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1 EU Tax Alert December edition 111 The EU Tax Alert is an newsletter to inform you of recent developments in the EU that are of interest for tax professionals. It includes recent case law of the European Court of Justice, (proposed) direct tax and VAT legislation, customs, state aid, developments in the Netherlands, Belgium and Luxembourg and more. To subscribe (free of charge) see: Please click here to unsubscribe from this mailing. Share the Expertise

2 Highlights in this edition CJ rules in FII 2 case: the asymmetrical application of the exemption and the credit method to nationally-sourced and foreign-sourced dividends is in breach of EU law; the free movement of capital applies in the case of dividends distributed by third country companies in which the shareholder holds a majority participation On 13 November 2012, the Court of Justice ( CJ ) delivered its judgment in case FII 2 (C-35/11). The High Court of Justice of England and Wales, Chancery Division asked the CJ for a clarification of its previous ruling in the FII Group Litigation case (C-446/04), which dealt with various aspects of the formerly applicable UK dividend taxation system. Commission publishes Action Plan to strengthen the fight against tax fraud and tax evasion On 6 December 2012, following its earlier Communication in June 2012, the Commission presented an Action Plan to strengthen the fight against fraud and tax evasion. The Commission also adopted two Recommendations, one on tax havens and the other on aggressive tax planning, to encourage Member States to take immediate and coordinated action on specific pressing problems. 2

3 Contents Top News CJ rules in FII 2 case: the asymmetrical application of the exemption and the credit method to nationallysourced and foreign-sourced dividends is in breach of EU law; the free movement of capital applies in the case of dividends distributed by third country companies in which the shareholder holds a majority participation Commission publishes Action Plan to strengthen the fight against tax fraud and tax evasion Direct taxation Council addresses Financial Transaction Tax, Savings Tax Agreements, tax fraud and evasion and other taxation related issues CJ rules that Finish legislation regarding dividends paid to foreign pension funds is in breach of the free movement of capital (Commission v Finland) CJ dismisses infringement case against Germany regarding taxation of foreign pension funds (Commission v Germany) Hungarian court refers preliminary question to the CJ regarding the compatibility of the special retail tax with EU law (Hervis Sport) UK Supreme Court refers preliminary questions to the CJ on amendment to limitation period relating to claims for the restitution of taxes levied in breach of EU law (FII 3) Commission asks Hungary to amend its special retail tax and the special telecommunication tax Commission requests the Netherlands to amend legislation on cross-border pensions EFTA Surveillance Authority requests Iceland to amend discriminatory taxation of unrealized capital gains in case of cross-border mergers Commission publishes 2013 Annual Growth Survey Developments in the Netherlands: District Court of Breda rules that the amendments to the 30% ruling are not in conflict with EU Law Developments in the Netherlands: Bill on deferral of payment of exit tax due approved by Parliament s Lower House VAT CJ rules that sale of goods under a customs suspension arrangement is in principle VAT taxable (Profitube) CJ rules that Member States may apply an alternative method than the turnover method for calculating the deductible proportion (BLC Baumarkt) CJ rules on inclusion of ground already owned for calculation of VAT on deemed supply (Gemeente Vlaardingen) CJ clarifies the type of conditions to which the exemption for out-patient care services may be subject (Ines Zimmermann) CJ rules that letting of houseboat and adjacent land constitutes a single VAT exempt supply of immovable property (Susanne Leichenich) Advocate General opines on scope of exemption for management of special investment funds (GfKb) Commission requests France and Luxemburg to amend their VAT rates on e-books Commission requests Spain to levy VAT on certain notary services Commission report on supplies on board of ships, aircraft, trains and buses Proposal for derogating measure for Bulgaria and Romania Customs Duties, Excises and other Indirect Taxes CJ rules on the burden of proof for certificates of origin (Lagura Vermögensverwaltung GmbH) CJ rules on the CN classification of set-top-boxes (Digitalnet OOD, Tsifovra kompania OOD and M SAT Cable AD) Commission requests Greece to change registration tax rules on leased or rented cars EU and Latin American countries formally end banana disputes EU, Thailand to Start FTA Negotiations 3

4 Top News CJ rules in FII 2 case: the asymmetrical application of the exemption and the credit method to nationally-sourced and foreign-sourced dividends is in breach of EU law; the free movement of capital applies in the case of dividends distributed by third country companies in which the shareholder holds a majority participation On 13 November 2012, the Court of Justice ( CJ ) delivered its judgment in case FII 2 (C-35/11). The High Court of Justice of England and Wales, Chancery Division ( High Court ) asked the CJ for a clarification of its previous ruling in the FII Group Litigation case (C-446/04) ( the first FII judgment ), which dealt with various aspects of the formerly applicable UK dividend taxation system. In this second case, the High Court referred five questions to the CJ. The summary below will discuss only the CJ s answers to the two most important questions. Exempting nationally-sourced dividends while taxing, with a credit, foreign-sourced dividends In the first FII judgment, the CJ held that Articles 49 and 63 of the Treaty on the Functioning of the European Union ( TFEU ) did not preclude legislation of a Member State which, on the one hand, exempted from corporation tax dividends which a resident company received from another resident company ( nationallysourced dividends ) and, on the other, imposed corporation tax on dividends which a resident company received from a non-resident company ( foreign-sourced dividends ) while at the same time granting a tax credit in the latter case for the tax actually paid by the company making the distribution in the Member State in which it was resident. However, this was subject to the proviso that: the rate of tax applied to foreign-sourced dividends is no higher than the tax rate applied to nationally- sourced dividends and that the tax credit is at least equal to the amount paid in the Member State of the company making the distribution, up to the limit of the amount of the tax charged in the Member State of the company making the distribution. The CJ added, at paragraph 56 of its first FII judgment, that: it is for the national court to determine whether the tax rates are indeed the same and whether different levels of taxation occur only in certain cases by reason of a change to the tax base as a result of certain exceptional reliefs. Following the first FII judgment, the claimants in the main proceedings proved that the effective level of taxation of the profits of companies resident in the UK was lower than the nominal tax rate in the majority of cases. The defendants in the main proceedings did not contest this evidence. They maintained, however, that the instruction given to the national court in paragraph 56 of the first FII judgment related to the examination of nominal rates and not that of effective levels of taxation. In particular, according to the defendants, the national court had to examine exclusively the question whether or not resident companies paying dividends and resident companies receiving dividends were subject to different nominal rates of tax only in exceptional circumstances. Having regard to this controversy, the High Court made a second referral to the CJ asking whether the references to tax rates and different levels of taxation at paragraph 56 of the first FII judgment refer to (a) solely nominal rates of tax; or (b) the effective rates of tax paid as well as the nominal rates of tax; or (c) whether they have any other meaning. The CJ considered that the question to be answered is essentially whether the freedom of establishment (Articles 49 TFEU) and the free movement of capital (Article 63 TFEU) precludes legislation of a Member State which applies the exemption method to nationallysourced dividends and the credit method to foreignsourced dividends when, in that Member State, the effective level of taxation of company profits is generally lower than the nominal rate of tax. This requires the 4

5 determination whether the exemption method and the credit method can be considered equivalent. Although as the first FII judgment held the two methods are, in principle, equivalent, the CJ pointed to two circumstances where that is not the case insofar as the credit method leads to a higher tax rate and thus, a less favourable treatment of foreign-source dividends. First, this is the situation if the resident company distributing the dividends is subject to a lower nominal rate of tax than the resident company receiving the dividends. Second, there is also no equivalence if the profits of the resident company paying the dividends are subject to an effective level of taxation lower than the nominal rate of tax which is applicable in its residence State. In such case, nationally-sourced dividends may benefit from that lower effective taxation, as the dividends distributed are exempt in the hands of the recipient company irrespective of the level of effective taxation at the distribution level. Contrarily, in the case of foreign-sourced dividends, the credit method has the effect of undoing all the benefits which the distributing company might have received in the form of reliefs and reductions in the tax base in its State of residence. Having regard to these two circumstances, the Court held that paragraph 56 of the first FII judgment is meant to refer both to the applicable nominal rates of tax and to the effective levels of taxation. The tax rates to which paragraph 56 refers relate to the nominal rate of tax and the different levels of taxation by reason of a change to the tax base relate to the effective levels of taxation. As in the case at hand it has been proven that in the UK the effective level of taxation of the profits of resident companies is lower than the nominal rate of tax not exceptionally but in the majority of cases, the simultaneous application of the two methods to nationally-sourced dividends, on the one the hand, and foreign-sourced dividends, on the other, results in a difference in treatment of the two types of dividends. According to settled case law, the situation of shareholders receiving foreign-sourced dividends is comparable to that of shareholders receiving nationally-sourced dividends. Differential treatment of comparable situations results in discrimination and in turn, restriction on Articles 49 and 63 TFEU. Such restriction, however, may be justified in this case by the overriding public interest of ensuring the cohesion of the national tax system provided that the measure at issue is proportional to such objective. The application of the credit method to foreign-sourced dividends and that of the exemption method to nationally-sourced dividends is suitable to secure the cohesion of the tax system having regard to the fact that it ensures that the tax advantage (i.e. the credit or exemption) granted is matched by a corresponding tax levy (the tax to which the profits underlying the distribution have been subject). However, it is not necessary continued the CJ in order to maintain the cohesion of the tax system to make a differentiation in applying the two methods in regard to whether the effective level or the nominal rate of taxation is taken into account. The exemption method has regard only to nominal rates of tax, as it grants the relief irrespective of what the level of effective taxation was at the distribution level thus assuming that the profits from which the distribution was made were taxed at the nominal rate. On the other hand, the credit method takes into account the effective level of taxation on the profits underlying the distribution, as it grants credit for the tax actually paid. The CJ held that national rules which would take account, also under the credit method, of the nominal rate of tax to which the profits underlying the dividends paid have been subject would be appropriate for preventing the economic double taxation of the distributed profits and for ensuring the internal cohesion of the tax system while being less restrictive on the freedom of establishment and the free movement of capital. Finally, the CJ concluded that the application of the exemption method to nationally-sourced dividends and the credit method to foreign-sourced dividends is in breach of Article 49 and 63 TFEU if it is established, first, that the tax credit to which the company receiving the dividends is entitled under the credit method is equivalent to the amount of tax actually paid on the profits underlying the distributed dividends and, second, that the effective level of taxation of company profits in the Member State concerned is generally lower than the prescribed nominal rate of tax. 5

6 Free movement of capital or freedom of establishment in relation to third countries in majority shareholding situations In short, the question to be resolved is which of the Treaty provisions in particular, the freedom of establishment or the free movement of capital applies to tax treatment of dividends emanating from a company which is resident in a third country and in which the shareholding enables the holder to exert a definite influence on the company s decisions and to determine its activities, while bearing in mind that the national legislation in question does not apply exclusively to such situations. The CJ, first, recalled that as regards the question whether national legislation falls within the scope of one or other of the freedoms, the purpose of the legislation concerned must be taken into consideration. National legislation intended to apply only to those shareholdings which enable the holder to exert a definite influence on a company s decisions and to determine its activities falls within the scope of Article 49 TFEU whereas that which applies to shareholdings acquired solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking falls exclusively under Article 63 TFEU. The UK rules at issue applied irrespective of whether the dividends were received on majority shareholdings of the type described above or on holdings of a smaller size. Insofar as such rules apply in an intra-eu situation, i.e. on dividends received from a company resident in a Member State, both the freedom of establishment and the free movement of capital may apply. In such case, the purpose of the legislation is not helpful in deciding which freedom is ultimately applicable. The CJ pointed out that it is in this situation, which was also at issue in the first FII case, that the facts of the case must be taken into account. However, in the case at hand where dividends originate in a third country it is sufficient to examine the purpose of the national legislation in order to determine the scope of what freedoms are engaged by it. Thus, the Court concluded that national rules relating to the tax treatment of dividends from a third country, which do not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends fall within the scope of the free movement of capital. A company resident in a Member State may therefore rely on that provision in order to call into question the legality of such rules, irrespective of the size of its shareholding in the company paying dividends established in a third country. While this seems to be a straightforward clarification of the scope of the free movement of capital in third country relations and a respectable effort to explain the previous far from consistent case law, the final statement of the CJ seems to raise new questions. In particular, the CJ stated that it is important to ensure that the free movement of capital, as interpreted in relation to third countries, does not become a backdoor to the freedom of establishment for those economic operators who do not otherwise fall within the limits of the territorial scope of the latter. The Court then added that such a risk does not exist in the present case, as the legislation of the Member State in question does not relate to the conditions for access of a company from that Member State to the market in a third country or of a company from a third country to the market in that Member State. It concerns only the tax treatment of dividends which derive from investments which their recipient has made in a company established in a third country. Commission publishes Action Plan to strengthen the fight against tax fraud and tax evasion On 6 December 2012, following its earlier Communication in June 2012 (see EU Tax Alert edition no. 107, July 2012), the Commission presented an Action Plan to strengthen the fight against fraud and tax evasion. The Commission also adopted two Recommendations, one on tax havens and the other on aggressive tax planning, to encourage Member States to take immediate and coordinated action on specific pressing problems. The package contains measures that will have to be implemented by the Member States in order to have direct effect on European taxpayers. The Action Plan contains an extensive package of recommended measures against tax fraud and tax evasion. Most of these concern enhanced administrative procedures and co-operation between revenue 6

7 authorities and measures in the field of tax compliance. There are, however, also some proposals that could have much wider implications outside the area of fraud and tax evasion. These proposed measures are the following. Member States are urged to introduce a subjectto-tax requirement both in their unilateral double tax relief rules and in their bilateral tax treaties, whereby income is only to be allocated to a certain State when this income is actually taxed there. The other State would thus retain the right to tax in situations where there would otherwise be double non taxation. Member States are encouraged to incorporate the following General Anti-Abuse Rule (GAAR) in their national legislation. An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored. National authorities shall treat these arrangements for tax purposes by reference to their economic substance. The recommendation contains an explanatory section on how this provision is to be applied and interpreted. The Commission further proposes to review the anti-abuse provisions in the Interest and Royalty Directive, the Merger Directive and the Parent-Subsidiary Directive to bring them into line with the GAAR. The Commission recommends measures intended to encourage third countries to apply minimum standards of good governance in tax matters. A third (non-eu) country only complies with these minimum standards where: (a) it has adopted legal, regulatory and administrative measures intended to comply with detailed standards of transparency and exchange of information and effectively applies those measures, and (b) it does not operate harmful tax measures in the area of business taxation. The recommendation contains a detailed definition of the term harmful for this purpose. Broadly speaking, a measure is considered harmful if it provides for a significantly lower effective level of taxation, including zero taxation, than those levels which generally apply in the third country. Such a level of taxation may operate by virtue of the nominal tax rate, the tax base or any other relevant factor. If third countries do not comply with the minimum standard of good governance, the Commission proposes to include such countries in national blacklists and to renegotiate, suspend, or terminate existing tax treaties with them. The Commission will propose, in the course of 2013, a revision of the Parent-Subsidiary Directive in order to allow effective measures by Member States against double non-taxation in the area of hybrid loan structures. It should be noted that, for the time being, the points mentioned above are no more than recommendations from the Commission to the Member States. Member States will have to implement the proposed measures before they can have any direct effect on European taxpayers. Direct Taxation Council addresses Financial Transaction Tax, Savings Tax Agreements, tax fraud and evasion and other taxation related issues The Economic and Financial Affairs (ECOFIN) Council held meetings on 13 November and 4 December 2012 where several taxation related matters were discussed, and various reports and conclusions were adopted. Financial Transaction Tax (FTT): discussion at both meetings focused on the developments regarding the introduction of the FTT through enhanced cooperation between the Member States which had indicated that they intended to participate. The Commission presented its proposal for a decision to authorise enhanced cooperation on the FTT. The Commission s proposal, submitted on 23 October, would allow Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia 7

8 and Slovakia to introduce the FTT via enhanced cooperation (see EU Tax Alert edition no. 110, November 2012). The Netherlands indicated that they would also be interested in participating, under certain conditions. Adoption of the decision to authorize enhanced cooperation requires a qualified majority of the Council. A number of Member States not wishing to join the enhanced cooperation indicated that they wished to receive a more detailed assessment of its impact on the internal market before supporting such decision. The decision also requires the consent of the European Parliament. On 30 November, the Permanent Representatives Committee decided to send a letter to the European Parliament requesting its consent to a draft decision that would authorise enhanced cooperation. The Council will continue work on the text once the Parliament has given its consent, and in the light of comments made by delegations. Savings Tax Agreements: at the meeting of 13 November, the Council discussed a proposed mandate that would enable the Commission to negotiate amendments to agreements signed in 2004 with Switzerland, Liechtenstein, Monaco, Andorra and San Marino on the taxation of savings income (see EU Tax Alert edition no. 106, June 2012). The presidency took note of the views expressed. In the light of reservations maintained by two delegations, it indicated that it would report to the European Council and would reflect on how to proceed with the dossier. Based on Article 218(3) and (4) TFEU, adoption of the draft decision requires unanimity of the Council. Tax fraud and tax evasion: at the meeting of 13 November, the Council adopted Conclusions on this matter. In the Conclusions, the Council welcomes the Communication on concrete ways to reinforce the fight against tax fraud and tax evasion, including in relation to third countries, presented by the Commission in June 2012 (see EU Tax Alert edition no. 107, July 2012) and expresses views on prioritising the steps suggested in the Communication to fight tax evasion and fraud. The Conclusions mention, inter alia, that attention must be paid to the areas of both direct and indirect taxation, without connecting them. Further, it is important to concentrate on actions for the short term. Action is needed at the level of both the Member States and the EU. Particular attention should be paid to the efficient and costeffective implementation of already existing EU legislation and IT systems, as well as to burdens on businesses and tax administrations. Beyond legislative instruments, the EU should consider pragmatic tax coordination at the level of the Council and support, where appropriate, coherent action in relation to third countries, while taking relevant work in international fora into account. In the area of direct taxation, the Council identifies the following issues as priorities: - carrying forward work and discussions on the revision of the Savings Directive and reaching rapidly an agreement on the negotiating directives for savings agreements with third countries, as recalled by the European Council conclusions of 28/29 June 2012, - ensuring effective information exchange between administrations, - exploring the possibility of deepening administrative co-operation in the area of direct taxation. In the area of indirect taxation, the following priorities are highlighted: - combating the considerable losses in the field of VAT, inter alia, by continued work with and analysis of possible measures to combat tax evasion effectively, taking into account the Council conclusions adopted in May 2012, - ensuring effective information exchange between administrations, and effective use of the existing computerised control system in the area of excise duties. Finally, the Council notes that Administrative and Criminal Sanctions and Joint Audits which are included in the Commission s Communication should not be taken as a priority area at this stage. 8

9 VAT fraud Quick Reaction Mechanism: at its meeting of 4 December, the Council held a policy debate on a proposal for a directive aimed at enabling immediate measures to be taken in cases of sudden and massive VAT fraud ( quick reaction mechanism ). The debate focused on whether implementing powers under the directive should be conferred on the Commission or on the Council. Fraud schemes are evolving rapidly and situations arise that require a rapid response, for instance in cases of carousel fraud. The Commission s proposal is aimed at speeding up the procedure for authorizing Member States to derogate from the provisions of the VAT directive, by providing for implementing powers to be conferred on the Commission under a quick reaction mechanism. Based on Article 113 TFEU, adoption of the directive requires unanimity of the Council, after consulting the European Parliament. EU Joint Transfer Pricing Forum (JTPF): at its meeting of 4 December, the Council adopted Conclusions on the JTPF Code of Conduct on Business Taxation: at its meeting of 4 December, the Council adopted Conclusions endorsing the report of the Code of Conduct Group on its progress achieved during the Cyprus Presidency Energy taxation: at its meeting of 4 December, the Council endorsed a report reflecting the state of play of negotiations and setting out proposals for future work regarding a directive amending the existing energy taxation directive to bring it more closely in line with the EU s energy and climate change objectives. The Cyprus presidency has presented four compromise proposals, the latest on 12 November. The Council invited the incoming Irish Presidency to continue work, using the latest compromise text as a starting point. Euro Plus Pact report on taxation: at its meeting of 4 December, the finance ministers of the Member States participating in the Euro Plus Pact (see EU Tax Alert edition no. 91, April 2011) endorsed a report on progress on the coordination of tax policies. Report to European Council on tax issues: at its meeting of 4 December, the Council endorsed a report to the European Council on tax issues. The report presents the state of play on key legislative proposals such as energy taxation, the common consolidated corporate tax base (CCCTB), the financial transaction tax (FTT), the revision of the savings tax directive and the negotiating directives for savings taxation agreements with third countries and works in the Council on ways to improve the fight against tax fraud and tax evasion. CJ rules that Finish legislation regarding dividends paid to foreign pension funds is in breach of the free movement of capital (Commission v Finland) On 8 November 2012, the CJ delivered its judgment in the case of Commission v Finland (C-342/10). The case deals with the compatibility of Finish legislation regarding dividends paid to non-resident pension funds with the free movement of capital provided for in Article 63 TFEU and Article 40 of the Agreement on the European Economic Area (EEA). According to the legislation at issue in the case, dividends paid to nonresident pension funds are subject to a withholding tax of 19.5% or a reduced rate pursuant to an applicable double tax convention of typically 15%. Resident pension funds are, in principle, also subject to taxation at a rate of 19.5% on all their income including dividends received. However, the dividends received by resident pension funds, which are transferred to reserves from which pensions are paid out to the beneficiaries, are treated as if they were expenditure, and thus, can be deducted from the taxable income. This leads to a de facto exemption (or limited taxation) of dividends received by resident pension funds as opposed to the taxation at 19.5% of dividends paid to non-resident funds which are not entitled to a similar deduction. The Commission claimed that such a difference in treatment was discriminatory, and brought the matter, eventually, to the CJ. 9

10 The CJ considered that the less favourable treatment granted to dividends paid to non-resident pension funds in comparison with dividends received by resident pension funds constitutes a restriction on the free movement of capital. It further added that such restriction cannot be offset by the double tax conventions concluded by Finland due to the fact that the latter had concluded only three conventions providing for a withholding tax rate of 0%, whereas the majority provided for a rate of 15%. It then analyzed whether resident and non-resident pension funds can be considered as objectively comparable. In that regard, it recalled that the comparability of cross-border situations with internal ones must be examined having regard to the aim pursued by the national provisions at stake. It considered that the specific purpose of both resident and non-resident pension funds i.e. to accumulate capital, by way of investments producing, in particular, dividend income in order to meet their future obligations under insurance contracts is identical and therefore, they are in a situation objectively comparable as regards Finish sourced dividends. The CJ s reasoning referred to the case law laying down that in relation to business expenses which are directly linked to an activity which has generated taxable income in a Member State, residents and non-residents of that State are in a comparable situation. The direct link between expenses and taxable income in this case results from the technique of assimilation chosen by the Finnish legislature (among other possible techniques, such as a simple tax exemption) which is intended to take into account the specific purpose of pension funds. The legislation which denies non-resident pension funds the right to deduct such expenses, while, on the other hand, allowing resident funds to do so, constitutes discrimination, according to the CJ. The CJ dismissed possible justifications for the discriminatory treatment of non-resident pension funds on the grounds of both the principle of territoriality and the coherence of the tax system. CJ dismisses infringement case against Germany regarding taxation of foreign pension funds (Commission v Germany) On 22 November 2012, the CJ delivered its judgment in the case Commission v Germany (C-600/10). The case deals with the taxation of dividend distributions and interest payments to non-resident pension funds under German law. Dividend distributions and interest payments made by German companies to a German pension fund are taxed at the level of the German pension fund on a net basis, whereas said distributions and payments are subject to withholding tax on a gross basis when paid to a nonresident pension fund without the possibility to deduct any business expenses directly related to the dividend or interest income received by the non-resident pension fund. Considering such different taxation, the Commission brought an infringement action against Germany based on an alleged breach of the free movement of capital (Article 63 TFEU), which had, eventually, been referred to the CJ. The CJ considered that prohibited restrictions include measures of a Member State that are likely to discourage non-residents from making investments in such Member State, such as a different taxation of dividends in the case of resident and non-resident pension funds. The CJ observed that the situations of non-resident and resident pension funds must be objectively comparable in order for a restriction to exist. In that respect, the CJ pointed out that, in line with settled case law with respect to business expenses directly linked to an activity which has generated taxable income in a Member State, residents and non-residents are in a comparable situation. The CJ however held that the Commission had failed to prove sufficiently, amongst others, that (i) the business expenses (such as bank fees) were directly linked to any dividend or interest income received by a non-resident pension fund and that (ii) the German legislation was as such in breach of EU law. 10

11 The CJ therefore dismissed the claim of the Commission by concluding that it had not succeeded in establishing that Germany treated non-resident pension funds less favourably than resident pension funds when denying non-resident pension funds a deduction of business expenses directly related to any dividend or interest income received by them. Hungarian court refers preliminary question to the CJ regarding the compatibility of the special retail tax with EU law (Hervis Sport) On 13 August 2012, the Court of Appeal of Székesfehérvár referred a question to the CJ for a preliminary ruling in the case Hervis Sport (C-385/12) regarding the compatibility with the various free movement provisions under EU law of the Hungarian special tax levied on taxpayers engaged in retail trade. In particular, the Court of Appeal asked the following question: Is the fact that taxpayers engaged in store retail trade have to pay a special tax if their net annual turnover is higher than HUF 500 million compatible with the provisions of the EC Treaty governing the principle of the general prohibition of discrimination (Articles 18 TFEU and 26 TFEU), the principle of freedom of establishment (Article 49 TFEU), the principle of equal treatment (Article 54 TFEU), the principle of equal treatment as regards participation in the capital of companies or firms within the meaning of Article 54 (Article 55 TFEU), the principle of freedom to provide services (Article 56 TFEU), the principle of the free movement of capital (Articles 63 TFEU and 65 TFEU) and the principle of equality of taxation of companies (Article 110 TFEU)? Worthy of note is that the Commission has also started an infringement procedure against Hungary regarding the special retail tax at issue in this preliminary reference (see below). UK Supreme Court refers preliminary questions to the CJ on amendment to limitation period relating to claims for the restitution of taxes levied in breach of EU law (FII 3) On 30 July 2012, the Supreme Court of the United Kingdom referred questions for a preliminary ruling to the CJ in the Test Claimants in the Franked Investment Income Group Litigation (FII 3) case (C-362/12). The questions concern the compatibility with EU general principles of a retrospective change to the limitation period relating to claims for the restitution of taxes levied in breach of EU law. In particular, the Supreme Court asked: 1. Where under the law of a Member State a taxpayer can choose between two alternative causes of action in order to claim restitution of taxes levied contrary to Articles 49 and 63 TFEU and one of those causes of action benefits from a longer limitation period, is it compatible with the principles of effectiveness, legal certainty and legitimate expectations for that Member State to enact legislation curtailing that longer limitation period without notice and retrospectively to the date of the public announcement of the proposed new legislation? 2. Does it make any difference to the answer to Question 1 that, at the moment when the taxpayer issued its claim using the cause of action which benefited from the longer limitation period, the availability of the cause of action under national law had only been recognised (i) recently and (ii) by a lower court and was not definitively confirmed by the highest judicial authority until later? Commission asks Hungary to amend its special retail tax and the special telecommunication tax On 21 November 2012, the Commission announced that it had formally requested Hungary to amend its legislation on the special taxes applied to the retail and the telecommunication sectors. The Commission considers that these taxes are discriminatory, as they fall disproportionately on non-hungarian operators. The 11

12 requests take the form of reasoned opinions (the second stage of the infringement procedure under Article 258 TFEU). Hungary has to change its legislation within two months to bring it in line with EU law. Failing this, the Commission may refer the cases to the CJ. Hungary imposes progressively increasing tax rates on all retail companies and on all telecommunication companies according to their annual turnover. Due to the design of these tax rates and the structure of the two markets, the taxes are mainly borne by foreignowned companies while domestic companies are practically exempt or taxed at a very law rate. Thus, the Commission considers these taxes to be in breach of the freedom of establishment as guaranteed by Article 49 TFEU. Worthy of note is that a separate infringement procedure against the special telecommunication tax, related to the EU Authorisation Directive, was referred to the CJ in March 2012, now pending as Case C-462/12 (see EU Tax Alert edition no. 104, April 2012). Commission requests the Netherlands to amend legislation on cross-border pensions On 21 November 2012, the Commission formally requested the Netherlands to change three rules related to the taxation of cross-border pensions. The Commission s request takes the form of a reasoned opinion. In the absence of a satisfactory response within two months, the Commission may decide to refer the matter to the CJ. According to the legislation at issue, first, foreign pension service providers have to give guarantees to the Netherlands authorities if they transfer pensions abroad or if they want to do business on the Netherlands market. Second, employees have to give guarantees if their pensions are transferred abroad or if they want to buy pension services abroad. Third, transfers of pensions to foreign providers by workers employed outside the Netherlands are only exempt from tax if the taxpayer provides a guarantee or if foreign providers assume the responsibility for any tax claims. None of these conditions has to be met by Netherlands pension service providers. The Commission considers that these rules constitute restrictions on the free movement of citizens and workers, the freedom of establishment, the freedom to provide services and the free movement of capital (Articles 21, 45, 49, 56 and 63 TFEU). EFTA Surveillance Authority requests Iceland to amend discriminatory taxation of unrealized capital gains in case of cross-border mergers On 28 November 2012, the EFTA Surveillance Authority (Authority) sent Iceland a reasoned opinion regarding its legislation which taxes unrealized capital gains of companies that merge cross-border. This is the second step in an infringement procedure. The Authority may bring the matter before the EFTA Court if Iceland fails to comply with the reasoned opinion within two months. According to Icelandic tax rules, companies in Iceland that merge cross-border within the EEA are required to pay tax on all capital gains relating to assets and shares when they leave Iceland, even though the gains have not been realised. Icelandic companies that merge with other companies within Iceland are under no such obligation. The Authority considers those rules to be a restriction on the freedom of establishment and the free movement of capital. The Authority acknowledges that Iceland may protect its right to tax gains that accrued while a company was resident in Iceland. However, Iceland should apply less restrictive measures to protect this right, for example, by offering companies the option to defer the payment of the tax instead of the immediate payment thereof at the time of relocation. Commission publishes 2013 Annual Growth Survey On 28 November 2012, the Commission issued the 2013 Annual Growth Survey. The Survey outlines priority actions to be taken by Member States in order to ensure better-coordinated and more effective policies 12

13 for fostering sustainable economic growth. The Annual Growth Survey is the starting point for the European Semester, which involves simultaneous monitoring of the Member States fiscal, economic and employment policies during a six-month period every year. The European Semester was introduced and organised for the first time in 2011 as part of the reform of economic governance within the EU. The Annual Growth Survey also gives guidance for the Member States tax reforms. The key message of the 2013 Survey is that taxation can be used to promote growth and competitiveness, boost employment and address specific social needs. Member States should therefore harness this potential of taxation. The Survey sets out five key objectives unchanged compared to the last year s objectives which Member States should pursue for growth-friendly tax reforms: Shift taxes away from labour towards more growthenhancing taxes such as consumption and property Broaden tax bases rather than just arbitrarily raising rates, for smarter revenue raising Increase environmental taxation; Improve tax collection and compliance, particularly through the fight against evasion Remove the tax bias which encourages debt In addition, this year, the Commission urges Member States to focus on increasing both the competitiveness and fairness of their tax systems, as these principles determine the legitimacy of any tax system for the public. Developments in the Netherlands: District Court of Breda rules that the amendments to the 30% ruling are not in conflict with EU Law On 8 November 2012, the District Court of Breda ruled that the amendments - i.e. the 150 kilometre requirement - to the Netherlands 30% ruling, effective from 1 January 2012, are in accordance with the free movement of workers set out in Article 45 TFEU. Under the 30% ruling, the employer may pay the employees, who have been posted to the Netherlands or recruited from abroad to work in the Netherlands, a tax free allowance of 30% of the employee s wage. This 30% tax free allowance is intended to cover extraterritorial expenses which the employee incurs as a consequence of the fact that the employee works outside his home country. As of 1 January 2012, an amendment to the 30% ruling came into force in order to prevent the improper use of the 30% ruling. Under this amendment, the 30% ruling is only applicable to employees who have lived at a distance of more than 150 kilometres from the Netherlands border for a period of more than two thirds of the twenty-four months prior to the commencement of employment in the Netherlands ( 150 kilometre requirement ). Employees who do not meet these criteria are only entitled to a tax free reimbursement of the actual extraterritorial expenses. In the case before the District Court of Breda, an employee who did not meet the 150 kilometre requirement requested a 30% ruling, which was rejected by the Netherlands tax inspector. The employee argued that the 150 kilometre requirement was in conflict with the free movement of workers, as laid down in Article 45 TFEU, and the principle of equality, as laid down in Article 26 of the International Covenant on Civil and Political Rights ( ICCPR ), and in Article 14 of the European Convention for the Protection of Human Rights and Fundamental Freedoms ( ECHR ). The District Court of Breda reasoned that even if there was an unequal treatment of equal circumstances in this case, it could be objectively justified as the legislature may prevent the improper use of the 30% ruling and ensure that it is only applied to the employees for whom it was initially introduced. Therefore, the amendment to the 30% ruling has the legitimate purpose of serving the public interest and does not go further than necessary. The 150 kilometre requirement is not disproportional 13

14 having regard to the fact that in the parliamentary history it is stated that this distance is fair and proportional. The claims based on Article 26 ICCPR and Article 14 ECHR were also rejected given that the amendment to the 30% ruling has an adequate objective justification. Developments in the Netherlands: Bill on deferral of payment of exit tax due approved by Parliament s Lower House On 4 December 2012, the Lower House of the Netherlands Parliament approved the Bill on the deferral of the payment of exit tax due. This Bill regarding the implementation of the CJ s ruling in the case National Grid Indus (C-371/10) is currently pending before the Upper House and if approved will become effective with retroactive effect from 29 November In National Grid Indus, the CJ ruled that taxation of unrealized capital gains at the time when an entity transfers its place of effective management to another Member State is in itself not precluded by the freedom of establishment even though future value fluctuations are not taken into account in the exit State (see EU Tax Alert edition no. 99, December 2011). However, instead of the immediate payment of the exit tax due, such entity should have a possibility to opt for a deferral of payment under the condition of providing security until actual realization of the capital gains. On 14 May 2012, the Bill on the deferral of payment of the exit tax due, which now appears to be in line with EU law, was submitted to Parliament and has now been approved by the Lower House. It is likely that approval by the Upper House where the Bill is currently pending will follow. It will enter into force when published in the Government Gazette, and will have retroactive effect to 29 November Compared to the Decree by the Netherlands State Secretary of Finance issued earlier (see EU Tax Alert edition no. 102, February 2012) the scope of the deferral has been broadened. A deferral is not only available in the case of a transfer of the effective place of management but also in the case of business restructurings which effectively wind up all Netherlands activities. The Bill applies also to businesses of individuals other than substantial shareholdings or portfolio investments. Instead of immediate payment, the proposed Bill provides a taxpayer the option to request an unlimited deferral at the time of filing the corporate income tax return. Sufficient securities must be provided to the tax authorities. To the extent that securities are no longer provided, the deferral will be terminated and the exit tax will become immediately due. Furthermore, the deferral discontinues to the extent a capital gain would be recognized under Netherlands law. To monitor this condition, the taxpayer is obliged to file annually an unofficial corporate income tax return. The deferral will also be cancelled if the former taxpayer is no longer a resident of an EU or an EEA country. During the deferral period, statutory interest will be charged. As an alternative, the taxpayer can opt for a ten-year periodic payment of exit tax due. The same events for cancellation will apply as those for unlimited deferral as well as the conditions are the same, except for the filing obligation. As a result, the administrative burden of this alternative is considerably less. Proceedings of the Netherlands Lower House make clear that the State Secretary expects that the infringement procedure started by the Commission against the Netherlands on this matter (see EU Tax Alert edition no. 86, December 2010) will not be terminated until the amended legislation has been adopted. At the request of the Netherlands Parliament, the State Secretary will suggest during the hearing of the infringement case before the CJ a ten or twelve year period of deferral as an alternative to the collection of the tax at the moment of realization. VAT CJ rules that sale of goods under a customs suspension arrangement is in principle VAT taxable (Profitube) On 8 November 2012, the CJ delivered its judgment in the case Profitube (C-165/11). 14

15 Profitube, a company established in Slovakia, imported semi-finished steel products from the Ukraine into Slovakia. The goods were first placed under a customs warehousing arrangement, and subsequently under an inward processing arrangement in order to be processed into structural steel. Profitube sold the goods to another Slovakian company. The goods stayed in the customs warehouse and were once again placed under the customs warehousing arrangement. The Slovakian tax authorities considered that the sale concerned a normal supply of goods subject to VAT, and therefore requested payment of that VAT. Profitube claimed, on the other hand, that due to the suspension arrangements, the goods in question could not yet be regarded as Community goods under Customs Law, and that the supply was therefore outside the scope of EU VAT. In the following proceedings, the Supreme Court of Slovakia decided to refer preliminary questions to the CJ. The CJ ruled that the customs warehouse is located in Slovakia and that the sale of the goods in such a customs warehouse is therefore, in principle, subject to VAT. According to the CJ, this is only different if the Member State concerned has made use of the facility of Article 16(1) of the Sixth EU VAT Directive to exempt such sales from VAT, which is for the national court to verify. CJ rules that Member States may apply an alternative method than the turnover method for calculating the deductible proportion (BLC Baumarkt) On 8 November 2012, the CJ delivered its judgement in the case BLC Baumarkt (C-511/10). BLC Baumarkt constructed a residential and commercial building, which it leased subject to VAT as far as the commercial premises were concerned and exempt from VAT as far as the apartments were concerned. In its VAT return, BLC Baumarkt deducted VAT based on a deductible proportion (pro rata), which was calculated on the basis of the turnover from the commercial letting and from the turnover from the letting of the apartments ( the turnover method ). The tax authorities claimed, however, that the pro rata had to be determined on the basis of the respective surface areas of the commercial premises and the apartments ( the surface area method ). The Federal Finance Court in Germany was not sure whether Member States were allowed to prescribe primarily an apportionment criterion other than the turnover method for a mixed-use building, and decided to refer preliminary questions to the CJ. According to the CJ, Article 17(5) of the Sixth EU VAT Directive does allow Member States to apply a different method than the turnover method for calculating the deductible amount of input VAT for a given operation, such as the construction of a mixed-use building, on the condition that the method used guarantees a more precise determination of the deductible proportion. CJ rules on inclusion of ground already owned for calculation of VAT on deemed supply (Gemeente Vlaardingen) On 8 November 2012, the CJ delivered its judgment in the case Gemeente Vlaardingen (C-299/11). A Netherlands Municipality, Gemeente Vlaardingen, owned sports complexes including a number of playing fields. It rented out those fields to sports associations exempt from VAT. In 2003, Gemeente Vlaardingen instructed contractors to replace grass pitches with korfball pitches and football pitches with an artificial grass structure, and with handball pitches with an asphalt structure. After that, the pitches were rented out again to the same sport associations. The Netherlands tax authorities regarded the renting out of the pitches as the use for business purposes of goods produced to order within in the meaning of Article 5(7) of the Sixth EU VAT Directive. On the basis of the Netherlands implementation of that provision, the value of the ground that Gemeente Vlaardingen already owned (the old playing fields) had to be included in order to calculate the amount of VAT due on this deemed supply. The Netherlands Supreme Court had doubts, however, whether it was in line with EU VAT law to include the value of the ground already owned and decided to refer preliminary questions to the CJ. 15

16 In a situation such as in the case at hand, where a taxable person has had a third party transform sports pitches which he already owned for the purposes of an economic activity exempt from VAT, the CJ ruled that Article 5(7) of the Sixth EU VAT Directive in principle allows Member States to calculate the VAT due on the basis of the aggregate of the transformation costs and the value of the ground on which the pitches lie. However, according to the CJ, this only applies insofar as the taxable person has not already paid VAT on the ground and provided that the pitches are not covered by the exemption provided for in Article 13(B)(h) of the Sixth EU VAT Directive. CJ clarifies the type of conditions to which the exemption for out-patient care services may be subject (Ines Zimmermann) On 15 November 2012, the CJ delivered its judgment in the case Ines Zimmermann (C-174/11). Ms Zimmermann is a registered nurse who had previously worked at a welfare centre as a staff nurse. She started working on a freelance basis and registered an out-patient care service. Ms Zimmermann was authorised by the health insurance schemes for home nursing services. In her VAT returns, Ms Zimmermann declared her services as exempt from VAT. The German Finanzamt partly denied the VAT exemption, however, on the grounds that Ms Zimmermann together with her staff had treated a total of 76 people in 1993, 52 of whom (68%) were private patients. According to a national provision, the VAT exemption only applied if the costs were borne in at least two-thirds of the cases in full or mainly by the statutory social security or social welfare authorities based on the circumstances of the preceding calendar year. Ms Zimmermann did not agree with the part denial of the VAT exemption because she rendered the same services as the welfare centres whose services were completely VAT exempt. Moreover, Ms Zimmermann argued that her business had been recognized for the purposes of social security law as a charitable organization. In the following proceedings, the case ended up before the Federal Finance Court, which decided to refer preliminary questions to the CJ. The referring court wanted to find out whether Article 13A(1) (g) and Article 13A(2)(a) of the Sixth EU VAT Directive construed in the light of the principle of fiscal neutrality allow Member States to make the VAT exemption for out-patient services supplied by commercial service providers subject to a condition that requires that in at least two-thirds of the cases the costs relating to those treatments must, during the preceding calendar year, have been borne in full or partly by the statutory social security or social welfare authorities, in particular where that condition does not apply to all providers of the type of service mentioned. According to the CJ, Member States in principle have a margin of discretion to specify the conditions and procedures in respect to the application of the VAT exemption. In this regard, the two-thirds threshold as such is, according to the CJ, allowed for meeting the need to recognize certain organizations as charitable in order to apply that provision. However, the CJ also ruled that national legislation may not lay down materially different conditions for profit-making entities, on the one hand, and non-profit making legal persons on the other. Such distinction would be contrary to the principle of fiscal neutrality, as the same services would be treated differently. As a consequence, the CJ ruled that Article 13A(1)(g) of the Sixth EU VAT Directive interpreted in the light of the principle of fiscal neutrality, precludes a threshold such as the two thirds threshold in so far as, in relation to supplies of goods and services which are essentially the same, that threshold is applied for recognition as charitable for the purposes of that provision to some taxable persons governed by private law but not to others. CJ rules that letting of houseboat and adjacent land constitutes a single VAT exempt supply of immovable property (Susanne Leichenich) Mrs. Leichenich concluded an agreement with the German State for the occupation of a parcel of land situated on the left bank of the Rhine, as well as an area of water adjacent to that land, for the purposes 16

17 of operating a houseboat with a landing stage as a restaurant. The houseboat had been moored in place for many years, was immobilized by ropes, chains and anchors, had no engine or system of propulsion, was connected to the water and electricity networks and had an address, a telephone line and a septic tank. The houseboat, landing stage, and adjoining area were let to a company, which used the boat exclusively as a restaurant and later as a discotheque. Mrs. Leichenich did not charge any VAT on the rent, because her tax advisers considered that it concerned a VAT exempt lease of immovable property in accordance with Article 13B(b) of the Sixth EU VAT Directive. The German tax authorities took the view, however, that VAT should have been charged on the letting of the houseboat, because it concerned movable property. Mrs. Leichenich brought a civil action against the tax advisors. In the following proceedings, the Higher Regional Court observed that the contract was not limited to the letting of the houseboat and landing stage, but also included the area of water and the adjoining plot of land. Moreover, the court considered that the use of the houseboat and landing stage was inextricably linked to the occupation of the area of water and adjoining river bank. Based on the contract, the boat could also not be moved or used for other purposes. The Higher Regional Court, therefore, decided to refer preliminary questions to the CJ to find out whether the letting could be regarded as a single supply for VAT purposes, which would fall under the VAT exemption for the letting of immovable property within the meaning of Article 13B(b) of the Sixth EU VAT Directive. On 15 November 2012, the CJ delivered its judgment in this case (C-532/11). Taking into account the elements that link the houseboat to the site and the fact that the contract allocated the houseboat exclusively and permanently to the operation on that site, the CJ ruled that the whole (constituted by the houseboat and the elements which compose the site where it is moored) must be regarded as immovable property for the purposes of applying the VAT exemption of Article 13B(b) of the Sixth EU VAT Directive. Moreover, the CJ ruled that this concerned a single supply. Finally, based on the factual circumstances, a houseboat such as the one let by Mrs. Leichenich is, according to the CJ, not considered a vehicle within the meaning of Article 13B(b) of the Sixth EU VAT Directive. Advocate General opines on scope of exemption for management of special investment funds (GfKb) On 8 November 2012, Advocate General Cruz Villalón delivered his Opinion in the case GfKb (C-275/11). Gesellschaft für Börsenkommunikation mbh ( GfKb ) is a German company that provides information and advice relating to the stock market and advice and marketing relating to financial assets. It rendered services to an investment fund company. In particular, GfBk advised the investment fund company on the management of the fund, constantly monitored the fund and made recommendations for the purchase or sale of assets. Moreover, GfBk was required to pay heed to risk diversification, statutory investment restrictions and investment conditions. For these services, GfBk was paid a remuneration calculated as a percentage of the value of the special investment fund. The German tax authorities took the position that the services rendered by GfBk did not constitute the management of special investment funds within the meaning of Article 13(B)(d)(6) of the Sixth EU VAT Directive. GfBk did not agree and went to court. Eventually the case ended up before the Federal Finance Court which decided to refer preliminary questions to the CJ. According to the Advocate General, advisory and information services relating to the management of a special investment fund as well as the purchase and sale of assets, constitute an activity of management specific and distinct in nature that is covered by the exemption of Article 13(B)(d)(6) of the Sixth EU VAT Directive, provided that the service is found to be autonomous and continuous in respect of the activities actually performed by the recipient of the service. The Advocate General Opined that this conclusion is not contrary to the principle of fiscal neutrality. 17

18 Commission requests France and Luxemburg to amend their VAT rates on e-books On 24 October 2012, the Commission asked France and Luxemburg to amend their VAT rates on electronic books (e-books). The Commission considers that France and Luxembourg have applied a reduced VAT rate on e-books since 1 January 2012, which it considers to be incompatible with the VAT Directive, as e-books constitute electronically supplied services for which the reduced VAT rate does not apply. According to the Commission, it creates a serious distortion to the disadvantage of operators in 25 other Member States of the EU, due to the fact that e-books can easily be purchased in a Member State other than that in which the consumer resides. The Commission, therefore, has issued reasoned opinions to the two Member States. France and Luxembourg have one month to bring their legislation in compliance with EU law, otherwise the Commission may refer the matter to the CJ. Finally, the Commission has indicated that it is aware of the different treatment being applied to e-books and printed books, and notes the importance of e-books. Therefore, it has opened a debate with the Member States and should put forward proposals on this matter before the end of Commission requests Spain to levy VAT on certain notary services On 24 October 2012, the Commission requested Spain to levy VAT on services supplied by notaries in connection with financial transactions. Currently, Spain applies an exemption to those services which is not allowed by EU VAT rules. According to the Commission, the services rendered by notaries are clearly distinct from the financial transactions and are not financial in nature. Therefore, the notary services cannot benefit from the exemption for financial services. Spain is requested to change its legislation within two months to bring it in line with EU law. Failing this, the Commission may refer the matter to the CJ. Commission report on supplies on board of ships, aircraft, trains and buses On 22 October 2012, the Commission published a report on the place of taxation of the supply of goods and services, including restaurant services, for passengers on board ships, aircraft, trains or buses. One of the main problems identified by the Commission is that the respective rules are applied differently by the Member States and that some rules are not entirely respected or are understood differently, which results in an increase in administrative burdens for business. The Commission will assess the situation further and has invited the Council to express its views on the content of the report. Proposal for derogating measure for Bulgaria and Romania Bulgaria and Romania have requested, in derogation from Article 5 of the EU VAT Directive, to be authorised to apply derogating measures as regards the VAT rules on territoriality for the maintenance and repair of the bridge over the river Danube between Vidin (Bulgaria) and Calafat (Romania) and the charging of toll for the crossing. On 23 October 2012, the Commission published a proposal for a Council Decision that provides for such authorization. Customs Duties, Excises and other Indirect Taxes CJ rules on the burden of proof for certificates of origin (Lagura Vermögensverwaltung GmbH) On 8 November 2012, the CJ delivered its judgement in case Lagura Vermögensverwaltung GmbH (C-438/11). The case concerns the post clearance of import duties in a situation where it is not possible to verify the accuracy of certificates of origin Form A. 18

19 Lagura imported shoes into the European Union in Between the months of February and September of that year, Lagura made a number of customs declarations for the purposes of the release of the goods for free circulation within the European Union. By way of documents attesting to the origin of the goods, certificates of origin Form A were attached to the customs declarations, showing that the goods came from Macao. On the basis of those documents, the duty charged by the German Main Customs Office on the shoe imports was applied, on each occasion, only at the preferential rate of 3.5%. After receiving information according to which certain goods originating in China had been wrongly declared as coming from Macao in order to avoid payment of a non-preferential import duty, the Main Customs Office arranged for an application to be made to the competent Macao authorities for subsequent verification of the certificates in accordance with Article 94 of Regulation No 2454/93, as amended by Regulation No 1602/2000. In the course of that verification, the Macao authorities confirmed that they had issued the certificates of origin for the goods in question but they were unable to verify the accuracy of the content of those certificates, as the companies who provided the information as exporters had ceased production and therefore, had been closed down. Nevertheless, the Macao authorities did not invalidate the certificates of origin. As the subsequent verification had not confirmed the origin of the goods, the Main Customs Office held that they were of unknown origin. Accordingly, by three import duty notices respectively dated 21, 22 and 25 August 2008, the Main Customs Office claimed, on the basis of Article 220(1) of the Community Customs Code, recovery of the difference between the customs duties calculated on the basis of the preferential rate of duty (3.5%) and those calculated on the basis of the normal rate of duty (7%). After unsuccessfully challenging that post-clearance recovery of import duties, Lagura brought proceedings before the Finance Court of Hamburg, the referring court, in which it invoked, inter alia, the principle of the protection of legitimate expectations, in accordance with Article 220(2)(b) of the Customs Code. The Finance Court of Hamburg is uncertain as to which party must bear the burden of proving that the certificate of origin was based on a correct or incorrect account of the facts by the exporter. In that regard, it points out that, in Case C-293/04 Beemsterboer Coldstore Services, the Court of Justice had ruled that the burden of proving that the certificate issued by the authorities of the non-member country was based on a correct account of the facts lies with the person liable for the duty, notwithstanding generally accepted rules on the allocation of the burden of proof according to which that burden rests with the customs authorities which wish to rely on the third subparagraph of Article 220(2) (b) of the Customs Code. Referring to paragraph 43 of the judgment in Beemsterboer Coldstore Services, according to which the European Union cannot be made to bear the adverse consequences of the wrongful acts of the suppliers of importers, the referring court asks whether the burden of proof must perhaps be borne by the person liable for payment only in cases where the exporter has done something wrong. In those circumstances, the Finance Court of Hamburg decided to stay the proceedings and to refer a question to the CJ for a preliminary ruling. The CJ ruled as follows: Article 220(2)(b) of Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code, as amended by Regulation (EC) No 2700/2000 of the European Parliament and of the Council of 16 November 2000, must be interpreted as meaning that if, owing to the fact that the exporter has ceased production, the competent authorities of the non-member country are unable, through a subsequent verification, to determine whether the certificate of origin Form A that they issued is based on a correct account of the facts by the exporter, the burden of proving that the certificate was based on a correct account of the facts by the exporter rests with the person liable for payment. 19

20 CJ rules on the CN classification of set-top-boxes (Digitalnet OOD, Tsifovra kompania OOD and M SAT Cable AD) On 22 November 2012, the CJ delivered its judgement in the joined cases Digitalnet OOD, Tsifovra kompania OOD and M SAT Cable AD (C-320/11, C-330/11, C-382/11 and C-383/11). The case concerns the classification in the Combined Nomenclature of apparatus capable of receiving television signals and incorporating a modem for gaining access to the internet and having a function of interactive information exchange (set-top boxes). Digitalnet (Cases C-320/11 and C-383/11), Tsifrova (Case C-330/11) and M SAT CABLE (Case C-382/11) are companies whose principal activity is the provision of access to digital television and to the internet. The goods at issue in the main proceedings are identical in the four cases. They are set-top boxes with a communication function ( set-top boxes ). Those settop boxes were manufactured in Korea and imported into Bulgaria between 21 November 2008 and 22 March 2010 under a variety of trade names by those companies. The set-top boxes were declared as classified under CN tariff subheading , that is to say, with exemption from customs duties. Following the communication of information by the European Anti-Fraud Office (OLAF), the customs authorities carried out an inspection and took the view that the set-top boxes were not equipped with an integrated modem and that they ought to have been classified under CN subheading Consequently, customs duty of 14% ought to have been collected. The customs authorities adopted administrative acts making the three companies liable for payment of customs duties. The applicants in the main proceedings have challenged the validity of those administrative acts before the Varna Administrative Court, bringing four separate sets of proceedings, two of which concern Digitalnet. According to the referring court, the customs authorities take the view that the set-top boxes consist of digital cable receivers with a microprocessor and a video tuner. They have the following interfaces: [SKART], Ethernet and RS-232 audio and video output. The items of equipment do not contain integrated modems allowing access to the internet. In accordance with the Explanatory Notes of 7 May 2008, due to the lack of incorporated modems, the set-top boxes could be classified, not under subheading , but under CN subheading Two expert reports were ordered for the court proceedings. According to the first report, the set-top boxes are not equipped with a modem. Internet access is gained via the TCP/IP protocol. It is possible to run internet applications in an interactive information exchange mode and to receive television signals. By contrast, it is apparent from the second report that set-top boxes are items of equipment with a microprocessor-based device with integrated modem software, which enable an interactive information exchange to be effected and are capable of receiving television signals. In Cases C-382/11 and C-383/11, according to the referring court, the applicants in the main proceedings claimed that the customs authorities had classified the set-top boxes without physically checking the goods at issue. In those circumstances the Varna Administrative Court decided to stay the proceedings in the four cases and referred questions to the CJ for a preliminary ruling, The CJ ruled as follows on those questions: 1 The Combined Nomenclature set out in Annex I to Council Regulation (EEC) No 2658/87 of 23 July 1987 on the tariff and statistical nomenclature and on the Common Customs Tariff, as amended, respectively, by Commission Regulation (EC) No 1214/2007 of 20 September 2007, by Commission Regulation (EC) No 1031/2008 of 19 September 2008, and by Commission Regulation (EC) No 948/2009 of 30 September 2009, must be interpreted as meaning that, for the purposes of classification of goods under subheading , a modem for gaining access to the internet is 20