Last Updated: 8 July 1999
Article by Magnus Brorsson

By Peter Utterström, Tax Partner

One of the main tasks of the European Commission has been to harmonise member countries´ internal legislation. This is primarily achieved by directives and recommendations issued by the Commission, which become local law in the member countries. The focus from the European Union has so far been in areas concerning free trade within the Union. Direct taxation has been almost left alone by the Commission, instead, indirect taxation such as excise taxes and duties etc., has been given most attention. Only areas that more directly concern free trade between countries (such as distribution of dividends, corporate group restructurings and the like) have been subject to harmonisation through directives.

Thus, so far direct taxes have been more affected only as a consequence of EU policies not mainly concerned with them. However, with increasing frequency, other issues involving direct taxation are becoming apparent - some of which are discussed here. It is true that they all revolve around cross-border issues, and are all based on the "discrimination rule" of the Rome Treaty. Still, it is clear that the local governments have been taken by surprise and that some countries or their politicians are less willing to accept that membership in the European Union also means that fiscal policies are directly affected to the extent shown by case law.

A few of a rapidly growing number of cases ruled by the European Court of Justice (ECJ) which reflect this issue are discussed below:

The first example relates to a broad subject - taxation of dividends. To avoid or reduce the double taxation on dividends some European countries - Denmark, Finland, France, Germany and England - apply the imputation system when taxing dividend distributions. This means that the shareholder may claim a credit against his personal tax charged on the dividend received for a part of the tax paid by the distributing company. However, the credit is only available when the shareholder and the distributing company are residents in the same company. The only exception to this general rule is where a tax treaty provides otherwise in which case a non-resident shareholder upon application may get a refund (of a part) of the tax paid by the distributing company. As a result, non-resident shareholders are effectively discriminated as they may not or can not take the full benefit of the imputation system. There are today two cases in process, one involving France and the other involving Germany. The former concerns two non-resident parent companies, Hoechst (resident in Germany) and Pirelli (resident in Italy) with subsidiaries in France. These two parent companies are both discriminated as compared to shareholders resident in France on dividends paid by their respective French subsidiary. Generally, the same issue is tested in the latter case where a German subsidiary of a Dutch parent, Denkavit, is subject to the same problem.

The second example deals with stamp duty on real estate in Holland. In Holland transfers of real estate within a corporate group is exempt from stamp duty. However, the Dutch authorities claimed that this should be the case only when the entities involved are all based in Holland. The case concerned the German company Halliburton GmbH and Halliburton B.V., the Netherlands, both subsidiaries of Halliburton Inc., U.S.. As a part of a corporate reorganisation the Dutch branch (including real estate) of Halliburton GmbH was transferred to Halliburton B.V.. The Dutch authorities charged stamp duty on the transfer. Halliburton claimed that this was discrimination and ultimately the ECJ ruled in favour of Halliburton B.V.

Another case (Schumacker) relates to a Belgian who worked in Germany but maintained his residency in Belgium. This meant that he did not qualify for certain tax exemptions available to married couples resident in Germany, and thus he was subject to a higher German income tax than if he had resided in Germany with his family. The ECJ deemed this unacceptable.

The third example – maybe of particular interest – is Leur-Bloem. The case concerned a merger by way of exchange of shares by the sole (Dutch) shareholder of two Dutch companies to a new, also Dutch, holding company. The purpose of the merger was to form a fiscal unity between the companies. Unexpectedly, the Dutch tax authorities ruled that the merger was not tax exempt, and thus, the Dutch shareholder would be charged Dutch tax on the transaction. The ECJ ruled against this.The case is interesting not only for the tax lawyers but also from the aspect that the ECJ found jurisdiction in a case which only concerned national law – in this case Dutch tax law as applied to Dutch residents.

The fourth and final example is the most recent ruling by the ECJ. In April 1998 the court ruled the Swedish tax law incompatible with the rule of free movement of services under the Rome Treaty. The law in question, which was in effect between 1991 and 1996, lead to a 15 % tax charge on the gross value of certain insurance fees paid by a Swedish resident to a non-Swedish insurance company. If the Swedish payor could prove that the foreign insurance company was taxed in a manner and at a rate similar to a Swedish company, the level of the tax could be reduced to minimum 7.5 %. This is clearly a discrimination of foreign entities. The British subsidiary of the Swedish insurance company Skandia, Skandia Life, took the matter to the ECJ which ruled in favour of Skandia Life.

The length of this article does not permit more examples, but it is worth mentioning that there are today a dozen cases involving direct taxation and discriminatory rules of non-residents at the ECJ. The trend seems clear and, therefore, we are likely to see more cases where local legislation will be deemed incompatible with European law and practice.

Based on the currently known cases and their outcome, we know that a number of Swedish rules are in conflict with the Rome Treaty. These ranges from the flat rate of income tax charged on non-residents working temporarily in Sweden to certain tax rules on group restructurings and intercompany sales of shares. It is clear that the Swedish Government will have to monitor these issues more closely. Other Governments will have to do likewise, as this is likely to be a pan-European problem.

If a problem, it is likely to be compounded by the realisation on the part of the taxpayers that it will be relatively easy to move within the Union. The next generation of Europeans will recognise this fact – they are used to move around and are far more flexible than the older generations. EMU and the euro is likely to make it far easier to compare not only the price of goods and services, but also the "cost" of government services. This alone is likely to eventually force the governments to harmonise their systems and the tax rates.

The title of this article was intended to be provocative! Nevertheless, the trend seems clear and in the long-term it seems inevitable that there will be a harmonisation of all aspects of taxation within the European Union – maybe to a point where we as Europeans may see a benefit of a federal tax law.

For further information, please contact Delphi & Co.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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