Restriction Analysis in ECJ Tax Jurisprudence relating to the Freedom of Establishment: Is the Court reinventing the wheel?

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1 Restriction Analysis in ECJ Tax Jurisprudence relating to the Freedom of Establishment: Is the Court reinventing the wheel? Gabrielle Pizzuto 1 1. Recent ECJ cases Two recent cases delivered by the ECJ are Truck Center 2 and Lidl Belgium. 3 Both cases deal with the freedom of establishment and the concept of restriction where the ECJ carried out a restriction analysis to determine whether the national tax rules in question create a restriction of the freedom of establishment under Article 43 and 48 of the EC Treaty. Article 43 and 48 of the EC Treaty prohibit any restriction on the freedom of establishment of nationals of a Member State in the territory of another Member State. Hence, EU nationals have the right to take up and pursue activities as self employed persons in any other Member State and companies formed in accordance with the law of a Member State have the right to establish themselves in any other Member State by setting up agencies, branches or subsidiaries under the same conditions established for nationals of the Member State where such establishment is effected. The phrase under the same conditions is key to all decisions delivered by the ECJ in the field of EC tax law. Indeed, these few words have enabled the Court to develop the national treatment principle which is central to EC tax law as it provides that point of reference which the Court needs to be able to detect a discriminatory measure or a restriction on the fundamental freedoms guaranteed by the EC Treaty which is in breach of Community law. In the context of the freedom of establishment, therefore, the Court must ensure that nationals seeking to establish themselves in another Member State are not treated less favourably than nationals of the Member State where such establishment is made. Furthermore, a Member State must also ensure that its nationals seeking to establish themselves in other Member States are not treated less favourably than nationals who are not exercising their right of establishment. This is the application of the national treatment principle to host state and origin state rules which will be discussed in further detail below. Hence the concept of restriction features strongly in tax cases relating to the freedom of establishment because it is one of the pillars on which the Court has developed its tax jurisprudence. 1 Gabrielle graduated in law with a first class degree at the University of Malta in 2005 and is currently reading for an M.A. in Taxation (Law, Administration & Practice) at IALS, University of London. She currently works as a tax consultant in the Corporate Tax Department of KPMG, Malta. 2 Case C 282/07, État belge SPF Finances v Truck Center SA 3 C 414/06, Lidl Belgium GmbH & Co. KG v Finanzamt Heilbronn

2 Indeed, it is one of the cardinal rules 4 which Member States must abide by in order to comply with their obligations under Community law and to ensure that the internal market objective is achieved. 2. Cardinal Rules In terms of Article 2 and Article 3 of the EC Treaty, Member States bind themselves to work together to create, inter alia, a common market and an economic and monetary union, including the establishment of an internal market characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital.... By signing the EC Treaty, therefore, Member States agreed to remove all obstacles to the establishment of the internal market in particular obstacles which may impinge on the fundamental freedoms enshrined in the EC Treaty and which cut across all aspects of the economy to ensure that the internal market objective is achieved. Furthermore, Article 10 EC imposes an obligation on all Member States to ensure the fulfilment of the obligations arising out of the EC Treaty. Article 10 EC is an expression of Community loyalty as it obliges Member States to be compliant with Community law and to abstain from any measure which could jeopardise the attainment of the objectives of this Treaty. On the basis of this Treaty article, Member States cannot impose restrictive or discriminatory tax measures which are contrary to their obligations under Article 10 and if they do so, the ECJ is entitled to declare such national tax measures to be incompatible with Community Law. Thus, in light of the above, Member States are obliged to comply with two cardinal rules 5 to ensure that they do not fall foul of their obligations relating to the internal market objective under the EC Treaty. These cardinal rules consist in ensuring that national tax measures do not discriminate on the basis of nationality and do not create a restriction which hinders or renders less attractive the exercise of free movement rights guaranteed by the EC Treaty, thereby impeding the attainment of the single market objective. In Avoir Fiscal, 6 the Court was asked to determine whether a French tax rule was discriminatory where it allowed a tax credit on shareholdings if such shares were held by French companies but disallowed the tax credit to French branches of non resident companies. Having established that for the purpose of taxing income, French tax legislation did not distinguish between companies having their seat in France and branches established in France of companies having their seat in another Member State, the Court held that French companies and French branches of non resident companies were in an objectively comparable situation. 4 See Tom O Shea, EU Tax law and Double Tax Conventions (Avoir Fiscal Limited, 2008), p 33 where this phrase was coined. 5 O Shea, p 33 6 Case 270/83, Commission v France( Avoir Fiscal ) [1986] ECR 273

3 Hence, the fact that French tax legislation did not grant branches of companies having their seat in another Member State the tax credit which was available to companies having their seat in France was discriminatory and placed non resident companies at a disadvantage with respect to the French companies. The Court further held that such a discrimination was also a restriction on the nonresident s freedom to establish itself in another Member State as a branch, as the rule suggested that the tax credit would have been granted to the non resident company had it established a subsidiary in France rather than a branch. The Court held that Article 52 EC (now Article 43 EC) relating to the freedom of establishment is intended to ensure that nationals of other Member States who wish to establish themselves in another Member State by means of a subsidiary, branch or agency should receive equal treatment as nationals of the latter state and hence prohibits as a restriction on the freedom of establishment, any discrimination on grounds of nationality resulting from the legislation of the Member State. 7 Having established that the French tax rule was discriminatory the Court concluded that such discrimination also constituted a restriction on the right of establishment of companies whose registered office was in another Member State, contrary to Article 52 (now Article 43 EC) of the EC Treaty. 3. The Concept of Restriction As seen above, in all tax cases brought before the ECJ, the Court will carry out a discrimination and/or restriction analysis to determine whether the national tax rule under scrutiny is in breach of Community law. This is because the ECJ prohibits not only discriminatory measures but also equally applicable restrictive measures because they hinder intra Community trade and make the exercise of the Treaty freedoms less attractive. 8 Hence, a subtle distinction exists between discrimination and restriction. Whilst discrimination occurs when different treatment is applied overtly or covertly to two categories of taxpayers, national rules may be indistinctly applicable but still have restrictive effects on intra Community trade. 9 In fact, national rules applied unevenly between two categories of taxpayers may be discriminatory and restrictive of the Treaty freedoms 10 but even handed national rules may only constitute a restriction. 7 Avoir Fiscal, paragraph Ben J.M. Terra & Peter J. Wattel, European Tax Law (Kluwer Law International, 2008) p 63 9 In such cases, the Court will not be required to carry out a two fold investigation since even handed rules cannot give rise to discrimination and therefore thus not warrant a discrimination analysis unless the issue is raised in the proceedings. See Marks & Spencer. 10 A discrimination analysis and a restriction analysis, of a national tax measure was carried out by the Court in the Avoir Fiscal case discussed above, where the discriminatory French tax rule was also considered from a restriction point of view and was found to be restrictive of the non resident company s right to exercise a freedom guaranteed by the EC Treaty.

4 The concept of restriction was defined by the ECJ in Dassonville 11 as constituting all trading rules enacted by Member States which are capable of hindering, directly or indirectly, actually or potentially, intra Community trade. 12 Hence, a national tax rule need not directly hinder the exercise of free movement rights and furthermore, need not create an actual restriction. The definition of restriction used by the Court in Dassonville shows that the Court may declare a national rule to be incompatible with Community law if it creates an indirect hindrance to the exercise of the free movement rights or has potential restrictive effects even though the restriction has not yet taken place. Furthermore, the Court will declare a national rule to be incompatible with Community law if the restriction caused by such rule is trivial in nature. Indeed, in determining whether a French exit tax rule requiring a French national moving to another Member State to pay tax on unrealised gains in certain securities held by him was restrictive of the right to freedom of establishment, the Court held in De Lastyerie du Saillant 13 that a restriction was prohibited by the Article 52 EC (now Article 43 EC) even if of limited scope or minor importance. 14 This had been previously determined by the Court in Avoir Fiscal where the Court held that Article 52 EC (now Article 43 EC) prohibited all forms of discrimination, even if limited in nature. 15 The Court therefore, does not require a total prohibition on access to the market and it is prepared to declare a national rule to be restrictive and incompatible with the EC Treaty even though the restriction may be minor in nature. Furthermore, as stated above, a restrictive national rule may only be justified by the ECJ if it pursues a legitimate aim compatible with the Treaty 16 and is justified by pressing reasons of public interest. 17 This is an application of the rule of reason test developed by the ECJ in Cassis De Dijon 18 which was subsequently applied by the Court in Gebhard where it held that a restrictive measure could be saved only if it satisfied the following four conditions: they must be applied in a nondiscriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary in order to attain it. 19 In Gebhard, the Court was faced with an Italian rule which provided that a person could only establish himself in Italy as a lawyer if he complied with the rules and regulations applicable to the 11 Case 8/74, Procureur du Roi v Benoit and Gustave Dassonville [1974] ECR Dassonville, paragraph 5 13 C 9/02, Hughes de Lasteyrie du Saillant v Minstere de l Economie, des Finances et de l Industrie [2004] ECR I Lasteyrie du Saillant, paragragh Avoir Fiscal, paragraph Case C 250/95, Futura Participations SA and Singer v Administration des contributions [1997] ECR I 02471, paragraph ibid 18 Case 120/78, Rewe Zentral AG v Bundesmonopolverwaltung für Branntwein [1979] ECR C 55/94, Reinhard Gebhard v Consiglio dell Ordine degli Avvocati e Procuratori di Milano [1995] ECR I 04165, paragraph 37

5 legal profession there. In this context, the Court held that Italy could impose conditions on a national of another Member State seeking to pursue activities in Italy. However, the Court concluded that if the effect of those conditions was such as to restrict or make less attractive the exercise of the fundamental freedoms guaranteed by the EC Treaty, they could only be justified if they fulfilled the abovementioned four conditions. 4. Two prong investigation Hence, Gebhard demonstrates that even if a rule is found to be non discriminatory, it may still be subjected to a restriction analysis. If, following on from such an analysis, the national rule is determined to be restrictive of the Treaty freedoms, then such a rule may be acceptable to the Court if it is justified by overriding reasons in the public interest, is suitable for attaining the aim pursued by such a rule and does not go beyond what is necessary to achieve the aim of that rule. A two prong assessment into the discriminatory and restrictive effects of a national tax measure was also carried out by the ECJ in subsequent cases such as Futura 20 and confirmed by a recent decision of the Court in Truck Center where, in both cases, a discrimination analysis was followed by a restriction analysis to determine whether the rule was in breach of Community law. Indeed, these cases confirm that, in the light of the cardinal rules discussed above, a discrimination analysis and a restriction analysis of a national rule may be required to determine whether such rule is in breach of Community law. Hence, if following a discrimination analysis a rule is found to be nondiscriminatory, the Court is still required to carry out a restriction analysis to ensure that the rule is not restrictive of the Treaty freedoms. In Futura, a discrimination analysis was carried out by the Court to determine whether the Luxembourg rule was discriminatory with respect to permanent establishments situated in Luxembourg which were denied the possibility of carrying forward losses unless such profits were economically linked to income arising in Luxembourg. The rule was held to be non discriminatory as companies having their seat in Luxembourg were subject to the same rule as non resident companies having a permanent establishment in Luxembourg. Hence the rule that losses carried forward had to be economically linked to the income earned in Luxembourg applied equally to both residents and non residents. The Court held that such a system, which is in conformity with the fiscal principle of territoriality, cannot be regarded as entailing discrimination, overt or covert, prohibited by the Treaty. 21 Following its discrimination analysis, however, the Court proceeded to determine whether the requirement to maintain accounts in Luxembourg in accordance with the rules of that State for the 20 Case C 250/95, Futura Participations SA and Singer v Administration des contributions [1997] ECR I ibid, paragraph 22

6 purposes of loss relief restricted the freedom of establishment under Articles 52 and 58 EC (now Articles 43 and 48 EC). It concluded that this requirement was restrictive because it created a heavier burden on the non resident taxpayer than on the resident since the former would have effectively been obliged to maintain two sets of accounts, one of which would have had to comply with the tax accounting rules of Luxembourg and be physically kept there. Even though held to be restrictive, the Luxembourg rule was justified on the grounds of effectiveness of fiscal supervision as the ECJ argued that in the absence of such a rule the Luxembourg authorities would not be able to ascertain the amount of taxable income and losses carried forward by relying on accounts prepared according to different rules applicable in other Member States. 22 In applying the proportionality test, however, the ECJ held that a less restrictive method could have been used to ascertain the losses of the Luxembourg permanent establishment such as requiring the non resident taxpayer to demonstrate that the claimed losses corresponded to the losses actually incurred in Luxembourg. 23 In Truck Center, the Court again carried out a two prong investigation to determine whether a provision in the Belgo/Luxembourg Double Taxation Convention ( DTC ) requiring interest paid to a Luxembourg company to be subject to withholding tax at a rate not exceeding 15% was in breach of Community law when, in accordance with Belgian law, interest paid to a Belgian company did not suffer withholding tax. Firstly, the Court carried out a discrimination analysis to determine whether the rule discriminated against the Luxembourg recipient company as opposed to a Belgian recipient company. Having concluded that the Belgian rule was not discriminatory for various reasons, it proceeded to carry out a restriction analysis to see whether the rule restricted the free movement rights of either the Luxembourg recipient company or the Belgian borrowing company. Hence, it investigated whether, by virtue of the DTC provision, the free movement rights of the Luxembourg company granting the loan to a Belgian company was restricted compared to a Belgian company granting a loan to Belgian company. Furthermore, the Court analysed whether the Belgian borrowing company s free movement rights were restricted when seeking to obtain a loan from a Luxembourg company compared to a Belgian company obtaining a loan from a Belgian company. The Court held that there was no restriction in both cases because, on the facts of the case, the Luxembourg lending company was not in a less favourable position than a Belgian lending company nor was the Belgian borrowing company seeking to obtain a loan from the Luxembourg company placed in a less favourable position that a Belgian company obtaining a loan from a Belgian company. This resulted from the fact that the interest payment was subject to a maximum withholding tax rate of 15% when paid by the Belgian company to the Luxembourg company while the interest paid by a 22 Futura, paragraph Futura, paragraph 36 43

7 Belgian company to another Belgian company would be subject to corporation tax at a rate of 30% in the hands of the latter company Origin and Host State rules The concept of restriction is best understood in the light of the national treatment principle which the Court applies from both an origin and a host Member State perspective. In De Groot the Court held that Member States should respect the principle of national treatment of nationals of other Member States and of their own nationals who exercise the freedoms guaranteed by the Treaty. 25 Thus, from a host state perspective, the national treatment principle requires that a national of another Member State seeking to exercise its free movement rights in the host state is not granted less favourable treatment than an objectively comparable national of the latter state. From an origin state perspective, the national treatment principle requires that a national of a Member State seeking to exercise free movement rights in another Member State is granted not less favourable treatment than an objectively comparable national of the former state. The national treatment test is described by O Shea in terms of the Migrant/Non migrant test. 26 In his book, O Shea states that the comparison used by the ECJ in determining whether different treatment constitutes a restriction of a fundamental freedom is between a person exercising that freedom (the migrant ) and a person who is in a comparable situation in either the host or the origin Member State not exercising such freedom (the non migrant ) and who is not disadvantaged by the national tax rule at issue. Thus, the Court checks whether the migrant and non migrant are in a comparable situation and if so will determine whether the migrant is treated less favourably by the national tax rule at issue compared to a non migrant. If the migrant is treated less favourably than the non migrant by the national tax rule, then the disadvantageous tax treatment must be justified because it creates a restriction to the exercise of the fundamental freedoms. 27 From a host state perspective, the host state must ensure that a migrant who chooses to exercise his free movement rights in the host state is not granted less favourable treatment than an objectively comparable national of that state. Thus, in Halliburton 28 the ECJ was faced with a host state rule which denied a tax exemption to a German company 29 operating through a Dutch branch seeking to transfer the assets of the Dutch branch to a Dutch group company. In this respect, the Court held that 24 O Shea, Truck Center: A Lesson in Source vs. Residence Obligations in the EU, Tax Notes International, Feb 16, 2009, p C 385/00, F.W.L. de Groot v Staatssecretaris van Financien, [2002] ECR I 11819, paragraph O Shea, EU Tax law and Double Tax Conventions (Avoir Fiscal Limited, 2008), p ibid 28 C 1/93, Halliburton Services BV v Straatssecretaris van Financien [1994] ECR I Interestingly, it was the Dutch company that brought the complaint in the Dutch courts and before the ECJ.

8 the right of freedom of establishment conferred by Article 52 (now Article 43) of the EC Treaty granted the possibility to nationals, and in terms of Article 58 (now Article 48) also to companies having their seat in a Member State, of establishing themselves in another Member State through a branch, agency or subsidiary on the same conditions as those laid down by the law of the Member State of establishment for its own nationals. 30 Since the tax exemption would have been granted had the transfer taken place between two Dutch companies, the ECJ held that the Dutch tax measure was discriminatory as it rendered the transfer of assets by the German company more burdensome, thus placing the foreign company in a distinctly less favourable position 31 than a Dutch company. Furthermore, this rule was also a restriction of the freedom of establishment as it restricted the nonresident company s freedom to establish itself in the Netherlands as a permanent establishment rather than a subsidiary. From an origin state perspective, the origin state must ensure that a national seeking to exercise his free movement rights in another Member State is not treated less favourably than an objectively comparable national (carrying on similar activities) which does not exercise such rights. Thus, in Marks & Spencer 32 the Court was asked to determine whether the UK group relief rules were restrictive of the freedom of establishment exercised by the UK parent company of the Marks &Spencer group by setting up subsidiaries in other Member States. The UK group relief rules were applicable to profits and losses falling with the scope of UK law and therefore applied without any discrimination on the basis of nationality. Nevertheless, they did have the effect of precluding a UK company setting up subsidiaries in other Member States from taking advantage of the UK group relief rules. Had the UK parent company set up subsidiaries in the UK, it would have been entitled to avail itself of such rules. In carrying out its restriction analysis, the Court held that the provisions concerning the freedom of establishment prohibited the Member State of origin from hindering the establishment in another Member State of one of its nationals or company incorporated under its national law. Hence, in applying the national treatment principle, the UK (as the origin state) could not treat its own nationals seeking to establish themselves in other Member States less favourably than nationals who did not exercise their right of establishment under Article 43 EC. In other words, in applying the Migrant/Non migrant test, the Court had to determine whether the UK parent company of the Marks &Spencer group having set up subsidiaries in other Member States (the migrant ) was treated less favourably than UK companies which established subsidiaries in the UK (the non migrant ). Having established that the UK group relief rules provided a cash flow advantage to the non migrant because it allowed it to set off its current losses immediately, the Court concluded that the 30 Halliburton, paragraph Halliburton, paragraph C 446/03, Marks & Spencer plc v David Halsey (Her Majesty s Inspector of Taxes) [2005] ECR I 10837

9 UK parent company which established subsidiaries in other Member States was in a less favourable position. This unequal treatment constituted a restriction of the freedom of establishment of the UK parent company within the meaning of Article 43 and 48 EC which could only be justified by overriding reasons in the public interest under the Gebhard rule and if the measure in question satisfied the proportionality test. The UK government argued that its group relief rules were justified by the need to safeguard the balanced allocation of taxing powers since profits and losses were two sides of the same coin and should be treated symmetrically. Failure to do so would increase the taxable base of the Member State whose company is transferring the losses and reduce the taxable base of the Member State receiving the losses. It also argued that double dipping could arise if losses were taken into consideration both in the Member State of the subsidiary and in the Member State of the parent company. Lastly, the UK government maintained that the possibility of allowing companies to shift losses from one tax jurisdiction to another could give rise to tax avoidance since companies could choose to shift losses to those Member State applying the highest tax rates. 33 In the light of the above, the Court held, taking the three justifications into account together, that the restrictive UK rules pursued legitimate objectives which were compatible with the Treaty and constituted overriding reasons in the public interest. 34 It further held that Member States were justified in maintaining rules which sought to deny tax benefits to wholly artificial arrangements designed purposely to circumvent or escape national tax law. 35 However, the Court then proceeded to apply the proportionality test to determine whether the restrictive tax rule in question went beyond what was necessary to attain the objective pursued. In doing so, the Court found that such a rule would only go beyond what was necessary to attain the objective pursued if the subsidiary seeking to offset its losses had exhausted all remedies available in its State of residence of having the losses taken into account for the accounting period concerned or for previous accounting periods and also for future periods either by the subsidiary itself or by a third party, particularly if the subsidiary has been sold to that third party. 36 In other words, the rules were considered to be disproportionate in the case of final or terminal losses because they could not be relieved in the member state of establishment, at that time or in the future. 37 Thus, if a UK 33 ibid, paragraph ibid, paragraph ibid, paragraph ibid, paragraph O Shea, ECJ Rejects Advocate General's Advice in Case on German Loss Relief Taxanalysts, 2008.

10 company could prove that the above conditions are satisfied, it would be entitled to set off the losses of its non resident subsidiary against its profits. 38 The same line of reasoning was applied in a recent case Lidl Belgium, where the Court was faced with an origin state rule which allowed the offsetting of losses only if the income attributable to that entity seeking to relieve its losses was taxable in Germany. In determining whether the German tax rule at hand was restrictive of Article 52 and 58 EC (now Article 43 and 48 EC) relating to the freedom of establishment, the Court held that even though these provisions are directed 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. 39 Hence, the national treatment principle was also applied from an origin state perspective because Germany, the origin state, was bound to grant to its nationals who sought to establish themselves in another Member State the same treatment as comparable nationals who did not exercise their free movement rights. The Court noted that the German tax rule in question constituted a tax advantage by allowing losses incurred by a permanent establishment to be taken into account in calculating the profits and taxable income of the principal company. However, the tax advantage was denied when the losses was incurred by a permanent establishment situated in another Member State. The fact that the company exercised its freedom of establishment by establishing a permanent establishment in another Member State placed it in a less favourable position than if the permanent establishment had been established in Germany. As a consequence, the Court held the German tax rule to be restrictive of the freedom of establishment since its effect was to discourage a German company from exercising its right of establishment through a permanent establishment situated in another Member State. However, the Court held that the restrictive measure could be justified by overriding reasons in the public interest and that its application be appropriate to ensuring the attainment of the objective in question and not go beyond what is necessary to attain it. Two arguments were put forward by the Member States to justify this restrictive measure: 1) the need to preserve the allocation of the power to impose taxes between the Member States concerned and 2) the need to prevent the danger that losses may be taken into account twice. Following its reasoning in Marks & Spencer, the Court held that allowing branches to set off their losses against the profits of the principal company located in another State would give companies the possibility of choosing freely where to set off the losses. This would inevitably undermine the balanced allocation of taxing rights between the Member States since the tax base would be 38 O Shea, Marks and Spencer v Halsey (HM Inspector of Taxes): restriction, justification and proportionality. EC Tax Review, 2006/2. 39 Lidl Belgium, paragraph 19

11 increased in the first State, and reduced in the second, by the amount of the losses surrendered 40 and thus, would disturb the balance existing between the right to tax profits and the right to deduct losses. Furthermore, there was also the danger that the losses would be taken into consideration twice and Member States were justified in preventing such a danger. 41 Hence, the Court held that the restrictive measure in question was justified on the basis of the arguments brought forward by the Member States and concluded that the rules were appropriate for ensuring the attainment of the objectives pursued by it. Thus, the Court had to determine whether the tax regime at issue went beyond what was necessary to attain the objectives pursued. Applying the Court s decision in Marks & Spencer the Court held that a measure which restricts the freedom of establishment goes beyond what is necessary to attain the objectives pursued where a non resident subsidiary has exhausted the possibilities for having the losses incurred in the Member State where it is situated taken into account for the accounting period concerned and also for previous accounting periods and where there is no possibility for that subsidiary s losses to be taken into account in that State for future periods. 42 Having already established in Marks & Spencer that loss relief rules that denied cross border relief were disproportionate only in cases of final or terminal losses, the Court in Lidl Belgium held the tax regime at issue was proportionate in relation to the objectives pursued by it because the losses in question with were not final or terminal but could be set off against future profits of the same permanent establishment. 43 Indeed, the Court noted that the losses of Lidl Belgium's permanent establishment incurred in 1999 had been relieved in Therefore, the tax regime in question was deemed to be proportionate to the aims and objectives pursued and was therefore held to be compatible with the EC Treaty. Prior to Marks & Spencer and Lidl Belgium, the Migrant/Non migrant test was also adopted in Futura where the effect of the Luxembourg rule which required taxpayers seeking to carry forward losses, to keep accounts in Luxembourg drawn up in accordance with its rules, was to place companies, incorporated in another Member State which operated in Luxembourg through a permanent establishment, in a less favourable position than companies established in Luxembourg since the former were required to keep two sets of accounts one in the country where its principal office was located and another set in the country where its permanent establishment was located, prepared in accordance with the laws of that State. Thus it placed a higher burden on those companies having their seat in another Member state. 40 Lidl Belgium, paragraph ibid, paragraph ibid, paragraph O Shea, ECJ Rejects Advocate General's Advice in Case on German Loss Relief Taxanalysts, 2008.

12 This is an application of the Migrant/Non migrant test discussed above where the host Member State must ensure that nationals of other Member States seeking to exercise their free movement rights in the host state cannot be restricted from exercising such rights. Thus, Luxembourg could not treat the branch of a French company less favourably than it treated Luxembourg companies. Similarly, the Migrant/Non migrant test was applied in Truck Center discussed earlier which enabled the Court to conclude that on the basis of the facts describe above, 44 the Luxembourg company granting the loan to the Belgian company (the migrant ) was not in a less favourable position than a Belgian company granting a loan to a Belgian company ( the non migrant ). Furthermore, the Belgian borrowing company which obtained the loan from the Luxembourg company (the migrant ) was not placed in a less favourable situation than a Belgian company that obtained a loan from another Belgian company (the non migrant ). Hence, following the application of the Migrant/Non migrant test the Court ruled that there was no restriction in this case because it was clear that the migrant was not treated less favourably than the non migrant under the Belgian rules. 6. Conclusion 45 From the above discussion, it seems clear that the Court has maintained a consistent approach in tackling restrictive national measures by applying the national treatment principle to its restriction analysis so as to ensure that the person exercising a fundamental freedom is not treated less favourably than a person in a comparable situation in that Member State. This consistency is confirmed further by the fact that the national treatment principle and/or the Migrant/Non migrant test are applied from both a host state and an origin state perspective. Hence, the Court will seek to determine whether a national tax measure is restrictive of the fundamental freedoms guaranteed by the EC Treaty on the basis of the national treatment principle referred to above and will only accept a restrictive national tax measure if it is justified by overriding reasons in the public interest, is suitable for attaining the objective pursued and does not go beyond what is necessary to achieve such objective. In this context in Futura, Marks & Spencer and Lidl Belgium the Court finds that loss relief rules are restrictive of the freedom of establishment and applies the Gebhard formula holding that the rules at issue are justified because they are deemed to satisfy a mandatory requirement in the public interest and are necessary to obtain the objectives pursued. In applying the proportionality test to determine 44 For further details see page 5 45 It should be noted that my investigations carried out in this paper are limited to cases dealing with the freedom of establishment. Therefore, my comments with respect to the consistency of the decisions taken by the ECJ are only applicable in relation to this fundamental freedom. A more detailed investigation would be required to determine whether the ECJ is consistent in its decisions relating to the other freedoms. O Shea has argued that the ECJ is entirely consistent in its case law across the fundamental freedoms. See EU Tax Law and Double Tax Conventions (Avoir Fiscal Limited, London, 2008).

13 whether the means to achieve the objectives are proportionate, Lidl Belgium applies the Court s ruling in Marks & Spencer to find that the denial of cross border relief in cases where losses are not final or terminal are not disproportionate and are therefore compatible with the EC Treaty. In Futura, the restrictive rule relating to the maintenance of accounts in Luxembourg is held to be disproportionate because the aim of the Luxembourg rule (i.e. to ensure that the claimed losses actually correspond to the losses incurred in Luxembourg) could still be achieved without requiring the maintenance of accounts in that state. Indeed, the Luxembourg tax authority could still obtain the information required from the Luxembourg branch to be able to ascertain the losses incurred in Luxembourg by using less restrictive means. Furthermore, Futura and Truck Center confirm that Member States must abide by the cardinal rules of non discrimination and non restriction referred to earlier. These cases show that the Court may carry out a two fold investigation of a national tax measure, i.e. a discrimination analysis and a restriction analysis to determine whether the tax measure in question is in breach of Community law. Thus, if the Court finds that a national measure is non discriminatory it will still carry out a restriction analysis to determine whether the measure in question is restrictive of the fundamental freedoms safeguarded by the EC Treaty. If a measure is deemed to be restrictive, it will only be justified by the Court if, in terms of the Gebhard rule, it meets the public interest requirement and is proportionate in achieving the aims and objectives pursued by such measure. It may be concluded from the above analysis that the Court interprets the concept of restriction in a very consistent way in relation to its freedom of establishment tax jurisprudence. As held in De Groot, the Court maintains a consistent approach in ensuring that Member States respect the national treatment principle both with respect to nationals of other Member States and with respect to their own nationals exercising the fundamental freedoms guaranteed by the EC Treaty. 46 Indeed, Truck Center and Lidl Belgium are yet again proof that the Court is confirming the application of the national treatment principle enunciated in its previous case law and is maintaining a consistent approach towards restrictive measures in origin and host state cases relating to the freedom of establishment. 46 De Groot, paragraph 94.