayers and against the
governments.
So, that was also one of the reasons why the governments are not so
happy with the Court. That's maybe also
one of the reasons why there is a certain change in the case law of the
Court. Because what happened
around 2005 that was especially true under the
They, for example, started to talk about a specific tax court with tax
specialists, for example, or to set up a Commission in order to help the courts
to evaluate its own judgements or so.
So, there was a certain kind of pressure on the Court, also. So, they made it quite clear that they were
not so happy and they were maybe willing to change the constitution, which is
not a constitution but to change the whole framework and to start
initiatives. So, the Court probably was
also a little bit under pressure.
Furthermore, also, in this time, the Court ‑‑ the members of
the Court changed a lot, because we had new member states and a lot of new
countries, of course, new cultures, the central and eastern European countries
came in. Under the system, every member
state can appoint one judge. So, we have
different personalities. I think it's
not a coincidence that many of the new member states nominate its judges which
were much more or less very much pro‑government as well. This might also play a role.
So, in 2005, I think, there are some changes of the case law of the
Court. The landmark decisions since then
are, for example, the EK of the Schempp case Marks and Spencer, and the end
case Cadbury Schweppes (unintelligible), that's just to name a few. Also, the more recent ones (unintelligible) I'll come back, not to all of them but to a
few of them. Again, I would like to
structure my presentation along this four step analysis. So, I'm talking first on the scope of the
freedom, second about comparability, third about justifications and then about
proportionality.
As far as the scope of the freedom is concerned, the Court is now taking
a different approach. So, the Court is
not accepting everything it gets from the domestic court. The Court is taking now a closer look at the
question which freedom is applicable.
Sometimes the Court rephrases the question it gets from the domestic
court. Sometimes, for example, if the
question was, is a certain treatment against the freedom of the free movement
of capital and payments, then the Court sometimes rephrases the questions, what
the domestic court obviously means is this treatment infringes the freedom of
establishment. So, it took another
freedom, for example, and looked more closely why and under which circumstances
or which freedom was applicable.
I think it's quite obvious why this is the case, because the Court was
now and is still now concerned about this situation that the one freedom, free
movement of capital and payment only applicable in relation to third countries. So, in the old case law, there had been
almost no cases in relation to third countries.
The Court almost exclusively had to deal with intra‑community
cases, because it only got such questions from the member states. So, the Court was not so much concerned about
that. Now the Court started to think
more about the relevance, especially of the free movement of capital and
payments in relation to the third countries.
There is a tendency now that the Court, in my field that's already made
an interpretation of the case law, the Court is not so explicit on that. But I would say whenever it's possible, then
the Court takes the view that it's not the free movement of capital and
payments is applicable, but one of the other freedoms; freedom to provide
services or freedom of establishment.
Even the intra‑community situations ‑‑ also in
intercommunity situations, as such, it's not relevant because the Court is
still applying the same standards. But
for third country situations, the Court, of course, is aware of the fact that
every question that it gets for an intercommunity situation could come back
again to the Court a year later or so for a third‑country situation. If you just think about the Austrian dividend
case, that did exactly happen.
So, we, in
Whenever it's possible the Court now tries to limit, to restrict the
scope of the free movement of capital and payment. So, the Court, more or less, takes the view,
whenever two freedoms are applicable, then the other freedom prevails over the
free movement of capital and payments.
That means also for third country situations, then the Court will then
take the position saying that ‑‑ I can give you an example.
I mentioned to you (unintelligible) that was a nontax case about a Swiss
non‑European union member a Swiss provider of financial services. They had a case, they thought they were
discriminated because they wanted to offer their services in
One, is the freedom to provide services because it's a financial
services provider. Second, is the free
movement of capital and payments because financial service has something to do
with capital and payments. Both freedoms
are concerned, but there is only one freedom which was applicable. Therefore, the freedom to provide services
prevails over the other freedom. So, therefore, the freedom to provide
services would be applicable, but since we are in a third country situation,
So far about scope of freedoms, they can be sure on comparability. I think there are also slight changes of the
case law because the Court nowadays is not so quick to take the view that
resident versus nonresident taxpayers or two domestic taxpayers, one in an
internal situation, one in a cross‑border situation are as such
comparable. Now, the Court takes a
closer look at the issue of comparability and sometimes, for example, takes
some of the arguments which had already been rejected, at the level of
justification, but takes the same arguments which it had rejected under the old
case law, the level of justification, now uses those arguments at the level of
comparability.
So, to give you just one example, that's the quite famous the D case
(phonetic), which is about different treatment under a tax treaty, also a case
similar to the Shoemaker case because there was under the Dutch system, there
was a net wealth tax at that time and Mr. D was a taxpayer who was a
German resident, and he wanted to be treated in The Netherlands in the same way
as a Dutch taxpayer. They had certain
allowances under the net wealth for Dutch taxpayers. Since he was a German resident, he didn't get
the allowance.
But here under the Belgian, Dutch tax treaty, they had the special
nondiscrimination clause that Belgian taxpayers would get this allowance. This is quite similar to the Shoemaker
case. However, this allusion here was
different because the Court said at the end of the day, that these situations
are not comparable because the difference of the treatment is due to the tax
treaty and therefore, this excludes comparability, which in my view is a clear
contradiction to the old case LAW I made reference to where reciprocity doesn't
play a role. Because as soon as the
Court starts to refer to the tax treaty at the end, it refers to reciprocity,
and it exacts reciprocity. Whereas, in
(unintelligible) the Court has rejected reciprocity at the level of justification. Here, reciprocity comes back and has been
accepted at the level of comparability.
You will find other cases here where you have with other justifications,
which had also been rejected, they came back and they had suddenly been
accepted at the level of comparability.
That's, I think, also one problem with the case law of the European
Court of Justice, what you see here, it's not so much that the Court is
changing its case law because I think (unintelligible) become wiser, and not
even the Court should be prevented to become wiser and change its case law, but
I think what you could expect from a court and what you should expect from a
court that whenever a court changes its case law, then it makes it
explicit. And that's not happening here
and that's really one critical remark.
The Court only gives the impression that it always develops the case law
farther.
But if you take a closer look at the case law, then you'll soon find out
that there are clear intentions and that the Court, as I said a minute ago,
uses the same arguments which had been rejected at another level of the
analysis and just accepts them on the level of comparability. So, which is, in my view, a clear
contradiction without making that explicit.
It's, of course, also human because judges are human beings who wants to
be exquisite, but who maybe in the past mad a mistake or so. But in the end, that's I think that's at
least what one should expect from a court to make such changes also
explicit.
But we still have at the level of comparability, at least in my view but
that's also disputed, that the Court still accepts two nonresident taxpayers in
different cross‑border situations.
Because after the D case, there had been in
I've mentioned some other examples where the Court accepted the
comparison of two other nonresident taxpayers and in my view, even the D case
which I've just referred to, is an example that the Court is still willing to
compare two different non‑taxpayers, because if you remember that's the
reason why the Court said that Mr. D, the German resident, is not in the same
position as a Belgian taxpayer was that there was a tax treaty concluded and
the tax treaty rules out the comparability.
But (unintelligible) that means or that could mean at the end of the day
in if the discrimination or if the different treatment would not have been due
to a tax treaty but, for example, to a domestic provision, then the Court would
still be willing to compare two nonresident taxpayers.
So, my thesis would be if, for example, another tax treaty would have
been in place between Belgium and The Netherlands, but if The Netherlands, for
example, would have domestic rules saying that Belgians are good guys, and
Germans are bad guys, saying that Belgian resident taxpayers would get this
allowance, German taxpayers wouldn't get the allowance, I think that the Court
probably would have taken this case and could have seen the situations as
comparable, and probably would have seen an infringement during that case.
So, therefore the D case in my view is not evidence that the Court is
now never comparing two different nonresident taxpayers. The Court gave a reason which you can discuss
if this is really convincing, but at least a specific reason why this situation
of Mr. D was not comparable to the Belgian taxpayer, because the difference was
due to a treaty.
Therefore, (unintelligible) different treatment would have been domestic
law, maybe the outcome which had been different and I mentioned some other
cases here, for example, Cadbury Schweppes, also a very interesting case, which
had been decided in 2006. That was
a case about the British CFC legislation.
The Brits had a CFC legislation.
Cadbury Schweppes was a British company.
They had a finance company, a subsidiary, in
Here Cadbury Schweppes complained and said, well, this is a different
treatment of the comparable situation, because if we would have a British
subsidiary, then no CFC rules would have been applicable. Then, of course if we would have a British UK
finance company as a subsidiary, the income wouldn't be allocated to the parent
company. So, it's a different treatment
of cross‑border situations versus internal situations.
But, at the same time, also ‑‑ and the Court in Cadbury
Schweppes, the government lost. So, the
Court said, well it's a different treatment of a comparable situation. There is no acceptable justification at the
end of the day. But what was interesting
about Cadbury Schweppes for the Court, it was not only that it was decisive
that there was a different treatment between a domestic and cross‑border
situation, but that there was also different treatment between two different
cross‑border situations. Because
the Court said, well if there is a British ‑‑ if Cadbury Schweppes,
a British Company, having a subsidiary in the
I know your experience is a little bit different here, but in
Also, I have to admit again that there is no rule without
exception. There is Columbus Container,
a case which been decided on some weeks after Cadbury Schweppes. That was a German case about, again, the
German CFC legislation. This was a case ‑‑
Columbus Container was Belgian coordination center, or a Belgian company which
was taxed at a very low level. In
Under German law, this rule, this Belgian company was treated as a
partnership, as a look through approach.
But of course ‑‑ not of course, but there was also a tax
treaty between
I should add that under the German ‑‑
So, therefore, in relation to
But this here, I mentioned it here in the context of comparable
situations. It's also an example,
Columbus Container, where two nonresident tax payers or two cross‑border
situations have not been compared, have not been seen in a comparable
situation.
There are some other issues which have no changes here. So, still the Court ‑‑ and I'm
always puzzled about that sometimes implies in order to determine comparability
and the approach of legal comparability and sometimes are factual
comparability. For me it's always is a
surprise when I read a new judgement of the Court of Justice that the Court
will apply one line of reasoning or the other line of reasoning.
So, you will find both, even in the very recent judgement
(unintelligible) from 2008 are approaches, are examples of legal comparability
and (unintelligible) are examples for factual comparability. So, I can't explain that. It's a miracle or a mystery.
The next issue is justifications here.
What we see here that the Court is willing to accept more justifications
as it did before nowadays. Here the
leading case probably is Marks and Spencer, which is also a quite famous
case. Marks and Spencer was, again, a
British company. They had subsidiaries
in
Therefore, they said, well, that's a discrimination. The
It's also true that danger of the double utilization of losses both in
This has been criticized quite heavily by many scholars in
The Court went even further here in other cases, like finished case
(unintelligible) the
One of these justifications had always been the location of taxing
powers, because what the Court has meant, more or less, in Marks and Spencer is
a possible justification that the member states are free to allocate their
taxing power, and are free to develop a system of a balanced allocation of
taxing powers. But I haven't found
anybody yet who could really explain what that means and that leads to a lot of
answers, because the Court is referring to this justification again and
again. It serves as an excuse, I would
say, for a lot of cases where the Court is not willing to consider a case as an
infringement of the freedom.
So, the Court uses this phrase of allocation of taxing power and says,
well, there is a comparable situation, there is a different treatment, but the
members states are free to find a balanced way to allocate their taxing
right. Therefore, at the end of the day
it's okay. So I find a little bit ‑‑
and maybe I'm over critical, but I'm very skeptical about this be new
justification, because nobody knows where it starts and where it ends.
What also has been accepted now is the prevention of the double
utilization of losses. We've seen that
in Marks and Spencer, for example. So,
the Court is now more concerned that double utilization of losses in more than
one member state should not occur, which policy‑wise is understandable I
would say. But still I have my doubts
because on the other hand, the Court is not concerned about double taxation and
such. Because the Court still says that
the possible and still holds that it's possible and the double taxation may
occur.
We have also recent cases from 2009, for example, the Block case,
which was a case about inheritance tax.
Here the Court held, if there is double taxation ‑‑ double
taxation as such is not on infringement of the freedoms. So, therefore, in my view, I think you can
take two different positions. You can
take the position that you're concerned about the double utilization of losses,
and then I think you should also be concerned about double taxation. Maybe you should consider double taxation is
an infringement of the freedoms, because it's definitely an impediments of
internal law because the same amount of income is taxed twice.
So, you could take this position.
You could also take the other position that you're never concerned about
double taxation, but then you shouldn't be concerned about the utilization of
losses, double utilization of losses either.
But I think there are two different approaches which you can take.
What the Court is doing is taking a third approach, which in my view is
difficult to argue because it's not very balanced. To be concerned about the utilization of the
double taxation or the prevention of double taxation, but on the other hand
accepting double taxation.
Proportionality now also plays a greater role in the case law of the
Court because it's understandable now we have more justifications which are
accepted. Therefore, it's quite natural
that the Court now has to go one step further and also examine more closely if
a measure is proportionate. So,
therefore, that is why it's understandable.
But here, also, to a certain extent the Court is applying different
standards because under the question of proportionality, the Court in the old
case law usually asks for the least restrictive measure, only the least
restrictive measure was considered to be proportionate.
In the more recent case law, the Court is more relaxed about that and
leaves more leeway to the member states.
So, it's not necessarily the case that they have to go to the most
restrictive ‑‑ for the least measure, they can also take other
measures or as long as they are kind of balanced. So, the Court is more relaxed about
that. Marks and Spencer for example,
recapture of losses because as I've mentioned, one justification was that this
group relief system would not be applied on a cross‑border level because
otherwise that would be the danger of double utilization of losses.
But, of course, you can prevent the double utilization of losses if you
implement a system of the recapture of losses.
So, you could have a system and that would probably be the least
restrictive system that on the one hand, you allow the cross‑border
implication of the British group relief system or you force
However, the Court took a different approach and said, well, the
That would be ‑‑ if you would have time for the other cases
as well. I think just to mention one
that's the A case (phonetic), which was a third country case. A Swedish company, which had shares in a
Swiss company, so
Of course, there was on the one hand, no mutual assistance directive in
relation to
However, for cross‑border situations, the Court said, that's not
enough in the taxpayer is willing to provide all of the evidence because we
have to make sure that this is the true evidence and therefore we still need a
mutual assistance director. Since we
don't have a mutual assistance director in relation to
Conclusions, I'll make very short because I was told as a rule we
shouldn't go after 10:00. So, as far as
conclusions about the difference is now between the old and the new case
law. As far as comparability is
concerned, I think we have still different pairs of comparisons. So, it has not changed so dramatically. The Court is still, in my view, is
considering to look at difference cross‑border situations as well, this
is the big issue. We still have this
ambivalence in respect of equal treatments of different situations. We still have some cases which are decided on
the legal comparability and the others on the factual comparability.
As far as justifications are concerned, we still have situations that
many justifications are rejected. So,
the Court didn't go so far that it accepted all the justifications that have
been brought forward by the member states in order to be fair to the Court.
As far as proportionality is concerned, the Court developed its concept
of wholly artificial arrangements in the Cadbury Schweppes case and it
developed standards for third country situations. However, in order to be fair to the Court, I
wouldn't say that this is a change of the case law of the Court, because in the
old case law the Court was not confronted with those third country
situations. So, it's the first time that
the Court really had to deal with the third country situations. So, I'm not saying that you can't take
different positions on that and be critical if it's really necessary to apply
different standards in relation to third countries I see also in general of
market arguments and so on. But I think
if you have you want to be critical to the Court because you think there are so
many changes in the case law. I think
this is really an example of the change in the case law.
Where are the real case changes in the case law now? That's on the one hand, as far the is as the
cope of the freedoms are concerned, so there is more emphasis now on drawing
the borderline between the different freedoms and the Court is narrowing the
scope of the free movement of capital and payments. I think that's kind of obvious, and that's really
a change to the old case law where the Court was not concerned about that. The obvious reason is probably the third
country issue here.
Comparability, I think as far as comparability is concerned, it's also
quite obvious that some justifications which recently ‑‑ which
rigorously had been rejected, are now accepted.
So, for example, reciprocity I've mentioned, this is something that had
been rejected in the past, and which has been accepted nowadays.
New justification have been accepted this strange, in my view this
strange concept of balanced allocation of taxing powers where ‑‑ at
least I can't come up with an explanation what that really means.
We have new standards of proportionality now.
The Court is not only looking for the at least restrictive measures, the
Court is more government‑friendly in that respect.
Again, what I think I said already, I would like to mention that again
as well, I think my critical remarks do not concern, or you shouldn't
understand my critical remarks. In that
way the Court will never change its case law.
I think that's perfectly legitimate.
But the big problem, I think is and this leads to a lot of uncertainty
that the Court doesn't make it explicit.
We never know when we refer to a judgement of the European Court of
Justice where we have another judgement which is in contradiction to this
judgement, if this just means that the Court has overlooked this situation
could be the case or if the Court implicitly overruled its old judgement. Therefore, it's very difficult now to predict
how new places will be decided.
I know I took a long time. I think we don't have much time for discussion. Maybe there is one question or so, if possible, I have no idea. Mr. Chairman, thank you for paying attention.
(RAC)
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