C Case C-64/11 O European Commission v. Kingdom of … · European Commission v. Kingdom of Spain ... freedom of establishment by transferring its activities to another ... Case C-261/11

Commission v. Spain C-64/11

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Case C-64/11

European Commission v. Kingdom of Spain

Synopsis

There is a restriction on the freedom of establishment when a Member Statetaxes the unrealized capital gains derived from the transfer of residence of acompany or the transfer of assets allocated to a permanent establishment inthat Member State to another Member State and the same operations are nottaxed under a purely internal situation. The restriction is justified and propor-tional where the Member State assesses the tax due at the moment the moveor the transfer takes place, i.e. when its fiscal sovereignty expires, in order toprotect the exercise of its taxing rights. However, the enforceability of imme-diate payment of those taxes is contrary to the freedom of establishment.

Facts

On 18 March 2010, the Commission brought proceedings against Spain regard-ing its corporate income tax legislation on certain unrealized capital gains. TheCommission claimed that Spain treated differently unrealized capital gainswhere there was a transfer of activities of a company from Spain to anotherMember State than where similar transfers were made within the Spanish terri-tory. According to the Commission, where a company exercised its right offreedom of establishment by transferring its activities to another Member State, itshould not have as a consequence a financial disadvantage for the company con-cerned (i.e. the integration of the unrealized capital gains in the corporate incometax base and the payment of the tax due), which disadvantage companies notexercising that right did not suffer.

Legal background and issue

According to the Spanish Corporate Income Tax law, the taxable amount of thetax year includes the difference between the market value and the book value (i.e.the non realized capital gains) further to the transfer of residence of a company or

Decision date: 25 April 2013Procedure type: Infringement procedureAG opinion: No opinion issuedJustifications: Territoriality Decision type: JudgmentLegal basis: Art. 43 EC Treaty, Art. 49 TFEU (Freedom of

establishment)Other EU legislation: Mutual Assistance Directive (for the recovery of claims)

2008/55/ECHost State/Home State: Home StateKeywords: Administrative assistance, exit tax, proportionality,

capital gains, cash-flow disadvantageAuthentic language: Spanish

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the transfer of assets allocated to a permanent establishment in that Member Stateto another Member State The issue was whether the obligation to declare the unrealized capital gains uponthe transfers was contrary to the freedom of establishment, since this obligationdid not exist in case the same transactions took place within the Spanish territory.

Decision

ScopeThe case was decided based on the freedom of establishment.Discrimination/restrictionThe Spanish Corporate Income Tax legislation implies a restriction on thefreedom of establishment because in case a Spanish company transfers its resi-dence to another Member State and also in case of a partial or total transfer of theassets of a permanent establishment located in Spain to another Member State,the company concerned is economically penalized in comparison to a similarcompany transferring its residence or assets within the Spanish territory. In thelater case, the unrealized capital gains resulting from those operations should notbe included in the corporate taxable base until they are effectively materialized.This different treatment is not based on an objective different situation and maydeter a company to transfer its activities from Spain to another Member State. However, where the Spanish legislation provides for the taxation of the unreal-ized gains derived from assets allocated to a permanent establishment whichceases its activity, there is no restriction on the freedom of establishment sincethere is not a different treatment between a purely internal situation and the sit-uation referred to in Art. 49 of the TFEU.Justifications Territoriality. The assessment of the unrealized capital gains to be taxed at thetime of transfer of the residence of the company or the transfer of assets allocatedto a permanent establishment is justified and is in accordance with the principleof proportionality, given the purpose of the Spanish legislation which is the tax-ation of the gains derived in the state where those gains are obtained and theassessment is made at the time its fiscal jurisdiction expires. However, undersettled case law, legislation demanding the immediate payment of the tax due onthose unrealized gains is contrary to the freedom of establishment. The mutualassistance mechanisms between the Member States (i.e. Mutual AssistanceDirective for the recovery of claims) are considered to be sufficient to control theaccuracy of the statements of the companies in case of a deferred payment of thetax due.


Commission v. Denmark C-261/11

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Case C-261/11

European Commission v. Kingdom of Denmark

Synopsis

The freedom of establishment precludes legislation of a Member State thatprovides for the immediate taxation of unrealized capital gains further to thetransfer of assets to another Member State, whereas the domestic transfer ofsuch assets is not subject to tax.

Facts

On 18 March 2010, the Commission sent Denmark a reasoned opinion requestingit to amend its tax legislation which imposes immediate taxation when entitiestransfer their assets to other Member States. On 25 May 2011, the Commissionreferred Denmark to the ECJ, as it had failed to amend its legislation to alleviatethe incompatibility with Art. 49 of the TFEU and Art. 31 of the EEA Agreement.


The Danish Corporate Income Tax Law provides that transfer of assets outsideDenmark, is considered as a sale of assets subject to tax on the market value ofthe assets at the date of the transfer. The tax is due in case a Danish companytransfers assets to its foreign permanent establishment or where a foreigncompany transfers assets from its Danish permanent establishment to its foreignhead office or to a permanent establishment outside Denmark. The tax is leviedimmediately, without having the possibility to defer the payment until the assetsare actually sold and the capital gains realized.The issue was whether immediate taxation of unrealized capital gains in case aDanish entity transfers its assets outside Denmark is compatible with the freedomof establishment provided by the TFEU and the EEA Agreement.

Decision date: 18 July 2013Procedure type: Infringement procedureAG opinion: No opinion issuedJustifications: Balanced allocation of taxing powersDecision type: JudgmentLegal basis: Art. 43 EC Treaty, Art. 49 TFEU (Freedom of

establishment)Art. 31 EEA Agreement (Freedom of establishment)

Host State/Home State: Home StateKeywords: Balanced allocation of taxing powers, capital gains,

corporate income tax, exit taxAuthentic language: Danish


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Decision

ScopeThe case was examined in the light of the freedom of establishment.Discrimination/restrictionThe immediate taxation of the unrealized capital gains further to the transfer ofassets from Denmark to another Member State or to a non-Member State party tothe EEA Agreement in comparison with a domestic transfer of assets which doesnot constitute a taxable event, constitutes a restriction on the freedom of estab-lishment provided by the TFEU and the EEA Agreement. This restriction appliesboth to financial and non-financial assets.JustificationsBalanced allocation of taxing powers. This justification could be accepted wherethe national tax system is designed to prevent any conduct that might imply a riskto the taxation rights of a Member State. An entity that transfers its assets outsideDenmark remains under the tax jurisdiction of Denmark, thus the risk not tocollect the tax does not exist. Consequently, the deferral of taxation on unrealizedcapital gains related to the transfer of non-financial assets by an entity estab-lished in Denmark to another Member State or to a non-Member State party to theEEA Agreement does not prevent Denmark from collecting the tax due. The fact that these assets are not sold after the transfer outside Denmark is irrel-evant because the tax is determined at the time of the transfer. In additionMember States are allowed to implement different tax events that may trigger thetaxation of capital gains from the transferred assets other than the sale of theseassets.Accordingly, the taxation of unrealized capital gains constitutes a restriction thatgoes beyond what is necessary taking into account that Member States maycharge interest and require a guarantee on the deferred tax. Also, the transfer of assets to an EEA Member State does not affect Denmark'spower to collect any information in order to assess or to collect the tax, irrespec-tive of the fact that the EEA Agreement does not include provisions on mutualassistance as provided in the Mutual Assistance Directive and Mutual AssistanceDirective (for the recovery of claims).


Commission v. Netherlands C-301/11

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Case C-301/11

European Commission v. Kingdom of the Netherlands

Synopsis

The freedom of establishment precludes legislation of a Member State thatprovides for the immediate recovery of the tax on unrealized capital gainsrelating to the assets of a company transferring its registered office or place ofeffective management to another Member State.

Facts

On 18 March 2010, the Commission sent to the Netherlands a reasoned opinionrequesting to amend its tax legislation which imposes an immediate exit taxwhen companies transfer their seat or assets to another Member State. On 24November 2010, the Commission referred the Netherlands to the ECJ, as it hadfailed to amend its legislation to alleviate, in its view, the incompatibility withArt. 49 of the TFEU.


Under the Dutch domestic law, when a company transferred (part of) its assets toanother Member State and ceased to be subject to unlimited taxation in the Neth-erlands (i.e. stopped being a resident for tax purposes subject to tax on worldwideincome), immediate taxation of that company's unrealized gains and reserveswas provided for. The Commission requested the ECJ to confirm that the Neth-erlands had not met its obligations under Art. 49 of the TFEU by permitting thelegislation that provided for the (immediate) taxation of the unrealized gains andreserves upon the transfer of the registered office or place of effective manage-ment of that company to another Member State.

Decision

The ECJ held that the provisions must be examined in the light of the freedom ofestablishment.

Decision date: 31 January 2013Procedure type: Infringement procedureAG opinion: No opinion issuedJustifications: Not invokedDecision type: JudgmentLegal basis: Art. 43 EC Treaty, Art. 49 TFEU (Freedom of

establishment)Host State/Home State: Home StateKeywords: Exit tax, transfer of centre of administration, tax

avoidance, tax evasionAuthentic language: Dutch


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The principle of exit taxation is, in general, not contrary to the freedom of estab-lishment. However, the manner in which this taxation is effectuated may be con-trary to EU law. In this respect, the ECJ referred to the decision in National GridIndus (C-371/10), whereby not the exit tax itself, but the immediate levyingthereof, was the infringement of the freedom of establishment.The Netherlands did not contest the Commission's finding that it had legislationincompatible with Art. 49 of the TFEU. The Netherlands, during the proceed-ings, stated that the similarities between the National Grid Indus (C-371/10) andthe current case were such that the Court's decision in the former applies mutatismutandis to the latter.The ECJ noted that the issue of whether or not a Member State has failed to meetwith its obligations should be determined on the basis of the situation at the endof the reasoned opinion stage of the infringement procedure (i.e. two monthsafter receiving the reasoned opinion). Any changes after that time are to be dis-regarded. Therefore, the ECJ decided that the Netherlands had indeed not ful-filled its obligations under Art. 49 of the TFEU by maintaining legislation thatprovided for the (immediate) taxation of unrealized gains and reserves upontransfer of the registered office or place of effective management of thatcompany to another Member State.

Case C-380/11

DI VI Finanziaria SAPA di Diego della Valle v. Administration des contributions directes

Synopsis

Legislation of a Member State under which granting a reduction of capital taxis dependent on the obligation to remain liable to tax for the following 5 yearsis incompatible with the freedom of establishment.

Decision date: 6 September 2012Procedure type: Preliminary rulingAG opinion: No opinion issuedJustifications: Balanced allocation of taxing powers, coherence of the

tax systemDecision type: JudgmentLegal basis: Art. 43 EC Treaty, Art. 49 TFEU (Freedom of

establishment)Host State/Home State: Home StateKeywords: Balanced allocation of taxing powers, coherence of the

tax system, exit tax, wealth taxAuthentic language: French


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Facts

DADV was a company incorporated under Luxembourg law. It had set up areserve to obtain a reduction from capital tax. The reduction was granted for theyears 2004 and 2005. On 12 October 2006, DADV transferred its legal seat toItaly. In December 2006, DIVI merged by absorption with DADV and claimed asits successor a reduction of the capital tax due by DADV in 2006.The tax authorities refused to grant the reduction for 2006 because DADV hadtransferred its legal seat to Italy. In addition, the tax authorities requested a repay-ment of the reduction granted for the years 2004 and 2005 because the 5 yearsrequirement was not met.


Luxembourg Capital Tax Law provides for the possibility of obtaining a reduc-tion in capital tax for companies further to the allocation of a part of the profit thatrelates to a given tax year to a reserve in the balance sheet. The reserve should bemaintained for a period of at least 5 years. This reduction amounts to one fifth ofthe reserve constituted but may not exceed the corporate income tax due,increased by the surcharge (i.e. contribution to the Employment Fund) beforeattribution of any credits for that tax year.The issue was whether the requirement that the capital tax reduction granted onlyif the company remained liable to tax in Luxembourg for a period of at least 5years is compatible with the freedom of establishment.

Decision

ScopeThe relocation of a company’s effective management did not affect its status as acompany incorporated under Luxembourg law. Therefore, a Luxembourgcompany may rely on the freedom of establishment when challenging an exit taximposed upon relocation of its place of effective management to another MemberState.Discrimination/restrictionThe Luxembourg provision constitutes a restriction of the freedom of establish-ment because it prohibits the Member State of origin from impeding the estab-lishment in another Member State of a company incorporated under itslegislation. Under settled case law all measures which prohibit, impede or renderless attractive the exercise of the freedom of establishment must be regarded asrestrictions on that freedom. The transfer of the legal seat to another Member State that results in an immedi-ate withdrawal of the capital tax reduction if the company is no longer liable totax in Luxembourg for a period of at least 5 years represents a restriction on thegrounds that a company which transfers its legal seat to another Member State isless favourably treated than a company which continues to have its legal seat inLuxembourg.


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Justifications(i) Balanced allocation of taxing powers. This justification was rejected

because the withdrawal of the reduction did neither ensure the powers oftaxation of Luxembourg nor the balanced allocation of taxing rightsbetween the Member States concerned.

(ii) Coherence of the tax system. This justification was also rejected because nodirect link existed between the granting of a reduction in capital tax to acompany that meets the requirements and offsetting that tax advantage withadditional corporate income tax and trade tax on operating profit during theyears when the reserve is maintained. Therefore, the remote and uncertainnature of such subsequent taxation cannot justify the restriction on thefreedom of establishment.

(iii Increase of the national tax revenue. This justification was rejected on theground that obtaining tax revenue cannot be regarded as an overridingreason in the public interest to justify a restriction of a fundamental free-dom.


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1.1.16. Taxation of cross-border service providers

Case C-345/04

Centro Equestre da lezíria Grande Lda v. Bundesamt für Finanzen

Synopsis

A Member State taxing non-residents on income derived from services per-formed on its territory is free to limit the deduction of operating expenses toexpenses directly linked to that income. However, to make a refund of taxeswithheld at source, dependent on the condition that those expenses exceed aspecified percentage of the income derived, is not compatible with thefreedom to provide services.

Facts

Centro Equestre was a company established under Portuguese law with its reg-istered seat and central management in Portugal, and without a permanent estab-lishment in Germany. In 1996, it earned income from a tour of equestrian showsthrough several European countries including Germany. Centro Equestre wastaxed as a non-resident on income from sources in Germany with a final with-holding tax of the then applicable rate of 45% on gross income from artistic per-formances. When Centro Equestre claimed a refund, it produced a certifiedPortuguese balance sheet including overhead expenses such as proportionatepersonnel costs, depreciation of horses and equipment, and expenses for taxadvice. Since 11 of 14 shows of the tour were held in Germany, Centro Equestrecalculated 11/14 of the accounted costs as deductible, resulting in an overall loss.A refund was denied, because the costs accounted were mostly indirect costswhich did not have a direct economic connection to the income derived in Ger-many, and the costs with a direct economic connection did not exceed 50% ofgross proceeds.

Decision date: 15 February 2007Procedure type: Preliminary rulingAG opinion: Léger, 22 June 2006Justifications: Tax avoidance, double deductionDecision type: JudgmentLegal basis: Art. 49 EC Treaty, Art. 56 TFEU (Freedom to provide

services)Other EU legislation: Mutual Assistance Directive (for the exchange of

information) 77/799/EECHost State/Home State: Host StateKeywords: Corporate income tax, cross-border services, tax at

source, deduction, costs, double deduction, exchange of information, tax treaty, territoriality, withholding tax, Mutual Assistance Directive

Authentic language: German


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Under the Germany–Portugal tax treaty in combination with German domesticlaw, income received by a company incorporated under Portuguese law in con-nection with artistic performances given in Germany was liable to corporateincome tax in Germany, levied at source. The taxpayer could apply for full orpartial refund of the tax withheld, subject to the condition that the expenses thathad a direct economic connection to that income exceeded more than 50% of thegross proceeds. Resident taxpayers on the other hand were allowed to fullydeduct all their expenses incurred, irrespective of a direct economic connection.The issue was whether it constitutes an infringement of the freedom to provideservices if the deduction of operating expenses incurred in connection with activ-ities which gave rise to the receipt of income in another Member State is subjectto the double condition that those expenses have a direct connection to thatincome and that they are greater than half of it.

Decision

ScopeThe freedom to provide services applied.Discrimination/restrictionUnder established case law, the freedom to provide services does not precludenational legislation which allows expenses incurred by non-residents in connec-tion with the provision of services within the territory of the source state only tobe taken into account if they are directly connected to the taxed income. Suchtreatment is consistent with the territoriality principle enshrined in internationaltax law and recognized by EC law, while EC law does not preclude a MemberState from allowing costs that do not have such a connection to be taken intoaccount.The Court defined directly connected operating expenses as expenses whichhave a direct economic connection to the provision of services that gave rise totaxation in the source state, and which are, therefore, inextricably linked to theseservices, such as e.g. travel and accommodation costs. The place and time atwhich the costs are incurred are immaterial in this context. The question of whichoperating expenses claimed by Centro Equestre were directly connected to theprovision of services that gave rise to taxation in Germany was left to be decidedby the referring national court.The consequence of the second condition, that a deduction of directly connectedexpenses and refund of withholding tax is only granted when the directly con-nected expenses exceed 50% of the gross proceeds derived from the services pro-vided in Germany, is that a deduction in respect of the costs directly connected tothe economic activity concerned is not automatically obtainable when theincome from that activity is taxed. Therefore it constitutes a restriction on thefreedom to provide services.JustificationsA justification based on the argument that, because the non-resident could alsodeduct the same costs in Portugal, allowing the same type of expenses to be


Commission v. Belgium C-433/04

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deducted in Germany could lead to a double deduction, was rejected on the fol-lowing grounds:(i) the tax treaty between Germany and Portugal provides for a tax credit in

Portugal with respect to the German tax levied on the German-sourceincome of Portuguese performers, which allows Portugal to review whichexpenses were deducted in Germany;

(ii) the German Income Tax Act provides for the exchange of information con-cerning the application for repayment submitted by non-resident taxpayers,which makes it possible to prevent any double counting of costs;

(iii) the Mutual Assistance Directive provides for exchange of informationbetween the tax authorities concerned, which contributes to achieving theobjective of avoiding that costs are being counted twice.

Case C-433/04

Commission of the European Communities v. Kingdom of Belgium

Synopsis

It is contrary to the freedom to provide services for a Member State to demanda 15% unconditional withholding on the remuneration for services providedby contractors in the construction sector, not registered within that State,regardless of whether or not they incur tax liability within that Member State.The same applies to the rule making the principals jointly and severally liablewith contractors for the tax debts of the contractors. Such measures are dis-proportionate and therefore cannot be justified by the need to avoid tax eva-sion.

Facts

On 8 October 2004, the Commission brought proceedings against Belgiumregarding the obligation for principals and contractors active in construction,who entered into contracts with third parties not registered in Belgium, to with-

Decision date: 9 November 2006Procedure type: Infringement procedureAG opinion: Tizzano, 6 April 2006Justifications: Tax avoidanceDecision type: JudgmentLegal basis: Art. 49 EC Treaty, Art. 56 TFEU (Freedom to provide

services)Host State/Home State: Host StateKeywords: Corporate income tax, individual income tax, cross-

border services, cash-flow disadvantage, proportionality, tax avoidance, tax at source, withholding tax

Authentic language: French


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hold 15% of the sum payable under the contract. The Commission claimed thatthe withholding obligation was incompatible with the freedom to provide ser-vices, together with the provisions stating that principals and contractors werejointly and severally liable for the tax debts of the non-registered parties withwhom they entered into contracts. During pre-court proceedings, the Belgiangovernment argued that the provisions were necessary to prevent tax avoidancein the construction sector.


The Belgian Income Tax Code (ITC) determined that principals or contractorswho entered into contracts for construction activities with contractors not regis-tered in Belgium were jointly and severally liable with the non-registered con-tractor for the tax debts of the latter. The provision also applied to non-registeredBelgian parties. The ITC restricted the liability of the Belgian party for all out-standing Belgian tax debts of the service provider for the tax year concerned up to35% of the price agreed for the activities concerned. In addition, principals and contractors who entered into contracts with foreignparties not registered in Belgium had to withhold 15% of the remuneration due,excluding VAT. The ITC stated that the tax withheld would be refunded onrequest only after it had been determined that the non-registered entrepreneur hadpaid all tax debts. The issue in the case was whether or not the provisions described were compat-ible with the freedom to provide services (Arts. 49 and 50 of the EC Treaty).

Decision

ScopeThe ECJ decided that the case had to be viewed in the light of the freedom toprovide services.Discrimination/restrictionThe ECJ referred to the earlier case law, in which it has been consistently heldthat Art. 49 of the EC Treaty requires the abolition of any restriction on thefreedom to provide services, even if this restriction applies to national providersas well as services providers of other EU Member States, which prohibits orimpedes or makes less advantageous the activities of service providers fromother EU Member States, who lawfully provide those services in their EUMember State of origin. The ECJ recalled that Art. 49 of the EC Treaty coversmeasures that are capable of deterring an operator from exercising the freedom toprovide services.The ECJ considered that the fact that a principal or contractor in Belgium had towithhold 15% of the price charged by any unregistered service provider effec-tively deprived that provider of the ability to immediately dispose of a part of hisincome, as it could only be recovered via a specific administrative procedure.Consequently, a disadvantage existed for services providers who were not regis-tered and not established in Belgium, which could prevent such services provid-


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ers from accessing the Belgian market to provide services in the constructionsector in Belgium.The ECJ also held that the provision of Belgian law, which made the principal orcontractor who contracted with a service provider not registered in Belgiumjointly liable for all tax debts of that provider relating to earlier taxable periods(limited to 35% of the price of the work to be carried out), was liable to deter thatprincipal or contractor from having recourse to the services of such providers.The Court held that the fact that the provision also applied to unregistered serviceproviders established in Belgium did not alter the conclusion that the measure inquestion made it difficult for unregistered (in Belgium) service providers estab-lished in other EU Member States to access the Belgian market.Accordingly, both the withholding obligations and the joint liability constituted arestriction on the freedom to provide services.JustificationsThe ECJ held that these restrictions could not be justified by overriding require-ments relating to the public interest, in particular by the need to prevent tax fraudin the construction sector, as relied on by the Belgian government. The ECJ observed that the provisions challenged were not limited to cases whereservice providers not established in Belgium were liable to taxes and deductionsin Belgium, but applied generally and on a precautionary basis to all service pro-viders not registered in Belgium and that, therefore, the provisions went beyondwhat is necessary for preventing tax fraud.With regard to the withholding obligation, the ECJ noted that a less restrictivemeasure could be a system based on an exchange of information between prin-cipals and contractors, their contracting partners and the Belgian tax authorities.Under this system, principals and contractors could obtain details of any taxdebts of their contracting partners, or they could be required to inform theBelgian tax authorities of any contract concluded with unregistered contractingpartners or any payment made to them. Also with regard to the joint liability, theECJ held that a less restrictive system could be applied which, e.g., allowedservice providers to prove the compliant status of their tax situation. Finally, thedisproportionate nature of the measures was compounded by their cumulativeapplication.


Documents

C Case C-64/11 O European Commission v. Kingdom of … · European Commission v. Kingdom of Spain ... freedom of establishment by transferring its activities to another ... Case C-261/11