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 ).
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 ).
posted by Talk Tax Blog at 9:23 am
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