© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
A8. Treaty principles
GENERAL
- Cannot rely on freedoms in cases of fraud or abuse
"[122] It must be stated at the outset that these questions are based on the premiss that the inapplicability of that system of exemption arises from the finding that there is fraud or abuse, within the meaning of Article 1(2) of Directive 90/435. However, in such a situation, a company resident in a Member State cannot, in the light of the case-law recalled in paragraph 70 above, claim the benefit of the freedoms enshrined in the FEU Treaty in order to call into question the national legislation governing the taxation of dividends paid to a company resident in another Member State." (T Danmark C-116/16)
FREE MOVEMENT OF GOODS
- Traders should not be in a less favourable position than before the abolition of frontier checks
"[62] Secondly, it is also important to ensure, as the Commission correctly submits, that the position of economic operators should not be less favourable than it was prior to the abolition of frontier checks between the Member States, because such a result would run counter to the purposes of the internal market which is intended to facilitate trade between them." (Teleos C-409/04)
- Requirements of proof of movement must comply with free movement of goods
"[63] Since it is no longer possible for taxable persons to rely on documents issued by the customs authorities, evidence of intra-Community supplies and acquisitions must be provided by other means. Whilst it is true that the regime governing intra-Community trade has become more open to fraud, the fact remains that the requirements for proof established by the Member States must comply with the fundamental freedoms established by the EC Treaty, such as, in particular, the free movement of goods." (Teleos C-409/04)
- No obligations giving rise to formalities connected with the crossing of frontiers
"[64] In that regard, it is also important to point out that, under Article 22(8) of the Sixth Directive, the Member States may impose the obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers." (Teleos C-409/04)
FREEDOM OF SERVICES
- Service defined broadly: anything for remuneration
"[54] In the first place, the Court notes that, under Article 57 TFEU, activities are to be classified as ‘services’ where they are normally provided for remuneration, in so far as they are not governed by the provisions relating to freedom of movement for goods, capital and persons (see, to that effect, judgment of 9 July 2020, RL (Directive combating late payment), C‑199/19, EU:C:2020:548, paragraph 31).
[55] If follows that the FEU Treaty defines the concept of ‘service’ broadly, so as to include any supply which is not covered by the other fundamental freedoms, in order to ensure that all economic activity falls within the scope of the fundamental freedoms (see, to that effect, judgment of 9 July 2020, RL (Directive combating late payment), C‑199/19, EU:C:2020:548, paragraph 32 and the case-law cited)." (Cartrans Preda C-461/21)
- Both provider and recipient of services may have rights re freedom
"[67] However, the Court has held that the provider and the recipient of the services are two distinct legal entities, each with its own interests and each entitled to claim the benefit of the freedom to provide services if their rights are infringed (judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraph 27)." (Cartrans Preda C-461/21)
FREE MOVEMENT OF WORKERS
- Characterised by subordination and the payment of remuneration for services rendered
"[32] It follows that legislation which is intended to tax an employee who provides services for and under the direction of an employer in return for remuneration, and who is therefore engaged in an employment relationship which is characterised by subordination and the payment of remuneration in return for services rendered, such as – subject to the findings of the referring court – the legislation at issue in the main proceedings, falls within the scope of those provisions of the Treaty which relate to freedom of movement for workers." (Petersen C-544/11)
- Effects on the establishment of employers as the unavoidable consequence of restriction on movement of workers: free movement of workers applies
"[33] Assuming that such legislation has restrictive effects on the freedom of employers established in another Member State to provide services, such as those evoked by the referring court or by the applicants in the main proceedings, which result in preferential treatment for employers established in Germany over those established in another Member State concerning the recruitment of qualified staff who can be seconded to development aid projects in another State, such effects would be the unavoidable consequence of any restriction on freedom of movement for workers and thus do not justify an independent examination in the light of Article 56 TFEU." (Petersen C-544/11)
- Freedom both ensures foreign workers are treated the same as nationals and prevent state obstructing nationals from working in another Member State
"[36] Even if, according to their wording, the rules on freedom of movement for workers are intended, in particular, to secure the benefit of national treatment in the host State, they also preclude the State of origin from obstructing the freedom of one of its nationals to accept and pursue employment in another Member State (see, to that effect, Terhoeve, paragraphs 27 to 29, and de Groot, paragraph 79).
[37] By analogy, the rules on freedom of movement for workers also preclude the Member State of residence of a taxable European Union national from obstructing the freedom of that national to accept and pursue employment in another Member State, even in a situation where that Member State is that resident’s Member State of nationality." (Petersen C-544/11)
- Applies where employee works in a third state for employer located in another Member State
"[39] In that regard, it must be stated that the Court has already had occasion to point out that, where a case concerns a national of a Member State who is an employee of a company established in another Member State, in principle such a case comes within the scope of the provisions of European Union law on the free movement of workers (see, to that effect, Case 237/83 Prodest [1984] ECR 3153, paragraph 5).
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[41] Provisions of European Union law may apply to professional activities pursued outside the territory of the European Union as long as the employment relationship retains a sufficiently close link with the European Union (see, to that effect, inter alia, Prodest, cited above, paragraph 6; Case 9/88 Lopes da Veiga [1989] ECR 2989, paragraph 15; and Case C-60/93 Aldewereld [1994] ECR I-2991, paragraph 14). That principle must be deemed to extend also to cases in which there is a sufficiently close link between the employment relationship, on the one hand, and the law of a Member State and thus the relevant rules of European Union law, on the other (Case C-214/94 Boukhalfa [1996] ECR I-2253, paragraph 15)." (Petersen C-544/11)
FREEDOM OF ESTABLISHMENT
- Right of EU nationals to pursue self-employment and set up undertakings in other Member States
"[36] Freedom of establishment, which Article 43 EC grants to Community nationals and which includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, under the conditions laid down for its own nationals by the law of the Member State where such establishment is effected, entails, in accordance with Article 48 EC, for companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Community, the right to exercise their activity in the Member State concerned through a subsidiary, branch or agency (see, inter alia, Case C-307/97 Saint‑Gobain ZN [1999] ECR I-6161, paragraph 35; Marks & Spencer, paragraph 30; and Cadbury Schweppes and Cadbury Schweppes Overseas, paragraph 41).
[37] In the case of companies, their registered office for the purposes of Article 48 EC serves, in the same way as nationality in the case of individuals, as the connecting factor with the legal system of a State..." (Test Claimants in Thin Cap C-524/04)
Which freedom
- Legislation targeted only at situations within groups of companies tested only against freedom of establishment
"[33] Legislation such as the legislation at issue in the main proceedings, which is targeted only at relations within a group of companies, primarily affects freedom of establishment and should, accordingly, be considered in the light of Article 43 EC (see, to that effect, Cadbury Schweppes and Cadbury Schweppes Overseas, paragraph 32, and Case C-446/04 Test Claimants in the FII Group Litigation [2006] ECR I‑0000, paragraph 118).
[34] If, as submitted by the claimants in the main proceedings, it were to be accepted that that legislation has restrictive effects on the freedom to provide services and the free movement of capital, such effects must be seen as an unavoidable consequence of any restriction on freedom of establishment and do not justify an independent examination of that legislation in the light of Articles 49 EC and 56 EC (see, to that effect, Case C-36/02 Omega [2004] ECR I‑9609, paragraph 27; Cadbury Schweppes and Cadbury Schweppes Overseas, paragraph 33; and Case C-452/04 Fidium Finanz [2006] ECR I-0000, paragraphs 48 and 49).
[35] The questions referred should therefore be answered in the light of Article 43 EC alone." (Test Claimants in Thin Cap C-524/04)
- Establishment has no application to a situation where there is no controlling shareholding
"[98] Article 43 EC has accordingly no bearing on the application of national legislation such as the legislation at issue in the main proceedings to a situation in which a resident company is granted a loan by a company which is resident in another Member State and which does not itself have a controlling shareholding in the borrowing company and where each of those companies is directly or indirectly controlled by a common parent company which is resident, for its part, in a non‑member country." (Test Claimants in Thin Cap C-524/04)
PROHIBITION ON RESTRICTIONS
- Direct tax competence must be exercised consistently with EU law
"[40] According to settled case-law, although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with Community law (Case C-311/97 Royal Bank of Scotland [1999] ECR I-2651, paragraph 19; Case C-319/02 Manninen [2004] ECR I-7477, paragraph 19; and Case C-446/03 Marks & Spencer [2005] ECR I-10837, paragraph 29)." (Cadbury Schweppes C‑196/04)
"[14] Although direct taxation falls within the competence of the Member States, the latter must none the less exercise that competence consistently with Community law (see, inter alia, Case C-80/94 Wielockx [1995] ECR I‑2493, paragraph 16, and Case C-242/03 Weidert and Paulus [2004] ECR I-0000, paragraph 12)." (Laboratoires Fournier C-39/04)
- Prohibition on national rules making provision of services between Member States more difficult than internal services
"[62] Article 56 TFEU precludes the application of any national rules which have the effect of making the provision of services between Member States more difficult than the provision of services purely within a Member State..." (Cartrans Preda C-461/21)
- No restriction on grounds that person providing service is established in another Member State
"[62] Article 56 TFEU precludes the application of any national rules which have the effect of making the provision of services between Member States more difficult than the provision of services purely within a Member State..." (Cartrans Preda C-461/21)
Restrictions (meaning of)
- Principle of fiscal territoriality permits distinctions based on residence, but not where a service is provided
"[17] The French Government submits, however, that that difference of treatment flows directly from the principle of fiscal territoriality, which the Court expressly recognised in Case C-250/95 Futura Participations and Singer [1997] ECR I‑2471, paragraph 22, and hence cannot be regarded as giving rise to overt or covert discrimination prohibited by the EC Treaty.
[18] In that case, however, the Court was considering the compatibility with the Treaty provisions on the freedom of establishment of national tax rules applying to resident and non-resident undertakings, whereas the main proceedings in the present case involve an assessment of the compatibility with the Treaty of national tax provisions which confer a benefit on companies established in a Member State in return for the provision of services provided on their behalf in that Member State alone. Such provisions are contrary to Article 49 EC because they are, albeit indirectly, based upon the place of establishment of the provider of services and are consequently liable to restrict its cross-border activities." (Laboratoires Fournier C-39/04)
- Restriction includes any measure which prohibits, impedes or renders less attractive the exercise of the freedom
"[62] Restrictions on the freedom to provide services are national measures which prohibit, impede or render less attractive the exercise of that freedom (judgment of 25 July 2018, TTL, C‑553/16, EU:C:2018:604, paragraph 46 and the case-law cited)." (Cartrans Preda C-461/21)
- Sufficient that legislation is capable of restricting the exercise of freedom
"[62] Contrary to what the United Kingdom Government submits, in order for such legislation to be considered to be a restriction on freedom of establishment, it is sufficient that it be capable of restricting the exercise of that freedom in a Member State by companies established in another Member State, and it is not necessary to establish that the legislation in question has actually had the effect of leading some of those companies to refrain from acquiring, creating or maintaining a subsidiary in the first Member State." (Test Claimants in Thin Cap C-524/04)
- Making exercise by national of freedom of establishment in another Member State
"[42] Even though, according to their wording, the provisions of the Treaty concerning freedom of establishment 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 (see, in particular, Case C-264/96 ICI [1998] ECR I-4695, paragraph 21, and Marks & Spencer, paragraph 31)." (Cadbury Schweppes C‑196/04)
- Other potential advantages for non-resident does not mean there is no restriction
"[86] That conclusion is not called into question by the fact that a Danish service provider may, because the withholding at source of tax on gross income is only at a rate of 4% and despite it being impossible to deduct business expenses, pay lower income tax than the income tax paid by a resident service provider who, while able to deduct business expenses, has 16% of his, her or its net income taxed. The Court has repeatedly held that unfavourable tax treatment contrary to a fundamental freedom cannot be regarded as compatible with EU law because of the potential existence of other advantages (judgment of 13 July 2016, Brisal and KBC Finance Ireland, C‑18/15, EU:C:2016:549, paragraph 32 and the case-law cited)." (Cartrans Preda C-461/21)
- Taxation of recipient of gratuitous advantage in domestic situation cannot be likened to taxation, in cross-border situation, of company granting the advantage
"[52] In that connection, it should be noted that the resident company granting an unusual or gratuitous advantage and the recipient company are separate legal persons, both of which have their own individual tax liability. In any event, the tax burden borne by the recipient company in a domestic situation cannot be likened to the taxation, in a cross-border situation, of the company granting the advantage in question.
[53] Even if, in a domestic situation in which the companies concerned are, directly or indirectly, 100% related to each other, the allocation of the tax burden between them may, in some circumstances, have no implications for the purpose of taxation, there is, in any event, still a risk of double taxation in a cross‑border situation. As the Advocate General has rightly observed at points 46 and 47 of her Opinion, in such a situation, the unusual or gratuitous advantages granted by a resident company which are added back to that company’s own profits may give rise to the recipient company being taxed thereon in the Member State in which it is established." (SGI C-311/08)
Restrictions (examples)
- Taxing a resident company on the profits of a subsidiary if the subsidiary is established in a Member State with lower taxation
"[46] As submitted by the applicants in the main proceedings and by Ireland and the Commission of the European Communities, the separate tax treatment under the legislation on CFCs and the resulting disadvantage for resident companies which have a subsidiary subject, in another Member State, to a lower level of taxation are such as to hinder the exercise of freedom of establishment by such companies, dissuading them from establishing, acquiring or maintaining a subsidiary in a Member State in which the latter is subject to such a level of taxation. They therefore constitute a restriction on freedom of establishment within the meaning of Articles 43 EC and 48 EC." (Cadbury Schweppes C‑196/04)
- Different collection mechanisms for residents v. non-residents not a restriction
""[66] While it is true that, as the Romanian Government submitted, in essence, in its written observations with reference to the judgment of 22 December 2008, Truck Center (C‑282/07, EU:C:2008:762), the Court has already accepted the application of different tax collection techniques to those deriving income from capital depending on whether they are resident or non-resident, that difference in treatment relates to situations which are not objectively comparable. As that difference in treatment does not, moreover, necessarily procure an advantage for resident recipients, the Court has ruled that it does not constitute a restriction of the freedom of establishment (judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraph 26 and the case-law cited)." (Cartrans Preda C-461/21)
- Different potential liabilities is a restriction
"[68] It follows that, as the Advocate General observed in point 37 of his Opinion, an obligation to withhold tax at source, such as the one described in paragraph 64 of the present judgment, inasmuch as it entails not only an additional administrative burden but also the risks concerning liability, may render cross-border services less attractive for resident recipients of services than services performed by providers that are also residents. Consequently, such an obligation is liable to deter those recipients from having recourse to non-resident service providers (see, to that effect, judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraphs 28 and 32), and it must be classified as a restriction on the freedom to provide services within the meaning of the case-law referred to in paragraph 63 of the present judgment." (Cartrans Preda C-461/21)
- Different levels of withholding tax is a restriction
"[64] In the present case, it is apparent, in essence, from the explanations provided by the referring court that, where a service is supplied to a Romanian resident by a non-resident provider, Romanian legislation requires the recipient of that service to withhold at source, by way of tax on the income of non-residents, 16% of the gross income paid to that operator. Where that operator is a resident of Denmark, the rate of that withholding tax is, however, reduced to 4% pursuant to the provisions of the double taxation convention. On the other hand, where the same services are supplied by a resident provider, no withholding is to apply.
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[68] Consequently, such an obligation is liable to deter those recipients from having recourse to non-resident service providers (see, to that effect, judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraphs 28 and 32), and it must be classified as a restriction on the freedom to provide services within the meaning of the case-law referred to in paragraph 63 of the present judgment." (Cartrans Preda C-461/21)
- Expense deduction rules different for non-residents is a restriction
"[85] In accordance with the case-law cited in paragraphs 63 of the present judgment, national legislation under which service providers that are resident in a Member State may deduct from the taxable amount of gross income received in return for a supply of services the business expenses connected with that provision, while non-resident service providers do not have the possibility to do so, constitutes a restriction on the freedom to provide services, within the meaning of Article 56 TFEU." (Cartrans Preda C-461/21)
- Exemption for employee income based on residence of employer restricts free movement of workers
"[46] By establishing a difference in treatment for employees’ income in this way, depending on the Member State in which their employer is established, the national legislation at issue in the main proceedings is liable to dissuade those employees from accepting work from an employer established in a Member State which is not the Federal Republic of Germany and thus constitutes a restriction on the free movement of workers, which is in principle forbidden by Article 45 TFEU." (Petersen C-544/11)
JUSTIFICATION
- Less favourable treatment of loans
"[45] It follows that, even prior to 1995 and, in any case, between 1995 and 2004, when interest was paid by a resident company in respect of a loan granted by a related non-resident company, the tax position of the former company was less advantageous than that of a resident borrowing company which had been granted a loan by a related resident company." (Test Claimants in Thin Cap C-524/04)
- Must pursue a legitimate objective and be proportionate
"[69] Such a restriction on the freedom to provide services is warranted only if it pursues a legitimate objective compatible with the FEU Treaty and is justified by overriding reasons in the public interest; if that is the case, it must be suitable for securing the attainment of the objective pursued and must not go beyond what is necessary in order to attain that objective (judgment of 27 October 2022, Instituto do Cinema e do Audiovisual, C‑411/21, EU:C:2022:836, paragraph 24 and the case-law cited)." (Cartrans Preda C-461/21)
"[47] Such a restriction is permissible only if it is justified by overriding reasons of public interest. It is further necessary, in such a case, that its application be appropriate to ensuring the attainment of the objective thus pursued and not go beyond what is necessary to attain it (Case C-250/95 Futura Participations and Singer [1997] ECR I-2471, paragraph 26; Case C-9/02 De Lasteyrie du Saillant [2004] ECR I-2409, paragraph 49; and Marks & Spencer, paragraph 35)." (Cadbury Schweppes C‑196/04)
- For the Member State to demonstrate specifically the existence of a reason relating to the public interest
"[89] In so doing, the Romanian Government does not, however, explain how such considerations may constitute a legitimate objective that is compatible with the FEU Treaty and which responds to overriding reasons in the public interest capable of justifying a restriction such as the one at issue in the present case.
[90] In that regard, it must be borne in mind that it is for a Member State which claims to have a reason justifying a restriction on one of the fundamental freedoms guaranteed by that treaty to demonstrate specifically the existence of a reason relating to the public interest (judgment of 16 December 2021, Prefettura di Massa Carrara, C‑274/20, EU:C:2021:1022, paragraph 38 and the case-law cited)." (Cartrans Preda C-461/21)
- Justifications may be combined (e.g. balanced allocation + preventing avoidance)
"[66] In that context, national legislation which is not specifically designed to exclude from the tax advantage it confers such purely artificial arrangements – devoid of economic reality, created with the aim of escaping the tax normally due on the profits generated by activities carried out on national territory – may nevertheless be regarded as justified by the objective of preventing tax avoidance, taken together with that of preserving the balanced allocation of the power to impose taxes between the Member States (see, to that effect, Oy AA, paragraph 63)." (SGI C-311/08)
Fraud prevention
- Need to prevent fraud can justify restrictions on free movement of goods
"[61] As regards, fourthly, Teleos and Others’ argument that the measures adopted by the United Kingdom authorities interfere with the free movement of goods, first, it is clear from the Court’s case-law that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Joined Cases C‑487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I‑5337, paragraph 76, and Kittel and Recolta Recycling , paragraph 54), which can, in certain circumstances, justify restrictions on the free movement of goods." (Teleos C-409/04)
Fiscal supervision
- Effective fiscal supervision is a potential justification
"[50] In that regard, the Court has already held that the need to guarantee the effectiveness of fiscal supervision constitutes an overriding requirement of general interest capable of justifying a restriction on the exercise of freedom of movement guaranteed by the Treaty (see, inter alia, Case C-101/05 A [2007] ECR I-11531, paragraph 55, and Case C-318/10 SIAT [2012] ECR, paragraph 36)." (Petersen C-544/11)
- Cannot rely on impossibility of seeking co-operation from another Member State to refuse advantage: can request evidence from taxpayer
"[51] However, a Member State cannot rely on the fact that it may be impossible to seek cooperation from another Member State in conducting inquiries or collecting information in order to justify a refusal to grant a tax advantage. There is no reason why the tax authorities concerned should not request from the taxpayer the evidence that they consider they require in order to effect a correct assessment of the taxes and duties concerned and, where appropriate, refuse the exemption applied for if that evidence is not supplied (see Case C-451/05 ELISA [2007] ECR I-8251, paragraph 95).
[52] It cannot be ruled out, as a matter of principle, that the taxpayer may be in a position to provide relevant documentary evidence enabling the tax authorities of the Member State imposing the tax to ascertain, clearly and precisely, whether he satisfies the requirements for receiving the tax advantage in question (see, to that effect, Case C-254/97 Baxter and Others [1999] ECR I-4809, paragraph 20; Case C-39/04 Laboratoires Fournier [2005] ECR I-2057, paragraph 25; ELISA, cited above, paragraph 96; and A, cited above, paragraph 59)." (Petersen C-544/11)
"[25] However, national legislation which absolutely prevents the taxpayer from submitting evidence that expenditure relating to research carried out in other Member States has actually been incurred and satisfies the prescribed requirements cannot be justified in the name of effectiveness of fiscal supervision. The possibility cannot be excluded a priori that the taxpayer is able to provide relevant documentary evidence enabling the tax authorities of the Member State of taxation to ascertain, clearly and precisely, the nature and genuineness of the research expenditure incurred in other Member States (see Baxter and Others, paragraphs 19 and 20)." (Laboratoires Fournier C-39/04)
- In some cases a tax advantage may depend on information from another tax authority
"[55] It is true that the Court has also ruled that, where the legislation of a Member State makes the grant of a tax advantage dependent on the satisfaction of requirements, compliance with which can be verified only by obtaining information from the competent authorities of a third State, it is, in principle, legitimate for that Member State to refuse to grant that advantage if, in particular, because that third State is not under any obligation pursuant to a convention or agreement to provide information, it proves impossible to obtain such information from that State (A, cited above, paragraph 63, and Case C-318/07 Persche [2009] ECR I-359, paragraph 70). The framework for cooperation between the competent authorities of the Member States established by Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation (OJ 1977 L 336, p. 15) and Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799 (OJ 2011 L 64, p. 1) does not exist between those authorities and the competent authorities of a third State where that State has not entered into any undertaking of mutual assistance (Case C-48/11 A [2012] ECR, paragraph 35)." (Petersen C-544/11)
Effective collection of tax
- Effective collection of tax is a justification
"[71] In that regard, the Court notes that, according to its case-law, the need to ensure the effective collection of tax constitutes an overriding reason of public interest capable of justifying a restriction on the freedom to provide services (see, to that effect, judgments of 3 October 2006, FKP Scorpio Konzertproduktionen, C‑290/04, EU:C:2006:630, paragraph 36, and of 13 July 2016, Brisal and KBC Finance Ireland, C‑18/15, EU:C:2016:549, paragraph 39)." (Cartrans Preda C-461/21)
- Withholding tax is legitimate and appropriate means of ensuring sum does not escape taxation
"[72] Thus, the Court has held that the procedure of retention at source and the liability rules supporting it constitute a legitimate and appropriate means of ensuring the tax treatment of the income of a person established outside the State of taxation and ensuring that the income concerned does not escape taxation in the State of residence and the State where the services are provided (judgments of 3 October 2006, FKP Scorpio Konzertproduktionen, C‑290/04, EU:C:2006:630, paragraph 36, and of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraph 39).
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[75] It also follows that the imposition, on the recipient of the supply of services, of an administrative burden and liability as a result of the obligation to withhold at source remuneration paid to the non-resident service provider appears to be specific and necessary in order to ensure the effective collection of tax." (Cartrans Preda C-461/21)
- At least where provider only performs services occasionally in Member State
"[73] The tax treatment of the income of a service provider established outside the State of taxation by means of a procedure where tax is withheld at source and the liability rules serving as a guarantee may, inter alia, prove to be legitimate and appropriate where that provider performs only occasional services in that State and where that provider remains only a short period of time (see, to that effect, judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraph 42)." (Cartrans Preda C-461/21)
- Mutual assistance mechanisms addressing problems collecting tax from taxpayers based in other Member States
"[73] In the third place, the mutual assistance mechanisms existing between the authorities of the Member States are sufficient to enable the Member State in which the dividends are paid to check the accuracy of the evidence put forward by non-resident companies wishing to claim a deferral of taxation of dividends which they have received (see, to that effect, judgment of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraph 68).
[74] In that connection, Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation and taxation of insurance premiums (OJ 1977 L 336, p. 15), as amended by Council Directive 2004/106/EC of 16 November 2004 (OJ 2004 L 359, p. 30), repealed and replaced by Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799 (OJ 2011 L 64, p. 1), allows a Member State to apply to the competent authorities of another Member State for all the information required to allow it to ascertain the correct amount of income tax.
[75] Further, Article 4(1) of Council Directive 2008/55/EC of 26 May 2008 on mutual assistance for the recovery of claims relating to certain levies, duties, taxes and other measures (OJ 2008 L 150, p. 28), repealed and replaced by Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (OJ 2010 L 84, p. 1), provides that ‘at the request of the applicant authority, the requested authority shall provide any information which would be useful to the applicant authority in the recovery of its claim’. That directive therefore allows the Member State in which dividends are paid to obtain, from the Member State of residence, the information necessary to allow it to recover a tax liability which arose when the dividends were distributed.
[76] Thus, Directive 2008/55 provides the authorities of the Member State in which dividends are paid with a framework of cooperation and assistance that allows them actually to recover a tax liability in the Member State of residence (see, to that effect, judgments of 29 November 2011, National Grid Indus, C‑371/10, EU:C:2011:785, paragraph 78, and of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraphs 70 and 71).
[77] Accordingly, if the advantage associated with the deferral of taxation on dividends distributed were also granted to loss-making non-resident companies, that would have the effect of eliminating any restriction on the free movement of capital, but would not thereby impede the achievement of the aim pursued by the national legislation at issue in the main proceedings.
[78] In those circumstances, justification of the national legislation at issue in the main proceedings in the effective collection of tax cannot be accepted." (Sofina C-575/17)
Balanced allocation of power to tax
- Preventing conduct capable of jeopardising right of Member State to tax activities carried on in its territory
"[60] First, as regards the balanced allocation between Member States of the power to tax, it should be recalled that such a justification may be accepted, in particular, where the system in question is designed to prevent conduct capable of jeopardising the right of a Member State to exercise its tax jurisdiction in relation to activities carried out in its territory (see, inter alia, Marks & Spencer, paragraph 46; Case C‑347/04 Rewe Zentralfinanz [2007] ECR I‑2647, paragraph 42; Oy AA, paragraph 54; and Aberdeen Property Fininvest Alpha, paragraph 66).
[61] The Court has recognised that the preservation of the allocation of the power to impose taxes between Member States may make it necessary to apply to the economic activities of companies established in one of those States only the tax rules of that State in respect of both profits and losses (see inter alia, Oy AA, paragraph 54, and Case C‑414/06 Lidl Belgium [2008] ECR I‑3601, paragraph 31).
[62] To give companies the right to elect to have their losses or profits taken into account in the Member State in which they are established or in another Member State could seriously undermine a balanced allocation of the power to impose taxes between the Member States, since the tax base would be increased in one of the States in question, and reduced in the other, by the amount of the losses or profits transferred (see, to that effect, Marks & Spencer, paragraph 46; Oy AA, paragraph 55; and Lidl Belgium, paragraph 32)." (SGI C-311/08)
- Permitting resident company to transfer profits in the form of gratuitous advantages to other territories may well undermine balanced allocation
"[63] In the present case, it must be held that to permit resident companies to transfer their profits in the form of unusual or gratuitous advantages to companies with which they have a relationship of interdependence that are established in other Member States may well undermine the balanced allocation of the power to impose taxes between the Member States. It would be liable to undermine the very system of the allocation of the power to impose taxes between Member States because, according to the choice made by companies having relationships of interdependence, the Member State of the company granting unusual or gratuitous advantages would be forced to renounce its right, in its capacity as the State of residence of that company, to tax its income in favour, possibly, of the Member State in which the recipient company has its establishment (see, to that effect, Oy AA, paragraph 56).
[64] By providing that the resident company is to be taxed in respect of an unusual or gratuitous advantage which it has granted to a company established in another Member State, the legislation at issue in the main proceedings permits the Belgian State to exercise its tax jurisdiction in relation to activities carried out in its territory." (SGI C-311/08)
Coherence of tax system
- Requires a direct link between tax benefit and tax charge
"[68]... However, for an argument based on such a justification to succeed, a direct link must be established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy (see, to that effect, Case C‑484/93 Svensson and Gustavsson [1995] ECR I-3955, paragraph 18; Manninen, paragraph 42; and Case C-471/04 Keller Holding [2006] ECR I-2107, paragraph 40)." (Test Claimants in Thin Cap C-524/04)
"[20] Although it is true that It is true that in Bachmann (paragraph 28) and Case C-300/90 Commission v Belgium [1992] ECR I‑305, paragraph 21, the Court accepted that the need to safeguard the coherence of the tax system could justify a restriction on the exercise of the fundamental freedoms guaranteed by the Treaty. Subsequently, however, it has stated that, in Bachmann and Commission v Belgium, there was a direct link, with respect to the taxpayer subject to income tax, between the deductibility of the insurance contributions from taxable income and the later taxation of the sums paid by the insurers under pension and life assurance contracts, and that link had to be maintained in order to preserve the coherence of the tax system concerned (see, inter alia, Case C-484/93 Svensson and Gustavsson [1995] ECR I‑3955, paragraph 18, and Case C-319/02 Manninen [2004] ECR I-0000, paragraph 42). Where there is no such direct link, the argument based on the need to safeguard the coherence of the tax system cannot be relied upon (see, inter alia, Weidert and Paulus, paragraphs 20 and 21).
[21] In a situation such as that in the main proceedings, there is no such direct link between general corporation tax, on the one hand, and a tax credit for part of the research expenditure incurred by a company, on the other." (Laboratoires Fournier C-39/04)
- Failure to show that disadvantage offset by advantage
"[69] As was stated in paragraphs 55 and 56 of this judgment, even if it were to be accepted that a tax advantage granted in the State in which the lending company is resident might be capable of offsetting the charge to tax arising for the borrowing company from the application of the legislation of the State in which it is resident, the Governments which have submitted observations have not shown that, by virtue of the application of the legislation in force in the United Kingdom, coupled with the DTCs concluded by that Member State, any upward adjustment to the taxable profits of the borrowing company to which the re-characterisation of interest paid to a related non-resident company may give rise is offset by the grant of a tax advantage to the latter company in the State in which it is resident." (Test Claimants in Thin Cap C-524/04)
Abuse
- Need to prevent reduction of tax revenue not by itself a justification
"[52] Rather than seeking to avoid the double taxation of profits arising in the United Kingdom, those provisions reflected the choice made by that Member State to organise its tax system in such a way as to prevent those profits from being untaxed in that State through a system of thin capitalisation of resident subsidiaries by related non-resident companies. As the Advocate General stated at points 55 and 56 of his Opinion, the unilateral nature of the provisions treating certain interest paid to non‑resident companies as a distribution is negated neither by the fact that, in giving effect to such treatment, that Member State did so on the basis of internationally-recognised principles nor even by the fact that, in the case of lending companies that are resident in certain other countries, that State sought to couple the application of its national legislation with DTCs containing clauses designed to prevent or to mitigate the double taxation that might arise from such treatment." (Test Claimants in Thin Cap C-524/04)
"In that respect, it is settled case-law that any advantage resulting from the low taxation to which a subsidiary established in a Member State other than the one in which the parent company was incorporated is subject cannot by itself authorise that Member State to offset that advantage by less favourable tax treatment of the parent company (see, to that effect, Case 270/83 Commission v France [1986] ECR 273, paragraph 21; see also, by analogy, Case C-294/97 Eurowings Luftverkehr [1999] ECR I-7447, paragraph 44, and Case C-422/01 Skandia and Ramstedt [2003] ECR I-6817, paragraph 52). The need to prevent the reduction of tax revenue is not one of the grounds listed in Article 46(1) EC or a matter of overriding general interest which would justify a restriction on a freedom introduced by the Treaty (see, to that effect, Case C-136/00 Danner [2002] ECR I-8147, paragraph 56, and Skandia and Ramstedt, paragraph 53).
- Restriction may be justified where it specifically relates to wholly artificial arrangements aimed at circumventing legislation
"[80] As the Court held in paragraph 37 of its judgment in Lankhorst‑Hohorst, that requirement is not met by national legislation which does not have the specific purpose of preventing wholly artificial arrangements designed to circumvent that legislation, but applies generally to any situation in which the parent company has its seat, for whatever reason, in another Member State." (Test Claimants in Thin Cap C-524/04)
"[51] On the other hand, a national measure restricting freedom of establishment may be justified where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned (see to that effect ICI, paragraph 26; Case C-324/00 Lankhorst-Hohorst [2002] ECR I-11779, paragraph 37; De Lasteyrie du Saillant, paragraph 50; and Marks & Spencer, paragraph 57)."
- Freedom of establishment intended to enable Community national to participate in economic life of another Member State on stable and continuing basis
"[53] ...To that end, freedom of establishment is intended to allow a Community national to participate, on a stable and continuing basis, in the economic life of a Member State other than his State of origin and to profit therefrom (Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 25).
[54] Having regard to that objective of integration in the host Member State, the concept of establishment within the meaning of the Treaty provisions on freedom of establishment involves the actual pursuit of an economic activity through a fixed establishment in that State for an indefinite period (see Case C-221/89 Factortame and Others [1991] ECR I-3905, paragraph 20, and Case C-246/89 Commission v United Kingdom [1991] ECR I-4585, paragraph 21). Consequently, it presupposes actual establishment of the company concerned in the host Member State and the pursuit of genuine economic activity there."(Cadbury Schweppes C‑196/04)
- Apportioning profits of subsidiaries to parent may thwart practices having no purpose other than escaping tax normally due
"[59] By providing for the inclusion of the profits of a CFC subject to very favourable tax regime in the tax base of the resident company, the legislation on CFCs makes it possible to thwart practices which have no purpose other than to escape the tax normally due on the profits generated by activities carried on in national territory. As the French, Finnish and Swedish Governments stated, such legislation is therefore suitable to achieve the objective for which it was adopted." (Cadbury Schweppes C‑196/04)
- Existence of main purpose of reducing tax does not establish a wholly artificial arrangement
"[62] If none of those exceptions applies, the taxation provided for by the CFC legislation may not apply if the establishment and the activities of the CFC satisfy the motive test. That requires, essentially, that the resident company show, first, that the considerable reduction in United Kingdom tax resulting from the transactions routed between that company and the CFC was not the main purpose or one of the main purposes of those transactions and, secondly, that the achievement of a reduction in that tax by a diversion of profits within the meaning of that legislation was not the main reason, or one of the main reasons, for incorporating the CFC.
[63] As stated by the applicants in the main proceedings and by the Belgian Government and the Commission, the fact that none of the exceptions provided for by the legislation on CFCs applies and that the intention to obtain tax relief prompted the incorporation of the CFC and the conclusion of the transactions between the latter and the resident company does not suffice to conclude that there is a wholly artificial arrangement intended solely to escape that tax." (Cadbury Schweppes C‑196/04)
- Genuineness of economic activity must be established by objective factors ascertainable by third parties
"[66] That incorporation must correspond with an actual establishment intended to carry on genuine economic activities in the host Member State, as is apparent from the case-law recalled in paragraphs 52 to 54 of this judgment.
[67] As suggested by the United Kingdom Government and the Commission at the hearing, that finding must be based on objective factors which are ascertainable by third parties with regard, in particular, to the extent to which the CFC physically exists in terms of premises, staff and equipment." (Cadbury Schweppes C‑196/04)
- Evidence to be furnished by resident company
"[82] As the Advocate General stated at point 67 of his Opinion, national legislation which provides for a consideration of objective and verifiable elements in order to determine whether a transaction represents a purely artificial arrangement, entered into for tax reasons alone, is to be considered as not going beyond what is necessary to prevent abusive practices where, in the first place, on each occasion on which the existence of such an arrangement cannot be ruled out, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that arrangement." (Test Claimants in Thin Cap C-524/04)
"[71] In the light of the evidence furnished by the resident company, the competent national authorities have the opportunity, for the purposes of obtaining the necessary information on the CFC’s real situation, of resorting to the procedures for collaboration and exchange of information between national tax administrations introduced by legal instruments such as those referred to by Ireland in its written observations, namely Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation (OJ 1977 L 336, p. 15) and, in this case, the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains of 2 June 1976." (Cadbury Schweppes C‑196/04)
PROPORTIONALITY
- Correcting avoidance in the form of gratuitous transfers must be limited to the excess over arm's length
"[72] Second, where the consideration of such elements leads to the conclusion that the transaction in question goes beyond what the companies concerned would have agreed under fully competitive conditions, the corrective tax measure must be confined to the part which exceeds what would have been agreed if the companies did not have a relationship of interdependence." (SGI C-311/08)
CONSEQUENCES
- Interpret domestic law motive test to be limited to wholly artificial arrangements
"[72] In this case, it is for the national court to determine whether, as maintained by the United Kingdom Government, the motive test, as defined by the legislation on CFCs, lends itself to an interpretation which enables the taxation provided for by that legislation to be restricted to wholly artificial arrangements or whether, on the contrary, the criteria on which that test is based mean that, where none of the exceptions laid down by that legislation applies and the intention to obtain a reduction in United Kingdom tax is central to the reasons for incorporating the CFC, the resident parent company comes within the scope of application of that legislation, despite the absence of objective evidence such as to indicate the existence of an arrangement of that nature." (Cadbury Schweppes C‑196/04)