(c) G.M.M. Michielse EU Harmonization: An Obstacle for Alternative Corporate Income Tax Systems? Geerten M.M. Michielse Technical Assistance Advisor, IMF Adjunct-Professor, Georgetown University Law Center

(c) G.M.M. Michielse Estonian Distribution Tax Income tax liability deferred to distribution: Profit300 Profit300 Distribution out of net profit100 Distribution out of net profit100 Distribution tax (26/74 th ) 35 Distribution tax (26/74 th ) 35 Dividend withholding tax (26%) 26 Dividend withholding tax (26%) 26

(c) G.M.M. Michielse Tax Treatment of PE ‘Distributions’ to HQ: Property movements beyond original property allocated to PE; Property movements beyond original property allocated to PE; Payment made by or on account of PE; Payment made by or on account of PE; Payments made under order of HQ through PE to third parties. Payments made under order of HQ through PE to third parties.

(c) G.M.M. Michielse European Union Parent-Subsidiary directive Parent-Subsidiary directive Freedom of establishment/ Free movement of capital Freedom of establishment/ Free movement of capital Code of conduct Code of conduct Merger directive Merger directive Arbitration convention Arbitration convention

(c) G.M.M. Michielse Parent-Subsidiary Directive No ‘dividend withholding tax’ on distribution of profit to EU parent company (>25%); No ‘dividend withholding tax’ on distribution of profit to EU parent company (>25%); No profit tax on distribution of profit from EU subsidiary (>25%). No profit tax on distribution of profit from EU subsidiary (>25%).

(c) G.M.M. Michielse ‘Withholding Tax’ Epson Case / Athinaiki Case: Labeling of tax = irrelevant Labeling of tax = irrelevant Chargeable event = distribution of profit Chargeable event = distribution of profit Taxable amount = income attributable to shares Taxable amount = income attributable to shares Taxpayer = shareholder (Epson Case) Taxpayer = shareholder (Epson Case) Loss carry over = characteristic of profit tax (Athinaiki Case) Loss carry over = characteristic of profit tax (Athinaiki Case) Treatment under DTA = Article 10 (Athinaiki Case) Treatment under DTA = Article 10 (Athinaiki Case)

(c) G.M.M. Michielse Implementation Requirements Does distribution tax qualifies as ‘withholding tax’ ? Does distribution tax qualifies as ‘withholding tax’ ? Abolish limitation of 12-months period for application of indirect tax credit Abolish limitation of 12-months period for application of indirect tax credit

(c) G.M.M. Michielse ‘Freedoms’ in EC Treaty Freedom of establishment Freedom of establishment –No different tax treatment between pe and foreign-owned subsidiary Free movement of capital Free movement of capital –Place of investment –Place of residence of investor

(c) G.M.M. Michielse Free Movement of Capital Estonian company with: (a) Resident corporate shareholders No tax on distribution of profit No tax on distribution of profit (b) Non-resident corporate shareholders Tax of 26/74 th on distribution of profit Tax of 26/74 th on distribution of profit

(c) G.M.M. Michielse EU Code of Conduct Advantageous measures only for non- residents or transactions with non- residents; Advantageous measures only for non- residents or transactions with non- residents; Ring-fenced from domestic market Ring-fenced from domestic market No real economic activity or presence No real economic activity or presence Profit determination departs from inter- national standards (OECD) Profit determination departs from inter- national standards (OECD) Lack of transparency Lack of transparency

(c) G.M.M. Michielse Ring-fenced Incentive Distribution tax not allowed under Parent-Subsidiary Directive Distribution tax not allowed under Parent-Subsidiary Directive Estonian Companies owned by foreign EU companies are tax exempt Estonian Companies owned by foreign EU companies are tax exempt Preferential regime applicable only to non-residents Preferential regime applicable only to non-residents

(c) G.M.M. Michielse Final Statement: “These Arguments Make The Spanish Inquisition Look Dangerously Liberal”