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Edition 83 ● September 2010

EU Tax Alert

The EU Tax Alert is an e-mail 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: www.eutaxalert.com

Developments in the Netherlands: Lower Court of Haarlem decides under what circumstances Dutch dividend tax withheld for the account of a French Bank can be in breach of EU law On 3 August 2010, the Netherlands Lower Court of Haarlem gave its decision in which it decided under what circumstances Dutch dividend tax withheld for the account of a French Bank can be in breach of EU law. (See: Top News)

Preliminary question referred to CJ on the Luxembourg legislation regarding investment tax credits (Tankreederi) On 10 June 2010, the Luxembourg tribunal referred a preliminary question to the CJ in the Tankreederi 1 case (C-287/10), regarding the compatibility of the Luxembourg investment tax credits set out in article 152 bis of the Luxembourg Income Tax law (‘LIR’) with EU law. (See: Top News)

CJ rules provision of retail vouchers constitutes a supply of services for consideration (Astra Zeneca) On 29 July 2010, the CJ rendered its judgment in the Astra Zeneca case (C-40/09), about VAT on the provision of the vouchers, who were not provided for consideration. (See: Top News)

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IN THIS EDITION:

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Contents

Top News● Developments in the Netherlands: Lower Court of

Haarlem decides under what circumstances Dutch dividend tax withheld for the account of a French Bank can be in breach of EU law

● Preliminary question referred to CJ on the Luxembourg legislation regarding investment tax credits (Tankreederi)

● CJ rules provision of retail vouchers constitutes a supply of services for consideration (Astra Zeneca)

Direct taxation● Commission launches public consultation on possible

amendments to the Interest and Royalty Directive● Commission launches public consultation on possible

approaches to tackle cross-border inheritance tax obstacles

● Preliminary question referred to CJ on the Belgian rules on deductibility of payments for supply of services to non-resident taxpayers or foreign permanent establishments (Siat)

VAT● CJ holds Polish restriction on the deductible amount of

input VAT compatible with EU law (Profaktor Kulesza, Frankowski, Jóźwiak, Orłowski)

● Advocate General opines multiplication of cartilage cells to fall under the exemption for the provision of medical care (Verigen Transplantation Service International)

Customs Taxes and Excise Duties● WTO rules imposing duty by EU violates the

International Technology Agreement

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Before making this actual comparison, the Lower Court first continued from a formal perspective, that article 15 of the Netherlands General Tax Act grants the formal right to challenge the Netherlands dividend tax withheld for the account of SA. The Court considered a 5-year statute of limitation reasonable for such claims. Based on the filing dates of these ‘article 15’ requests on behalf of SA, the Court further investigated the years 2003-2008.

For the years 2003-2007, SA received a tax credit in France for the Netherlands dividend withheld, even though the double tax treaty between France and the Netherlands did not oblige France to do so. Nevertheless, according to the Lower Court, these tax credits sufficed to neutralize any restriction of the free movement of capital caused by the Netherlands. According to the Court, timing differences in this respect are the result of incomparable situations (i.e. a fully domestic situation with one authority, and a cross border situation with two competent authorities).

For the year 2008, SA did not receive a tax credit in France due to losses it incurred. Based on this, the Court investigated whether a forbidden restriction of the free movement of capital was present by comparing 15% dividend tax on the gross dividend in the cross border situation, versus 25.5% levy of corporation tax on the net dividend with the possibility to fully credit the 15% dividend tax in the domestic situation. The Court put the burden on SA to prove that the 25.5% levy of corporation tax on the net dividend was lower than the 15% dividend tax on the gross dividend. According to the Court, SA did not provide sufficient evidence to prove this position. The Lower Court rejected the refunds for all the years requested by SA.

Preliminary commentsIt is good to receive confirmation that the Lower Court explicitly accepts article 15 of the General Income Tax Act as a formal means of effectuating claims for refund of dividend tax based on EU law. The Court found a 5-year recovery period a reasonable statute of limitation. It is, however, not to be excluded that this term should be longer based on EU law.

The Lower Court of Haarlem rightly dismissed the argument that in the Truck Center case (C-282/07) the CJ considered differences in tax base in line with EU law. The CJ merely compared the differences in tax rates

Top NewsDevelopments in the Netherlands: Lower Court of Haarlem decides under what circumstances Dutch dividend tax withheld for the account of a French Bank can be in breach of EU law On 3 August 2010, the Netherlands Lower Court of Haarlem gave its decision in which it decided under what circumstances Dutch dividend tax withheld for the account of a French Bank can be in breach of EU law. These proceedings were initiated by Loyens & Loeff on behalf of the French Bank.

During the years 2000-2008, the Netherlands levied dividend tax at a rate of 15% (after reduction under the applicable double tax treaty) for the account of the bank resident in France and incorporated under French law (‘SA’) on dividends distributed by Netherlands’ companies. SA invested in Netherlands’ shares, being minority interests, as part of its derivatives trading activities in France.

According to the Lower Court, the EU law comparison should be made between SA and a bank resident in the Netherlands and incorporated under Netherlands’ law holding Netherlands’ shares for derivatives trading activities in the Netherlands. Making this comparison, it has to be acknowledged that the bank resident in the Netherlands would have had the possibility to obtain a full credit (including a refund) of the Dutch dividend tax withheld, taking into account that it would be subject to Netherlands corporation tax.

On a pure dividend tax level comparison, there would have been no difference in treatment, but taking corporation tax into account, a difference may occur: while SA will be taxed at 15% dividend tax on the gross dividend, a bank resident in the Netherlands will be subject to a 25.5% levy of corporation tax on the net dividend with the possibility to fully credit the 15% dividend tax. The Lower Court of Haarlem dismissed the argument brought by the Dutch tax inspector that in the Truck Center case (C-282/07) the CJ considered such differences in line with EU law. The Lower Court was then asked to compare the differences in both tax rate and tax base (i.e. level of effective taxation), and thus to take into account the possibility to deduct costs.

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For the years 2000 to 2003, the company requested the application of the investment tax credit set out in article 152 bis, LIR.

The tax administration denied the claim based on the wording of article 152 bis, LIR, which requires that the investment be made for the purposes of a Luxembourg establishment on a permanent basis and must be ‘put to use’ only on the Luxembourg territory. The taxpayer brought the case before the Luxembourg tribunal arguing that by denying the benefit of the investment tax credit, the company would receive a less favourable tax treatment than that granted to companies carrying out the same activity within the Luxembourg territory. As such, the company argued that the provision of article 152 bis, LIR is incompatible with the freedom of movement of services set out in Article 56 TFEU.

The Tribunal held that article 152, LIR conditions the benefit of the investment tax credits to investments physically ‘put in use’ in Luxembourg and referred the following preliminary question to the CJ: ‘Do Articles 56 TFEU (former Article 49 EC) and 63 TFEU (former Article 56 EC) preclude the provisions of the first paragraph of Article 152 bis of the amended Law of 4 December 1967 on income tax, insofar as, under those provisions, Luxembourg taxpayers are granted a tax credit for investments only if the investments are made in an establishment situated in the Grand-Duchy and are intended to remain there on a permanent basis, and only if they are physically used on Luxembourg territory?’

CJ rules provision of retail vouchers constitutes a supply of services for consideration (Astra Zeneca)On 29 July 2010, the CJ rendered its judgment in the Astra Zeneca case (C-40/09). Astra Zeneca, a company active in the pharmaceutical industry, offered its employees to exchange part of their salary for other benefits such as retail vouchers for certain shops. If employees choose for such exchange, they received a nominal voucher of GBP 10 whereas the cash salary was diminished with an amount between GBP 9.25 and GBP 9.55.

Astra Zeneca claimed that it was not required to charge VAT on the provision of the vouchers, because the vouchers were not provided for consideration. On the

of dividend tax and corporation tax in the Truck Center case, and did not (as it was not asked to do so) take the differences in tax base into the equation.

The reasoning of the Lower Court as regards the neutralization of the restriction by credits received in France, seems in breach of CJ cases Commission v Italy (C-540/07) and Commission v Spain (C-487/08), where only a full credit based on the bilateral tax treaty was considered sufficient to neutralize such restrictions caused by the source State. Such obligation to grant a full credit in France was not present in the double tax treaty in the case at hand. To put the burden of proof on the taxpayer, although it is the source State which decides to levy taxes on the gross dividend in the cross border situation, and on the net dividend in the domestic situation, can be explained by the CJ decision in Commission v Portugal (C-105/08). It must be noted, however, that in that judgment, the CJ does seem to acknowledge broad examples supported by statistical information as sufficient proof of the presence of a restriction.

Preliminary question referred to CJ on the Luxembourg legislation regarding investment tax credits (Tankreederi)On 10 June 2010, the Luxembourg tribunal referred a preliminary question to the CJ in the Tankreederi 1 case (C-287/10), regarding the compatibility of the Luxembourg investment tax credits set out in article 152 bis of the Luxembourg Income Tax law (‘LIR’) with EU law.

Article 152 bis, LIR provides for an investment tax credit in two components: (a) a credit for increasing investment and (b) a credit for global investment. The following are excluded from the benefit of the investment tax credit, (i) buildings and such items as mineral deposits, (ii) assets written-off over a period of less than three years, (iii) most motor vehicles, (iv) second-hand assets (in most circumstances), and (v) assets not ’put to use’ in the territory of Luxembourg (except for ships flying the Luxembourg maritime flag).

In the case at hand, a Luxembourg company acquired two boats which were used for the river traffic in the harbours of Antwerp and Amsterdam. The two boats were booked in the balance sheet of the company and were used within the framework of an activity fully taxable in Luxembourg.

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The objective of this initiative is not only to clarify the existing legislation but also to extend its scope. In this last regard, it considers three issues which are aimed at aligning the Interest and Royalty Directive with Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (the ‘Parent-Subsidiary Directive’): (i) include other legal forms of companies that may benefit from the Directive; (ii) reduce the current threshold to be considered an associated company from 25% to 10%; and (iii) to take account of indirect shareholdings to compute the total holding as currently (and contrary to the Parent-Subsidiary Directive), the Interest and Royalty Directive only provides for direct shareholdings.

In addition, it considers extending the exemption to payments between unrelated parties. It also proposes to solve a potential technical problem derived from the requirement that the payment be a tax deductible cost for the permanent establishment making it by stating that the Directive covers payments linked to the activity performed by such an establishment. The parties wishing to contribute to this public consultation should do so no later than 31 October 2010.

Commission launches public consultation on possible approaches to tackle cross-border inheritance tax obstaclesOn 27 August 2010, the Commission opened a public consultation regarding possible approaches to tackling cross-border inheritance tax obstacles within the EU. According to the Commission, there seems to be a growing concern regarding cross-border inheritance tax issues. The Commission invited stakeholders to submit, before 22 September 2010, suggestions on possible solutions to deal with the following problems.

The first major issue relates to the discriminatory application of Member States’ inheritance tax rules. In that regard, in six cases since 2003, the CJ has ruled that the domestic inheritance tax legislation of Member States was in breach of the free movement of capital as it provided for a less favourable treatment if either the assets or the beneficiaries were not located in the Member State in question.

other hand, the company considered that it was entitled to deduct the VAT resulting from the acquisition of the vouchers, because it concerned business overheads costs.

The Commissioners for Her Majesty’s Revenue and Customs did not agree that Astra Zeneca was entitled to deduct the input VAT on the purchase of the vouchers, because the vouchers were not used for taxable transactions. Moreover, if Astra Zeneca was entitled to deduct the input VAT on the vouchers, the Commissioners were of the opinion that the company also had to account for output VAT on the vouchers provided to the employees on the ground that the vouchers were provided for consideration (deduction from the salary receivable in cash), or that the vouchers were made available to the employees for purposes other than business purposes.

The VAT and Duties Tribunal in Manchester decided to refer preliminary questions to the CJ on whether the provision of the vouchers constituted a supply of services for consideration. In this regard, the CJ indicated that any transaction that does not constitute a supply of goods is regarded as a supply of services. As a consequence, the provision of the vouchers constituted a supply of services as indicated in Article 6, paragraph 1 of the Sixth EU VAT Directive insofar as the vouchers did not immediately transfer the right to dispose of property within the meaning of Article 5, paragraph 1 of the Sixth EU VAT Directive. Furthermore, the CJ decided that the consideration for the provision of the vouchers corresponded with the (part of the) cash remuneration that the employees waived.

Direct TaxationCommission launches public consultation on possible amendments to the Interest and Royalty DirectiveOn 24 August 2010, the Commission opened a public consultation regarding possible amendments to be introduced to Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (the ‘Interest and Royalty Directive’).

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VAT CJ holds Polish restriction on the deductible amount of input VAT compatible with EU law (Profaktor Kulesza, Frankowski, Jóźwiak, Orłowski)On 29 July 2010, the CJ rendered its judgment in the Profaktor Kulesza, Frankowski, Jóźwiak, Orłowski case (C-188/09). The case concerned proceedings between the Polish tax authorities and Profaktor Kulesza Frankowski, Jóźwiak, Orlowski sp. j. (‘Profaktor’). Pursuant to provisions in the Polish VAT law, the tax authorities reduced the amount of deductible input VAT as indicated by Profaktor in its VAT returns by 30% on the ground that Profaktor had not complied with the obligation to record its turnover and the amount of tax due by means of cash registers. The Polish Supreme Administrative Court decided to refer preliminary questions to the CJ regarding the compatibility of the Polish provisions with EU VAT law.

The CJ considered that the Polish administrative sanction is included in the measures which Member States may adopt on the basis of Article 22, paragraph 8 of the Sixth EU VAT Directive. According to this provision, Member States are allowed to impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of tax evasion as long as those measures do not go further then necessary to attain those objectives. Although the question of whether the Polish administrative sanction is proportional is for the national Court to determine, the CJ indicated that the sanction does not appear to be manifestly inappropriate, excessive or inadequate in relation to the objective which it seeks to attain.

Finally, the CJ ruled that the Polish provisions in question were not special measures for derogation within the meaning of Article 27, paragraph 1 of the Sixth EU VAT Directive and that the provisions do not have the characteristics of a VAT, as a consequence of which they are not excluded on the basis of Article 33 of the Sixth EU VAT Directive.

The second major issue relates to the risk of unrelieved double or even multiple taxation of a single inheritance by several Member States. Many Member States do provide for mechanisms to avoid double taxation of inheritance under their domestic law. However, in most of the cases those provisions do not provide for full relief of the double taxation. Furthermore, as very few double taxation agreements on estate and inheritance tax have been concluded between Member States, in the absence of appropriate tax relief mechanisms, that may lead to an excessive overall taxation.

Preliminary question referred to CJ on the Belgian rules on deductibility of payments for supply of services to non-resident taxpayers or foreign permanent establishments (Siat)On 2 July 2010, the Belgian Supreme Court referred a preliminary question to the CJ regarding the compatibility with the free movement of services of the Belgian rules on deductibility of payments for supply of services to non-resident taxpayers or foreign permanent establishments. The case, which is now pending as C-318/10 (Siat SA v. Belgian State), concerns a Belgian company that paid a commission to a Luxembourg company for services provided. The Luxembourg company was not subject to Luxembourg income tax. Hence, the Belgian tax administration denied the deductibility of the commission because Belgian legislation provides that payments for services provided to non-resident taxpayers or foreign establishments which are not subject to income tax or are, for the relevant income, subject to a substantially more advantageous tax regime than the Belgian tax regime for such income are not tax deductible, unless the taxpayer proves, by any legal means, that such payments 1) relate to genuine and proper transactions and 2) do not exceed the normal limits. Such double proof, however, is not required for the deductibility of payments for services provided to a Belgian company, even if this company is not subject to any tax on income or is subject to a substantially more advantageous tax regime than the Belgian ordinary tax regime.

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of fiscal neutrality on the ground that the cartilage plaster is functionally comparable to pharmaceutical products. Whether a service constitutes medical care or the provision of medical care can depend only on its own nature and not on the nature of alternatives. As a consequence, it is unnecessary to establish the place of supply as the services are exempted from VAT.

Nonetheless, the Advocate General decided in the affirmative the question of whether the services have to be regarded as work on moveable tangible property within the meaning of Article 28b F of the Sixth EU VAT Directive when taking into account that Verigen mentioned the VAT numbers of the customers on its invoices. The Advocate General is of the opinion that the provision should apply when the customer informs the supplier that he has a VAT number in his own Member State. No other conditions should be applicable, according to Advocate General Sharpston.

Customs Taxes and Excise DutiesWTO rules imposing duty by EU violates the International Technology AgreementA World Trade Organisation (WTO) panel has ruled that the EU was wrong to impose duties on three types of electronics products that were imported into the EU. The WTO panel backed the United States as well as Japan and Taiwan in their complaint that EU duties on flat-panel displays, multifunction printers and television set-top boxes violated the WTO’s Information Technology Agreement (‘ITA’).

The 1996 ITA had eliminated duties amongst a group of 72 participating countries on goods such as computer screens and printers to promote trade in high-tech products. But the EU argued that added functionality meant that some of these products were now also consumer goods not covered by the agreement rather than information technology products and therefore, should not benefit from the lower duties. As a result, the EU imposed duties ranging from 6% to 14% on the three products. EU imports of the three products from all suppliers totalled around USD 11 billion in 2007.

Advocate General opines multiplication of cartilage cells to fall under the exemption for the provision of medical care (Verigen Transplantation Service International) On 29 July 2010, Advocate General Sharpston gave her Opinion in the Verigen Transplantation Service International case (C-156/09), concerning a German biotechnology company (‘Verigen’) operating in the field of tissue engineering. At issue were the transactions where doctors or clinics resident in other Member States send cartilage material taken from patients to Verigen and Verigen had stated their VAT number on its invoices. The services rendered by Verigen consist of the multiplication of cartilage cells, after which the material is returned to the doctors or clinics for reimplantation. The case concerns services rendered under the ‘old rules’ prior to the 2010 changes.

Verigen and the German tax authorities did not agree on the VAT treatment of the services rendered. According to Verigen, the services are not liable to VAT in Germany when provided to customers in other Member States, because the services qualify as the work on moveable goods and the foreign VAT number of the customers was mentioned on the invoices. The German tax authorities argued that the use of a VAT identification number would require an express agreement prior to the supply of the service.

Following preliminary questions of the German Federal Tax Court, Advocate General Sharpston considered that the question that should be addressed first was whether the services fall within the exemption of the provision of medical care within the meaning of Article 13A, paragraph 1 under c of the Sixth EU VAT Directive, because if that question had to be answered in the affirmative, the services would be VAT exempt regardless of the Member State where the services are taxable. According to the Advocate General, the services in question have a therapeutic aim, and are an essential, inherent and inseparable part of the process of the removal, multiplication and reimplantation of the cartilage cells. Therefore, the services are covered by the concept of the provision of medical care.

In this regard, the Advocate General dismissed the suggestion of the German government that classification of the services as medical care is contrary to the principle

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Editorial boardFor contact, mail: eutaxalert@loyensloeff.com:● René van der Paardt (Loyens & Loeff Rotterdam)● Thies Sanders (Loyens & Loeff Amsterdam)● Dennis Weber (Loyens & Loeff Amsterdam; University of Amsterdam)

Although great care has been taken when compiling this newsletter, Loyens & Loeff N.V. does not accept any responsibility whatsoever for any consequences arising from the information in this publication being used without its consent. The information provided in the publication is intended for general informational purposes and can not be considered as advice.

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Editors● Patricia van Zwet

Correspondents● Peter Adriaansen (Loyens & Loeff Tokyo)● Séverine Baranger (Loyens & Loeff Luxembourg)● Gerard Blokland (Loyens & Loeff Amsterdam)● Alexander Bosman (Loyens & Loeff Rotterdam)● Kees Bouwmeester (Loyens & Loeff Amsterdam)● Joke Brabants (Loyens & Loeff Brussels)● Alexander Fortuin (Loyens & Loeff Frankfurt am Main)● Raymond Luja (Loyens & Loeff Amsterdam; Maastricht University)● Bruno da Silva (Loyens & Loeff Amsterdam)● Patrick Vettenburg (Loyens & Loeff Eindhoven)

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