Constructive dialogue between the Advocate General and the ECJ

Today several judgments and opinions of the European Court of Justice were made available, namely the Judgments in the CLT-UFA case (C-253/03) and Keller Holding (C-471/04) , both dealing with the freedom of establishment, van Hilten case (C-513/03) dealing with free movement of capital and the Opinion from the Advocate General on Class IV of the ACT Group Litigation (C-374/04) dealing with the freedom of establishment and the free movement of capital.

In such a productive day, you are bound to find interesting stuff! I refer to the sharp critics from the Dutch Advocate General Geelhoed, in the ACT Group Litigation case, on the previous ECJ decision on the famous Bosal case. Those critics are not new (see for example Wattel in European tax law, 2005). What is interesting is that on the same day the Advocate General states its points of view, a German case, which has evident similarities with the Bosal case, was also decided by the ECJ (going the opposite way suggested by the AG).

What did the Advocate General said:

62. As regards home State obligations in the field of corporate income taxation, I should like to add a brief comment on the Court’s judgment in Bosal. In that case, the Court held contrary to Article 43 EC a Dutch rule by which Dutch-resident parent companies could only deduct costs relating to a subsidiary if that subsidiary was taxable in the Netherlands, or if its costs were indirectly instrumental in the making of profits taxable in the Netherlands. The Court used an essentially three-step reasoning in reaching this conclusion. First, after concluding that the Dutch limitation on deductibility of costs was in principle compatible with the Parent-Subsidiary Directive, (60) the Court observed that such a limitation ‘might dissuade’ a (Dutch) parent company from carrying on its activities via a subsidiary established in another Member State, and so constituted a hindrance to the establishment of subsidiaries within the meaning of Article 43 EC. Second, the Court rejected the possibility that the rule could be justified on so-called ‘fiscal cohesion’ grounds (i.e., the need to preserve the coherence of the Dutch tax system). It reasoned that no ‘direct link’ existed in the present case between the granting of a tax advantage - the right of a parent company to deduct costs connected with holdings in the capital of their subsidiaries - and the liability to tax of its subsidiary. In this regard, the Court cited its judgment in Baars that no direct link could be found to exist when dealing with different taxes or the tax treatment of different taxpayers. Third, the Court dismissed the argument that, because of the territoriality principle, the situations of a Dutch parent company with Dutch-taxable subsidiaries, and a Dutch parent company with non-Dutch taxable subsidiaries, could not be considered ‘comparable’ for Article 43 EC purposes. On this point, the Court confined itself to citing its judgment in Metallgesellschaft and observing that, while the application of the territoriality principle in its Futura judgment concerned the taxation of a single company (active in another Member State via a branch), the present case concerned the taxation of parent and subsidiary (i.e., two legal persons, taxable separately).

63. With respect, this judgment did not, in my view, accord sufficient recognition to the Member States’ division of tax jurisdiction in that case. I refer in particular to the Court’s finding that the comparability criterion was satisfied. It is in my view crucial to the analysis that the Netherlands exempt from taxation all profits coming ‘inward’ from non-domestic subsidiaries. That is to say, the division of tax jurisdiction between the Netherlands and the Member States of residence of the subsidiaries was such that jurisdiction to tax the foreign subsidiaries’ profit fell solely to the latter - the source State. As a result, it would seem to me to be wholly consistent with this division of jurisdiction for the Netherlands to allocate those charges paid by the Dutch parent, which were attributable to the exempted profits of the foreign subsidiaries, to the Member State of the subsidiaries. In other terms, it would seem clear that the position of a domestic parent company with a subsidiary whose profits are taxable in that Member State, on the one hand, and such a parent company with a subsidiary whose profits are not taxable (exempt) in that Member State, on the other hand, are not comparable. In sum, this would appear to be a classic example of a difference in treatment resulting directly from dislocation of tax base. It seems to me that the result of the Court’s judgment was to override the Member States’ choice of division of tax jurisdiction and priority of taxation - which choice, as I observed above, lies solely within Member States’ competence.

64. I would add that, in principle, the result of the Bosal judgment also means that the (same) charges could equally be deducted in the Member State of the subsidiary. While it can be presumed that the Court would not have intended to allow ‘double relief’, its judgment gives no indication which of the two States - that of the parent company or the subsidiary - should have priority of taxation in this cost deduction. Indeed, this was the second question referred by the Hoge Raad in that case, to which the Court did not explicitly respond. Suffice to say, as I observed above, that Community law does not contain any basis for allocating such jurisdiction and priority.

In response to a similar argument raised by the German and United Kingdom Governments, namely that the position of a parent company established in a Member State having an indirect subsidiary in the same State is not comparable to that of a parent company whose indirect subsidiary is established in another Member State, the ECJ held in the Keller Holding (the case similar to the Bosal case):

37. In that regard, it is noteworthy that, as far as the taxation of dividends received is concerned, parent companies subject to unlimited tax liability in Germany are in a comparable position whether they receive dividends from an indirect subsidiary established in that Member State or from an indirect subsidiary having its registered office in Austria. In both cases, the dividends received by the parent company are, in reality, exempt from tax. Accordingly, a restriction on the deductibility of a parent company’s financing costs – as a corollary of the non-taxation of dividends – which affects solely dividends from abroad does not reflect a difference in the situation of parent companies according to whether the indirect subsidiary owned by the latter has its registered office in Germany or in another Member State.

38. In that regard, the fact that indirect subsidiaries established in Austria are not subject to corporation tax in Germany is not relevant. The difference in tax treatment at issue in the main proceedings relates to parent companies according to whether or not they have indirect subsidiaries in Germany, even though those parent companies are all established in that Member State. As far as the tax situation of the latter is concerned as regards the dividends paid by their indirect subsidiaries, the fact remains that those dividends do not give rise to tax being levied on the parent companies, whether they are derived from indirect subsidiaries taxable in Germany or in Austria.

I particularly like this type of constructive dialogue! Nevertheless, I personally have my doubts as to whether the relevant forum to expose such critics is on an advisory opinion to the ECJ. All being said, we at least know that controversial judgments are still being discussed and the Bosal was definitely one of them!