EUROPEAN TAX LAW (32E22000) JAKI TAALAS & JOEL KERÄNEN SGI, C-311/08 TRANSFER PRICING

AGENDA Case background Legal framework Illustration of facts Legal assessment Conflict of laws Resolution

CASE BACKGROUND This reference for a preliminary ruling concerns the interpretation of Articles 12 EC, 43 EC, 48 EC and 56 EC and it was made in proceedings between SGI, a company incorporated under Belgian law, and the Belgian State. The national tax authorities had added back to that company’s own profits the amount of unusual or gratuitous advantages which the company had granted to companies with which it has a relationship of interdependence that are established in other Member States.

LEGAL FRAMEWORK 1 (3) OECD Model Convention Arm´s lenght principle Arbitration convention between the Member States Belgian law Code des impôts sur les revenus 1992 (Income Tax Code of 1992, CIR 92) Articles 26, 49, 79, 207, 224 The Treaty on the Functioning of the European Union Articles 12(18), 43(49), 48(54), 56(63) (tax years 2001 & 2002)

LEGAL FRAMEWORK 2 (3) Belgian law (Income Tax Code of 1992, CIR 92) Article 26 Unusual or gratuitous advantages shall be added to profits unless they are taxable income of the recipient. Article 49 Authentic business expenses shall be regarded as deductible. Article 79 Deduction of losses by the beneficiary of an unusual or gratuitous advantage shall be restricted. Article 207 Further deductions from income deriving from unusual or gratuitous advantages shall be excluded. Article 227 Defines non-resident (foreign) companies.

LEGAL FRAMEWORK 3 (3) The Treaty on the Functioning of the European Union Article 12 Prohibition of discrimination on grounds of nationality. Article 43 Freedom of establishment. Article 48 Definition of ”Companies or firms” Article 56 Free movement of capital.

ILLUSTRATION OF FACTS SGI Belgium COBELPIN SA Luxembourg 34 % share RECYDEM SA France 65 % share € loan € per month External finance Member of a board 0,00 % interest rate

LEGAL ASSESSMENT 1 (2) As a result of an inspection the Belgian tax authorities issued SGI with two revised assessments for the tax years 2001 and In the view of the referring court, the authorities correctly applied Article 26 of the CIR 92 by adding on the interest. In addition, the tax authorities refused to grant a deduction for the monthly remuneration paid to Cobelpin for its services as director of SGI.

LEGAL ASSESSMENT 2 (2) Following an administrative appeal, SGI brought an action challenging the tax assessments before the Tribunal de première instance de Mons which decided to stay the proceedings and to refer the questions to the Court for a preliminary ruling. By its two questions, the tribunal de première instance de Mons asks, whether Article 43 EC, read in conjunction with Article 48 EC, and/or Article 56 EC must be interpreted as precluding legislation of a Member State, such as that at issue in the main proceedings, under which a resident company is taxed in respect of an ‘unusual’ or ‘gratuitous’ advantage which it has granted to a company established in another Member State with which it has, directly or indirectly, a relationship of interdependence, whereas a resident company cannot be taxed on such an advantage where the advantage has been granted to another resident company with which it has such a relationship.

CONFLICT OF LAWS Tax position is less favourable in cross-border situations.  CIR 92 Article 26 (1) restricts the freedom of establishment. (2) restricts the free movement of capital. Allocation of the power to impose taxes?  Risk of artificial income transfers. Principles of proportionality and justification.

RESOLUTION On those grounds, the Court hereby ruled: Article 43 EC, read in conjunction with Article 48 EC, must be interpreted as not precluding, in principle, legislation of a Member State, such as that at issue in the main proceedings, under which a resident company is taxed in respect of an unusual or gratuitous advantage where the advantage has been granted to a company established in another Member State with which it has, directly or indirectly, a relationship of interdependence, whereas a resident company cannot be taxed on such an advantage where the advantage has been granted to another resident company with which it has such a relationship. However, it is for the referring court to verify whether the legislation at issue in the main proceedings goes beyond what is necessary to attain the objectives pursued by the legislation, taken together.