December 2016 - edition 162EU Tax Alert

Highlights in this edition

• CJ rules that tax benefits for multinationals could form forbidden State aid (World Duty Free Group)

• Commission publishes final decision in Apple State aid investigation

• CJ rules that Portuguese legislation on relief of economic double taxation is in breach of the free movement of

capital and the EU-Mediterranean Agreements concluded with Tunisia and Lebanon (Secil)

• Commission proposes legislation on modernising VAT for cross-border e-commerce

2

Contents

Highlights in this edition• CJ rules that tax benefits for multinationals could form

forbidden State aid (World Duty Free Group)

• Commission publishes final decision in Apple State

aid investigation

• CJ rules that Portuguese legislation on relief of

economic double taxation is in breach of the free

movement of capital and the EU-Mediterranean

Agreements concluded with Tunisia and Lebanon

(Secil)

• Commission proposes legislation on modernising

VAT for cross-border e-commerce

Direct taxation• CJ finds Danish legislation that denies exemption for

interest paid by foreign subsidiaries to be in breach of

the freedom of establishment (Masco)

• CJ rules that Portuguese personal income tax

provisions levying exit tax and denying tax deferral are

in breach of the fundamental freedoms (Commission

v Portugal)

• AG Kokott opines on UK exit tax legislation on trusts

(Panayi)

• AG Kokott opines on Belgian fairness tax levied on

dividend distributions (X)

• EESC Opinion on proposed directive regarding

hybrid mismatches with third countries

VAT• CJ rules on VAT treatment supply of horses for

races, deductibility of input VAT on related costs and

applicability reduced VAT rate on operation of racing

stables (Baštová)

• AG opines on application of reverse charge

mechanism on Hungarian supply of movable property

sold in a compulsory sale procedure (Farkas)

• EESC Opinion on the VAT Action Plan

• VAT Expert Group (“VEG”) Document on first-step

issues to be examined for the Definitive VAT regime

for intra-EU trade

• Commission publishes summary report on

consultation on reduced VAT rates for electronically

supplied publications

• Council authorizes Italy to continue to apply

derogating measure limiting deduction of VAT on

expenditure for motorized road vehicles not wholly

used for business purposes

Customs Duties, Excises and other Indirect Taxes• Update of dual use list

• The European Commission has launched an open

consultation on excise duties applied to manufactured

tobacco

3

for State aid purposes. The General Court decided in

November 2014 that the measure was not selective

because the Spanish tax benefit was open to every

undertaking; i.e., the benefit was not limited to certain

undertakings or the production of certain goods. The

CJ now reversed this decision and ruled that it is not

relevant that the measure is in principle open for every

undertaking. The CJ clarified that the mere fact that the

tax benefit is a derogation from the normal tax system

and discriminates between two taxpayers who are in the

same factual and legal situation, is in general enough to

be selective under the State aid rules.

This broad application of the selectivity criterion in

State aid law may have an effect on any measure in

Member States providing for preferential tax treatment

for multinationals only, which cannot be justified by the

nature or general system of the tax system.

Furthermore, iis likely that the Commission will present

this judgment as supportive of its reasoning in some

State aid cases involving multinationals..

Commission publishes final decision in Apple state aid investigation On 19 December 2016, the Commission published its

final decision in the formal State aid investigation into

two advance pricing agreements (APAs) obtained by

Apple in Ireland in 1991 and 2007. According to the

Commission, those APAs amounted to unlawful State

aid to be recovered from Apple. The press release dated

30 August 2016 announcing the decision left many

questions concerning the Commission’s arguments for

the decision. The now published non-confidential version

of the final decision provides more insight into the

Commission’s reasoning. Ireland has already appealed

the Commission’s decision and Apple has announced it

will do so as well.

The APAs issued by the Irish tax authorities confirmed that

nearly all sales profits recorded by two Irish incorporated

but non-Irish resident Apple group companies were

attributable to head offices outside Ireland, rather than to

their Irish trading branches. The Commission’s analysis

is that the allocation of profit to the foreign head office

of the two Apple group companies is in violation of the

arm’s length principle and amounts to unlawful State aid.

Highlights in this editionCJ rules that tax benefits for multi-nationals could form forbidden State aid (World Duty Free Group)On 21 December 2016, the CJ issued its judgment in case

Commission v World Duty Free Group (Joined cases

C-20/15 and C-21/15). The CJ ruled that tax benefits

merely available for multinationals and derogating

from the ordinary tax system could amount to unlawful

State aid. This judgment may have a serious impact on

any measure of Member States seeking to provide for

preferential tax treatment for multinationals only.

Within the EU, in some circumstances selective tax

benefits are forbidden under the State aid rules. In the

World Duty Free Group case the CJ confirms a broad

application of the selectivity criterion. The CJ embraces a

discrimination approach for tax measures which derogate

from the normal tax system. For instance, measures

which provide for a different treatment of international

transactions in comparison to national transactions can

be selective, unless justified by the nature and general

structure of the tax system (for instance relief for double

taxation). So, contrary to the ruling of the General Court,

the CJ now clarifies that it cannot be deduced from the

CJ’s standing case law that, in order to demonstrate the

selectivity of a national measure, it is always required

to identify a particular category of undertakings that

exclusively benefit from that measure.

This means that tax benefits merely available for

multinationals and which form a derogation from the

normal tax system could fall within the scope of the State

aid provisions.

The cases at hand deal with a Spanish measure

introducing a more beneficial amortization regime for

financial goodwill arising from foreign acquisitions

as compared to domestic acquisitions. The Spanish

measure was applicable irrespective of the type

of activities or nature of assets of the company. The

measure is effectively a subsidy for Spanish companies

making certain foreign acquisitions. The crucial question

was whether the distinction between national and

international transactions makes the measure selective

4

In its decision, the Commission sets out its methodology

to calculate the value of the undue competitive advantage

enjoyed by Apple. In particular, Ireland must allocate to

the Irish branch of each company all profits from sales

previously allocated to the head offices and apply the

normal corporation tax in Ireland on these re-allocated

profits. The amount of unpaid taxes to be recovered by the

Irish authorities would be reduced if other countries were

to require Apple to pay more taxes on the sales profits

recorded by the two Irish companies or if the US were to

require an increased contribution of the two companies to

Apple’s R&D expenditure. Notably, the decision does not

ask for the reallocation of any interest income of the two

companies that can be associated with the head offices.

The decision, accessible here, confirms that the

Commission remains determined to challenge potential

State aid elements arguably embedded in tax rulings.

The published decision does not contain many new

arguments compared to previous similar State aid

decisions that have been published.

There is widespread criticism on the Commission’s novel

approach, claiming that the Commission has developed

its “own” version of the arm’s length principle, which

should not be the benchmark for State aid purposes.

Ultimately, it will be the Court of Justice of the European

Union that will decide on whether or not this approach is

in line with the provisions of the Treaty on the Functioning

of the European Union.

Three other formal State aid investigations into

individual tax rulings are still ongoing, involving Amazon

(Luxembourg), McDonald’s (Luxembourg) and Engie

(Luxembourg). More formal State aid investigations in

relation to tax rulings are expected to follow.

CJ rules that Portuguese legislation on relief of economic double taxation is in breach of the free movement of capital and the EU-Mediterranean Agreements concluded with Tunisia and Lebanon (Secil) On 24 November 2016, the CJ issued its judgment in the

case SECIL – Companhia Geral de Cal e Cimento SA

v Fazenda Publica (C-464/14). The case deals with the

Portuguese regime on relief of economic double taxation

According to the Commission, Ireland should have taxed

a higher portion of the profits.

The Commission’s arguments can be summarized as

follows:

• First, the Commission argues that the Irish Revenue

should have examined whether the allocation of Apple

intellectual property licences could be considered at

arm’s length on the basis of a two-sided functional

analysis. Given (i) the absence of employees at head

office level, and (ii) what the Commission perceives

as a lack of involvement of the companies’ boards

in intellectual property matters, it considers that the

head offices did not control or manage the relevant

Apple intellectual property licences. According to the

Commission, the related trading income should be

allocated to the branches in Ireland, rather than to

the head offices.

• By an alternative line of reasoning, the Commission

argues that even if the allocation of intellectual property

to the head offices were justified, the profit of the Irish

branches departs from a reliable approximation of a

market-based outcome in line with the arm’s length

principle, because the applied allocation methods

are perceived as not being correct. First of all, the

Commission challenges the choice for the branches

as less complex given the limited capacity of the

head offices to control risk as compared to the scope

of the activities of the Irish branches. Second, the

Commission considers that the choice of operating

expenses as profit level indicator instead of sales (for

the one branch) or total costs (for the other branch)

inappropriately lowered the annual taxable profits of

the Irish branches. Third, the Commission rejects the

selection of comparables.

• Finally, the Commission observes that although

Ireland argued that the relevant Irish tax rules do not

require Irish Revenue to follow the guidance provided

by the OECD framework when issuing tax rulings,

the one-sided profit allocation methods actually

endorsed by the contested APAs as well as in other

Irish tax rulings appear to be based on and in line with

the OECD Transfer Pricing Guidelines. Therefore, the

Commission submits that the arm’s length principle

is inherent in the application of the relevant Irish

tax rules and must, therefore, be followed by Irish

Revenue.

5

are subject to the standard corporate tax rate. According

to the CJ, such difference in treatment is likely to

discourage companies resident in Portugal from investing

their capital in companies established in non-member

States to the extent that income from capital originating

in non-member States receives less favourable tax

treatment. Therefore, it constitutes a restriction to the free

movement of capital.

As regards possible justifications the Court started by

analysing the argument based on the need to prevent tax

avoidance considering, notably, the absence of a legal

framework such as the Directive on mutual administrative

assistance as well the fact that no Double Tax Treaty

had been concluded with Lebanon and that the article

on exchange of information of the Double Tax Treaty

concluded with Tunisia was not binding, contrary to the

Directive. The CJ reminded, however, that a justification

based on the prevention of tax avoidance can only be

justified in the case the legislation at stake specifically

addresses wholly artificial arrangements. The legislation

at stake excludes, in general, the application of double

tax relief and does not specifically address those kinds

of artificial arrangements. As regards the effectiveness

of fiscal supervision, the Court observed that such

justification can only be accepted in the case the

legislation of one Member State makes the concession

of a tax benefit dependent on conditions that can only

be verified by obtaining the relevant information from

the competent authorities of a third State. In this case,

the Court considered that granting such benefit may be

dependent on demonstrating the status of tax liability

of the distributing company. In all events, the CJ stated

that the referring court should determine whether the

mechanism for exchange of information pursuant to a

relevant Double Tax Treaty with Tunisia is sufficient to

verify such condition. As regards Lebanon, the absence

of a tax treaty with Portugal could justify the refusal to

grant economic double tax relief if it proves impossible

to obtain information from Lebanon such to verify the

condition relating to the taxation of the distributing

company.

The CJ stressed the fact that, in general, for granting the

partial economic double tax relief (50% reduction), no

provision was in place requiring that profits were taxed at

in the case of dividends paid to the Portuguese company,

Secil, by its subsidiaries located in Tunisia and Lebanon.

The Portuguese legislation provides for a mechanism of

economic double taxation relief which is applicable both

to subsidiaries located in Portugal and to subsidiaries

located in EU Member States, and that meet the

conditions set forth in Article 2 of the Parent-Subsidiary

Directive.

Secil is a company resident in Portugal which held

majority shareholdings in companies located in Tunisia

and Lebanon. During the year 2009, it received dividend

income from those subsidiaries which was taxed in

Portugal without any economic double taxation relief. In

the year of 2012, it submitted a claim before the local tax

authorities and subsequently before the Portuguese First

Instance Tax Court claiming, in essence, that the limitation

of the Portuguese economic double taxation regime

was in breach of the EU-Mediterranean Agreements

concluded with Tunisia and Lebanon.

As a preliminary question, the CJ deal with the issue of

which freedom is applicable to the present case, i.e. was

it the freedom of establishment or the free movement

of capital. The CJ started by recalling its previous case

law according to which, in a context relative to the tax

treatment of dividends originating in a non-member

State, it is sufficient to examine the purpose of national

legislation in order to determine whether the tax

treatment of such dividends falls within the scope of the

provisions of the Treaty on the free movement of capital.

In that context, and since the legislation at issue in the

main proceedings is not intended to apply exclusively to

situations in which the recipient company has a decisive

influence on the distributing company, it must be held that

a situation such as that at issue in the main proceedings

falls under Article 63 TFEU, relating to the free movement

of capital. Subsequently it went to analyse whether the

situation at stake constituted a restriction on the free

movement. In this regard, it noted that the Portuguese

law provides for a difference in treatment as regards

dividend income depending on the origin of such income.

While dividends received from a Portuguese company

benefit from total or partial double tax relief, dividends

received from companies located in Tunisia and Lebanon

6

The proposals address four key actions:

• Introduction of an EU wide digital online portal for

businesses engaged in EU cross border online trade

in which all their VAT obligations for all EU countries

can be fulfilled.

• A simplified VAT regime for start-ups and micro-

businesses selling online within the EU. VAT on

cross-border sales under EUR 10,000 can be

handled domestically. SMEs will benefit from

simpler procedures for cross-border sales of up to

EUR 100,000.

• Abolition of the VAT exemption for import of small

consignments not exceeding a value of EUR 22.00,

aimed at combatting fraudulent transactions from

outside the EU.

• Allowing EU Member States to apply the same VAT

rates on e-books and e-newspapers (“e-publications”)

as the applicable rates on their printed equivalents.

Point 1. New VAT rules for sales of goods and services onlineCurrently, online traders are obliged to VAT register in the

EU Member States of their non-business customers. The

Commission now proposes that businesses submit one

simple quarterly VAT return across the whole EU, using

a new online portal. A similar system already exists for

sales of e-services.

Point 2. Simplifying VAT rules for start-ups and micro-businessesBelow a threshold of EUR 10,000 businesses selling

cross-border can continue to apply the VAT rules of their

home country. This threshold is optional. In addition, if the

supplier’s turnover is less than EUR 100,000 simplified

rules will apply for identifying where its customers are

based. These two thresholds would apply as early as

2018 on electronic services, and by 2021 for online

goods. Other proposed simplifications allow EU sellers to

apply home country rules in areas such as invoicing and

record keeping.

the level of the distributing entity. Therefore, the referring

court should determine whether such partial relief can be

applied in the case it is not possible to demonstrate the

liability to tax of the distributing company.

The CJ then went to analyse whether it was possible to

rely on the provisions of the EC-Tunisia and EC-Lebanon

agreements in order to challenge the Portuguese

legislation according to which, a company resident

in Portugal may deduct from its taxable amount the

dividends received from a company which is a resident

of that Member State but may not deduct dividends

distributed by a company resident in Tunisia or Lebanon.

In this regard the CJ confirmed that both Agreements with

Tunisia and Lebanon have direct effect and therefore, the

Portuguese legislation that precludes granting economic

double tax relief to dividends originating from companies

resident on those countries is in breach of the respective

Agreements.

Commission proposes legislation on modernising VAT for cross-border e-commerceOn 1 December 2016, the Commission proposed

changes to the EU VAT Directive for cross-border “B2C

e-commerce”. The proposals aim at minimizing burdens

arising from applying different VAT regimes on cross

border online sales and to reduce VAT compliance

costs. If adopted, the proposals will have a great impact

for businesses engaged in online sales. The proposals

will now be submitted to the European Parliament

for consultation and to the Council for adoption. The

proposal for VAT rates on e-publications can enter into

force immediately upon approval by the Council. Other

elements of the proposals are expected to enter into

force in 2018 and 2021.

The Commission’s proposals embrace a new VAT

approach for e-commerce and follow up on commitments

made by the Commission in the Digital Single Market

strategy for Europe (May 2015) and the VAT Action Plan

(April 2016). The changes should make it easier for

consumers and companies – in particular start-ups and

SMEs – to buy and sell goods and services online.

7

of a lending parent company established in Denmark

(Damixa), the interest paid by a borrowing subsidiary

established in Germany (Damixa Armaturen) which

cannot be deducted from the taxable profits of that

subsidiary by reason of the German legislation on thin

capitalisation. In a purely domestic situation, Denmark

would grant a tax exemption to a Danish company for

interest income where an affiliated Danish company

was not allowed a tax deduction for the corresponding

interest expenditure as a result the Danish rules on thin

capitalization.

The CJ started by dealing with the issue whether

the difference in treatment between domestic and

cross-border situations constitutes a restriction to

the fundamental freedoms. In that regard it noted the

exclusion of the tax advantage (exemption) for a resident

parent company in relation to interest paid to that

company by a subsidiary resident in another Member

State, in so far as that interest cannot be deducted from

the taxable profits of that subsidiary by reason of the

legislation of that Member State on thin capitalisation, is

liable to render less attractive the exercise by that parent

company of its freedom of establishment by deterring

it from setting up subsidiaries in other Member States.

Furthermore the Court considered that domestic and

cross-border situations were objectively comparable

taking into account the aim of the legislation at stake:

to avoid a series of charges over the same income.

Therefore it concluded that such difference in treatment

constitutes a restriction unless it can be justified by

overriding reasons of public interest.

As regards the need to safeguard the balanced allocation

of taxation powers between the Member States, the Court

considered that the Danish legislation that limits the tax

exemption solely to interest paid by a resident subsidiary

appropriately ensures a balanced allocation of the power

to impose taxes between the Member States concerned.

By allowing a resident company which has granted a loan

to a subsidiary resident in another Member State to deduct

all interest paid by its subsidiary where that subsidiary is

not entitled to deduct that interest expenditure under the

thin capitalisation rules of that other Member State, the

Member State in which the parent company is resident

Point 3. Action against VAT fraud from outside the EUCurrently, import into the EU of small packages with a

value less than EUR 22.00 per consignment is exempt

from VAT. Since this system is open to fraud and puts

EU businesses at a disadvantage, this exemption would

be abolished as from 1 January 2021. In addition, the

Commission has proposed a new scheme for distance

sales of goods imported from third countries not exceeding

EUR 150.00. The use of this new scheme will allow for

VAT to be declared and paid on imported goods ordered

online. As a result, in the view of the Commission, the

VAT collection will be drastically simplified. The proposed

date of entry into force of the import scheme is 1 January

2021.

Point 4. Equal rules for taxing e-books, e-news-papers and their printed equivalentsCurrently, the EU VAT Directive prevents EU Member

States from applying the same VAT rates to e-publications

and physical publications. In most EU Member States,

e-publications have a less favourable VAT treatment than

printed publications. The Commission now proposes to

grant all EU Member States the possibility to apply the

same VAT rates to e-publications as they currently apply

to printed publications.

The Commission’s proposals will now be submitted to

the European Parliament for consultation and to the

Council for adoption. The proposal for VAT rates on

e-publications can enter into force immediately upon

approval by the Council. Implementation of the first part

of the VAT e-commerce proposal is foreseen for 2018.

Measures such as the new online portal should come into

place in 2021.

Direct TaxationCJ finds Danish legislation that denies exemption for interest paid by foreign subsidiaries to be in breach of the freedom of establishment (Masco) On 21 December 2016 the CJ issued its judgment in case

Masco Denmark ApS, Damixa ApS v Skatteministeriet

(C-593/14). The case deals with the decision of the

Danish tax authority to include, in the taxable income

8

Portuguese personal income tax provision according

to which a taxable person who exchanges shares and

transfers his residence to another EU or EEA State must

include, for the transactions in question, any income not

taxed in the last fiscal year in which the taxable person

was still regarded as a resident taxpayer is in breach

of the free movement of workers and the freedom of

establishment. And second that the Portuguese personal

income tax provision according to which a taxable

person who transfers assets and liabilities related to an

activity carried out on an individual basis in exchange for

shares of a company with its head office or its effective

management in the territory of another Member State or

of another EEA State may not benefit from a deferral of

taxation resulting from the transaction in question is in

breach of the freedom of establishment.

The CJ started by analyzing the first question and

whether if the provision at stake constitutes a breach

to the free movement of workers and the freedom of

establishment. In that regard it recalled that Rules which

preclude or deter a national of a Member State from

leaving his country of origin in order to exercise either

his right to freedom of movement or his right to freedom

of establishment therefore constitute an obstacle to

that freedom even if they apply without regard to the

nationality of the national concerned. In the present case,

taxable persons who continue to reside in Portugal benefit

from a tax deferral on the capital gains resulting from the

exchange of the shares until the subsequent disposal of

the shares received upon the exchange, taxable persons

who transfer their residence outside Portugal are obliged,

as a result of that transfer, to pay the capital gains tax

resulting from that exchange immediately. According to

the Court, that difference in treatment as regards the time

of taxation of the capital gains at issue constitutes a cash-

flow disadvantage for the taxable person who wishes to

transfer his residence outside Portugal as compared to

a taxable person who maintains his residence in that

territory. While the former becomes liable, simply by

reason of such a transfer, to a tax on a capital gain which

has not yet been realised and which he therefore does

not have at his disposal, the latter taxable person will

have to pay that tax only when, and to the extent that, the

capital gains have actually been realized. The exclusion

would be foregoing, on the basis of the choice made by

companies having relationships of interdependence, its

right to tax the interest income received by the parent

company depending on the rules on thin capitalisation

adopted by the Member State of residence of the

subsidiary, which is what the legislation at issue in the

main proceedings seeks to avoid.

However the Court considered that such justification

went beyond what is necessary to achieve this objective.

According to the CJ, the freedom of establishment

cannot have the effect of requiring the Member State of

residence of a parent company which has granted a loan

to a subsidiary resident in another Member State, to go

beyond according a tax exemption to that parent company

for the amount of interest expenditure which could not be

deducted by the subsidiary if the thin capitalisation rules

of the first Member State were to be applied. That means,

in the present case, that a less restrictive measure for

the freedom of establishment would be for Denmark,

not to apply stricter rules for cross-border situations as

the current legislation, but rather limit the tax exemption

for interest paid by a subsidiary up to the amount that

the subsidiary is not entitled to deduct under the thin

capitalisation rules of other Member State.

As regards the objective of preventing tax avoidance,

the CJ concluded that he legislation at issue in the

main proceedings does not have the specific purpose

of preventing wholly artificial arrangements, set up

to circumvent Danish tax legislation, from attracting

tax benefits; rather, it generally excludes all resident

companies which have granted, for whatever reason, a

loan to a thinly capitalised subsidiary resident in another

Member State from attracting the relevant tax benefits

CJ rules that Portuguese personal income tax provisions levying exit tax and denying tax deferral are in breach of the fundamental freedoms (Commission v Portugal) On 21 December 2016, the CJ issued its judgment in

case European Commission v Portuguese Republic

(C-503/14). The case deals with two complaints made

by the Commission against Portugal. First, that the

9

proceed it is necessary to demonstrate the existence of

a direct link be established between the tax advantage

concerned and the offsetting of that advantage by a

particular tax levy. However and according to the CJ there

is no such direct link in this situation. While in a cross-

border situation the tax advantage (deferral) is offset by

a tax levy, since the amount of the tax due is necessarily

recovered at the time of transfer of the taxable person’s

residence outside Portugal, this is not the case when the

situation is purely internal, as the recovery of the tax on

capital gains resulting from an exchange of shares takes

place only in the eventuality of a definitive disposal of

the shares received during that exchange. Therefore,

so long as an individual does not dispose of the shares

that he has received, a taxable person who maintains his

residence in Portugal can still claim the benefit of the tax

advantage thus making the recovery of the tax from him

no more than a future possibility.

Finally the CJ rejected the third possibility based on the on

the effectiveness of fiscal supervision and the prevention

of tax avoidance and evasion, as Portugal merely argued

such justifications without further developing them.

As regards the second question at stake the Court started

by pointing out that natural persons who transfer all the

assets in question to a company with its head office and

effective management in Portugal, the capital gains tax

must be paid by the transferee company at the time of

the subsequent disposal of the assets. However, natural

persons transferring all of those assets to a company

with its head office or effective management in the

territory of a State other than the Portuguese Republic

become liable to capital gains tax at the time of such a

transfer. According to the CJ, such difference in treatment

results in a cash-flow disadvantage for a taxable person

who transfers all the assets in question to a company

with its head office or effective management outside

Portugal, compared to a taxable person who transfers

the same assets to a company with its head office and

effective management in Portugal, and thus constitutes

a restriction on the exercise of the right of establishment.

The Court went to analyze whether such restriction could

be justified by overriding reasons in the public interest.

Portugal relied on the need to preserve a balanced

of a cash-flow advantage in a cross-border situation

where it is available in an equivalent domestic situation

constitutes a restriction on the free movement of workers

and the freedom of establishment.

The Court went to analyze whether such restriction could

be justified by overriding reasons in the public interest.

Portugal relied first on the necessity of safeguarding the

balanced allocation of powers to impose taxes between

the Member States, in accordance with the principle of

territoriality, second, the need to preserve the cohesion

of the tax system and, third, the need to ensure the

effectiveness of fiscal supervision and the prevention of

tax avoidance and evasion.

As regards the first justification the Commission argued

that Portugal could not rely on such justification as

invoked in National Grid Indus case (C-371/10) since

that judgment related to the taxation of companies and

not individuals. However the CJ considered that there is

no objective reason for distinguishing, for the purposes

of the justification deriving from the objective of ensuring

a balanced distribution of the power to impose taxes

between Member States, between the exit taxation of

natural persons and that of legal persons in respect of

unrealised capital gains. However, while accepting such

justification, the CJ considered that the legislation at stake

went beyond what is necessary in order to achieve such

objective. The Portuguese provision does not leave the

choice to the taxable person who transfers his residence

from Portuguese territory to another Member State to

opt between, on the one hand, the immediate payment

of the amount of the tax on capital gains resulting from

an exchange of shares and, on the other hand, the

deferred payment of that amount, which necessarily

involves an administrative burden for the taxable person,

in connection with tracing the transferred assets, and

accompanied by a bank guarantee. Therefore, the CJ

concluded that the need to ensure the allocation of the

power to impose taxes between the Member States

could not justify the restriction of the freedoms.

Subsequently the CJ assessed the justification based

on the need to maintain the cohesion of the tax system.

The Court recalled that in order for such justification to

10

‘other legal persons’ may not be interpreted strictly and

includes forms of organisation such as a trust. Therefore

it concluded that a trust may rely on the fundamental

freedoms provided that is able to engage in economic

transactions in its own right and to that extent benefits

from and is subject to its own rights and obligations under

national law.

Subsequently AG Kokott went to analyze the question

whether he taxation of unrealised capital gains (that is to

say the taxation of hidden reserves) on the transfer of the

place of effective management constitutes a restriction

on the freedom of establishment. In this context, the AG

referred that a trust which wishes to transfer its place

of effective management outside the United Kingdom (or

which national law deems to have been so transferred

on the ‘exit’ of the majority of its trustees) suffers a

liquidity disadvantage - due to the triggering of immediate

taxation - by comparison with similar actors who maintain

their place of effective management in the United

Kingdom, in which the increases in value are not taxed.

Therefore for the AG there is indeed a restriction to the

freedom of establishment.

As regards possible justifications the AG stated that

an exit tax such as that at issue here is in principle

permissible for the purposes of preserving the allocation

of the powers of taxation. However such justification must

be proportional. In that regard, the AG remarked that the

fact that the tax debt relating to the unrealised hidden

reserves was incurred immediately is disproportionate

according to the case-law of the CJ. The AG added

that the exit tax would still be disproportionate even

considering that the hidden reserves were successfully

realised after the assessment to tax but before the due

date for payment of the tax debt. For the AG, even then,

there would continue to be a difference of treatment

by comparison with the domestic context. Therefore,

Kokott concluded that the tax at issue in the present

case remained disproportionate despite the fact that the

hidden reserves were realised before the due date for its

payment because there was no option to defer payment

at the time of the assessment to tax.

allocation of the powers to tax and the need to ensure

economic continuity. As regards the first justification the

CJ made reference to the fact of not being proportional

due to the existence of less restrictive measures as

previously mentioned.

In what refers to the second justification the Court stated

that he requirement for a transferee company to have

its head office and effective management in Portugal

is therefore ultimately intended to ensure that the

Portuguese State can tax the capital gains in question.

However, the Court concluded that such objective cannot

justify the different treatment of natural persons.

AG Kokott opines on UK exit tax legislation on trusts (Panayi) On 21 December 2016 AG Kokott delivered her Opinion

in case Trustees of the P Panayi Accumulation &

Maintenance Settlements v Commissioners for Her

Majesty’s Revenue and Customs (C-646/15). The case

deals with the UK exit taxation in case the majority of

the trustees transfer their residence abroad or on the

appointment of trustees most of whom are resident

abroad. The dispute in the main proceedings concerns

four trusts originally managed by trustees who were

resident in the United Kingdom but were later replaced

by new trustees, with the result that the trustees were

then resident in Cyprus.

Concretely, the case raises the question of whether the

fundamental freedoms provided for in the TFEU may

also be relied on by a trust. Furthermore it also discusses

whether there is also a right to tax where the exit State

to some extent retains an option to tax notwithstanding

the exit. Furthermore it is also raised before the Court

whether the fact that hidden reserves are voluntarily

realised after the assessment to tax but before the due

date for payment of the tax debt may have a bearing on

that assessment.

As regards the first question the issue raised is whether

an ‘arrangement’ such as a trust (created under UK law)

may rely on one of the fundamental freedoms. According

to the AG, that depends on whether trusts are ‘other legal

persons’ within the meaning of Article 54 TFEU. In that

regard AG Kokott started by referring that the concept of

11

permanent establishment, it is subject to the fairness tax

if it itself distributes profits. Consequently, a non-resident

company with a permanent establishment in Belgium

is treated less favourably than if it were to maintain a

subsidiary there.

As regards this argument, the AG mentioned the fact

that the freedom to choose the legal form is not to be

understood as an independent requirement. A difference

in treatment between a PE and a subsidiary can only be

understood if there is an adverse treatment of the cross-

border situation compared with a purely domestic one.

However, in the opinion of the AG in the present case,

there is no such adverse treatment. Resident and non-

resident companies alike are subject to the same tax rate

with regard to the levying of the fairness tax. Also, the

chargeable event is the same in both cases, namely the

distribution of profits where deductions were taken in the

same taxable period for losses carried forward and for

risk capital.

The second part of the first question dealt with the issue

whether the freedom of establishment precludes the

levying of the fairness tax in such a way that non-resident

companies that operate in Belgium through a permanent

establishment are subject to it when they distribute

profits, even though the permanent establishment’s

profits were retained, whereas resident companies that

retain profits in full are not. According to the AG, the non-

resident company is treated less favourably than the

resident company, since only the former is subject to the

fairness tax. However, the two situations are manifestly

not objectively comparable with respect to the levying of

the tax.

As regards the second question, the issue is whether the

levying of the fairness tax qualifies as a withholding tax

within the meaning of Article 5 of the Parent-Subsidiary

Directive. AG Kokott explained that three conditions must

be met in order to assume that a tax is a withholding tax

within the meaning of Article 5 of the Parent-Subsidiary

Directive: the tax is triggered by the distribution of profits,

the taxable amount is based on the amount of the

distribution, and the taxable person is the recipient of the

distribution. In the present case, while the fairness tax

Finally the AG concluded that the principle of

proportionality does not oblige the exit State to take

account of any subsequent fall in value. According to the

AG subsequent increases and decreases in value are in

principle to be taken into account not in the exit State but

only in the State of establishment (that is to say, in the

State of destination).

AG Kokott opines on Belgian fairness tax levied on dividend distributions (X) On 17 November 2016, AG Kokott delivered her Opinion

in case X (C-68/15). The case deals with the fairness tax

levied on undistributed profits. This tax applies where

companies distribute profits but have effectively lowered

their tax liability for tax on profits in the same taxable period

by making use of deductions such as the carry forward of

losses and the deduction of the so-called risk capital. In

simple terms, the taxable amount is based on the amount

by which a company’s distributed profits exceed its

taxable profits. Prior to applying the tax rate, that amount

is multiplied by a so-called proportionality factor, which

reflects the extent to which profits were reduced through

the use of loss and risk-capital deductions. Questions

arose about whether the fairness tax is compatible with

the freedom of establishment, since it also covers non-

resident companies that operate in Belgium through

a permanent establishment rather than through a

subsidiary. Moreover, since the tax has characteristics of

both a corporation tax and a dividend withholding tax, it

is in dispute whether the tax is precluded by the Parent-

Subsidiary Directive.

Part of the first question aimed at clarifying whether the

freedom of establishment precludes national legislation

that levies a tax on non-resident companies in the case

of a distribution of profits when they maintain a PE in

Belgium, but not when they exercise their activities in

Belgium through a subsidiary. The argument raised was

based on the fact that, the way in which the fairness tax

was levied posed an obstacle to non-resident companies

in freely choosing the legal form for their activities in

Belgium. If a non-resident company operates there

through a subsidiary, it faces tax only indirectly, namely to

the extent of the profits distributed to it by the subsidiary.

But if it exercises its activities in Belgium through a

12

EESC Opinion on proposed directive regarding hybrid mismatches with third countries On 21 November 2016, the European Economic and

Social Committee (“EESC”) published its Opinion on

the Proposal for a Council Directive amending Directive

(EU) 2016/1164 as regards hybrid mismatches with third

countries.

The EESC welcomed the proposal as fitting well within

the scope of the Commission’s efforts in tackling

aggressive tax planning and the OECD BEPs project.

It considered in general that special attention should be

given to imported mismatches taking into account also

that further clarification is required in order to ensure

coherent implementation in all Member States.

Furthermore the Opinion states that while the EESC

supports the current approach concerning hybrid

mismatches, it considers that Member States should also

look at the causes of hybrid mismatch arrangements,

close the potential loopholes and prevent aggressive

tax planning, rather than simply seeking to obtain tax

revenue.

Finally, the EESC recommended all Member States

to look into the possibility of introducing and applying

sanctions on taxpayers benefiting from hybrid mismatch

arrangements, in order to prevent and/or tackle such

practices.

VAT CJ rules on VAT treatment supply of horses for races, deductibility of input VAT on related costs and applicability reduced VAT rate on operation of racing stables (Baštová) On 10 November 2016, the CJ ruled in the case Pavlína

Baštová (C-432/15). Ms Pavlína Baštová is a VAT

taxable person by virtue of the operation of horse racing

stables in the Czech Republic. She breeds and trains her

own race horses and those of other owners. In addition,

Ms Baštová had two horses which she used for agro-

tourism and training young horses, and breeding mares

and foals, from which she hoped to derive future income.

Ms Baštová earns two types of income. The first type

meets the first two conditions, the third condition is not

met, since the taxable person owing the fairness tax is

not the recipient of the distribution but rather the company

distributing the profits. Therefore, she concluded that the

Belgian fairness tax does not constitute a withholding tax

within the meaning of Article 5 of the Parent-Subsidiary

Directive.

The third and last question to be analysed was whether

Article 4(3) of the Parent-Subsidiary Directive precludes

the levying of the fairness tax if it has the effect that, in the

case where a company distributes a received dividend in

a year subsequent to the year in which it received that

dividend itself, it is taxed on a portion of the dividend

that exceeds the amount permitted under that provision.

In concrete terms, the question addressed situations in

which a company that is resident in Belgium is the middle

link in a chain of companies, receives dividends itself,

and then subsequently, in turn, (re-)distributes them.

Moreover, the question is based on the premise that such

dividends, if (re-)distributed in a year subsequent to the

year in which they were received, are ultimately subject

to a higher tax burden than that allowed by Article 4(3)

of the Parent-Subsidiary Directive because of the way

in which the fairness tax is levied. AG Kokott recalled

that Articles 4 and 5 of the Parent-Subsidiary Directive

gives a fundamental decision about the allocation of

the power to tax a subsidiary’s profits. In principle, the

Member State of the subsidiary has the right to tax its

profits. This is intended to ensure that distributions of

profit that fall within the scope of the Parent-Subsidiary

Directive are fiscally neutral. The same applies to chains

of companies, since double or multiple taxation is to be

eliminated, also where profits are distributed through the

chain of subsidiaries to the parent company. Therefore,

it is incompatible with the Parent-Subsidiary Directive if

the profits of a company further up the chain are subject

to a higher tax burden than that permitted by Article 4 of

the directive. In this regard, it cannot be of significance

whether that burden takes hold when dividends are

received or instead, when they are redistributed. A

different interpretation would mean that a Member State

could avoid its obligations under the directive simply by

changing the way it levies taxes.

13

AG opines on application of reverse charge mechanism on Hungarian supply of movable property sold in a compulsory sale procedure (Farkas) On 10 November 2016, Advocate General Bobek

delivered his Opinion in the case Tibor Farkas (C-564/15).

Mr Farkas bought a mobile hangar at an electronic

auction, in a compulsory sale of an insolvent company’s

assets. Mr Farkas paid the sale price as well as the

amount of VAT charged by the insolvent company on

that supply. Subsequently, he sought to have this amount

deducted in his VAT returns.

The tax authorities indicated, however, that the

transaction should have been subjected to the reverse

charge mechanism. Under that mechanism, Mr Farkas

was obliged to pay that VAT to the tax authorities. The

tax authorities, therefore, requested that payment and,

in addition, fined Mr Farkas in the amount of 50% of the

VAT due. Mr Farkas alleged that such decisions taken

by the national tax authorities infringe EU law and stated

that the tax authorities had deprived him of his right to

deduct VAT because of a mere error of form, as the

invoice in question was issued by the insolvent company

in accordance with the ordinary tax system instead of the

reverse charge mechanism.

The matter ended up before the referring court, which

referred questions to the CJ on whether such decisions

of the tax authorities comply with the EU VAT Directive.

According to the AG, Hungary is prevented from applying

the reverse charge mechanism to the supply of a movable

hangar as that EU Member State had not been granted a

derogation based on Article 395 of the EU VAT Directive.

Moreover, the AG came to an interim conclusion that the

principle of neutrality of VAT does not prevent the tax

authorities from requesting a VAT taxable person, who

has paid undue VAT to the supplier, to pay the VAT under

the reverse charge mechanism. However, in the AG’s

view, the principle of neutrality of VAT prevents the tax

authorities from denying that VAT taxable person the right

to deduct input VAT which the VAT taxable person failed

to declare correctly under the reverse charge mechanism,

where there is no evidence of fraud on his or her part.

consists of prizes obtained by her own race horses and

the trainer’s share of prizes won by the horses of other

third parties. The second type results from the operating

of racing stables and consists of payments made by horse

owners for training their horses for races, and payments

made for stabling and feeding the horses.

In her VAT return, Ms Baštová claimed a full right to

deduct VAT on the supplies acquired, which concerned

her horses and horses belonging to others. In the same

VAT return, Ms Baštová also declared output VAT at the

reduced rate of 10% on the service ‘operation of racing

stables’ which she supplied to the other horse owners.

The Czech tax authorities did not accept the claim for full

deduction, nor did it agree with the reduced rate of VAT

on the service ‘operation of racing stables’. Ms Baštová

brought an appeal against that decision and finally, the

matter ended up before the Supreme Administrative

Court. Having doubts as to the interpretation of the

provisions of the EU VAT Directive, the referring court

decided to stay the proceedings and to refer questions to

the CJ for a preliminary ruling.

The CJ ruled that the supply of a horse by its VAT taxable

owner to the organizer of a horse race for participating

purposes does not constitute a supply of services for

consideration, where it does not give rise to a direct

remuneration and where only the owners of horses which

are placed in the race receive a prize. Furthermore, in

the view of the CJ, a VAT taxable person who breeds and

trains his own race horses and those of other owners, has

a right to deduct input VAT on transactions relating to that

preparation, on the ground that the costs made are part of

the general costs linked to his economic activity, provided

that the costs incurred in each of those transactions have

a direct and immediate link with that overall activity. In

such case, any prize won on account of the placing of

one of his horses in a race is not to be included in the

VAT taxable amount. Finally, according to the CJ, the VAT

reduced rate may not be applied to a single composite

supply of services, made up of several components,

where the use of sporting facilities, within the meaning of

point 14 of Annex III to the EU VAT Directive, and training

of the horses constitute two components having equal

status or where the training of the horses constitutes the

main component.

14

current VAT system and issues to be addressed in order

to implement the first step. A timetable with two stages is

also proposed.

Commission publishes summary report on consultation on reduced VAT rates for electronically supplied publications The Commission has published a summary report on

responses received from its open public consultation on

reduced VAT rates for electronically supplied publications.

This consultation was held for eight weeks, between

25 July and 19 September 2016, using the EU Survey

tool. A large majority of respondents were readers, but of

the 251 responses, businesses and organizations also

participated largely in the consultation together with 107

authors. The responses between the different groups of

respondents do not differ significantly. The key findings

are:

1. 94% of the respondents agreed that Member States

should be allowed to apply a reduced VAT rate to

e-books.

2. 88% of the respondents agreed that Member States

should be allowed to apply a reduced VAT rate to

e-newspapers and e-periodicals, too.

3. A number of respondents (45%) found that super-

reduced and zero rates for printed publications should

not be abolished. Out of these 45%, an overwhelming

majority (90%) was in favour of allowing all Member

States to apply super-reduced or zero VAT rates to

printed publications and e-publications.

Council authorizes Italy to continue to apply derogating measure limiting deduction of VAT on expenditure for motorized road vehicles not wholly used for business purposes By Council Implementing Decision of 8 November

2016, Italy has been authorized to continue to apply the

derogating measure from Articles 26(1)(a) and 168 of

the EU VAT Directive. For the period until 31 December

2016, Italy had already been authorized to limit the right to

deduct VAT charged on expenditure on certain motorized

road vehicles not wholly used for business purposes to

40%. This authorization also provides that the use for

private purposes of such vehicles is not to be considered

EESC Opinion on the VAT Action Plan The European Economic and Social Committee

(“EESC”) has published its Opinion on the Action Plan

on VAT (COM(2016) 148 final). The EESC welcomes the

Action Plan, which aims to move towards a definitive VAT

system in the EU, and endorses both its objectives and

the approach based on four components with a short-

term and medium-term perspective. In the Committee’s

view, the transformation of the current system should

result in a definitive VAT system that is clear, consistent,

robust and comprehensive, as well as proportionate and

future-proof. For the EESC, it is important for this Action

Plan to be fully implemented in its entirety and as an

indivisible whole, with all its elements. Furthermore, it is

important, according to the EESC, to make closing the

VAT gap and tackling fraud a priority and to deliver results

without delay. With regard to the increased flexibility on

reduced rates, the Committee highlights its concern that

this could lead to greater fragmentation of VAT rates

between Member States, which would be detrimental to

the clarity and applicability of the system, particularly for

SMEs.

VAT Expert Group (“VEG”) Document on first-step issues to be examined for the Definitive VAT regime for intra-EU trade The European Commission Directorate-General Taxation

and Customs Union has made available a document

in respect of first-step issues to be examined for the

Definitive VAT regime for intra-EU trade (VEG No. 57).

The purpose of the document is to examine the main

features of such a system and to identify and examine

the issues which could arise and how to tackle them so

as to prepare the drafting of the legislative proposal to be

tabled in 2017. To this end, in the Annex to the document,

the workings of such a system are described in more

detail and some basic scenarios are outlined. The

document addresses general rules, such as the place of

taxation, the introduction of a Certified Taxable Person

(CTP) and general obligations. Furthermore, it refers

to the rules as regards supporting evidence of goods

having been transported to another EU Member State,

the special scheme for call-off stocks, rules regarding

‘chain transactions’, anti-avoidance and anti-fraud

measures, the various impacts of the new rules on the

15

reputational consequences for companies and their

employees.

The Commission has launched an open consultation on excise duties applied to manufactured tobacco The aim of the consultation is to obtain the views of all

stakeholders on a possible revision of the EU rules on

excise duties applied to manufactured tobacco. It offers

an early opportunity to comment on the need and the

possible options for such a revision. The consultation

also covers possible harmonization of tax treatment of

electronic cigarettes which, under the current rules, are

not harmonized.

Objective and scope of the consultation

This consultation is intended to gather the views of EU

citizens and stakeholders on a set of possible options for

the revision of Directive 2011/64/EU. The consultation

questionnaire is divided into several sections, namely:

1st section - on respondent’s profile and details.

2nd section - on the so-called electronic cigarettes and

heat-not-burn products, and possible tax harmonisation

issues.

3rd section - on the so-called ‘borderline’ cigarillos, and

possible related distortions of the market.

4th section - on fine-cut tobacco, including the so-called

make-your-own (or ‘volume’) tobacco, and possible

related distortions of the market.

5th section - on raw tobacco, intermediate products, and

possible legal uncertainties and diversion to the illicit

trade.

6th section - on water pipe tobacco, and possible tax

categorisation issues.

7th section - on the Minimum Excise Duty (MED) on

cigarettes, and possible disparities of implementation.

8th section - on the correspondence between excise and

customs classification systems for tobacco products, and

possible uncertainties.

Final remarks. Here you can upload any document you

might want to share with us (position paper, reports,

statistics etc.)

The consultation period ends on 16 February 2017.

as a supply for a consideration. In addition, certain

categories of vehicles and expenditure are excluded. The

Decision will expire on 31 December 2019.

Customs Duties, Excises and other Indirect TaxesUpdate of dual use list On 15 November 2016, EU Regulation No 2016/1969

was published. This regulation contains an update of

the list of dual use items that is included in the Dual Use

Regulation (Regulation (EC) No 428/2009.

Dual-use items are items that can be used for both civil

and military purposes; they are subject to controls for

exports outside of the EU territory but could also have an

impact on intra-EU transfers.

The lists of dual-use items are regularly updated to

take account of changes to control lists maintained by

international non-proliferation regimes and export control

arrangements.

Among the numerous changes made to the lists, the

most notable are:

• New controls for:

- Electronic equipment performing high-speed,

analogue-to-digital conversions

- Software for the operation and maintenance of

guidance sets

- Gel propellant rocket motors

- Certain chemicals

- Two viruses, the SARS-related coronavirus and

the Reconstructed 1918 influenza virus

• Removal of certain controls, such as those on

aerospace/missile seals, hydraulic fluids and

underwater cameras

• Changes to the control of laser measuring systems

The European Commission has published a summary of

the changes to the control lists.

It is advised that companies exporting dual-use items

should verify whether their exports will be impacted by

the changes to the lists. Non-compliance with EU export

controls rules can have serious criminal, financial and

16

Editors● Patricia van Zwet

● Bruno da Silva

Correspondents● Gerard Blokland (Loyens & Loeff Amsterdam)

● Kees Bouwmeester (Loyens & Loeff Amsterdam)

● Almut Breuer (Loyens & Loeff Amsterdam)

● Robert van Esch (Loyens & Loeff Rotterdam)

● Raymond Luja (Loyens & Loeff Amsterdam;

Maastricht University)

● Arjan Oosterheert (Loyens & Loeff Zurich)

● Lodewijk Reijs (Loyens & Loeff Rotterdam)

● Bruno da Silva (Loyens & Loeff Amsterdam;

University of Amsterdam)

● Patrick Vettenburg (Loyens & Loeff Rotterdam)

● Ruben van der Wilt (Loyens & Loeff Amsterdam)

www.loyensloeff.com

About Loyens & LoeffLoyens & Loeff N.V. is the first firm where attorneys at law,

tax advisers and civil-law notaries collaborate on a large

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international law and tax law firms makes Loyens & Loeff

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Editorial boardFor contact, mail: eutaxalert@loyensloeff.com:

● Thies Sanders (Loyens & Loeff Amsterdam)

● Dennis Weber (Loyens & Loeff Amsterdam;

University of Amsterdam)

Although great care has been taken when compiling this newsletter, Loyens & Loeff N.V. does not accept any responsibility whatsoever for any

consequences arising from the information in this publication being used without its consent. The information provided in the publication is intended

for general informational purposes and can not be considered as advice.

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