TAX. Freedom of establishment tax jurisprudence: Avoir Fiscal re-visited 2008±6 REVIEW

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1 Freedom of establishment tax jurisprudence: Avoir Fiscal re-visited ec TAX REVIEW 2008±6 Dr. Tom O'Shea, Lecturer in Tax Law, Centre for Commercial Law Studies, Queen Mary, University of London 1 Abstract This paper examines the tax jurisprudence of the ECJ relating to the freedom of establishment from the perspective of a `host' Member State and from that of an `origin' Member State. The Court's Avoir Fiscal decision is revisited and reconsidered. The Court's subsequent case law is analysed. The paper highlights that a `national treatment' test is applied by the Court from both perspectives. The paper also demonstrates that the reasoning used in Avoir Fiscal, an establishment case, has been used analogously by the Court in relation to the other fundamental freedoms and that the Court's application of the concept of comparability has been deeply influenced by this seminal and landmark judgment. 1. Introduction On 28 January 1986, the European Court of Justice delivered a short 29 paragraph judgment in Case 270/ 83, Commission v France, 2 or Avoir Fiscal as many have come to know it. To mark the twentieth anniversary of that judgment a special tax seminar was held at the Centre for Commercial Law Studies, Queen Mary, University of London. 3 This article, which is based on a talk originally delivered at that seminar entitled: `From Avoir Fiscal to Marks and Spencer', demonstrates that over the past twenty years and down to the present day the Avoir Fiscal case has continued to play its role in the direct tax jurisprudence of the Court. Indeed, the Court in its recent Arens-Sikken 4 judgment applied the reasoning that it used in Avoir Fiscal analogously, in a case involving inheritance taxes and the free movement of capital and, perhaps, even more significantly, the Court in Marks and Spencer 5 used a paragraph from the Avoir Fiscal judgment to illustrate that the place where a company is resident is not always `a proper factor' 6 for justifying different treatment and went on to develop what related to a `host' Member State situation in Avoir Fiscal into an `origin' Member State concept in Marks and Spencer. The Court highlighted that: `acceptance of the proposition that the Member State in which the company wishes to establish itself may freely apply to it a different treatment solely by reason of the fact that its registered office is situated in another Member State would thus deprive that provision of all meaning.' 7 This article revisits the Avoir Fiscal case and examines how the direct tax jurisprudence of the Court in relation to freedom of establishment 8 has The author welcomes comments: t.o'shea@qmul.ac.uk. Much of the material covered in this article is explored in greater detail in the author's recent book entitled EU Tax Law and Double Tax Conventions (Avoir Fiscal Limited, London, 2008). Case 270/83 Commission v France [1986] ECR A report of the seminar was published in Tax Notes International. See `From Avoir Fiscal to Marks & Spencer', Tax Notes International 2006, vol. 41, pp. 587±612. See Case C-43/07 D.M.M.A. Arens-Sikken v Staatssecretaris van FinancieÈn (`Arens-Sikken'), [2008] ECR I See also O'Shea, `Dutch Inheritance Tax Rules on Endowment Debts Incompatible With EU Law, ECJ says', WTD 2008, pp. 191±195 and Tax Notes International, 6 October 2008, pp. 20±22. See Case C-446/03 Marks and Spencer plc v David Halsey, [2005] ECR I-10837, (`Marks and Spencer'). See T. Lyons, `Marks & Spencer: something for everyone?' BTR 2006, pp. 9±14; M. Lang, `The Marks & Spencers case: the open issues following the ECJ's final word', European Taxation 2006, vol. 46, no. 2, pp. 54±67; M.P. Scheunemann, `Decision in the Marks and Spencer case: a step forward but no victory for cross-border group taxation in Europe', Intertax 2006, vol. 34, no. 2, pp. 54±57. Marks and Spencer, para. 37. See Case 270/83 Commission v France (`Avoir Fiscal'), para. 18 and Marks and Spencer, para. 37 (emphasis added). It is clear from the emphasized part that the Court was referring to the Member State of establishment or the `host' Member State in Avoir Fiscal. This is clear from the quote. Interestingly, however, the Court applied the quotation from Avoir Fiscal from the perspective of an `origin' Member State (the UK) in Marks and Spencer. For a full discussion of the Marks and Spencer case and this point see T. O'Shea, `Marks and Spencer v Halsey (HM Inspector of Taxes): Restriction, Justification and Proportionality', EC Tax Review 2006, vol. 15, no. 2, pp. 66±82. The literature in this area is vast and only a very selected review can be noted here: F. Capriglione, `Freedom of establishment and Provision of Services', EBLR 2004, p. 447; H. van den Hurk, `Is the ability of the Member States to conclude tax treaties chained up?', EC Tax Review 2004, p. 17; F. Wooldridge, `Uberseering: Freedom of establishment of Companies Affirmed', EBLR 2003, p. 227; W.F. Ebke, `The European Conflict-of-Corporate-Laws Revolution: Uberseering, Inspire Art and Beyond', EBLR 2005, p. 9; A. Landsmeer, `Capital Movements: On the Interpretation of Article 73b of the EC Treaty', LIEI 2000, vol. 27, no. 2, pp. 195± 200; E. Vaccaro, `Transfer of seat and Freedom of Establishment in European Company Law', EBLR 2005, p. 1348; E. Wymeersch, `The Transfer of the Company's Seat in European Company Law', CMLR 2003, pp. 661±695; A. Koerner, `The ECJ's Lankhorst- Hohorst Judgment ± Incompatibility of Thin Capitalization Rules with European Law and Further Consequences', Intertax 2003, vol. 31, no. 4, p. 162; O. Thoemmes et al., `Thin Capitalization Rules and Non-Discrimination Principles', Intertax 2004, vol. 32, EC TAX REVIEW 2008/6 259

2 developed over the 20 years since Avoir Fiscal. The article focuses on some of the key ECJ cases in this area, including the SEVIC Systems AG, 9 Marks and Spencer, and Keller Holding 10 decisions. The Court's post-avoir Fiscal jurisprudence on freedom of establishment is examined from two distinct viewpoints: from the `host' Member State and the `origin' Member State perspectives. 2. Avoir Fiscal ± the first `direct tax' case? Interestingly, and contrary to the generally held view and the opinion of most EC tax textbook writers, the Avoir Fiscal case was not the Court's first interaction with the direct tax competence of the Member States. This accolade appears to be reserved for the Humblet case 11 from as far back as 1960, when the Court noted that competence in certain direct tax matters had actually been conferred on the Community under the Community's treaties. 12 As a consequence the salaries of Community officials were exempt from Member States' direct taxation systems. The issue which arose in the case was whether this was a complete `exemption' or whether it was an `exemption with progression' ± the kind with which we are familiar today under certain exemption country double tax conventions (DTCs) ± enabling a Community official's salary to be exempt from income tax but at the same time taken into account when his wife's income was taxed under certain Belgian domestic tax rules. The Court was, therefore, faced with a competence issue ± as opposed to a `compliance' issue ± and held that: `Indeed it is contrary to the principle recognised by the law of the European Communities which provides for a clear distinction between income subject to the control of the national tax authorities of the Member States on the one hand and the salaries of officials of the Community on the other; by the terms of the Treaties of Rome, the latter are subject to Community law alone as regards any liability to tax while the other income of officials remains subject to taxation by the Member States.(...) This division of reciprocal fiscal jurisdiction must exclude any taxation, direct or indirect, of income which is not within the jurisdiction of the Member States.' 13 Thus, the Court, as far back as 1960, had sent a warning to the Member States that direct tax matters were not entirely beyond the realms of its jurisdiction. Belgium had attempted to indirectly tax a Community official's salary contrary to the competence arrangements put in place by the Community's treaties. As a cont. no. p. 126; S. Bergstroem and A. Bruzelius, `Home-State Restrictions on the Freedom of Establishment in a Swedish Tax Law Perspective', Intertax 2001, vol. 29, nos 6±7, p. 233; M. Garcia-Riestra, `The Transfer of Seat of the European Company v Free Establishment Case law', EBLR 2004, p. 1295; O. Thoemmes and A. Rainer, `When Practice Converges with Principle: European Companies and the Slow March Toward Freedom of Establishment', Intertax 2004, vol. 32, no. 2, p. 118; S. Ebert, `The European Company on the level Playing Field of the Community', EBLR 2003, p. 183; H.E. Kostense, `The Saint- Gobain case and the application of tax treaties. Evolution or revolution?', EC Tax Review 2000, no. 4, p. 220; J.H. Jans, `Proportionality Revisited', LIEI 2000, vol. 27, no. 3, pp. 239± 265; K. Aarnio, `Treatment of permanent establishments and subsidiaries under EC law: towards a uniform concept of secondary establishment in European tax law?', EC Tax Review 2006, p. 18; J. Bezzina et al., `The 2005 Leiden Forum on Recent and Pending Direct Taxation Cases before the European Court of Justice', Intertax 2006, vol. 34, no. 4, p. 199; N. Lavranos, Case note on the `Open Skies' Cases ± `Commission v UK, DK, S, FIN, B, L, AUS, G', LIEI 2003, vol. 30, no. 1, pp. 81±91; F. Amatucci, `Limited tax liability of non-resident companies and freedom of establishment', EC Tax Review 2003, vol. 4, p. 202; W-G. Ringe, `No Freedom of Emigration for Companies?', EBLR 2005, p. 621; F. Vanistendael, `The compatibility of the basic economic freedoms with the sovereign national tax systems of the Member States', EC Tax Review 2003, vol. 3, p. 136; G. Meussen, `The Marks & Spencer case: reaching the boundaries of the EC Treaty', EC Tax Review 2003, vol. 3, p. 144; D. Gutmann, `The Marks & Spencer case: proposals for an alternative way of reasoning', EC Tax Review 2003, vol. 3, p. 154; M. Lehner, `Limitation of the national power of taxation by the fundamental freedoms and non-discrimination clauses of the EC Treaty', EC Tax Review 2000, vol. 1, p. 5; D. Gutmann and L. Hinnekens, `The Lankhorst-Hohorst case. The ECJ finds German thin capitalization rules incompatible with freedom of establishment', EC Tax Review 2003, vol. 2, p. 90; H.C. Hirt, `Freedom of Establishment, International Company Law and Comparison of European Company Law Systems after the ECJ's Decision in Inspire Art Ltd', EBLR 2004, p. 1189; F. Wooldridge, `The Advocate General's Submissions in Kamer van Koophandel: Further Emphasis on the Right of Establishment', EBLR 2003, p. 497; O-F. Kerssenbrock, `In the Wake of Lankhorst-Hohorst', Intertax 2004, vol. 32, nos 6/7, p. 306; T. Daniels, `The freedom of establishment: some comments on the ICI decision', EC Tax Review 1999, vol. 1, p. 39; E. Szyszczak, `Golden Shares and Market Governance', LIEI 2002, vol. 29, no. 3, pp. 255±284; M.A. Caamano Anido and J.M. Calderon Carrera, `Accounting, the permanent establishment and EC law: the Futura Participations case', EC Tax Review 1999, vol. 1, p. 24; V. Skouris, `Fundamental Rights and Fundamental Freedoms: The Challenge of Striking a Delicate Balance', EBLR 2006, p. 225; O. Roumelian, `The End of French Thin Capitalization Rules?', Intertax 2003, vol. 31, nos 6/ 7, p. 244; K. Stahl, `Free movement of capital between Member States and third countries', EC Tax Review 2004, vol. 2, p. 47; E. Tomsett, `AG Rejects Non-resident Companies Claim for UK Tax Credits', Intertax 2006, vol. 33, no. 12, p. 595; M. Helminen, `The Esab Case (C-231/05) and the Future of Group Taxation Regimes in EU', Intertax 2005, vol. 33, no. 12, p. 595; N. Kuehrer, `Cross-border company establishment between the UK and Austria', EBLR 2001, p. 110; J. Winter, `EU Company Law on the Move', LIEI 2004, vol. 31, no. 2, pp. 97±114; A. Roussos, `Realising the Free Movement of Companies', EBLR 2001, p. 7; A. Landsmeer, `Movement of capital and Other Freedoms', LIEI 2001, vol. 28, no. 1, pp. 57±69; H. van den Hurk and B. Wagenaar, `The far-reaching consequences of the ECJ decision in Bosal and the response of the Netherlands', BIFD 2004, vol. 58, no. 6, pp. 269±278; J. Schwarz, `European Corporate Group Structures and Financing: The Impact of European Court Decisions and European Legislative Developments', BIFD 2003, vol. 57, no. 11, pp. 514±519; J. Schonfeld, `United Kingdom: The Cadbury Schweppes Case: Are the days of the United Kingdom's CFC legislation numbered?', ET 2004, vol. 44, no. 10, pp. 441± 452; A. Cordewener et al., `The Tax treatment of Foreign Losses: Ritter, M&S and the way ahead (Part two)', ET 2004, vol. 44, no. 5, pp. 218±233; and ( Part One) ET 2004, vol. 44, no. 4, pp. 135± See Case C-411/03 SEVIC Systems AG [2005] ECR I-10805, (`SEVIC'). 10 See Case C-471/04 Finanzampt Offenbach am Main-Land, [2006] ECR I-2107, (`Keller Holding'). 11 Case 6/60 Humblet v Belgian State (`Humblet') [1960] ECR In Humblet, a European Coal and Steel Community Treaty provision was involved which exempted from all taxation the salary of ECSC officials. 13 See Humblet, para EC TAX REVIEW 2008/6

3 result of the Belgian domestic `exemption with progression' rules, the non-exempt spouse of the Community official had her income taxed at a higher rate because the Belgian tax rules took her husband's (supposedly) exempt salary into account when calculating the progressive rate of tax on her income. According to the Court, this had the `effect, at least in substance' 14 of taxing the Community official's salary directly. This was an intrusion on the taxing powers of the Community. The question that remains is: why did Avoir Fiscal take another 26 years to happen? 2.1. Avoir Fiscal 15 In 1983, the Commission brought infringement proceedings against France, alleging that France had failed to grant branches and agencies set up in France by insurance companies resident in other Member States the benefit of the shareholders' tax credit, known as the `avoir fiscal' and from which corresponding French undertakings benefited, contrary to the freedom of establishment provisions of the Treaty. 16 France granted this tax credit to its own resident companies and on a reciprocal basis to companies resident in certain countries which had entered into a DTC with France, but refused to grant it to branches situated in France of companies resident in other Member States. The Commission argued that this different treatment constituted (a) discrimination by France against companies resident in other Member States and (b) an indirect restriction on the freedom to set up secondary establishments in France. The Commission pointed out that branches were assimilated to companies for corporate income tax purposes. France put forward a number of important counter-arguments: that branches and subsidiaries were different ± a subsidiary was a resident for the purposes of taxation with a legal personality, whereas a branch was not autonomous and was a non-resident; that insurance companies from other Member States could simply incorporate their establishment as a French subsidiary and they would automatically qualify for the avoir fiscal; that the tax laws in this area in the various Member States differed, and the matter could only be resolved by Community legislation or by DTCs; and that because non-residents avoided the burden of certain taxes to which residents of France were subject, there were no grounds for claiming that they were placed at a disadvantage compared to French companies The Opinion of Advocate General Mancini Avoir Fiscal first came before the Advocate General for his Opinion. The Advocate General summarized the Commission's two complaints ± discrimination against foreign companies and a restriction on the freedom of establishment contrary to Article 43 of the Treaty. 18 On the discrimination issue, the Commission demonstrated that a company incorporated under French law was treated differently from a taxation point of view than a foreign company operating in France through a branch or agency. This different treatment fell within the scope of Article 43 of the Treaty: the different treatment was based on nationality and made the management of foreign companies subject to conditions which were less advantageous. 19 The Commission argued that this different treatment infringed the principle of equality in regard to the management of undertakings laid down in the second paragraph of Article 43. On the restriction issue, the Commission argued that the French avoir fiscal rules caused foreign insurance companies to establish subsidiaries rather than branches or agencies and thus, indirectly limited their right of establishment under Article 43. France put forward seven arguments which can be listed briefly as follows: (1) the French rules were justified by the lack of harmonization in the field of direct tax law; (2) the problem can only be resolved by DTCs in the absence of Community rules; (3) there was a danger of large scale tax avoidance if the tax credit was extended to branches and agencies of foreign companies; (4) the disadvantages suffered by branches were amply compensated for by other tax and financial advantages that they enjoy when compared to French companies; (5) the different treatment was based on the resident/ non-resident distinction recognised by international tax law; (6) foreign companies can easily set up French subsidiaries to qualify for the avoir fiscal, thus there is no hindrance of the right of establishment; (7) the effect of granting the Commission's application would be to discriminate against undertakings operating in the non-insurance sector. 20 The Advocate General dismissed the French arguments almost entirely from the outset. He relied on established case 21 law to refute the French argument that harmonization was necessary before the French rules had to be amended to comply with the freedom of establishment: `delay on the part of the Community legislature does not suspend the Member States' obligation to apply their tax law in a non-discriminatory way'. 22 Similarly, the French argument that DTCs were necessary to extend the avoir fiscal on a reciprocal basis was incompatible with the principle 14 See Humblet, para. 5(B). 15 See I.G.F. Cath, `Freedom of Establishment of companies: a new step towards completion of the internal market', YEL 1986, vol. 6, pp. 247± See Opinion of Advocate General Mancini in Avoir Fiscal, para See Opinion of Advocate General Mancini in Avoir Fiscal, para. 3 for a full discussion of the facts leading up to the case. 18 Note it was Art. 52 of the Treaty, at the time of the case. For the convenience of readers, current Treaty Article numbers will be used throughout this paper with appropriate amendments being made to the text. See Opinion of Advocate General Mancini in Avoir Fiscal, para See Opinion of Advocate General Mancini in Avoir Fiscal, para See Opinion of Advocate General Mancini in Avoir Fiscal, para See Opinion of Advocate General Mancini in Avoir Fiscal, para. 6 where he cited Case 193/80 Commission v Italy [1981] ECR See Opinion of Advocate General Mancini in Avoir Fiscal, para. 6. EC TAX REVIEW 2008/6 261

4 enunciated in Case 159/78 Commission v Italy 23 that the scope of Article 43 may not be restricted by a reciprocity clause. The Advocate General also considered, as rather weak, the French argument that the avoir fiscal could not be extended to companies resident in other Member States because the balance established in DTCs might be affected. Citing the principle of supremacy of Community law, he pointed out that France could not enter into DTCs after the entry into force of the Treaty which contain provisions incompatible with it: `That principle requires that the effectiveness of a rule of the Treaty should not be subordinated to an internal rule...'. 24 On the question of advantages being available to branches and agencies which outweigh any possible disadvantages, Advocate General Mancini noted that it was normally more onerous to establish a subsidiary than to open an agency or branch as a subsidiary generally involved more expenditure and administrative formalities and could `obscure the prestige of insurance companies whose registered office is in another country'. 25 The French Government's resident/non-resident argument ± that there was no discrimination on grounds of nationality and the different treatment was based on objective justifications ± was also rejected by the Advocate General, who accepted the Commission's argument based on Sotgiu, 26 that, just: `like citizenship for natural persons, the location of the registered office of a company serves in France as a criterion for deciding whether companies are subject to the national rules. It follows that to treat them differently by reason of the location of their registered office (in France or another Member State) amounts to discrimination on the basis of their nationality.' 27 The Advocate General noted that for corporation tax purposes in France, account was taken: `solely of profits made in the undertakings operating in France ± (...) liability to corporation tax is governed by a sole criterion: the principle of territoriality. It applies, moreover, in a perfectly symmetrical way 28 in the sense that foreign companies are taxed in respect of their activities in France and French companies are not taxed in respect of activities carried out abroad.' 29 Thus, French companies and branches located in France of foreign companies are treated in the same way when French corporation tax is levied but not in the same way when the amount of tax due is calculated. The Advocate General concluded that this different treatment affects ` ``the management of undertakings'' inasmuch as they impose a greater burden on the management of foreign companies operating through secondary establishments' and `infringe the principle that there must be equal conditions of establishment laid down in the second paragraph of Article [43] of the Treaty'. 30 Accordingly, the Advocate General proposed that the Court should uphold the Commission's complaint The judgment of the ECJ in Avoir Fiscal The ECJ noted that only French companies, and companies resident in the four Member States 32 which had concluded DTCs with France and which included a provision extending the avoir fiscal on a reciprocal basis, could receive the avoir fiscal. 33 In delivering its landmark judgment in the area of direct taxes, the Court observed that freedom of establishment meant that nationals of Member States who establish themselves in another Member State, even if that establishment is only secondary, for the purpose of pursuing activities there as self-employed persons receive the same treatment as nationals of that state and it prohibits, as a restriction on freedom of establishment, any discrimination on grounds of nationality resulting from the legislation of the Member State'. 34 The freedom of establishment includes `the right to take up and pursue activities as self-employed persons and to set up and manage undertakings under the conditions laid down for its own nationals by the law of the country where such establishment is effected'. 35 The Court noted that French branches of companies resident in Member States other than France were not treated in the same way as French resident companies because the avoir fiscal was denied in the former case. 36 This different treatment required justification. France argued that the resident/non-resident distinction accepted by international tax law applied, and that branches enjoyed `various advantages over French companies which balance out any disadvantages'. 37 The Court rejected these arguments, noting that Articles 43 and 48 allowed Member State companies `to pursue their activities in the Member State concerned through a branch or agency (...) Acceptance of the proposition that the Member State in which a company seeks to establish itself may freely apply to it a different treatment solely by reason of the fact that its registered office is situate in another Member State would thus deprive' the freedom of establishment of all meaning. 38 Furthermore, French tax law did not distinguish: 23 See Case 159/78, Commission v Italy [1979] ECR See Opinion of Advocate General Mancini in Avoir Fiscal, para See Opinion of Advocate General Mancini in Avoir Fiscal, para See Case 152/73 Sotgiu v Deutsche Bundespost [1974] ECR See Opinion of Advocate General Mancini in Avoir Fiscal, para This notion of symmetry appears in Marks and Spencer, para. 43. See further analysis below. 29 See Opinion of Advocate General Mancini in Avoir Fiscal, para See Opinion of Advocate General Mancini in Avoir Fiscal, para See Opinion of Advocate General Mancini in Avoir Fiscal, para Namely, the UK, Luxembourg, Italy and Germany. 33 See Avoir Fiscal, para See Avoir Fiscal, para See Avoir Fiscal, para. 13 and Art. 43 of the EC Treaty. 36 See Avoir Fiscal, para See Avoir Fiscal, para See Avoir Fiscal, para EC TAX REVIEW 2008/6

5 `for the purpose of determining the income liable to corporation tax, between companies having their registered office in France and branches and agencies situated in France of companies whose registered office is abroad 39 (...) both are liable to taxation on profits made in undertakings carried on in France, to the exclusion of profits which are made abroad or which France is entitled to tax under the terms of a double taxation agreement.' 40 The Court decided that as the French tax rules placed French companies on the same footing as French branches of companies resident in other Member States `for the purpose of taxing their profits, those rules cannot, without giving rise to discrimination, treat them differently' 41 when it comes to granting the avoir fiscal, a tax concession. Thus, by taxing the two types of establishment in the same way for the purpose of taxing their profits, France `has in fact admitted that there is no objective difference between their positions' to justify different taxation treatment. 42 The Court then examined the other justifications put forward by France. Pertaining to the argument that French branches benefited from other advantages 43 which French companies were denied, the Court found that Even if such advantages actually exist, they cannot justify a breach of the obligation laid down in Article 43 to accord foreign companies the same treatment in regard to shareholders' tax credits as is accorded to French companies'. 44 Significantly, the Court noted that there was no need to assess the extent of the disadvantages because Article 43 prohibited `all discrimination even if only of a limited nature'. 45 Similarly, the Court rejected the French argument, that any problems for companies resident in other Member States could be avoided by the establishment of a subsidiary; observing that the freedom of establishment expressly left `traders free to choose the appropriate legal form in which to pursue their activities in another Member State and that freedom of choice must not be limited by discriminatory tax provisions'. Also, the Court did not accept that the difference in treatment was the result of differences in the corporate tax systems of the Member States, or their tax treaties, or were necessary to prevent tax evasion. On the disparities between corporate tax systems, and the lack of harmonised rules, the Court simply pointed out that `Article 43 prevents the Member States imposing conditions on persons exercising their right of establishment which differ from those laid down for its own nationals'. 46 Concerning the tax evasion argument, the Court noted that Article 43 did not permit any derogation from the freedom of establishment on that ground. 47 Finally, on the tax treaty argument, the Court concluded that `the rights conferred by Article 43 of the Treaty are unconditional and a Member State cannot make respect for them subject to the contents of an agreement concluded with another Member State. In particular, that article does not permit those rights to be made subject to a condition of reciprocity imposed for the purpose of obtaining corresponding advantages in other Member States'. 48 Therefore, the Court held that France had breached its Treaty obligations by not granting the avoir fiscal to French branches of companies resident in other Member States. Such discrimination constituted a restriction on the right of establishment of companies whose registered office was in another Member State, contrary to Article Analysis In Avoir Fiscal, we see an application of the freedom of establishment provisions from the perspective of a `host' Member State ± France. France was obliged to give the same treatment to French branches of companies resident in other Member States as it granted to French resident companies because the Court found that there was no objective difference for taxation purposes between such branches and French companies. Both were taxed in the same way ± both should have received the avoir fiscal in the same way. In other words, freedom of establishment in a host state involves the granting of `national treatment'. Any different treatment had to be justified as otherwise discrimination or a restriction of the freedom of establishment could occur. The Court's jurisprudence after Avoir Fiscal deals with the freedom of establishment from two different perspectives: from the perspective of a `host' Member State and from that of an `origin' Member State. Section 3 of this article examines the jurisprudence of the Court in relation to `host' Member States, and section 4 analyses the case law of the Court on freedom of establishment from the perspective of `origin' Member States. Section 5 concludes with some final thoughts on the freedom of establishment and concludes that the `national treatment test' applies from both an `origin' and a `host' state perspective. 3. Freedom of establishment and `host' states 3.1. Commerzbank The Court's post-avoir Fiscal case law confirmed that host states were obliged to grant `national treatment' 39 See Avoir Fiscal, para See Avoir Fiscal, para See Avoir Fiscal, para See Avoir Fiscal, para The Court rejected a similar argument in Commerzbank, para. 17. See Case C-330/91 The Queen v Inland Revenue Commissioners, ex parte Commerzbank AG (`Commerzbank') [1993] ECR I See D. Williams, `Freedom of establishment and Double Taxation Agreements', European Law Review 1994, vol. 19, no. 3, pp. 313±319; A.I.L. Campbell, `Having your cake...?: Case C-330/91, The Queen and Inland Revenue Commissioners, ex parte Commerzbank AG', JBL 1994, March, pp. 191±194; D. Rothenberg, `Commerzbank, Colmer and all that', Taxation 1994, pp. 132(3443), 470, 472± See Avoir Fiscal, para See Avoir Fiscal, para See Avoir Fiscal, para See Avoir Fiscal, para See Avoir Fiscal, para. 26. EC TAX REVIEW 2008/6 263

6 when companies and individuals from other Member States established themselves on their territory. Thus, in Commerzbank, 49 a German company with a branch in the UK sought equal treatment with UK resident companies in relation to a repayment supplement granted by the United Kingdom's Revenue authorities when tax was overpaid. UK rules limited repayment supplement to companies resident in the UK. 50 The Court noted that: `the use of the criterion of fiscal residence (...) is liable to work more particularly to the disadvantage of companies having their seat in other Member States. Indeed, it is most often those companies which are resident for tax purposes outside the territory of the Member State in question.' 51 The Court held that `[a] national provision such as the one in question entails unequal treatment' Halliburton Similarly, in Halliburton, 53 when an American parent company, with subsidiaries in Germany and the Netherlands carried out a group reorganization involving the transfer of a Dutch permanent establishment of the German subsidiary to the Dutch subsidiary, it was denied a tax concession which would have been granted if the reorganization had involved two Dutch companies; the Court held that the: `payment of tax on the sale of immovable property constitutes a burden which renders the conditions of sale of the property more onerous and thus has repercussions on the position of the transferor [the German company]. In a case such as this, the vendor was in a distinctly less favourable position than if it had chosen the form of a public or private limited company instead of that of a permanent establishment for its business in the Netherlands.' 54 The Court was satisfied that even though the different treatment only had an `indirect effect' on companies resident in other Member States, it still constituted `discrimination on grounds of nationality' prohibited by Article 43 of the EC Treaty. 55 The Advocate General had noted ± rather significantly 56 for the much later Marks and Spencer v Halsey case, that: `Every business which intends to set up a branch must also consider the costs and risks associated with the disposal of assets which comprise the whole or part of that branch. (...) A business of that kind must consider the need to dispose of such property if there is a change in economic circumstances in relation to the time when the establishment was set up. Burdens which arise in that connection therefore affect, if only indirectly, the taking up of activities as self-employed persons within the meaning of Article 43 and thus, so far as concerns companies from other Member States, their previously defined freedom to set up branches.' 57 The Advocate General saw the German company which gave up its branch in the Netherlands as carrying-out a `negative' act of establishment. 58 Interestingly, the Court found that such treatment was contrary to the freedom of establishment rights of the German company even though the act of disestablishment only took place at some future date, long after the decision to establish the branch in the Netherlands had taken place. This indicates that non-resident companies must receive the same treatment as resident companies in circumstances where they have exercised the right of establishment, unless the host Member State can demonstrate some objective reason acceptable to the Court to justify the different treatment. 59 Halliburton is also of interest because of the third country setting. The case demonstrates how American companies, and parent companies located in other third countries like Switzerland, Brazil, India, China and Russia can obtain access to the Community's freedom of establishment. They can do so indirectly by incorporating a company in an EU Member State. In Halliburton, the US parent company of the Halliburton group established subsidiaries in Germany and the Netherlands. Although Halliburton (US) was not able to directly obtain the benefits and advantages of the freedom of establishment, its subsidiaries located in Germany and the Netherlands could. Halliburton (Germany) was therefore entitled to the same Community law rights as any other German company even though it was owned by a US parent company. However, it should be noted from para. 75 of the Uberseering decision that freedom of establishment requires `a real and continuous link' with a Member State in situations where the company has `nothing but its registered office within the Community'. This prevents `letter-box' and `brass-plate' companies acquiring Community law rights such as freedom of establishment when they are incorporated by third country nationals Saint-Gobain Freedom of establishment and DTCs came into play in the Court's Saint-Gobain decision, 60 when Germany 49 See n. 40 above. 50 See Commerzbank, para See Commerzbank, para See Commerzbank, para See Case C-1/93 Halliburton Services BV v Staatssecretaris van Financien, [1994] ECR I-1137 (`Halliburton'). See A.J. Shipwright and E. Keeling, `Some taxing problems concerning nondiscrimination and the EC Treaty', European Law Review 1995, vol. 20, no. 6, pp. 580±597; T. Lyons, `Challenging tax laws in Europe', Taxaxation 1994, pp. 133(3463), 395± See Halliburton, para See Halliburton, para See n. 6 above. 57 See the Opinion of Advocate General Lenz in Halliburton, para See the Opinion of Advocate General Lenz in Halliburton, para See Halliburton, para See Case C-307/97 Compagnie de Saint-Gobain (`Saint-Gobain'), [2001] CMLR 34. See O. Thommes, `European Court of Justice to decide on discrimination of permanent establishments', Intertax 1997, vol. 25, no. 12, pp. 452±453; R. Eggert, `Discrimination 264 EC TAX REVIEW 2008/6

7 refused certain tax advantages to the German branch of a French company that it ordinarily granted to German resident companies concerning certain dividends received from foreign companies. The dividends in question were received by the German branch from companies resident in the US and Switzerland and were refused tax concessions which were designed to prevent such dividends from being taxed again in Germany 61 on the ground that the DTCs, concluded between Germany and the US, and Germany and Switzerland, restricted the reliefs to German resident companies. 62 The national court, citing Avoir Fiscal, considered that the refusal to grant the tax advantages could constitute discrimination contrary to Article 43 of the Treaty and consequently sought a preliminary ruling from the Court. 63 The Court asked whether Articles 43 and 48 of the Treaty precluded `the exclusion of a permanent establishment in Germany of a company (...) having its seat in another Member State (...) from enjoyment, on the same conditions as those applicable to companies (...) having their seat in Germany, of tax concessions...'. 64 It observed that those two provisions: `guarantee nationals of Member States of the Community who have exercised their freedom of establishment and companies or firms which are assimilated to them the same treatment in the host Member State as that accorded to nationals of that Member State.' 65 In this case, it was the German branch of the French company which held the shares in the companies which were non-resident in Germany. As such, Germany refused the tax concessions on the ground that the tax reliefs were limited to companies which were resident in Germany. This imposed less favourable treatment on non-resident companies operating in Germany via a permanent establishment. 66 It made it less attractive for those companies to hold shares via their German branches and thus, restricted `the freedom to choose the most appropriate legal form for the pursuit of activities in another Member State, which the second sentence of Article 43 expressly confers on economic operators'. 67 The Court examined the justifications put forward by Germany, namely: the resident/non-resident distinction 68 ± branches of non-german companies were different to German companies; the need to prevent a reduction in tax revenue 69 ± because Germany could not tax any dividends distributed by the non-german companies operating branches in Germany; that branches enjoy advantages compared to German companies when it comes to the transfer of profits to the non-resident parent company 70 ± branch profits are attributed to their non-resident parent; the conclusion of DTCs with third countries (TCs) does not come within the sphere of Community competence; 71 and finally, that the balance inherent in such DTCs would be disturbed if the benefit of their provisions were extended to companies established in Member States which were not parties to the DTCs. 72 The Court dealt with each of these arguments in turn ± rejecting them entirely. On the resident/nonresident argument, the Court merely pointed out that the German branch of the French company, and a German resident company, were objectively comparable because the receipt of dividends in Germany was liable to tax there by both resident and non-resident companies operating via a branch in Germany, and also because shareholdings held in foreign subsidiaries were liable to tax there irrespective of whether they were held by resident companies or branches of nonresident companies. 73 The Court also found that the difference in treatment applied only to the tax concessions: by failing to grant them to non-resident companies with a German branch meant that the tax liability of the branch included `dividends from foreign sources and shareholdings in foreign companies' even though the tax liability of the branch should have been limited to German sources. 74 Consequently the resident and non-resident distinction could not justify the different treatment of the German branch of the French company because it was in a comparable situation to a German resident company which qualified for the tax advantages. Next, the Court swiftly rejected the `loss of tax revenue' argument saying that it was not listed as a possible justification in Article 46 of the Treaty and that it could not `be regarded as a matter of overriding general interest which may be relied upon in order to justify unequal treatment that is in principle incompatible with Article 43 of the Treaty'. 75 Similarly, citing Avoir Fiscal, it rejected the `advantages' argument. 76 And, in relation to the DTC arguments, the Court explained that even though Member States could enter into DTCs, their competence was restricted by the parameters set by Community law. 77 In other words, when Member States entered into DTCs with TCs: cont. against German permanent establishments of EU corporations', International Tax Review 1997/98, vol. 9, no. 1, pp. 54±55; M. Lausterer, `Unlawful German tax discrimination of permanent establishments comes before the European Court of Justice', EC Tax Journal 1998, vol. 3, no. 1, pp. 35±51; K. Eicker, `ECJ to decide on German discrimination of permanent establishments', Intertax 1999, vol. 27, no. 12, p. 488; J.D.B. Oliver, `Entitlement of a permanent establishment to third state treaty benefits', BTR 2000, no. 3, pp. 174± See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para. 55. This was a Swedish Government argument. 73 See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para See Saint-Gobain, para. 53, citing Avoir Fiscal, para See Saint-Gobain, para. 57. EC TAX REVIEW 2008/6 265

8 `the national treatment principle requires the Member State which is a party to the treaty to grant to permanent establishments of non-resident companies the advantages provided for by that treaty on the same conditions as those which apply to resident companies.' 78 The ECJ also confirmed the Opinion of Advocate General Mischo 79 that: `the obligations which Community law imposes on (...) Germany do not affect in any way those resulting from its agreements with the United States of America and the Swiss Confederation. The balance and reciprocity of the treaties concluded by (...) Germany with those two countries would not be called into question by a unilateral extension, on the part of (...) Germany, of the category of recipients in Germany of the tax advantage provided for by those treaties, (...) since such an extension would not in any way affect the rights of the non-member countries which are parties to the treaties and would not impose any new obligation on them.' 80 The outcome of Saint-Gobain was that Germany was obliged to extend the dividend tax advantages reserved for its own resident companies to German branches of companies resident in other Member States. The Court, therefore, demonstrated that international tax law principles and practices, and DTCs with TCs are equally capable of being incompatible with Community law and fall within the scope of the Treaty. Significantly, this does not mean that residents of Member States are able to gain automatic access as of right to the DTCs of other Member States. The advantages and benefits of such DTCs are usually restricted to residents of the DTC Contracting States. 81 Consequently, in an internal market where DTCs form a necessary part of the regulatory framework because of the absence of Community rules dealing with the problems associated with economic and juridical double taxation, such rules are not outlawed as of right by the Court. Thus, in Saint-Gobain, the French resident company with a branch in Germany did not manage to gain access to the German-US DTC. If it did, then the US would be obliged to grant the advantages of the DTC to a person who was not a resident of Germany or the US. This, of course, was not the result of the Court's Saint-Gobain judgment. Instead, the Court insisted that Germany should grant `national treatment' to the French company with the branch in Germany. In other words, not less favourable treatment to that of a German company because the nonresident French company through its branch in Germany was in a comparable situation to a German resident company. It was German's obligation under the freedom of establishment provisions of the EC Treaty to ensure such equal treatment. The Court noted that the unilateral extension of the DTC benefits to the French company would not upset the balance and the obligations imposed on Germany by the DTC because the `national treatment' obligation was that of Germany and not that of the US. Therefore, the French company, Saint-Gobain, did not access the DTC benefits rather it had to be compensated by Germany for breach of Community law rights to the extent that freedom of establishment was breached by the German rules. This should have been equivalent to the tax advantages that were received under the DTC by a comparable German resident company with similar investments to Saint- Gobain in the US. Taking this reasoning a bit further, it seems clear that Germany was entitled to enter into a DTC with the US which did not include residents of other Member States with branches in Germany as `persons' entitled to benefits of the German-US DTC. In other words, the DTC in question had a restriction or a limitation imposed from the outset which restricted the DTC benefits to `residents' of the Contracting States. Clearly, this type of DTC was acceptable to the Court (and presumably the Commission because there was no spate of infringement cases brought against all the Member States since the Court's decision in Saint- Gobain). Understanding why it was acceptable to the Court is important. DTC rules form a necessary part of the regulatory framework for tax in the EU in the absence of harmonized rules. Accordingly, Germany was entitled to enter into DTCs for the benefit of its residents with other Member States and with third countries with a view to eliminating double taxation. When Germany entered into the DTC with the US, it was on the basis that such an agreement complied with Community law. 82 As the DTC was restricted to `residents' of the DTC states, it was clear from the outset that such an international agreement failed to grant equivalent benefits to branches of companies resident in other Member States which were in a comparable situation to German companies. This failure on the part of Germany was not, however, sufficient to set aside the DTC with the US because the French company entitled to `national treatment' could be guaranteed such `national treatment' by Germany. 83 Saint-Gobain ensured this outcome: the DTC could stand but Germany had to ensure equal treatment for those nonresidents entitled to national treatment in Germany Royal Bank of Scotland Different treatment of branches in the host Member State in terms of `tax rates' has also forced the ECJ to declare that such host state rules are incompatible with 78 See Saint-Gobain, para See para. 81 of the Opinion of Advocate General Mischo in Saint- Gobain. 80 See Saint-Gobain, para However, the Commentary to Art. 1 of the OECD MTC makes it clear that the term `resident' of a Contracting State could be changed to `taxpayer' of a Contracting State. Of course, this would represent a significant extension of the DTC that the Contracting States might not agree within their negotiations. 82 See the Court's subsequent decision in Gottardo, para. 33. Case C-55/00 Elide Gottardo v Istituto nazionale della previdenza sociale (INPS) [2002] ECR I See the response of the UK revenue authorities to the Saint- Gobain decision at (last visited 2 October 2008). 266 EC TAX REVIEW 2008/6

9 the fundamental freedom of establishment provided in Articles 43 and 48 of the EC Treaty for companies. In the RBOS case, 84 a branch of a UK bank located in Greece was charged a 40 per cent tax on its branch profits compared to a 35 per cent tax on the branch profits of a bank resident in Greece. A lower tax rate was thus provided to companies with their seat in Greece but not to companies with their seat or registered office in other Member States: a higher rate of tax applied to companies which had their seat in another Member State. 85 The Court analysed whether this different tax treatment of resident and non-resident companies could be justified and noted that: `As far as the method of determining the taxable base is concerned, the Greek tax legislation does not establish, as between companies having their seat in Greece and companies which, whilst having their seat in another Member State, have a permanent establishment in Greece, any distinction as to justify a difference of treatment between the two categories of companies.' 86 The Court rejected the notion that the two companies were incomparable because the company resident in Greece was subject to world-wide taxation and the company resident in another Member State was subject only to limited tax liability in Greece in relation to the profits attributed to its Greek permanent establishment, saying: `that circumstance which arises from the limited fiscal sovereignty of the State in which the income arises in relation to that of the State in which the company has its seat is not such as to prevent the two categories of companies from being considered, all other things being equal, as being in a comparable situation as regards the method of determining the taxable base.' 87 Therefore, the Court concluded that the different treatment was not justified because there was no objective difference between the two categories of company. Furthermore, the Court observed that this fact was borne out by the Greece-UK Double Tax Convention (DTC) 88 which provided for equal treatment of branches of UK companies operating in Greece with that of Greek companies CLT-UFA In a similar case involving German tax rules, in CLT- UFA, 89 a Luxembourg company with a German branch was subjected to a rate of tax of 42 per cent. This compared with the rate of tax of either 30 per cent or 33.5 per cent for German resident companies. Arguably this different treatment of branches of companies resident in other Member States and German companies affected the freedom of establishment because such branches were treated less favourably than German companies. 90 The Court commented that `the freedom to choose the appropriate legal form in which to pursue their activities in another Member State primarily serves to allow companies having their seat in another Member State to open a branch in another Member State in order to pursue their activities under the same conditions as those which apply to subsidiaries'. 91 The outcome of the German rules was that establishment in Germany by way of a branch was made less attractive for non-german companies and this restricted the freedom to choose the `appropriate legal form in which to pursue their activities in another Member State'. 92 The German argument that profits distributed by a subsidiary to its parent were different from profits distributed by a branch to its head office was rejected by the Court. Germany maintained that profits, in the former situation, were no longer profits of the subsidiary; whereas, in the latter situation, such profits continued to be part of the internal assets of the same company. 93 The Court rejected this argument because in both cases `the profits are made available to the company which controls the subsidiary and the branch respectively'. 94 Furthermore, it noted that even if the profits distributed by the subsidiary to the parent were no longer part of the assets of the subsidiary, `the profits could still be made available to that subsidiary by its parent company in the form of share capital or a shareholder loan'. 95 Consequently, the German rules in determining the taxable amount did `not draw a distinction between companies with their seat in another Member State, according to whether they pursue their activities through a branch or a subsidiary, which is capable of justifying a difference in treatment between the two categories of companies'. 96 The Court's solution was, therefore, that `it is necessary to apply a tax rate to the profits made by the branch which is equivalent to the overall tax rate which would have been applicable in the same circumstances to the distribution of the profits of a subsidiary to its parent company' See Case C-311/97 Royal Bank of Scotland plc v Elliniko Dimosio (Greek State) [1999] 3 CMLR 973 (`RBOS'). See K. Eicker, `European Court of Justice continues to strengthen the situation of permanent establishments', Intertax 1999, vol. 27, nos 8/9, p. 311; J. Schwarz, `Cross-border corporate structures and financing: the impact of European Court decisions on tax discrimination', BIFD 2000, vol. 54, no. 3, pp. 113± See RBOS, para See RBOS, para See RBOS, para See RBOS, para See Case C-253/03 CLT-UFA SA v Finanzamt Koln-West (`CLT- UFA'). See A. Schnitger, `Germany/European Union: the CLT- UFA case and the principle of ``neutrality of legal form'' ', European Taxation 2004, vol. 44, no. 12, pp. 522±527; Case Comment, `Branch of Foreign Company must not be taxed more heavily', EU Focus 2006, 184, pp. 28± See CLT-UFA, para See CLT-UFA, para See CLT-UFA, para See CLT-UFA, para See CLT-UFA, para See CLT-UFA, para See CLT-UFA, para See CLT-UFA, para. 33. As this comparison had to be made in the light of the factual circumstances of the case, the Court left that matter to be determined by the national court. EC TAX REVIEW 2008/6 267

10 3.6. Futura All of the above `host state' cases involved `host' state rules which treated comparable situations differently, contrary to the freedom of establishment provisions. From the Court's Futura judgment, 98 it is clear that indistinctly applicable rules can also fall foul of Community rules on freedom of establishment. In Futura, a French company established a branch in Luxembourg which was required under Luxembourg tax rules to maintain a set of Luxembourg accounts in order to carry forward losses which also had to be connected to Luxembourg activities. Advocate General Lenz in his Opinion pointed out that this requirement meant that the French company had to produce a second set of accounts for the branch resulting in additional costs for that company. 99 He noted that branches are a more `cost-effective form of establishment since they entail fewer costs' but he could not ascertain any different treatment of Luxembourg companies and branches in terms of taxation of profits: all Luxembourg companies and branches had to maintain a Luxembourg set of accounts if they wanted to carry forward their losses. He also commented, rather importantly, that: `as long as there is no discrimination against non-resident companies and no restriction on the freedom of establishment, it is for the Member state to choose the way in which losses are to be determined.' 100 The Advocate General concluded that the requirement to maintain a second set of accounts was a restriction on the freedom of establishment which was not justified by the need to ensure effective fiscal supervision ± the requirement of the second set of accounts was `disproportionate' 101 as `there was nothing to prevent the tax authorities from requiring the person concerned to provide such proof as they consider necessary'. 102 The ECJ picked up on the Advocate General's reasoning, although they structured their judgment in a more roundabout way and preferred to commence with the mantra: `although direct taxation falls within the competence of the Member States, the latter must none the less exercise that competence consistently with Community law and therefore avoid any overt or covert discrimination on grounds of nationality.' 103 The Court noted that both resident taxpayers and non-residents with branches were taxed in the same way, and having first conducted a `discrimination' analysis, it found that the Luxembourg rules which limited the basis of assessment to Luxembourg profits and losses was in keeping with the `fiscal principle of territoriality' and therefore could not constitute discrimination prohibited by the EC Treaty. 104 Next the Court examined the Luxembourg rule which required a (second) set of accounts to be maintained at the branch premises in Luxembourg drawn up in accordance with Luxembourg rules, in cases where the branch wished to carry forward losses. This time the Court conducted a `restriction' analysis (arguably following the more direct approach by the Advocate General) and concluded that such a requirement could constitute a restriction on the freedom of establishment as the French company, if it wished to carry forward branch losses in Luxembourg `in addition to its own accounts' had to keep an additional set of accounts in Luxembourg maintained according to Luxembourg accounting rules. 105 The Luxembourg Government argument that the rule was essential in order to ascertain the correct amount of taxable income in Luxembourg: 106 to make sure that the losses being carried forward related to Luxembourg activities and that the amount of losses corresponded to the `losses actually incurred by the taxpayer'. 107 Consequently, there was no guarantee that the use of the company's French accounts would be sufficient, as they might not produce the appropriate figures relating to losses incurred in Luxembourg. However, the justification offered by Luxembourg still had to be measured against the principle of proportionality: to examine whether the requirement to maintain the second set of accounts went `beyond what is necessary to enable the losses (...) to be ascertained'. 108 The Court confirmed that as no harmonising rules had been adopted to determine the basis of assessment for direct taxes it was within the competence of a Member State to draw up `its own rules governing the determination of profits, income, expenditure, deductions and exemptions as well as the amounts in respect of each of them which may be included in the calculation of taxable income or of losses which may be carried forward'. 109 Thus, the Court is saying that as the Member States retain the competence in direct tax matters they can design their own loss relief systems. However, this must be understood in the context of para. 19 in which the Court made it clear that such competence in direct tax matters must be exercised in compliance with Community law. Consequently, the Court demonstrates this requirement by first subjecting the Luxembourg loss relief rules to a `discrimination' assessment, and secondly to a `restriction' analysis 98 See Case C-250/95 Futura Participations SA and Singer v Administration des contributions (`Futura'), [1997] ECR I See O. Thommes, `European Court of Justice releases branches of EU companies from duplication of bookkeeping requirements', Intertax 1997, vol. 25, nos 8/9, pp. 322±323; M. Clayson, `Futura Participations: Luxembourg account-keeping requirement unlawful', EC Tax Journal 1997, vol. 2, no. 2, pp. 133±137; T. Lyons, `Futura Participations: discriminatory accounting', BTR 1998, vol. 1, pp. 61± See Opinion of Advocate General Lenz in Futura, para See Opinion of Advocate General Lenz in Futura, para See Opinion of Advocate General Lenz in Futura, para See Opinion of Advocate General Lenz in Futura, para See Futura, para See Futura, paras 21 and See Futura, para See Futura, para See Futura, para See Futura, para See Futura, para EC TAX REVIEW 2008/6

11 which, following the Gebhard formula 110 (discussed below), concludes with a proportionality assessment. The Court concluded that non-residents as a rule were not obliged to keep accounts under Luxembourg rules relating to their Luxembourg activities ± Luxembourg accounts were only required if the non-resident wished to carry forward losses relating to their Luxembourg branch activities. Therefore: `the sole concern of the Luxembourg tax authorities was to ascertain clearly and precisely that the amount of the losses carried forward corresponds (...) to the amount of losses actually incurred in Luxembourg by the taxpayer. Consequently, provided that the taxpayer demonstrates, clearly and precisely, the amount of the losses concerned, the Luxembourg authorities cannot refuse to allow him to carry them forward.' 111 The French company was, therefore, not obliged to maintain a second set of accounts according to Luxembourg rules; it merely had to demonstrate that the amount of losses sought to be carried forward related to its Luxembourg activities. 112 Interestingly, the Court commented that the condition requiring the losses to be `economically related to the income earned by the taxpayer in that State' was not contrary to the freedom of establishment ± `provided that resident taxpayers do not receive more favourable treatment'. 113 The Court merely precluded the loss relief being tied to the maintenance of a second set of accounts in Luxembourg as this was a disproportionate restriction of the freedom of establishment; the same result could be achieved by a less restrictive means where the taxpayer concerned demonstrated clearly and precisely that the amount of losses claimed corresponded to the amount of losses incurred in relation to Luxembourg activities. 114 The Court's Futura decision also demonstrates the significant difference between a `restriction' and `discrimination'. In Futura, the Court found no `discrimination' but did find a `restriction'. The two concepts also deserved a separate analysis by the Court. In the Court's subsequent FII GLO and ACT IV GLO cases, Advocate General Geelhoed put forward a substantial argument that there was no difference between the concepts of restriction and discrimination. Clearly, from a reading of Futura, that is not the case. However, one can see where his argument comes from, because if one applies the `migrant/non-migrant test' to a restriction situation, one can clearly discern a `discrimination' type analysis at play: the `migrant', or person exercising the fundamental freedom (from either a `host' or `origin' Member State rule) is compared with the `non-migrant', and a determination is made by the Court as to whether the `migrant' is treated less favourably than the `non-migrant'. In other words, whether there is discrimination between the two persons. It is clear from Futura, however, that persons can be treated in the same way and still `restrict' the freedom of establishment in certain circumstances. This seems to explain why the Court chose not to follow the learned Advocate General on this point even though it accepted his underlying thesis on the `source' and `residence' obligations of the Member States in relation to the elimination of double taxation. Indeed, it is respectfully suggested that the Advocate General had a huge impact on the Court's understanding of the concepts of `source' and `residence' Member States' obligations under the EC Treaty, in particular on the nature of the `comparability' concept. This is evident from the approach it adopted in the ACT IV GLO case when compared with its approach in Bouanich SEVIC Systems To conclude this brief review of `host' state cases involving establishment, it is useful to examine the SEVIC Systems AG case, 116 which involved a merger between a German company and a Luxembourg company. German law provided for the registration of mergers between German resident companies only: cross-border mergers were not recognised. The Court found that such rules were contrary to the freedom of establishment provisions contained in the Treaty. It said that the freedom of establishment includes `the formation and management of those companies under the conditions defined by the legislation of the State of establishment for its own companies'. 117 This covers all measures: `which permit or even merely facilitate access to another Member State and the pursuit of an economic activity in that State by allowing the persons concerned to participate in the economic life of the country effectively and under the same conditions as national operators.' 118 The Court saw a cross-border merger as a one way of exercising the freedom of establishment: the merger operation allows a company to transform itself without dissolving, thus providing a way, within a single operation, to pursue an activity in a new company format without interruption; saving time, costs, and 110 See Case C-55/94, Gebhard v Consiglio dell `Ordine degli Avvocati e Procuration di Milano 1995] ECR I See M. Jarvis, `Freedom of establishment and freedom to provide services ± lawyers on the move', European Law Review 1996, vol. 21, no. 3, pp. 247± See Futura, para See Futura, para See Futura, para See Futura, para Case C-265/04 Margaretha Bouanich v Skatteverket [2006] ERC I In Bouanich, the Court did not find comparability on the basis of the extension of the Swedish tax jurisdiction to include the French resident who made an investment in Sweden. See para. 40 of the judgment. Subsequently, the Court's approach to comparability appears to have been altered by Advocate General Geelhoed's Opinion in ACT IV GLO. See Test Claimants in Class IV of the ACT Group Litigation v Commissioners of Inland Revenue, para. 68 (`ACT IV GLO'). 116 The SEVIC judgment was delivered on the same day as Marks and Spencer. For an analysis of SEVIC, see O. Thommes and R. Eismayr, `ECJ rules on cross-border mergers of EU competition', Intertax 2006, vol. 34, no. 2, pp. 121± See SEVIC, para See SEVIC, para. 18. The Court followed the advice of Advocate General Tizzano as set out in para. 30 of his Opinion in SEVIC. EC TAX REVIEW 2008/6 269

12 the complications associated with a dissolution or liquidation and a new company formation. 119 As such, the German rules treated internal German mergers more favourably than cross-border mergers this constituted a restriction of the freedom of establishment which required justification. Germany put forward a number of justifications including the protection of creditors, the protection of minority interests, and the preservation of the effectiveness of fiscal supervision. Whilst the Court was somewhat sympathetic, it simply pointed out that refusing to register all cross-border mergers even in situations where these interests were not threatened would go beyond what was necessary to protect those interests. Consequently, the German rules failed the Gebhard formula 120 proportionality test, and the German rules were incompatible with the freedom of establishment. This is quite a significant decision of the Court because at first glance it appears that the freedom of establishment has been considerably extended to include an automatic right to merge with companies located in other Member States. Clearly, this is not the case. The Luxembourg company in SEVIC was only allowed to merge with the German company because Germany provided such an advantage for its own companies. Had Germany not provided for such an advantage for German-German situations, the Luxembourg company would not have obtained such a right under the freedom of establishment. In this respect, SEVIC is analogous to Marks and Spencer. In Marks and Spencer, the United Kingdom was obliged to extend loss relief cross-border in certain limited situations. However, had the United Kingdom not granted `group relief' in United Kingdom-United Kingdom situations, it would not have been obliged to grant group relief cross-border. SEVIC and Marks and Spencer demonstrate that the problems relating to the freedom of establishment concern `protectionist' tax rules which endeavour to retain advantages for domestic situations to the disadvantage of the cross-border operators, exercising their fundamental freedom rights granted by the EC Treaty. If the `protectionist' rules do not exist, crossborder situations such as those seen in SEVIC and Marks and Spencer are not disfavoured and freedom of establishment would not require a merger between a Luxembourg company and a German company to be recognized in Germany, nor the United Kingdom to have to grant group relief cross-border in the circumstances seen in Marks and Spencer. One must therefore try to understand the Court's approach in SEVIC and Marks and Spencer. In SEVIC, the Luxembourg company that merged with the German company clearly exercised its freedom of establishment rights and was entitled to `national treatment' in the `host' Member State Germany. As Germany provided the right to merge to German companies, the Luxembourg company was entitled to `not less favourable treatment' in the `host' Member State (Germany). By contrast, in Marks and Spencer, there was an `origin' Member State tax rule at play which denied cross-border loss relief. In certain situations, where loss relief was not possible in the `host' Member State (in `terminal' or `final' loss situations), the United Kingdom was obliged to extend that loss relief cross-border as otherwise there would be `less favourable treatment' of a United Kingdom parent company compared to another United Kingdom parent company which qualified for group relief. In this instance, the comparison was between two United Kingdom parent companies in the `origin' Member State (the United Kingdom) in relation to an `origin' Member State tax rule; in the SEVIC situation, the comparison involved two companies operating in the `host' Member State (Germany) in relation to a `host' Member State rule. In both situations `national treatment' had to be granted Concluding remarks The Court's jurisprudence on freedom of establishment from a `host' state perspective shows that the ECJ applies a `migrant/non-migrant' test (or a `national treatment' test) from the perspective of the `host' Member State's rules. In other words, if the person exercising the freedom of establishment is in a comparable situation to a resident of the `host' Member State, the tax rules of the `host' Member State must ensure that the two persons (the `migrant' and the non-migrant') are treated similarly. This means that the `migrant' must receive not less favourable treatment than the `non-migrant'. The case law demonstrates that if the `host' Member State taxes the non-resident with a branch in the `host' state in a similar way to a resident of the `host' state, then it is obliged to extend any tax advantages that it grants to residents also to non-residents which are in a comparable situation. From the perspective of a `host' Member State's rule, the non-resident taxpayer should receive not less favourable treatment than the comparable resident of the `host' Member State. The next section considers the tax jurisprudence of the ECJ relating to freedom of establishment viewed from an `origin' state perspective. The conclusion is that the `migrant/non-migrant test' also applies in relation to an `origin' Member State's tax rules, but this time from a different perspective. Whereas the `host' Member State is obliged to grant `national treatment' and cannot unjustifiably restrict the freedom of establishment of nationals of other Member States; the `origin' Member State (on the basis of the `migrant/ non-migrant test' or `national treatment test'), must not restrict its own residents who are exercising the freedom of establishment. This applies to its nationals and to the nationals of other Member States resident on its territory. 119 See SEVIC, para See Case C-55/94, Gebhard v Consiglio dell `Ordine degli Avvocati e Procuration di Milano [1995] ECR I EC TAX REVIEW 2008/6

13 4. Freedom of establishment and origin Member States 4.1. Daily Mail Approximately one year after the Avoir Fiscal judgment, the English High Court referred a question to the ECJ involving a freedom of establishment question relating to an `origin' state rule. In Daily Mail, 121 a UK company wished to cease to be a resident of the UK for tax reasons. However, UK rules required the consent of the United Kingdom's Treasury before such action could be taken. In this instance, it was denied to the Daily Mail company. As the Daily Mail company wished to transfer its residence to the Netherlands, it argued that its right of freedom of establishment was infringed by these UK company law rules. Consequently, it sought a declaration that the rules were incompatible with Community law, and in particular, with Article 43 of the EC Treaty. 122 The principal reason for the proposed transfer of the central management and control of the company to the Netherlands was to avoid the payment of taxation. 123 The Court was thus faced with an origin state rule which hindered the transfer of the central management and control of a company formed under English law (thus, the law of a Member State) to another Member State. It determined: `Even though those provisions [referring to the freedom of establishment] are directed mainly to ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State, they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation which comes within the definition contained in Article 48 (...) the rights guaranteed by Articles 43 et seq. would be rendered meaningless if the Member State of origin could prohibit undertaking from leaving in order to establish themselves in another Member State.' 124 The Court noted that establishment was generally exercised by the setting up of agencies, branches or subsidiaries or taking part in the incorporation of a company in another Member State. 125 In the Dail Mail situation, however, the UK rules did not restrict any of these forms of establishment: the UK rules merely required Treasury consent `only where such a company seeks to transfer its central management and control out of the United Kingdom while maintaining its legal personality and its status as a United Kingdom Company'. 126 As the rules relating to companies moving their central management and control had not been harmonized at the Community level, the Court affirmed that companies were `creatures of national law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning'. 127 As such, national rules varied widely in this area. The UK's rules made the transfer of the central administration of a UK company to a foreign country subject to certain restrictions. 128 Having noted that Article 48 of the Treaty placed the registered office, the central administration and principal place of business of a company on the same footing ± in other words, that the Treaty recognized that the Member States used different connecting factors to link a company to their territory ± the Court decided that the right of establishment did not resolve the problems related to the transfer of the registered office or real head office or the central administration from one Member State to another. 129 It regarded this as a matter for `future legislation or conventions'. 130 The Court concluded that the freedom of establishment provisions of the Treaty did not confer on companies incorporated under the law of a Member State the right to transfer their central management and control to another Member State while retaining their status as companies in their origin Member State. 131 Thus, whilst the Court held that the freedom of establishment could not be restricted by an origin Member State, in this particular case, the UK rules did not fall within the scope of the freedom of establishment De Groot The ECJ has echoed this line of reasoning relating to origin Member States and the fundamental freedoms in subsequent cases such as ICI, 132 Terhoeve, 133 XAB and YAB, 134 De Groot, 135 and Marks and Spencer v Halsey. In De Groot, a free movement of workers case, the Court confirmed that `even if, according to their wording, the rules on freedom of movement for workers are intended, in particular, to secure the benefit of national treatment in the host State, they also preclude the State of origin from obstructing the 121 See The Queen v H.M.Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc (`Daily Mail'), [1988] ECR See B. Knobbe-Keuk, `Restrictions on the fundamental freedoms enshrined in the EC Treaty by discriminatory tax provisions ± ban and justification', EC Tax Review 1994, vol. 3, pp. 74± See Daily Mail, para This was agreed by the parties to the case. See Daily Mail, para See Daily Mail, para. 16 (emphasis added). 125 See Daily Mail, para See Daily Mail, para See Daily Mail, para See Daily Mail, para See Daily Mail, para See Daily Mail, para See Daily Mail, para See Case C-264/96, ICI v Colmer (HM Inspector of Taxes) paragraph 21 (`ICI'). See T. Lyons, `ICI v Colmer affirms Community supremacy', BTR 1999, vol. 1, pp. 65±69; Ohommes, `European Court of Justice continues to dictate the pace for European tax harmonisation', Intertax 1998, vol. 26, no. 10, pp. 320± See Case C-18/95 Terhoeve [1999] ECR-I 345, para See Case C-200/98, XAB and YAB v Riksskatteverket, [1999] ECR I-8261, para See Case C-385/00 F.W.L. de Groot paragraph 78 (`De Groot'), [2002] ECR I See N. Mattsson, `Does the European Court of Justice understand the policy behind tax benefits based on personal and family circumstances?', European Taxation 2003, vol. 43, no. 6, pp. 186±194. EC TAX REVIEW 2008/6 271

14 freedom of one of its nationals to accept and pursue employment in another Member State'. 136 The Court, therefore, confirmed the application of the `migrant/ non-migrant test' (or `national treatment test') from the perspective of both the `host' Member State and the `origin' Member State Baars Another `origin' case worth noting is Baars, 137 as in this case, the relationship between the freedom of establishment provisions of the Treaty and the free movement of capital provisions is elucidated by the Court. Baars lived in the Netherlands and owned all the shares in an Irish company. Dutch rules provided a tax relief for substantial holdings in Dutch resident companies for wealth tax purposes, but did not provide the tax relief if the substantial holding was in a non-dutch resident company. Baars argued these rules restricted his freedom of establishment and his free movement of capital rights. 138 The Court indicated that a `100 per cent holding in the capital of a company having its seat in another Member State undoubtedly brings such a taxpayer within the scope of the Treaty provisions on the right of establishment'. 139 Furthermore: `a national of a Member State who has a holding in the capital of a company established in another Member State which gives him a definite influence over the company's decisions and allows him to determine its activities is exercising his right of establishment.' 140 The Court echoed its Daily Mail reasoning pertaining to the freedom of establishment and origin Member States 141 but took matters somewhat further by indicating that Article 43 likewise prohibits a Member State from hindering the establishment in another Member State of nationals of Member States residing on its territory ± in other words, not simply its own nationals, but also nationals of other Member States residing there. 142 This constituted different treatment which required justification. The Netherlands argued that its rules were justified by the need to maintain the cohesion of the Dutch tax system. In rejecting this argument, the Court noted that there was no double taxation of profits because the wealth tax was a tax on the assets of the shareholders through the value of their shareholdings in the capital of the company, not a tax on dividends. 143 Secondly, there was no Bachmann direct link, 144 as this case concerned `two separate taxes levied on different taxpayers'. 145 As such the Bachmann `cohesion of the tax system' defence did not apply ± the tax advantage related to Dutch wealth tax; there was no direct link between that `advantage' and the fact that Dutch companies were subject to corporation tax and the company established in Ireland was not De Lasteyrie du Saillant In relation to individuals, the Court has determined that `exit' taxes imposed by an origin Member State may be incompatible with the freedom of establishment. Thus, in de Lasteyrie, 147 where the taxpayer left France to settle in Belgium and was hit with an immediate French `exit' tax requiring him to pay tax on unrealised gains in certain securities held by him, the taxpayer argued that this `exit' tax restricted the exercise of his freedom of establishment rights. The Court agreed, saying, that even if the French tax rule did `not prevent a French taxpayer from exercising his right of establishment, this provision is nevertheless of such a kind as to restrict the exercise of that right, having at the very least a dissuasive effect on taxpayers wishing to establish themselves in another Member State'. 148 As an aside, the Court also cited Avoir Fiscal, 149 noting that `a restriction on the freedom of establishment is prohibited (...) even if of limited scope or minor importance'. 150 Thus, a taxpayer who wished to leave France and reside in another Member State was subjected to `disadvantageous treatment in comparison with a person who maintains his residence in France'. 151 Had he remained in France, tax would become payable only on the realization of his shares, whereas if he left France an immediate tax charge crystallized and this tax charge occurred at a time when there was no actual realization of the shares to generate income to pay the tax. As the Court noted, this different treatment was capable of `having considerable repercussions on the assets of a taxpayer wishing to transfer his residence outside France [and was] (...) likely to discourage a taxpayer from carrying out such a transfer'. 152 The Court, therefore, applied the `migrant/non-migrant' test to determine whether there was a difference in treatment between the domestic and the cross-border situation to ascertain whether the treatment of the cross-border migrant is 136 See De Groot, para See Case C-251/98, Baars v Inspecteur der Belastingen Particulieren/Ondernemingen Gorinchem, [2000] ECR I See A. Lupo, `Reliefs from economic double taxation on EU dividends: impact of the Baars and Verkooijen cases', European Taxation 2000, vol. 40, no. 7, pp. 270±275; K. Eicker, `In the case Baars Jr, the ECJ did not decide on the relationship between freedom of establishment and free movement of capital', Intertax 2000, vol. 28, nos 6/7, p See Baars, paras 9± See Baars, para See Baars, para See Baars, para. 28, citing Daily Mail, para. 16, inter alia. 142 See Baars, para See Baars, para See Case C-204/90 Bachmann [1992] ECR I-249 and Case C- 300/90 Commission v Belgium [1992] ECR I See Baars, para See Baars, para See Case C-9/02 Hughes de Lasteyrie du Saillant v Ministere de l'economie, des Finances et de l'industrie (`De lasteyrie') [2004] 3 CMLR 39. See T. Lyons, `Out with an exit charge: Hughes de Lasteyrie du Saillant', BTR 2004, vol. 6, pp. 589± See De Lasteyrie, para See Avoir Fiscal, para See De Lasteyrie, para See De Lasteyrie, para See De Lasteyrie, para EC TAX REVIEW 2008/6

15 disadvantageous when compared with the nonmigrant in similar circumstances Uberseering The question that remains to be determined is whether the Court will use similar reasoning in relation to `exit' taxes placed on companies. Whilst there are certainly proportionality arguments to be considered, and the purpose of each tax rule would have to be taken into account, it is interesting to note that in its UÈberseering judgment, 154 in November 2002, some 14 years after Daily Mail, the Court implicitly approved Daily Mail in a host state context, holding that where a company which is validly incorporated in one Member State (`A') in which it has its registered office is deemed, under the law of a second Member State (`B'), to have moved its actual centre of administration to Member State B following the transfer of all its shares to nationals of that State residing there, the rules which Member State. The Court found that `a necessary precondition for the exercise of the freedom of establishment is the recognition of those companies by any Member State in which they wish to establish themselves'. 155 Whilst this case looked at things from a host State perspective, there was clearly no criticism whatsoever of its much earlier Daily Mail decision and it is likely that Daily Mail still represents good law. Clearly, a distinction must be drawn between tax rules that make the exercise of the freedom of establishment by a company less attractive and the type of company law rules seen in Daily Mail. In relation to the former, significant harmonization has taken place, as is evidenced by the adoption and implementation of the Mutual Assistance Directive and the Mutual Assistance in the Recovery of Taxes Directive, which enable Member States to recover taxes after an `exit' tax situation has occurred Marks and Spencer plc In Marks and Spencer, the Court repeated its reasoning in relation to restrictions of the freedom of establishment by origin Member States, highlighting that `they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation'. 157 The Court observed that UK group relief constituted a tax advantage which conferred a cash advantage on the group: 158 `[t]he exclusion of such an advantage in respect of the losses incurred by a subsidiary established in another Member State (...) is of such a kind as to hinder the exercise by that parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States.' 159 As such, it constituted a restriction which required justification under the Gebhard formula Keller Holding Finally, in its Keller Holding judgment, the ECJ examined German tax rules which provided for the different treatment of a parent company's financing costs depending on whether they related to a German indirect subsidiary or to an indirect subsidiary established in another Member State. The German rule provided that expenditure which had a direct economic link with non-taxable profits could not be deducted as operating expenditure. Consequently, the financing costs incurred by a German parent company with an indirect holding in an Austrian subsidiary were not deductible to the extent that they related to dividends paid to the parent under a tax-free scheme. However, where all the companies concerned were resident in Germany, such expenditure was deductible. 161 As such, the Court found that there was different treatment of the German-Austrian situation compared to the German-German situation and that such different treatment might dissuade a parent company from carrying on activities through subsidiaries or indirect subsidiaries in other Member States. 162 In other words, the Court applied the `migrant/non-migrant test' (or `national treatment test') and noted that the `migrant' was treated less favourably than a `non-migrant' in a comparable situation. The Court rejected the argument that a German parent company with an indirect subsidiary in Austria differed from a German parent company with an indirect subsidiary in Germany and that the restriction on the deductibility of the financing costs was the corollary of the non-taxation of the foreign dividends. 163 The Court pointed out 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 indirect subsidiaries resident in 153 For a full discussion of this `migrant/non-migrant' test and the Marks and Spencer case see n. 6 above. See also T. O'Shea, EU Tax Law and Double Tax Conventions (Avoir Fiscal Limited, London, 2008). 154 See UÈberseering BV v Nordic Construction Company Baumanagement GmbH (NCC) (`UÈberseering') [2005] CMLR 1. See K. Eicker, `New decision dealing with the German seat theory: the decision by the ECJ in C-208/00 Uberseering BV', Intertax 2003, vol. 31, no. 2, pp. 91± See UÈberseering, para See for instance, the ELISA case. Case C-451/05 EuropeÂenne et Luxembourgeoise d'investissements SA (ELISA) v Directeur geâneâral des impoãts, [2007] ECR I-000. For an analysis of the ELISA case see T. O'Shea, `French Rule Obstructs Free Movement of Capital, ECJ Concludes', Tax Notes International, 7 January 2008, pp. 30± See Marks and Spencer, para See Marks and Spencer, para See Marks and Spencer, para See Case C-55/94, Gebhard v Consiglio dell `Ordine degli Avvocati e Procuration di Milano [1995] ECR I See Keller Holding, para See Keller Holding, para See Keller Holding, para. 36. EC TAX REVIEW 2008/6 273

16 Germany or in other Member States'. 164 The Court makes it very clear that: `the fact that indirect subsidiaries established in Austria are not subject to corporation tax in Germany is not relevant. The difference in tax treatment (...) 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 German parent companies] (...) 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.' 165 The outcome is that, from an `origin' Member State's perspective, the Court applies the `migrant/nonmigrant test' to parent companies that are both resident in Germany. As both receive tax-free dividends from their indirect subsidiaries located in either Germany or Austria, both are in a comparable situation for taxation purposes. However, the treatment of the purely German situation is much more favourable than the situation where the German parent company exercises its freedom of establishment cross-border: it is only in the purely German situation that financing costs may be deducted; similar deductions are denied to the German parent company with an establishment in another Member State, despite it being in a comparable situation. Consequently, the Court determined that freedom of establishment was restricted and then went on to examine the justifications put forward by the German authorities. The ECJ rejected the need for cohesion of the tax system argument offered by the German and UK Governments. 166 The Court noted that the tax advantage of deducting the finance costs did not correspond to any tax levied on the dividends distributed to the parent company. 167 Furthermore, it rejected the German Government's argument relating to the non-taxation of the indirect Austrian subsidiary in Germany, pointing out that there was no `relationship between the deductibility of the financing costs relating to the shareholdings of the parent company and the profits in respect of which the indirect subsidiary is liable to tax'. 168 In any event, the profits of the indirect subsidiary were taxed in Austria in the same way that the profits of the indirect subsidiary resident in Germany were taxed in Germany, `since the place of establishment of the parent company is of no importance in that regard'. 169 In assessing comparability, the Court examined the purpose of the tax rule 170 in the origin state and investigated the tax treatment in the `host' Member State before coming to a conclusion whether a `coherence of the tax system' justification 171 is a valid one. This was in line with its Manninen judgment. 172 The fact that the indirect subsidiary resident in Austria was taxed by Austria, and the indirect subsidiary resident in Germany was taxed by Germany did not matter because there was no direct link between the granting of the tax advantage in question (the deduction of the finance costs) and the taxation of the profits of the indirect subsidiary, or in the words of the Court `for an argument based on such a justification to succeed, a direct link must be established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy'. 173 Accordingly, the Court concluded that the German tax rules were incompatible with the freedom of establishment. 174 The final part of this article shows the impact of the Avoir Fiscal judgment on the Court's recent tax jurisprudence. An example is the Arens-Sikken case decided in September Final thoughts In its 2008 decision in Arens-Sikken, the Court applied the reasoning it adopted in Avoir Fiscal, an establishment case, analogously, in relation to Dutch inheritance tax rules and the free movement of capital. The ECJ determined that the Dutch inheritance tax rules at issue relating to the deduction of endowment debts from Dutch immovable property forming part of the estate of a deceased were incompatible with the free movement of capital in situations where the debts were deductible from the value of the estate if the deceased resided, at the time of his death, in the Netherlands, but were not deductible if the deceased resided, at the time of his death, in another Member State. The Court noted that the Dutch inheritance tax rules placed the heirs of residents (at time of death) and the heirs of non-residents (at time of death) with immovable property in the Netherlands on the same footing for inheritance taxation purposes. Therefore, applying the reasoning of Avoir Fiscal, the Court determined that the two situations were comparable for taxation purposes. The Netherlands, therefore, could not grant a deduction for over-endowment debts in relation to heirs of residents and not to heirs of non-residents as the two situations qualified for equal treatment. There was no objective difference between the two situations to justify the different tax treatment. The case demonstrates the significance and longevity of the Avoir Fiscal judgment and, perhaps, the emergence of a more detailed understanding of the 164 See Keller Holding, para See Keller Holding, para. 38 (emphasis added). 166 See Keller Holding, para See Keller Holding, para See Keller Holding, para See Keller Holding, para Following its De Lasteyrie du Saillant reasoning. See Case C-9/02 De Lasteyrie du Saillant [2004] ECR I-2409 para See Case C-204/90 Bachmann [1992] ECR I-249 and Case C-300/ 90 Commission v Belgium [1992] ECR I See Case C-319/02 Manninen, [2004] ECR I-7477 para. 46 et seq. 173 See Keller Holding, para The Court also indicated that the rules in question were incompatible with the freedom of establishment provisions of Art. 31 of the European Economic Area Agreement as they are identical to Art. 43 of the EC Treaty and must be interpreted uniformly. See Keller Holding, para EC TAX REVIEW 2008/6

17 concept of comparability in relation to a source Member State's taxation rules which apply to nonresidents. From the Court's jurisprudence, it seems clear that the Court has developed a simple rule to determine comparability of a non-resident with that of a resident: if the source Member State extends its tax jurisdiction to cover a non-resident, comparability between the non-resident and the resident is established in the absence of objective evidence to the contrary. Thus, in Avoir Fiscal, (involving the freedom of establishment) insurance companies (from Member States other than France) with branches in France were determined by the ECJ to be in a comparable situation to French resident companies because France taxed such branches in a similar way to French companies. Similarly, in relation to freedom to supply services, the Court in Gerritse 175 applied analogous reasoning to determine comparability between a Dutch resident provider of services in Germany with a German resident service provider, and in relation to the free movement of workers, in Schumacker, 176 the Court found comparability between a non-resident worker and a resident worker in Germany in a situation where the non-resident worker earned almost his entire family income in Germany. In the absence of some objective reason, such a non-resident was entitled to similar treatment to that of a resident. 177 The impact of the Court's Avoir Fiscal judgment therefore continues to play a major role in the Court's tax jurisprudence across the fundamental freedoms to the present day. 175 See Case C-234/01 Arnoud Gerritse v Finanzamt NeukoÈlln-Nord, [2003] ECR I Case C-279/93 Finanzamt KoÈln-Altstadt v Roland Schumacker, [1995] ECR I For a discussion of the `comparability' issue and the related `objective factors', see n. 3 above. Objective reasons may be seen in Manninen in relation to free movement of capital and in Gschwind in relation to free movement of workers. See Case C- 319/02 Petri Manninen [2004] ECR I-7477, and Case C-391/97 Frans Gschwind v Finanzamt Aachen-AuaÃenstadt [1999] ECR I EC TAX REVIEW 2008/6 275