Thursday, June 30, 2005


"There is no art which one government sooner learns from another than that of draining money from the pockets of the people."
By Adam Smith
Previous quotes:
Week I
Week II
Week III
Week IV
Week V
Week VI
Week VII

Emigration fiction clause of Dutch inheritance tax not incompatible with free movement of capital

Advocate General (AG) Léger rendered his opinion in Case C-513/03 (van Hilten case). A preliminary ruling from the European Court of Justice (ECJ) was requested by the Court of Appeal of 's-Hertogenbosch on 5 November 2003. The final judgment is expected later this year or beginning of 2006.

A bit of backround: Dutch nationals who die or make gifts within 10 years of emigrating from the Netherlands are deemed to be still resident (“extended residence”) for purposes of gift and inheritance tax. in the Netherlands Non-Dutch nationals are not subject to this rule and are accordingly subjected to a less burdensome tax regime. Although this rule was declared by a lower court to be in breach of the freedom of capital movement under the EC Treaty as regards emigration within the EU, the question has arisen in the Van Hilten case whether the same would apply in the case of emigration outside the EU (Switzerland in this case). Both cases (EU/EU and EU/Third countries) are pending on the Supreme Court.

Basically, although the EU “freedoms” provided for under the EC Treaty are generally only applicable with regard to cross-border activity between member states, the freedom of capital movement, in certain circumstances, can also apply as regards cross-border activity between a member state and a third state. In view of the uncertainties surrounding this issue, the Dutch lower Court referred the matter to the ECJ for a preliminary ruling. The preliminary questions questioned whether the principle of freedom of movement of capital might also be invoked against the Dutch inheritance tax in the event of a Dutch national emigrating to a non-EU Member State, in this case Switzerland.

In a rather complex and somewhat surprising opinion the AG held that Art. 3 ITA (“extended residence” fiction) is not incompatible with Art. 73B(1) of the EC Treaty (currently art. 56). It rests to be seen if the same issue, but as regards emigration within the EU, will be solved in the same way. I hope to further expand on this issue soon. Till then au revoir.

Deloitte has published a good summary of the AG opinion. Click here to read it.

Wednesday, June 29, 2005

The EU tax dilemma

A friend of mine asked me the other day a tricky question about Europe and taxes. According to him, taxes can be levied at a local level, state or federal level and since up until now the EU is not a federal government, what is the business of the EU with regards to taxation? Should it mind its own business?

In fact, within the EU, the national governments retain exclusive powers with regard to direct taxation, i.e. the revenue they receive from personal income tax and corporation tax goes to their pockets. But Community policy does not totally stay away from taxation. Community tax policy has an impact on both direct taxation and indirect taxation (e.g. VAT and excise duties), which ultimately are liable to have an immediate impact on the single market. Such interference is in fact more visible in the indirect taxation field, although in recent years the push towards the harmonization on the field of direct taxation has been substantial.

An important point to take into account in this discussion is the internal market, which is one of the basic elements of the European Union. The internal market is the result of the Treaty of Rome and the basis of the free movement of goods, persons, establishment, services and capital. Community tax policy also aims to ensure that tax regulations do not impair the EU free movements (that being for example the free movement of establishment, capital or even the right of European citizens to work in any EU country). Certain common regulations and directives have also been adopted within the EU to ensure that the single market functions more smoothly and that each Member State receives a fair share of the tax revenue.

But (as you can imagine) there are still many inefficiencies and inconsistencies of having 25 member states and 25 different tax systems. The litigation that these days reaches the ECJ on the field of taxation is a good demonstration of such dilemma. On top of this, the rights of the Member States are protected, as any change made to Community tax rules requires a unanimous vote. This means in practice that it is difficult if not impossible to adopt far-reaching EU legislation on the field of taxation.

At the end, European tax is a dilemma. From one side, national governments must have sound public finances and respect the main EU economic policy objectives. For this they set the priorities for their own spending and taxes that they apply to generate the necessary revenue. They are also free to set the rates of corporation tax and personal income tax, as well as the taxes applied to savings and capital gains. They can set the rates of value added tax and excise duties according to their needs. BUT they have to abide to the EU internal market rules. Their tax regulations should not impair the EU free movement and the scope of that free movement is still in the process of being designed by the ECJ. That is why the dilemma grows by the time the scope of the internal market increases. The necessity to find a middle ground requires in my view rethinking the taxing powers of the EU. Stay back or go further. "Mind your own business or start a new business" in the words of my friend.

To overcome that dilemma the EU would need to acquire new competences of stabilization and redistribution. This would also presuppose a tax and spending capacity of the EU, which would be independent from the member states. And that my friend is a far, far of becoming reality!

What to expect from the UK Presidency of the EU

Following the rejection by France and the Netherlands of the EU Constitution, the recent EU summit failure to reach an agreement on the European Union's future budget, failure has become the "flavour of the month" in the EU corridors and plunged the EU into a middle age or juvenile crisis (depending how you see the leaders are acting!). While doubts are being expressed about the wisdom of enlargement, one should ask where does the issue of taxation in the EU fall?

In the context of those wider issues, the panorama of European taxation and the latest effect of the ECJ decisions on national revenues seems a bit trivial. Nevertheless, I would say that such an issue also mirrors those wider matters pending in the heads of the EU leaders. For example, where does the EU concern on establishing an internal market ends and the national interest of sustaining high tax revenues begin?

We know already that the United Kingdom, which takes over the presidency for the following six months, will not be paying to much attention to issues of taxation. Its main priorities lie elsewhere. Nevertheless, we also know that the UK Presidency plans to form a "high-level" group during its presidency to study the impact of ECJ tax cases on national policies and revenue. A recent commentator said that such study could only end up recommending two of the following possibilities: (a) change EU law or (b) change the ECJ! I would add that from a UK point of view, perhaps option (b) is the only admissible option!

If you want to follow such developments, please update your favourites and include the new link to the official website for the UK Presidency of the EU 2005, which runs from 1 July to 31 December 2005.

Monday, June 27, 2005

Attribution of Profits to a Permanent Establishment – Release of Discussion Draft of Part IV (Insurance)

The OECD has released on 27 June 2005 Part IV and final part of the Report on the Attribution of Profits to a Permanent Establishment. Part IV looks at the insurance industry and discusses how the authorised OECD approach applies to enterprises carrying on an insurance business through a permanent establishment. More specifically, Part IV applies the authorised OECD approach to the operation of property and casualty insurance, life insurance, and reinsurance activities. Comments to the Discussion Draft of Part IV (Insurance) should be submitted by 16 September 2005. The Discussion Draft of Part IV (Insurance) forms part of an ongoing OECD process intended to find a consensus regarding the attribution of profits to a permanent establishment.

Beginning in 1998, OECD launched a project to re-examine Art. 7 of the OECD Model Tax Convention. An initial Discussion Draft was published in February 2001 that focused on both general issues (Part I) and issues relating to the banking sector (Part II). This has been followed by drafts relating exclusively to banking and global dealing issues (Parts II and III) and by a significantly revised and expanded Report on Part I (General Considerations) issued in August 2004. Part IV represents the final part of the Report on the Attribution of Profits to a Permanent Establishment, which will ultimately result in the revision of the Commentary on Art. 7 of the OECD Model Tax Convention and the language of the Article itself. The originally projected completion date of the report is January 2007.

The report in PDF and the press release

Could you please stop hurting my Budget?

According to recent news, the UK will campaign during its EU Presidency (July – Dec 2005) for a reduction in the powers of the European Court of Justice (ECJ) in tax matters. The move, announced by UK officials on 20 June 2005, comes as a reaction to a recent series of cases in which the ECJ has acted to increase the circumstances in which companies may claim tax rebates. The cases have led to fears of a flood of rebate claims from big corporations that could amount to huge losses in revenue for governments across the EU.

In April, in the Marks & Spencer case, the court's advocate-general gave a preliminary view that refunds could be claimed in relation to offshore subsidiaries. In May 2005, in an Austrian case, Kretztechnik, the court ruled that companies could recover VAT on fees charged by advisors on share issues. Remember that at the June 2005 EcoFin Council, a proposal was made by the German finance minister Hans Eichel that a special committee be set up to look into the issue.

This shows that Member states are starting to be quite worried with the consequences of the ECJ judgments on their budgets. Worried enough, that they start lobbying for a more “member state friendly” ECJ.!

But, I am quite suspicious of this type of approaches. The role of the ECJ in removing discriminatory tax provisions and barriers to the exercise of fundamental freedoms is well known to all of you. The integration process is an ongoing process and the the institutions and processes need to develop over time. Europe will not and cannot develop overnight (in fact, the French and Dutch No to the EU Constitution demonstrate this).

The ECJ is arguably the most important factor in European Taxation nowadays. Failure to understand its role and its far-reaching judgments has already cost dearly to some Member States budgets. But what I do not understand is that instead of reviewing their domestic laws in order to achieve a good level of EU compliance, member states appear to want to go the other way and lobby for a more relaxed ECJ, a Court that would instead of doing its job of protecting the taxpayer would protect EU budgets! No way JOSE! I prefer the Robin Hood version of the ECJ!

Pensions: Effects on national budgets of tax incentives for retirement savings

For the fanaticals of tax numbers, take into account that a special issue of the OECD economic studies series released on June 23 addresses tax-favoured retirement saving. The study (OECD Economic Studies 39, 2004/2) looks at the effects on national budgets of tax incentives for retirement savings, the size of the subsidies in different countries, whether the tax incentives do in fact encourage private saving, and what policy choices might be more effective than tax incentives.

The first comprehensive book of its kind, this comparison of key features of pension systems of OECD countries provides coverage of retirement ages, benefit accrual rates, ceilings, and indexation. Future pension entitlements are shown for full-career workers at different earnings levels. Indicators measure redistribution in pension systems, the cost of countries' pension promises, and potential resource transfer. Thirty country chapters explain pension systems and replacement rates in detail.
To see more details click here.

Can the US and the market afford to indict (once more) one of the Big Four?

Remember my last post on ethics? The story is somewhat developing in the US. According to the latest news, KPMG acknowledged 'unlawful conduct' for first time in creation and sale of tax shelters that government contends cheated Treasury out of billions of dollars in taxes. This unusual public admission appears to be attempt by KPMG to avoid criminal indictment. In fact, the Wall Street Journal reports that top Justice Department officials are debating whether to pursue indictment against company (M)

Not enough, A Now York Law firm, along with two Arkansas firms, filed a proposed class action in Arkansas state court in January 2005 on behalf of Thomas Becnel and a nationwide class of taxpayers who entered into tax strategies known as the Offshore Portfolio Investment Strategy (OPIS) and/or Bond-Linked Issue Premium Structure (BLIPS) between 1998 and October 2000. The suit was filed against KPMG, Deutsche Bank, Sidley Austin Brown & Wood, Bayerische Hypo und Vereinsbank, Presidio Advisors, Quellos Group, and Quadra Capital Management.

The OPIS and BLIPS shelters were marketed and sold by KPMG as legitimate transactions that would produce financial gain or produce legitimate tax losses to minimize tax liability, the complaint alleges. The plaintiffs assert that the firms and banks knew or should have known that the tax products were illegal. The complaint alleges that KPMG sold the products to hundreds of clients, generating at least US $81 million in fees. Brown & Wood issued at least 250 opinion letters for the transactions, charging $50,000 per letter, and Deutsche Bank earned over US $60 million for its involvement in approximately 100 BLIPS and OPIS transactions, according to the complaint.

KPMG allegedly paid the law firm known now as Sidley Austin Brown & Wood $23 million to provide supportive legal opinions on more than 600 shelters. It allowed one former Sidley Austin lawyer, R.J. Ruble, to bill it at the equivalent rate of $9,000 an hour! That is definitely a good rate! Time will see where this story goes! But one thing is certain, that US regulators will review more carefully any possible indictment of another accounting firm. We all know what happened with Andersen and we all know what we do not need to see again happening!
If you are interested on the topic, please read the last article of the economist “The woes of KPMG”, where is discussed whether the US government and the market can afford to indict (once more) one of the Big Four accounting firms?

Sunday, June 26, 2005

10 Q&A on the Savings Directive

The Savings Directive will shortly enter into force in Europe. The ultimate aim of the Directive is to enable savings income in the form of interest payments made in one EU Member State to beneficial owners who are individuals resident for tax purposes in another EU Member State to be made subject to effective taxation in accordance with the laws of the latter Member State. Directive will apply to income derived from third countries ( Switzerland , Andorra , Liechtenstein , Monaco and San Marino) and dependent or associated territories. The U.K. Revenue and Customs recently released questions and answers on the EU savings tax directive. This Q&A although specifically adressed to UK resident or domiciled taxpayers, may be used by resident in other EU countries to understand the mechanics of the new saving directive. Find below a selection of some of the most relevant Q&A which I adapted to tackle general issues arising in any EU member state:

1. When will the savings tax directive begin?
The savings tax directive comes into effect on 1 July 2005.

2. Which are the prescribed territories?
The prescribed territories are the territories prescribed in regulations. They are:
- the 25 EU Member States
- Aruba, the British Virgin Islands, Gibraltar, Guernsey, the Isle of Man, Jersey, Montserrat and the Netherlands Antilles

3. Where can I get hold of a copy of the Directive?
The Directive was published in the Office Journal of the European Union on 26 June 2003.

4. Which territories will be withholding tax?
The following territories will be withholding tax during a transitional period:
- Austria, Belgium and Luxembourg
- The British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Netherlands Antilles and the Turks & Caicos Islands
- Andorra, Liechtenstein, Monaco, San Marino and Switzerland

5. I have a bank account in Austria/Jersey etc. -- will I have tax withheld?
Paying agents in these territories will be withholding tax from savings income they pay. You will be able to have the income paid without deduction of withholding tax under the Directive. Basically there are 2 options that territories can use to allow you to do this. Each territory will decide which of the 2 options it will adopt. (under procedure 1, the individual may authorise the paying agent to report details of the savings income payment to its tax authority, who will supply it to its tax authorities. Under procedure 2, the individual can ask its tax authorities for a specific certificate showing certain data. The individual then presents the completed certificate to the paying agent, and requests them not to withhold tax from the savings income).

6. I have a bank account in a country that will exchange information -- what does this mean for me?
The Directive will have no impact on anyone who properly declares all their income. In future the tax authorities of the country where you reside will receive information about savings income you receive from abroad. This will be supplied by the tax authority of the country in which the person who pays you (or who collects the income for you) is based. The information will then be compared with what you disclose in your tax return.

7. I already have tax withheld on my overseas bank account -- will this change?
No. Any tax withheld under the Directive is in addition to any tax withheld under the domestic laws of the country where the account is held.

8. How much tax will be withheld under the Directive?
Under the Directive, 15% tax will be withheld during the first three years after it takes effect, 20% during the next three years, and 35% after that.

9. Can I reclaim the tax withheld?
There are procedures on how you can ensure that no tax is withheld under the Directive. But if it is withheld, you can set it off against other tax you have to pay, or reclaim it (though any other foreign tax withheld can, as now, only be set off against any tax liability and cannot generally be repaid).

10. How will conventional tax withheld (at source) and tax withheld under the Directive (by paying agents) be treated?
Credit will be given first for any conventional tax withheld at source under existing rules before giving credit for tax withheld by paying agents under the Directive. This ensures that you get the maximum amount of credit.

Suppose you receive interest of 100 from which tax of 10 is withheld in the country of source and from which tax of 15 is also withheld under the Directive by a paying agent in Luxembourg.
- If you have no worldwide tax liability, the tax authorities will repay to you the 15 Luxembourg tax. As now, there is no provision for repaying any of the tax withheld in the country of source.
- If you have a worldwide tax liability of 10, all the 10 tax withheld in the country of source will be credited against that liability, reducing it to nil, and the excess Luxembourg tax of 15 will be repaid to you.
- If you have a worldwide tax liability of 20, all the 10 tax withheld in the country of source and 10 of the Luxembourg tax will be credited against that liability, reducing it to nil. The tax authorities will repay to you the remaining 5 Luxembourg tax. If you have a worldwide tax liability of 40, all the 10 tax withheld in the country of source and all the 15 Luxembourg tax will be credited against that liability, reducing it to 15.

For the page of the EU commision on the Savings Directive click here.

Tuesday, June 21, 2005

Chartered Institute of Taxation Conference - Details

Last Friday (17 June 2005), I attended at IBFD premises the European Branch Conference of the Chartered Institute of Taxation.

The program was very interesting. It started with a discussion of the potentially far-reaching new UK Rules on Tax Arbitrage by Mike Hardwick of Linklaters. Hans Pijl of Deloitte followed with the uses that can be made of hybrid entities and structures both generally and specifically in the Netherlands. After lunch, Simon Whitehead of Dorsey & Whitney explained his view on the pending Marks & Spencer case and gave an overview of the pending related "group loss cases" that his firm is involved: CFC & insurance dividend taxation, ACT Class 4, FII & dividend taxation, and Thin Cap. This cases are expected to be decided by the ECJ late this year or beginning of 2006. The following discussion involved the abuse of rights principle in EC law. VAT experts Paul Connolly (of Chiltern Plc) and Han Kogels (non-Executive Chairman of the IBFD) discussed the developments of the abuse of rights principle in EC law on the basis of Halifax Case (C-255/02). Finally, Waine Weaver of Deloitte discussed the UK Tax Issues that result from developments in International Accounting Issues and Remco van der Linden of PricewaterhouseCoopers dealt with the issue of International Financial Reporting Standards (IFRS) and its impact for tax (accounting), mainly key principles of deferred tax accounting and the consequences of IFRS for tax purposes.

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The 13,000members of the CIOT have the practicing title of ‘Chartered Tax Adviser’. The CIOT recently launched an Advanced Diploma in International Taxation. For more details click here.

Tuesday, June 14, 2005


"Benjamin Franklin said nothing is certain but death and taxes: but at least death doesn't get worse every year."

Previous quotes:
Week I
Week II
Week III
Week IV
Week V
Week VI
Week VII

Monday, June 13, 2005

Withholding tax on outbound dividends and the freedom of establishment

Some weeks ago, I reported a case submitted by the French Conseil d'Etat on the compatibility of French withholding tax on outbound dividends with the freedom of establishment. Now the questions submitted to the ECJ are available in the ECJ website.

In this case, two French companies distributed dividends to their Netherlands parent company (Denkavit BV) from 1987 to 1989. The dividend withholding tax was reduced to 5% on application of Art. 10(2)(a) of the France-Netherlands tax treaty. The French and the Netherlands companies brought a procedure before the French Courts to get a refund of the withholding tax paid on the dividend distributions on the grounds that such withholding tax was irreconcilable with the freedom of establishment as construed by the ECJ. In order to understand the facts, you must take into account that under Arts. 119 bis and 187(1) of the French Tax Code, a withholding tax at a rate of 25% is levied on dividends distributed by French companies to foreign shareholders. Such withholding tax is generally reduced by application of a tax treaty. In contrast, qualifying parent companies that are subject to French corporate income tax at the standard rate (i.e. French parent companies or foreign parent companies with a permanent establishment in France to which the shares of the subsidiary are to be attributed) with a holding participation of at least 5% in their subsidiaries benefit from a participation exemption in respect of dividends received from their resident and non-resident subsidiaries, so that qualifying dividends are quasi-exempt from corporate tax. Under Netherlands law, a participation exemption is applicable, under certain conditions amongst others that the parent company owns at least 5% of the nominal paid-up capital of the subsidiary. As a corollary effect, Netherlands parent companies cannot credit the foreign withholding tax against Netherlands corporate tax.

The Court of Appeals of Nantes rejected this claim on 13 March 2001, arguing that Art. 119 bis (2) of the French Tax Code is not incompatible with Art. 43 of the EC treaty as the Netherlands parent company was not in a comparable objective situation in respect to French corporate income tax as a parent company benefiting from the French participation exemption. The Court held that the participation exemption regime is available only to parent companies that are subject to French corporate income tax at normal rate, either because they have their tax residence in France or because they have a permanent establishment in France. The Court also denied the necessity to refer to the ECJ for interpreting the compatibility of Art 119 bis (2) with Art. 43 of the EC treaty. The two companies referred their case to the Administrative Supreme Court, which rendered a preliminary decision on 15 December 2004. The Supreme Administrative Court opined that the dividend withholding tax, which is borne by the recipient of the dividends and not by the distributing company, in itself triggers a difference of treatment between a French parent company benefiting from the French participation regime and a foreign parent company. Accordingly, the Court questioned whether a French company and a foreign parent company are in a comparable situation in respect of a withholding tax mechanism. In the second stage, the Supreme Administrative Court questioned whether the provisions in respect of the dividend withholding tax (Art. 10) and on double taxation relief set out in Art. 24 of the France-Netherlands treaty may be analyzed as a simple tax sharing mechanism on dividends between France and the Netherlands without burdening the global tax liability of the Netherlands parent company, and thus not impeding the freedom of establishment.Lastly, the Supreme Administrative Court stated that considering that the Netherlands parent company may only benefit from the foreign tax credit where the latter exceeds the tax due in the Netherlands, it questioned whether or not it is necessary to take into account this situation to evaluate whether the withholding tax is compatible with the freedom of establishment. The Conseil d'Etat (France) submitted to the ECJ the following questions:

1. Is a system which imposes the burden of taxation on a parent company in receipt of dividends which is not domiciled in France, while relieving parent companies which are domiciled in France of a similar burden, open to challenge in the light of the principle of freedom of establishment?

2. Is such a system of deduction at source itself open to challenge in the light of the principle of freedom of establishment, or, where a taxation agreement between France and another Member State authorising that deduction at source provides for the tax due in that other Member State to be set off against the tax charged in accordance with the disputed system, must that agreement be taken into account in assessing the compatibility of the system with the principle of freedom of establishment?

3. In the event that the second alternative set out at 2 above is held to apply, is the existence of the aforementioned agreement sufficient to ensure that the disputed system may be regarded merely as a means of apportioning the taxable item between the two States concerned without any effect on the undertakings, or must the fact that a parent company which is not domiciled in France may be unable to set off tax as provided for by the agreement mean that this system must be regarded as incompatible with the principle of freedom of establishment?

Thursday, June 02, 2005

Free movement of capital principle in the context of third countries

Suddenly there are a number of new cases pending before the European Court of Justice (ECJ) on the scope of the free movement of capital principle in the context of third countries (Art. 56 EC Treaty). This area is still an unexplored area for the ECJ and therefore the outcome is unpredictable. It is interesting to look at some of the cases that now reached the ECJ and will only be decided in 2006. I selected three cases, submitted by Swedish Supreme Administrative Court (cases C-101/05 and C-102/050) and by the Higher Administrative Court of Austria (C-157/05).

Swedish Cases
Case A C-101/05 - Tax-neutral spin-off - absence of exchange of information provision in Sweden-Switzerland tax treaty
(a) Advance Tax Ruling Council. The question submitted to the ATRC was whether a dividend distribution from a parent company, in the form of shares in its subsidiary located in a third state, should be exempt from tax according to Swedish tax law.
Swedish tax law allows a tax-neutral spin-off of a company quoted on a Swedish or a foreign stock exchange. Dividend distributions by a Swedish or a non-resident parent company, in the form of shares in a Swedish or a non-resident subsidiary to its shareholders, are tax exempt provided certain conditions are fulfilled. The rule applies to companies established within the EU or in a state with which Sweden has concluded a tax treaty that includes an exchange of information provision. The applicable treaty in this case (Sweden-Switzerland) did not include an exchange of information provision.
Taking into account the facts described above, the ATRC examined the compatibility of the Swedish rule with EC Law and held that a condition requiring that a treaty with an EEA country or a third state includes a provision on exchange of information constitutes a restriction on the freedom of capital and such restriction cannot be justified under Art. 58 EC Treaty. For the Supreme Court reference to the ECJ click here.

Case A and B (C-102/05) - Remuneration to employees in Russian branch excluded from payroll costs
(a) Advance Tax Ruling Council. The question submitted to the ATRC was whether remuneration paid to employees working for a branch established in a third state, not being subject to payments of social security contributions according to Swedish law, should be included when computing the aggregate amount of payroll costs paid in accordance with Swedish tax law. Accordingly, resident individual shareholders of unlisted Swedish and non-resident companies are exempt from tax on dividends received up to a certain amount. Payroll costs subject to Swedish social security contributions shall be taken into account when computing the tax-exempt amount, excluding thereby remuneration paid to employees working for a branch established in a third state.
According to previous case law, this rule has been held as a restriction on the freedom of establishment (Art. 43 EC Treaty). The Supreme Administrative Court held that remuneration paid to employees in subsidiaries in other EU Member States that are not subject to Swedish social security contributions payments should be included when computing payroll costs for the purpose of applying the tax relief under Swedish tax law. The ATRC held that the Swedish rule governing the computation of payroll costs constitutes a restriction on the freedom of capital (Art. 56 EC Treaty). For the Supreme Court reference to the ECJ click here.

Austrian Case
Case Holböck (C-157/05) - inbound dividends received from third States taxed at a rate higher than dividends received from domestic entities
(a) Facts. This case involves an Austrian resident individual that owns 2/3 of a Swiss company. The Swiss company distributed dividends to the Austrian individual from 1992-1996, which were taxed at the ordinary progressive income tax rate (up to 50%). However, during the years at issue, dividends distributed by Austrian companies were taxed at a more favorable rate (25%). The taxpayer claims that the fundamental principle of the free movement of capital that applies between EU Member States and third countries prohibits Austria – from the date of its accession to the EU, i.e. from 1 January 1995 – from taxing dividends distributed by a Swiss company at a rate higher than comparable domestic dividends are taxed. It should be noted that the Austrian Income Tax Act was amended as from 1 April 2003 so that domestic and foreign dividends are now tax at the same rates. The case at issue concerns assessments for tax periods before 1 April 2003.
(b) Administrative Court reference. The Administrative Court makes reference to the ECJ decision in the Lenz case (C-315/02) to support its case. The Administrative Court concluded that the differential treatment also could impair the free movement of capital with respect to a third country. In this connection, article 56 EC prohibits restrictions on the movement of capital between Member States and between Member States and third countries. Article 57 EC, however, contains a “standstill clause”. The Administrative Court considers that these two articles raise questions whose answers are not obvious. For the Administrative Court reference to the ECJ click here.

If you are interested on this issue please note that the following ECJ pending cases also deal with the issue of how the free movement of capital principle applies between EU Member States and third countries: van Hilten case (C-513/03), Lasertec (C-492/04) and the thin capitalization group litigation case (C-524/04 ).