1 Which fundamental freedom prevails? 1 Introduction In connection with the first series of third-country cases, the relationship of the fundamental freedoms has been extensively discussed. The obvious reason was mainly the fact that only the free movement of capital applies to third-country situations. This essay aims at analysing how the ECJ deals with the question of the prevailing freedom. In this respect it shall be examined whether the Court curbs any third-country rights granted by the free movement of capital or just applies the same concept as in its intra-community case-law. 2 Internal Market and the fundamental freedoms 2.1 Internal Market The goal of the European Community is to achieve an Internal Market, which is characterized as "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured". 1 Unlike for indirect taxes, the EC Treaty does not contain provisions harmonizing direct tax laws of the Member States. With the establishment of the Internal Market, which bases on the fundamental freedoms, the Member States gave up certain rights. The new legal framework also described by the Triangular Model has limiting effects on the national tax laws of the Member States as they must exercise their powers retained consistently with Community law. 2 The basis of the Internal Market are the four fundamental freedoms: the free movement of goods (Article EC), the free movement rights of persons (free movement of workers (Articles EC) and the freedom to provide services (Articles EC)), the free movement of services (freedom to provide services (Article EC) and the free movement of capital (free movement of capital and payments (Article EC)). Since its entry into force, the Treaty of Amsterdam additionally comprises the freedom of citizenship, which is sometimes referred as fifth freedom (Article 18 EC). 1 2 Article 14(2) EC. The Triangular Model was developed and introduced by O'SHEA (O'Shea, 'EU Tax Law and Double Tax Conventions', Avoir Fiscal 2008); Case C-279/93 Finanzamt Köln-Altstadt v Roland Schumacker ('Schumacker'),  ECR I-225, para. 21.
2 2 2.2 Free movement of goods For direct tax purposes, the free movement of goods does not play a significant role. Although this fundamental freedom is supposed to be the most important fundamental freedom, it is rather negligible in the direct tax area. 3 Besides the non-discrimination principle, the free movement of goods prohibits customs duties on imports and exports between Member States as well as all charges having equivalent effect. 4 Important elements of this freedom are Articles 90 and 91 EC, which ensure with respect to the VAT that, neither directly nor indirectly, a less favourable taxation is applied on im- or exported products. Furthermore, Article 93 EC mandates the Council with the harmonization of the indirect taxes. 2.3 Free movement of workers The free movement of workers ensures the "abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment". 5 The freedom entails the right of free choice of vocation, free professionalism and residence in the Member States subject to the special provisions laid down in the secondary legislation. With respect to direct taxation, the free movement of workers provides for the abolition of all discrimination based on nationality between workers of the Member States, particularly concerning remuneration. In this respect the Court held that the principle of equal treatment "would be rendered ineffective if it could be undermined by discriminatory national provisions on income taxes". 6 Under comparable situations, residents and non-residents must - unless giving raise to discrimination provide for a non-less favourable treatment (national treatment). Such national treatment not only forbids "overt discrimination by reason of nationality but also all covert forms of discrimination which, by the application of other criteria such differentiation, lead in fact to the same result". 7 Moreover, domestic tax laws of the Member States typically distinct on the basis of residence as opposed to non-residents. 8 This fact leads to the following conclusions: Firstly, "the situation of residents and non-residents are, as a rule not comparable" 9 unless "the non-resident receives no significant income in the State of his residence and obtains the major part of his taxable income from an activity performed in the State of employment, with the result TERRA/WATTEL, European Tax Law, 5 th Ed., 2008, p. 52. Articles 23 EC. Article 39(2) EC. Case C-175/88 Klaus Biehl v Administration des Contributions du Grand-Duché de Luxembourg ('Biehl'),  ECR I-01779, para. 12; Schumacker, supra. fn. 2, para. 22. Case C-152/73 Giovanni Maria Sotgiu v Deutsche Bundespost ('Sotgu'),  ECR I-00153, para. 11; Schumacker, supra. fn. 2, para. 26. TERRA/WATTEL, supra. fn. 3, p. 716; Schumacker, supra. fn. 2, para. 28. Schumacker, supra. fn. 2, para. 31.
3 3 that the State of his residence is not in a position to grant him the benefits resulting from the tacking into account of his personal and family circumstances" 10. The same applies with respect to the taxpayer's ability to pay. 11 Secondly and contrary to the general non-comparability of residents and non-residents, it must be noted that the tax base of non-residents must correspond to the one of residents Freedom of establishment The freedom of establishment ensures the right to do business by "setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State". 13 It therefore "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 Member State where such establishment is effected, entails ( ) for companies ( ) the right to exercise their activity in the Member State through a subsidiary, a branch or an agency." 14 The freedom of establishment is generally characterized by the "actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period" 15 respectively as the pursuit of an economic activity "on a stable and continuous basis, in the economic life of a Member State other than his State of origin and to profit therefrom" 16. Settled case-law determines "indefinite period" by factors like duration, regularity, periodicity or continuity 17 and the fact that pursuit of the economic activity has to be "on a stable and continuous basis". 18 For companies or a group of companies, a less favourable treatment of secondary establishment set-ups may refrain non-resident companies from "acquiring, creating 10 Schumacker, supra. fn. 2, para C-107/94 P.H. Asscher v Staatssecretaris van Financiën ('Asscher'),  ECR I-03089, para C-385/00, F.W.L. de Groot v Staatssecretaris van Financiën ('De Groot'),  ECR I-11819, para Article 43(2) EC. 14 C-196/04 Cadbury Schweppes plc, Cadbury Schweppes Oversseas Ltd v Commissioners of Inland Revenue ('Cadbury-Schweppes'), para. 41; C-307/97 Companie de Saint-Gobain, Zweigniederlassung Deutschland v Finanzamt Aachen Innenstadt ('Saint-Gobain'),  ECR I-6161, para. 35; C-446/03 Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes) ('Marks&Spencer'),  ECR I-10837, para. 30; C-471/04 Finanzamt Offenbach am Main-Land v Keller-Holding GmbH ('Keller-Holding'),  ECR I-2107, para C-221/89, The Queen v Secretary of State for Transport, ex parte Factortame Ltd and others ('Factorame'),  ECR I-03905, para C-55/94 Reinhard Gebhard v Consiglio dell'ordine degli Avvocati e Procuratori di Milano ('Gebhard'),  ECR I-04165, para Gebhard, supra. fn. 16, para Gebhard, supra. fn. 16, para. 25; C-70/95, Sodemare and Regione Lombardia ('Sodemare'),  ECR I-3395, 24. Interestingly to note that the same term "on a stable and continous basis" is differently translated in the two cases. While it is translated as "stetig und dauerhaft" in Sodemare, the German version of the Gebhard ruling speaks about "stabil und kontinuierlich".
4 4 or maintaining a subsidiary in the State which adopts" 19 such measures by its national tax laws. Many decisions deal with group of companies and mainly regard issues in connection with CFC-legislation, thin-capitalization rules as well as tax avoidance. The significance of such provisions mainly affecting group of companies on the applicable fundamental freedom will be dealt with later. 2.5 Freedom to provide services The freedom to provide services in a Member State by nationals of another Member State, without establishing domicile there, is guaranteed by Article 48(1) EC. The freedom to provide services precludes, according to settled case-law, "the application of any national rules which have the effect of making the provision of services between Member States more difficult than the provision of services purely within one member State". 20 It is established that the freedom to provide services also "includes the freedom of the persons for whom the services are intended to go to another member State, where the provider is, in order to enjoy the services there". 21 Additionally, the freedom applies to situations in which the service provider offers its services in a Member State other than the one in which he is established, irrespective of the place where the recipient is established. 22 Finally, the freedom to provide services applies to situations where only the service itself crosses the border. TERRA/WATTEL point out that, according to Article 50 EC, the freedom to provide services is supplementing the free movement of goods, persons and capital and is thus for situations where none of the latter freedoms apply. 23 The interpretation and application of the freedom to provide services "corresponds to the objective of covering any activity performed for remuneration which does not fall within the scope of free movement of goods and capital or freedom of movement for persons". 24 AG Stix-Hackl argued in her opinion in Stauffer concerning an Italy based foundation that held some real estate in Germany, that the freedom to provide services is subsidiary to the also invoked freedom of establishment and free movement of capital and 19 C-324/00, Lankhorst-Hohorst v Finanzamt Steinfurt ('Lankhorst-Hohorst'),  ECR I-11779, para C-281/06, Hans-Dieter and Hedwig Jundt v Finanzamt Offenburg ('Jundt'),  ECR I-0000, para. 52; C-136/00, Rolf Dieter Danner ('Danner'),  ECR I-8147, para. 29; C-118/96, Jessica Safir v Skattemyndigheten / Dalarnas Län, formerly Skattemyndigheten / Kopparbergs Län ('Safir'),  ECR I-1897, para. 23; C-290/04, FKP Scorpio Konzertproduktionen GmbH v Finanzamt Bergisch ('Scorpio'),  ECR I-09461, para C-76/05, Herbert Schwarz und Marga Gootjes-Schwarz v Finanzamt Bergisch ('Schwarz'),  ECR I-06849, para. 36; Scorpio, supra. fn. 20, para. 32; C-294/97, Eurowings Luftverkehrs AG v Finanzamt Dortmund-Unna ('Eurowings'),  ECR I-07447, para. 34; C- 55/98, Skatteministeriert v Bent Vestergard ('Vestergaard'),  ECR I-07641, para Vestergaard, supra. fn. 21, para TERRA/WATTEL, supra. fn. 3, p Gebhard, supra. 16, para. 22; also see C-155/73, Giuseppe Sacchi ('Sacchi'),  ECR I , para. 26 and C-452/04, Fidium Finanz AG v Bundesanstalt für Finanzdienstleistungs aufsicht ('Fidium Finanz'),  ECR I-9521, para. 32.
5 5 therefore it is to be examined only if neither of the other freedoms is applicable in the present case. 25 The ECJ noted in that respect that the free movement of capital applies in the present case and that "it is therefore not necessary to consider whether the foundation acts as a service provider". 26 Despite the supplementing character, the freedom to provide services is needed as a separate freedom because the crossborder provision of services may be effected without any goods being moved, without relocation of capital and without (secondary) establishment across the border. 27 Fidium Finanz clarifies however that, although Article 50(1) EC defines 'services' as services not being governed by the provisions relating to freedom of movement of goods, capital and persons, it does not establish any order of priority between the freedom to provide services and the other fundamental freedoms. 28 The provision of services applies in the case of a "temporary pursue of the activity". 29 The temporary nature of the provision of services does, however, not exclude the service provider to "equip himself with some form of infrastructure in the host Member State (including an office, chambers or consulting rooms) in so far as such infrastructure is necessary for the purposes of performing the services in question". 30 Furthermore, the mere fact of having some kind of infrastructure in the Host State does not per se preclude the application of the freedom to provide services. 31 The freedom to provide services is distinguished from the free movement of goods by the fact that services are intangible. 32 The provision of services can however require importing respective auxiliary materials. 2.6 Free movement of capital Article 56(1) EC provides that all restrictions on the free movement of capital between member States and between Member States and third countries are prohibited. In contrast to the other fundamental freedom, the free movement of capital gives effect not only to the free movement of capital between Member States but also between Member States and third countries. 33 The Treaty itself does not contain a definition on capital movement. According to settled case-law, the ECJ has "recognized the nomenclature which constitutes Annex I 25 Opinion of AG Stix-Hackl in C-386/04, Centro de Musicologia Walter Stauffer v Finanzamt München für Körperschaften ('Stauffer'),  ECR I-8203, para Stauffer, supra. fn. 25, para TERRA/WATTEL, supra. fn. 3, p Fidium Finanz, supra. fn. 24, para Art. 50(3) EC; Gebhard, supra. fn. 16, para. 26 and 39; C-234/01, Arnoud Gerritse v Finanzamt Neuköln-Nord ('Gerritse'),  ECR I-5933, para. 23 and Gebhard, supra. fn. 16, para See above section TERRA/WATTEL, supra. fn. 3, p C-98/01, Commission v United Kingdom ('Golden Share UK'),  ECR I-4641, para. 38.
6 6 to Directive 88/361 as having indicative value, even if the latter was adopted on the basis of Articles 69 and 70(1) of the EEC Treaty ( ), it being understood that, according to the third paragraph of the introduction to that annex, the nomenclature it contains is not exhaustive as regards the term 'movement of capital'". 34 The nomenclature contains a list of all kinds of transactions that are to be considered as capital movements whereby its non-exhaustive character shown by the title of the last section 'Other capital movements Miscellaneous'. Generally, a capital movement "may be understood as unilateral and one-sided, that is to say a transfer of capital that is not conditional upon a transaction falling under the free movement of goods or services, a cross-border flow of value in form of monetary capital or other material or immaterial assets from one Member State to another". 35 One-sidedness means transactions on pure financial investment grounds and has to be denied in cases "where the transfer in question corresponds to an obligation to pay arising from a transaction involving" another fundamental freedom. 36 With respect to the case-law discussed below and also in order to demonstrate the relation of the free movement of capital to the other fundamental freedoms, acquisitions of shares in companies are especially relevant. Any other forms of capital movements are therefore not discussed in detail. Points I and III in the nomenclature and the explanatory notes "indicate that direct investment in the form of participation in an undertaking by means of a shareholding or the acquisition of securities on the capital market constitute capital movement for the purposes of Article 56(1) EC". 37 The heading 'Acquisition ( ) of domestic securities ( )' includes, inter alia, the transaction 'acquisition by non-residents' of shares and bonds in domestic companies on pure financial grounds, i.e. without the aim of exercising any definite influence on the company's decisions. 38 This type of participation is usually known as 'portfolio investment'. In contrast, the heading 'Direct investments' comprises "investments of all kinds ( ) which serve to establish or to maintain lasting and direct links between the person providing the capital and the ( ) undertaking to which the capital is made available in order to carry on an economic activity". As defined by the explanatory notes, "there is participation in the nature of direct investment where the block of shares held by a person ( ) enables the shareholder ( ) to participate effectively in 34 C-67/08, Margarethe Block v Finanzamt Kaufbeuren ('Block'), ECR pending, para. 19 with further case-law reference; C-222/97, Manfred Trummer and Peter Mayer ('Trummer and Meyer'),  ECR I-1661, para. 20 and 21; Golden Share UK, supra. fn. 33, para C-26/83, Luisi and Carbone v Ministero del Tesoro ('Luisi & Carbone'),  ECR 377, para. 21; SEDLACZEK, 'Capital and Payments: The Prohibition of Discrimination and Restrictions", ET 2000, p Luisi & Carbone, supra. fn. 35, para Golden Share UK, supra. fn. 33, para Communication of the Commission on certain legal aspects concerning intra-eu investment, OJ C 220, 19. July 1997, p , para. 3.
7 7 the management of the company or in its control". The Commission mentions that "the acquisition of controlling stakes, as well as the full exercise of the accompanying voting rights, in domestic companies by other EU investors is also considered to be a form of capital movement". 39 Furthermore, the Commission outlines that an acquisition of a controlling stake is also covered by the provisions of the freedom of establishment at the same time. The rights granted under the freedom of establishment enable nationals of other EU Member States to freely acquire controlling stakes, exercise voting rights and manage domestic companies under the same conditions applicable in a given Member State to its own nationals" Right of residence of EU citizens With the Maastricht Treaty, the Community citizenship right was adopted. 41 The right of residence grants EU citizens "the right to move and reside freely within the territory of the Member States ( )". 42 The Community citizenship right ensures that nationals are not less favourably treated even though they have not availed themselves of the opportunities offered by the EC Treaty in relation to freedom of movement. 43 The application of this freedom appears in cases of pensioners like Ms. Turpeinen who decided to relocate after her retirement first to Belgium and subsequently to Spain. Based on this freedom she was granted equal treatment 44 with respect to the imposed flat Finish withholding tax of 35% on her pension payments and could claim the normal progressive tax rates with basic allowance, which resulted in her personal situation to a final tax burden of approximately 28.5%. 45 Werner, a case decided before the adoption of the Community citizenship right, demonstrates the need of the Community citizenship right for achieving an undistorted internal market. This case concerned a German national who lived in the Netherlands and first practised as an employed dentist in Germany, and thereafter opened his own practice there. Since he had always worked in Germany and thus had not exercised his free movement rights, he was prevented from benefitting equal treatment and was thus due to the lack of the Community citizenship right at that moment subject to the less favourable limited taxation regime COMMISSION, supra. fn. 38, para COMMISSION, supra. fn. 38, para O'SHEA, 'EU Tax Law and Double Tax Conventions', Avoir Fiscal 2008, p Article 18 EC; Schwarz, supra. 21, para. 86 with further references to case-law. 43 C-224/02, Heikki Antero Pusa and Osuuspankkien Keskinäinen Vakuutusyhtiö ('Pusa'),  ECR I-5763, para. 18; Schwarz, supra. fn. 21, para O'SHEA, supra. 41, p C-520/04, Pirkko Marjatta Turpeinen ('Turpeinen'),  ECR I-10685, para. 6; TERRA/WATTEL, supra. 3, sec , p C-112/91, Hans Werner v Finanzamt Aachen Innenstadt ('Werner'),  I-00429, para. 4-6 and 16.
8 8 According to settled case-law, the Community citizenship right is secondary to the fundamental freedoms. This subordination can be seen in N with respect to the freedom of establishment, in Turpeinen with respect to the free movement of workers and in Schwarz with respect to the freedom to provide services. 47 The Court generally holds that if the case in the main proceeding falls under (another) fundamental freedom, "it will not be necessary to ( ) to rule on the interpretation of Article 18 EC" and "it is therefore to rule on Article 18(1) EC only in so far as the case in the main proceedings does not fall within the scope (of another fundamental freedom)" Concept of the prevailing freedom 3.1 General According to the EC Treaty, none of the fundamental freedoms generally prevails. The Community citizenship however, is as mentioned above of secondary nature and only applies if the national provisions at issue do not fall under any particular provisions of the other fundamental freedoms. Furthermore, it has to be recalled that the freedom to provide services is supplementing the free movement of goods, persons and capital. 3.2 Cadbury-Schweppes In the context of direct taxation, the ECJ for the first time examined in Cadbury- Schweppes the question of the prevailing fundamental freedom. The taxpayer invoked freedom of establishment, freedom to provide services as well as free movement of capital. The Court first held in accordance with settled case-law "that national provisions which apply to holdings by nationals of the Member State concerned in the capital of a company established in another Member State, giving them definite influence on the company's decision and allowing them to determine its activities come within the substantive scope of the provisions of the Treaty on freedom of establishment." 49 In contrast to Baars 50 where this definition has been applied for the first time, the Court explicitly ruled in Cadbury-Schweppes, that if the scrutinized legislation has "restrictive effects on the free movement of services and the free movement of capital, such effects are an unavoidable consequence of any restriction 47 C-470/04, N. v Inspecteur van de Belasingsdienst Oost/kantoor Almelo ('N'),  ECR I- 7409, para ; Turpeinen, supra. fn. 45, para. 13; Schwarz, supra. fn. 21, para. fn See also C-318/05, Commission v Germany ('Commission v Germany (School fee)'),  ECR I-06957, para. 32 and Schwarz, supra. fn. 21, para Cadbury-Schweppes, supra fn. 14, para C-251/98, C. Baars v Inspecteuer der Belastingen Particulieren/ondernemingen Gornichen ('Baars'),  ECR I-2787.
9 9 on freedom of establishment and do not justify, in any event, an independent examination of that legislation in the light of Articles 49 EC and 56 EC." 51 The fact that the Court determined the prevailing freedom became more important in connection with its early third-country decisions. Since only the free movement of capital provides for an erga-omnes effect and thus also applies in a third-country context while the other freedoms only apply in a MS-MS context, the determination of the prevailing freedom is decisive. After the Court's decisions in Fidium-Finanz 52, Lasertec 53 and Holböck 54 where in each case the freedom to provide services or the freedom of establishment was found to be prevailing over the free movement of capital, the discussion whether the Court is curbing third-country rights emerged. 55 WEBER disagreed with the Court's approach and argued with respect to the Fidium- Finanz decision that, since the freedom to provide services is not applicable in a MS- TC context, the Court should have examined whether the restriction of the free movement of capital is justified by imperative reasons in the public interest. 56 In addition, recent court decisions like Burda 57 show that the Court, however follows the concept of the prevailing freedom and therefore examined the facts under the free movement of establishment which displaced the free movement of capital. The discussion raises several questions, which will be addressed in this article, (i) why is it necessary to determine the prevailing freedom even in a intra-community context, (ii) when is the application of one fundamental freedom only the "unavoidable consequence" of another freedom and (iii) whether this concept curbs any rights of the taxpayers. 3.3 Relationship between the free movement of workers, freedom of establishment and the freedom to provide services From the case-law in Gebhard it emerges that the free movement of workers, the freedom of establishment and the freedom to provide services are "mutually exclusive". 58 In these situations, the Court has to define the scope of the invoked freedoms. Gerritse may serve as an example where the Court concludes that not the invoked freedom of establishment is at stake but, due to the temporary nature of the 51 Baars, supra. fn. 50, para Fidium Finanz, supra. fn C-492/04, Lasertec Gesellschaft für Stanzformen GmbH v Finanzamt Emmendingen ('Lasertec'),  ECR I C-157/05, Winfried L. Holböck v Finanzamt Salzburg-Land ('Holböck'),  ECR I See, e.g. WEBER, 'Fidium Finanz AG v Bundesantsalt für Finanzdienstleistungsaufsicht: the ECJ gives the wrong answer about the applicability of the free movement of capital between the EC Member States and non-member countries', BTR (2007), pp WEBER, supra. fn. 56, p See Case C-284/06 Finanzamt Hamburg-Am Tierpark v Burda GmbH, formerly Burda Verlagsbeteiligungen  ECR I-00000, ('Burda'). 58 Gebhard, supra. fn. 16, para. 20.
10 10 self-employed activity, the freedom to provide services. 59 The cases of Gebhard or Schnitzer 60 are about the distinction between the material scope of the freedom to provide services and the freedom of establishment. Mr Gebhard, a German national and admitted to the Bar of Stuttgart (Germany), took up residency in Italy where he pursued his professional activity first as an associate and later as a partner of a law firm. 61 Upon starting his own business, his application, which based on the Council Directive 89/48/EEC 62, to the Milan Bar Council to be entered on the role of members of the bar, was denied. 63 In connection with the subsequent disputes, the ECJ had inter alia to decide which freedom applies. In its judgement the Court distinguished the freedom to provide services from the freedom of establishment by noting that "the temporary nature of the provision of services ( ) has to be determined in the light of its duration, regularity, periodicity and continuity". 64 In contrast, the freedom of establishment applies if a national of a Member States pursues his professional activity "on a stable and continuous basis in another Member State where he holds himself out from an established professional base to, amongst others, nationals of that State". 65 The Court essentially determined, like in Schnitzer, the functional scope of the mutually exclusive freedoms. Also in the judgements in Sacchi 66 and Schindler 67 the Court is determining whether the present cases come under the free movement of goods or freedom to provide services. Sacchi was about the qualification of tv-signals while Schindler concerned the importation of lottery advertisements and tickets. In both cases the Court decided that the freedom to provide services applies 68. In Omega, a case concerning the operation of a 'laserdome' which is normally used for the practice of the 'laser sport', the Court argued that "where a national measure affects both the freedom to provide services and the free movement of goods, [it] will, in principle, examine it in relation to just one of those two fundamental freedoms if it is clear that ( ) only one of those freedoms is entirely secondary in relation to the other". 69 It must thus be noted that the referred case actually contains two questions. One aspect concerns the fact that the required equipment is imported from UK to Germany and the other that the claimant's 'laser sport' business whose restriction is 59 Gerritse, supra. fn. 29, para C-215/01, Bruno Schnitzer ('Schnitzer'),  ECR I Gebhard, supra. fn. 16, para Council Directive 89/48/EEC of 21 December. 63 Gebhard, supra. fn. 16, para. 6 and Gebhard, supra. fn. 16, para Gebhard, supra. fn. 16, para Sacchi, supra fn C-275/92, Her Madjesty's Customs and Excise v Gerhart Schindler and Jörg Schindler ('Schindler'),  ECR I Sacchi, supra. fn. 24, para. 6; Schindler, supra. fn. 67, para C-36/02, Omega Spielhallen- und Automatenaufstellungs-GmbH v Oberbürgermeisterin der Bundesstadt Bonn ('Omega'),  ECR I-9609, para. 3 and 26 with further references.
11 11 backed by the public policy reasons since it comprises simulating acts of homicide. 70 Any restriction in connection with the import of required equipment, which is "specifically designed for the prohibited variant of the laser game" is therefore "an unavoidable consequence of the restriction imposed with regard to supplies of services" Relationship between freedom of establishment or freedom to provide services and free movement of capital Two types of case remain for the analysis of the concept of the prevailing freedom, namely the relationship between the freedom of establishment and the free movement of capital as well as the relationship between the freedom to provide services and the free movement of capital. The question of the relationships has been extensively discussed. The reasons for the extensive academic writing was mainly the fact that non-resident taxpayers can, in a third-country context, only rely on the free movement of capital and the fact that there has suddenly been quite a series of cases referred to the ECJ. Except from the first decision in Sanz de Lera 72 with respect to the export of coins, banknotes or bearer cheques, which was subject to prior authorization, the third-state cases date between February 2006 and April The first case was Fidium Finanz 73, followed by the decisions in the FII Group Litigation 74, Thin Cap Group Litigation 75, A and B 76, Lasertec 77, Holböck 78, SEW 79, A 80 and CFC and Dividend Group Litigation 81. Besides these third-country cases, the ECJ also dealt with quite a few Community internal cases like the Baars, Cadbury-Schweppes etc. and the most recent decisions in Burda 82, Truck Center 83 and STEKO 84. All of these cases help to better understand the relationship between the two freedoms. 70 Omega, supra. fn. 69, para. 27 and Omega, supra. fn. 69, para Joined cases C-163/94, C-165/94 and C-250/94, Criminal proceedings against Lucas Emilio Sanz de Lera, Raimundo Díaz Jiménez and Figen Kapanoglu ('Sanz de Lera'),  I Fidium Finanz, supra. fn C-446/04, Test Claimants in the Franked Investment Income Group Litigation v Commissioners of Inland Revenue ('Test Claimants in the FII Group Litigation'),  ECR I C-524/04, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue ('Thin Cap Group Litigation'),  ECR I C-102/05, Skatteverket v A and B ('A and B'),  ECR I Lasertec, supra. fn Holböck, supra. fn C-415/06, Stahlwerk Ergste Westing GmbH v Finanzamt Düsseldorf-Mettmann ('SEW'),  ECR I C-101/05, A v Skatteverket ('A'),  ECR I C-201/05, The Test Claimants in the CFC and Dividend Group Litigation v Commissioners of Inland Revenue ('CFC and Dividend Group Litigation'), not yet reported. 82 Burda, supra. fn C-282/07, État belge - SPF Finances v Truck Center SA ('Truck Center'), not yet reported. 84 C-377/07, Finanzamt Speyer-Germersheim v STEKO Industriemontage GmbH ('STEKO').
12 12 Prior to the mentioned third-country cases, AG Stix-Hackl delivered in her opinion in Stauffer 85 a summary on the case-law regarding the differentiation between the freedom of establishment and free movement of capital. The differentiation of the two freedoms is affected by the close connection between the provisions governing the freedom of establishment and those governing the free movement of capital which can also bee seen from the reciprocal reservations contained in Article 43(2) EC and 58(2) EC. 86 STAHL therefore concludes that it becomes evident from these provisions that the drafters of the Treaty were aware that one and the same transaction could be covered by both freedoms. 87 Also the freedom to provide services and the free movement of capital are closely linked but nevertheless are designed to regulate different situations and have their own field of application. 88 According to AG Stix-Hackl in Stauffer, the ECJ took in its existing case-law the position that the freedom of establishment and the free movement of capital apply in parallel. AG Alber concluded in his earlier Opinion in Baars that the "reservations do not signify that conduct can be protected only under one of these fundamental freedoms". 89 Based on the broad material scope of Article 56(1) EC, the free movement of capital seems to apply to all kinds of cross-border activities that are subject to the freedom of establishment or freedom to provide services. This view was supported by the caselaw of the ECJ which did in contrast to some of its AGs refrain from determining the prevailing freedom and kept concluding that there is no need for a separate examination under a different freedom. 90 For instance, AG Alber in Baars analysed in detail the relationship between the freedom of establishment and the free movement of capital and also provided an overview on the respective case-law while the Court briefly concluded that in cases where a national of a Member State "has a holding in the capital of a company established in another Member State which gives him definite influence over the company's decisions and allows him to determine its activities is exercising his right of establishment" and that "it is unnecessary to reply to the second question" which regarded the applicability of the free movement of capital. 91 Another example in the direct tax area is Safir. In his respective Opinion, AG Tesauro 85 Stauffer, supra. fn Opinion of AG Stix-Hackl in Stauffer, supra. 25 para. 35; Opinion of AG Alber in Baars, supra. 50, para STAHL, Free movement of capital between Member States and third countries, EC Tax Review 2004/2, p Fidium Finanz, supra. fn. 24, para Opinion of AG Alber in Baars, supra. fn. 50, para See e.g. Safir, supra. fn. 20, para. 35; C-200/98, X AB and Y AB v Riksskatteverket ('X AB and Y AB'),  ECR I-10829, para. 30; Baars, supra. fn. 50, para. 42; C-35/98, Staatssecretaris van Financiën v B.G.M. Verkooijen ('Verkooijen'),  ECR I-4071, para. 63; C-265/04, Margarethe Bouanich v Skatteverket ('Bouanich'),  ECR I-00923, para Opinion of AG Alber in Baars, supra. fn. 50, para. 22 and 42; see additionally para which provide an overview on the existing case-law until the delivery of Alber's opinion in October 1999.
13 13 discussed the relationship between the freedom to provide services and the free movement of capital based on the existing case-law and noted that in the present case it has to by analyzed within the purview of Article 49 EC 92. The Court however did not address the relationship of the freedoms in its judgement and held that "it is not necessary to determine whether such legislation is also incompatible with [the free movement of capital]." 93 The parallel application of the free movement of capital with the freedom of establishment or the freedom to provide services would have significant impact on any third country situations since it could as initially argued by WEBER 94 - always be relied on the free movement of capital and thus third country nationals would, at least to a certain extent, indirectly get access to the community internal movement rights. Arguing that the Court is actually restricting or curbing third-country rights granted under Article 56 EC, may only be legitimate if it applies a different concept of examination. As long as the Court follows the concept of the prevailing freedom in the same manner as described in the above sections, the third country rights are fully respected and the confusion appears to lie in understanding exactly the scope of thirdcountry rights Relevant third-country case-law compared to intra-community case-law Fidium Finanz Fidium Finanz, a company incorporated in Switzerland, grants on a commercial basis small credits of EUR 2'500 EUR 3'500 to clients established abroad, most of which are in Germany, by using an internet site. 96 As the company does not have the respective authorisation to carry on banking activities and to provide financial services in Germany, the respective German supervisory authority prohibited Fidium Finanz from carrying on lending activities on a commercial basis. 97 The respective dispute was finally referred to the ECJ as Fidium Finanz argued that this restricts its rights granted under the free movement of capital. The Court held that "where a national measure relates to the freedom to provide services and the free movement of capital at the same time, it is necessary to consider to what extent the exercise of those fundamental liberties is affected and whether, in the circumstances of the main proceedings, one of those prevails over the other". 98 Furthermore the Court continued noting that it "will in principle examine the measure in dispute in relation to only one 92 Opinion of AG Tesauro in Safir, supra. fn. 20, para Safir, supra. fn. 20, para See above under section O'SHEA, 'Thin Cap GLO and Third-Country Rights: Which Freedom Applies?', Tax Notes Int'l, April 23, 2007, p. 372; 96 Fidium Finanz, supra. fn. 24, para Fidium Finanz, supra. fn. 24, para Fidium Finanz, supra. fn. 24, para. 34.
14 14 of those freedoms if it appears, in the circumstances of the case, that one of them is entirely secondary in relation to the other and may be considered together with it". 99 Thereby, the Court referred to its earlier case-law in, inter alia, Schindler and Omega. 100 In contrast to these judgements, it explicitly noted, that "the activity of granting credit on a commercial basis concerns, in principle, both the freedom to provide services within the meaning of Article 49 EC et seq. and the free movement of capital within the meaning of Article 56 EC et seq." 101 After having analyzed the purpose of the German provisions, which concern regulatory aspects, it concluded, "the predominant consideration is freedom to provide services rather than the free movement of capital". 102 Therefore, any restrictions on the free movement of capital are "merely an unavoidable consequence of the restriction on the freedom to provide services". 103 The Court applies here the same reasoning by determining the prevailing freedom as in Cadbury-Schweppes. 104 Thin Cap Group Litigation In Thin Cap Group Litigation, the freedom of establishment, the freedom to provide services as well as the free movement of capital were invoked. The main proceedings are part of a group litigation concerning the rules on UK thin capitalisation rules. Two of the involved test cases have a third-country dimension. 105 While determining the applicable freedom, the Court followed its settled case-law by saying that "national provisions which apply to holdings by nationals of the Member State concerned in the capital of a company established definite influence on the company's decisions and allowing them to determine its activities, come within the substantive scope of the provisions of the EC Treaty on freedom of establishment". 106 The national provisions, which are directed against thin capitalisation, only concern situations in which the parent companies exercise control over the other group companies. Consequently and based on the facts that the subsidiaries are at least 75% owned by its parent companies, the main proceedings have to be considered in the light of Article 43 EC. 107 Any restrictive effects on the freedom to provide services and the free movement of capital, ( ) "must be seen as an unavoidable consequence of any restriction on free freedom of establishment and do not justify an independent examination of that 99 Fidium Finanz, supra. fn. 24, para See above sec Fidium Finanz, supra. fn. 24, para Fidium Finanz, supra. fn. 24, para and Fidium Finanz, supra. fn. 24, para Cadbury-Schweppes, supra. fn. 14, para Test Claimants in the Thin Cap Group Litigation, supra. fn. 75, para. 17 and Test Claimants in the Thin Cap Group Litigation, supra. fn. 75, para. 27 with reference to caselaw. 107 Test Claimants in the Thin Cap Group Litigation, supra. fn. 75, para. 32 and 33.
15 15 legislation in the light of Articles 49 EC and 56 EC". 108 Thin capitalisation legislation is typically targeted at group of companies and only applies to situation where the parent company providing loans to its subsidiaries actually has definite influence over it. Thus, the test cases come within the functional scope of the freedom of establishment. In a third-country context the application of the freedom of establishment means that the taxpayer cannot rely on this freedom since, contrary to the free movement of capital, it does not have an erga-omnes effect. Nevertheless, it must be recalled that any interaction between a number of fundamental freedoms, irrespective whether in an intra-community or third-country context, has been solved by first determining the prevailing freedom. 109 Lasertec In Lasertec the Court had as already in Lankhorst-Hohorst 110 to decide on the compatibility of the German thin capitalization rules but this time in a third county context as the parent company was domiciled Switzerland. The Court thereby stressed in its order that the purpose of the concerned national rule has to be taken into account. According to the order "it is apparent from settled case-law that in order to ascertain whether national legislation falls within one or the other freedoms of movement, the purpose of the legislation at issue must be taken into consideration". 111 With respect to the settled-case law, the ECJ referred in the decision primarily to its intra-community decision in Cadbury-Schweppes but also to the recent decisions in Test Claimants in ACT Group Litigation, Test Claimants in FII Group Litigation and Test Claimants in Thin Cap Group Litigation. 112 This makes generally clear that the Court applies in intra-community situations the same legal differentiation. As the German provisions related only to substantial shareholdings "giving the holder a definite influence on the decisions of the company concerned and allowing him to determine its activities", the case "falls within the material scope solely of the Treaty provisions relating to freedom of establishment". 113 Any restrictive effects on the free movement of capital "must be seen as an unavoidable consequence 108 Test Claimants in the Thin Cap Group Litigation, supra. fn. 75, para O'SHEA, 'Thin Cap GLO and Third-Country Rights: Which Freedom applies', Tax Notes Int'l, 27 April 2007, p Lankhorst-Hohorst, supra. fn. 19. Lankhorst-Hohorst concerned a German subsidiary of a Dutch parent company. The loan granted to the German subsidiary which was intended to be a substitute for capital was subject to the scrutinized thin capitalization rules applied by Germany. Since these rules treated interest paid to non-resident parent companies less favourably than interest paid in the national context, without being justified by a public interest like the prevention of tax avoidance, the rules were precluded by the freedom of establishment. 111 Lasertec, supra. fn. 53, para Lasertec, supra. fn. 53, para Lasertec, supra. fn. 53, para. 20 and 24.
16 16 of the restriction on freedom of establishment". 114 As the freedom of establishment provisions do not apply with respect to third countries, the ECJ consequently held that third-country nationals could not rely on Art. 43 EC. 115 A and B On the same day as Lasertec, the ECJ delivered also its reasoned order in A and B. A and B concerned national provisions regarding closely held companies that, in determining the applicable tax rate on any dividends received, denied to the detriment of its shareholders to take into account any compensation paid to employees of its permanent establishment located in a third country. The provisions prevent from converting of any employment income subject to higher income into less heavily taxed dividend income. 116 Unlike in Lasertec, the Court did not argue that the shareholders exercised definitive influence on the decisions of the company and thus determined its activities but based its ruling on the fact that the freedom of establishment entails the right to exercise the business activities through a subsidiary, branch or agency. 117 Setting up of branches is an important right under the freedom of establishment. 118 Any national rules that are discouraging the exercise of the rights granted under the freedom of establishment, "solely come within the scope of the Treaty provisions relating to that freedom". 119 Therefore, "any restrictive effects on the free movement of capital must bee seen as an unavoidable consequence of any restriction on the freedom of establishment". 120 Since the freedom of establishment does not apply with respect to third country situations, the claimant could again not rely on Art. 43 EC. Holböck Mr Holböck, an Austrian resident individual, owned two-thirds of the share capital in a Swiss company and received dividend income thereon. The facts of the case were generally identical with Lenz where the Austrian half-rate regime was scrutinized but this time in a third-country context. In contrast to the decisions in Lasertec and A and B, the ECJ appears to have agreed with the taxpayer that the legislation at issue, which equally applies to portfolio holdings as well as participation holdings, "may fall within the scope of both Article 43 EC on freedom of establishment and Article 56 EC 114 Lasertec, supra. fn. 53, para. 25. The reference to Lankhorst-Hohorst, supra. fn. 19, is interesting as in this case only the freedom of establishment was invoked and the Court did therefore not have to determine the applicable Treaty freedom. 115 Lasertec, supra. fn. 53, para. 27; O'SHEA, 'Third Country Denied Freedom of Establishment Rights in Lasertec', Tax Notes International, June 4, 2007, p A and B, supra. fn. 76, para A and B, supra. fn. 76, para Article 43(1) EC; A and B, supra. fn. 76, para. 23 with further reference to case-law. 119 A and B, supra. fn. 76, para A and B, supra. fn. 76, para. 27.
17 17 on free movement of capital." 121 Already in Test Claimants in the ACT Group Litigation and the Test Claimants in the FII Group Litigation, the ECJ examined national provisions equally applying to all kind of holdings, may fall within the scope of both freedoms. 122 A portfolio interest which is made on pure financial investment grounds without the aim of exerting any influence in the company's management would consequently come within the free movement of capital. Also from Burda, which mainly concerned the correct implementation of the Parent-Subsidiary Directive into national legislation 123, it becomes evident that in situations where the scrutinized national provisions equally apply to portfolio as well as participation holdings ('direct investments'), the freedom of establishment prevails if a controlling shareholding is actually given. Following its reasoning in Test Claimants in the FII Group Litigation the Court held that "it should ( ) be pointed out that national legislation such as that at issue in the main proceedings, the application of which does not depend on the extent of the holding which the company receiving the dividend has in the company paying it, may fall within the purview both of Article 43 EC on freedom of establishment and of Article 56 EC on the free movement of capital." 124 The Court further concluded that, based on the fact that the parent company holds a 50% participation in its subsidiary, the freedom of establishment applies in the present case. 125 The recent decision in STEKO clarifies that a holding of less than 10% comes within the functional scope of the free movement of capital. 126 Also the fact that STEKO holds its shares as fixed assets ("hielt ( ) in ihrem Anlagevermögen Aktien ausländischer Gesellschaften") does not lead to a different result, i.e. the effective holding is decisive whether the free movement of capital or freedom of establishment is applicable. 127 In Holböck the Court did finally not determine the applicable freedom and just noted that the provisions of the freedom of establishment cannot be invoked in a thirdcountry context and that the free movement of capital would neither apply as "that legislation is caught by the exception laid down in Article 57(1) EC" Holböck, supra. fn. 54, para. 22 and 23; CODEWENER/KOFLER/SCHINDLER, 'Free Movement of Capital and Third Countries: Exploring the Outer Boundaries with Lasertec, A and B and Holböck', ET 2007, p C-374/04, Test Claimants in Class IV of the ACT Group Litigation v Commissioners of Inland Revenue ('Test Claimants in the ACT Group Litigation'),  ECR I-11673; Test Claimants in the FII Group Litigation. 123 Parent-Subsidiary Directive 90/435/EEC. 124 Burda, supra. fn. 57, para Burda, supra. fn. 57, para STEKO, supra. fn. 84, para. 13; Test Claimants in the FII Group Litigation, supra. fn. 74; Test Claimants in the ACT Group Litigation, supra. fn STEKO, supra. fn. 84, para Holböck, supra. fn. 54, para. 30 and 31.
18 18 SEW SEW concerned a German limited liability company that participated in two partnerships established in the US, which constituted due to their transparency for tax purposes as permanent establishments of the German entity. The German tax authorities however denied a deduction for loss by arguing that the exemption enacted by the German US double tax treaty did not allow including the losses of the US permanent establishments. 129 The case actually corresponds to the intra- Community case of Lidl-Belgium. 130 The ECJ argued in its reasoned order that in order to determine the applicable freedom, the purpose of the national legislation must be taken into consideration. 131 It continued saying that in accordance with settled caselaw, holdings held by nationals of the Member State in the capital of a company established in another Member State, which give them definite influence on the company's decision come within the substantive scope of the freedom of establishment provisions. 132 The provisions of the German US double tax treaty apply to permanent establishments and therefore only to situations where the company exercises definite influence. Furthermore, SEW held 100 per cent interest in those partnerships that qualify as a permanent establishment for tax purposes. 133 The ECJ concluded that the case falls solely within the material scope of the freedom of establishment 134, which is coherent with earlier case-law in connection with national legislation that only targets at a group of companies. In her opinion in Truck-Center, AG Kokott recalled that, "when examining which fundamental freedom a rule of national law comes under, primarily the purpose of the legislation concerned must be taken into consideration." 135 Although the provisions of the Belgian income tax code "admittedly do not apply only in cases in which the lender has a holding of a certain size in the borrower", AG Kokott argued "those provisions, however, cannot be viewed in isolation from the DTC, which is also part of the national legal order of Belgium". 136 She apparently also takes the DTC provisions as part of the national legislation into consideration while determining whether the national provisions only apply with respect to holdings giving definite influence over the company's decisions and allowing to determine the company's activities. Consequently, she concludes that since "withholding tax is permitted only on interest which a company resident in one Contracting State allocates to a company resident in 129 SEW, supra. fn. 79, para C-414/06, Lidl Belgium GmbH & Co. KG v Finanzamt Heilbronn ('Lidl-Belgium'), not yet reported. 131 SEW, supra. fn. 79, para. 13 with further references to case-law. 132 SEW, supra. fn. 79, para SEW, supra. fn. 79, para SEW, supra. fn. 79, para. 15 and Opinion of AG Kokott in Truck-Center, supra. fn. 83, para Opinion of AG Kokott in Truck-Center, supra. fn. 83, para. 20 and 21.
19 19 the other Contracting State which holds, directly or indirectly 25% of the voting shares in the former company" and given the fact that the parent "held 48% of the capital of Truck Center", the case falls within the substantive scope of freedom of establishment. Her conclusion follows the same arguments as delivered in SEW which also took the DTC provisions into account Conclusions From the analysed case-law, the following pattern emerges: Cross-border acquisition of real estate Provided that the real estate investment is not conducted through on agencies, branches or subsidiaries, the free movement of capital covers ownership and administration of such property. 137 Only in cases where a national of a Member State has "secured a permanent presence in the host Member State and, where immovable property is purchased and held, that property [is] actively managed". 138 Both freedoms may be infringed at the same time and it must be recalled, that "the right to acquire, use or dispose of immovable property on the territory of another Member State, which is the corollary of freedom of establishment ( ) generates capital movements when it is exercised". 139 The Court consequently examines in such situations the applicability of both freedoms. In the light of the specific facts of ELISA and Stauffer, the provisions governing the freedom of establishment however cannot be applied. Under different circumstances, both freedoms may apply and the Court would thus have to determine the prevailing freedom. Participations From the case-law it emerges that dividend payments may come under the functional scope of both freedom of establishment as well as free movement of capital. Case-law shows that the Court consequently applies its opinion of the "prevailing freedom" once it is established that the provisions of both freedoms can be applied in the present circumstances, irrespective whether there is a third-country element or not. 140 According to settled case-law, any national rules which only concern groups of companies primarily affect the freedom of establishment. 141 National legislation which applies "irrespective of the extent of the holding which the shareholder has in the 137 Stauffer, supra. fn. 25, para Stauffer, supra. fn. 25, para C-451/05, Européenne et Luxembourgeoise d'investissements SA v Directeur general des Impôt, Direction des services généraux et de L'informatique and Ministère public ('ELISA'),  ECR I-8251, para. 59 with further references to case-law. 140 See also O'SHEA, supra. fn. (thin cap article), p Burda, supra. fn. 57, para. 68; Test Claimants in the FII Group Litigation, supra. fn. 74, para. 118; Test Claimants in ACT Group Litigation, supra. fn. 122, para. 33; Lasertec, supra. fn. 53, para. 19; Cadbury-Schweppes, supra. fn. 14, para. 31 and 32.
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