1. Free Movement and Taxation of Companies Piet Van Nuffel Court of Justice of the EC, Katholieke Universiteit Brussel 15 November 2007 5th Annual Conference on EU Law, Kranjska Gora

2. Taxation: national competence…  Allows a Member State to perform State functions  Competence to be exercised Unilaterally Through conventions with other States

3. ….but limited by EC law!  Harmonisation measures (Art. 94 EC) Mutual assistance amongst tax authorities (Directive 77/779) Grouping of companies (Directive 90/434, Directive 90/435, Convention 90/436)  In the absence of harmonisation: Treaty provisions on free movement Right of Establishment (Art. 43 EC) Free movement of capital (Art. 56 EC)

4. First « intrusion »: Avoir fiscal, 1986 Case 270/83, Commission/France  Distribution of dividends: tax credit granted to shareholders, including French companies but not branches/agencies of foreign companies  Such branches/agencies are subject to French corporate tax in the same way as French companies  Held: restriction of the right to set up a secondary establishment  Even though absence of harmonisation

5. « If you tax, respect EC law! » « although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with Community law»

6. Free movement; prohibition of discrimination  Prohibition of direct and indirect discrimination Less favourable treatment if company is not resident Less favourable treatment if parent/daughter company is not resident  Presupposes comparable situations Resident = non-resident? Cross-border transaction = internal transaction?

7. Different treatment to be justified?  Some grounds are not legitimate Lack of Community harmonisation Prevent reduction of tax revenue  Legitimate objectives, to be attained in a proportionate way Effectiveness of fiscal supervision Fight against fraud/ tax evasion (Preserve cohesion of tax system)

8. Case studies  Taxation of profits earned  Taxation of profits distributed (dividends) Outbound dividends Inbound dividends

9. Taxation of Profits Earned  No less favourable treatment for companies with foreign parent/daughter No higher tax rate if foreign parent Case C-311/97, Royal Bank of Scotland Deduction for financing costs not to be excluded if related to foreign (grand)daughter Case C-471/04, Keller Holding → if situations are comparable!

10. Taxation of Profits Earned (II)  Inclusion of profits of controlled foreign company in tax base of parent Case C-196/04, Cadbury Schweppes  Requalification as dividends of interests paid to parent Case C-524/04, Test Claimants in the Thin Cap Group Litigation → allowed but only in so far as to prevent wholly artificial arrangements which do not reflect economic reality

11. Taxation of Dividends: Outbound Outbound dividends: no discriminatory withholding tax  No withholding tax solely on distribution to foreign parent Case C-170/05, Denkavit Internationaal & Denkavit France

12. Taxation of Dividends: Inbound Inbound dividends: non- discriminatory application of systems to avoid double taxation  Relief cannot be granted solely to national dividend Case C-446/04, Test Claimants in the FII Group Litigation

13. Taxation of Dividends: Inbound (II)  No obligation to avoid double taxation… Case C-513/04, Kerckhaert-Morres Foreign and national dividends taxed at 25% Foreign dividends may be subject to foreign withholding tax, for which no tax credit But shareholder must bear consequences of parallel exercise by Member States of tax power

14. Conclusion  EC law respects Member States power to tax  If a Member States exercises power to tax, it should do so without discriminatory restrictions  Parallel exercise of tax power does not as such go against EC law: EC law does not resolve conflicts of law in taxation matters