Right to opt and EC Law

Bas Opmeer

Malta, 5 February 2010

Right to opt and EC Law

Two totally different cases:• HSBC Holdings plc, ECJ 1 October 2009, no C-

569/07 (UK- case on Stamp duty reserve tax (SDRT))

• Gielen, conclusion Advocate general ECJ, 27 October 2009, no C-440/08 NL-case on Income tax: deductions on profits derived from a permanent establishment and opportunity to opt for treatment as a domestic taxable person.

HSBC Holdings

• Art 11 of the Capital Duties Directive (69/335/EEC as amended by 85/303/EEC) prohibits charging of any form of taxation upon the issue of shares etc.

• Art 12 Directive permits charging of duties on the transfer of securities.

• UK charges SDRT at 0,5% of the consideration on the transfer of shares

HSBC Holdings (2)

• System differs on the issue of shares to a clearance service. This service can either:– elect to be charged at a rate of 1,5%, or– enter into an agreement with the UK Revenue

effect: clearance service is obliged to collect SDRT at 0,5% on each subsequent transfer

• Clearance services are commonly not used in the UK.

HSBC Holdings (3)

Questions:• Is the 1,5% charge on the issue of shares to the

clearance taxation on:– the issue of shares prohibited by Art 11 Directive– the transfer of securities permitted by Art 12

Directive• Does Art 43, 49 or 56 EC Treaty or any other

provision of EC law prohibit this 1,5% charge.

HSBC Holdings (3)

Answer ECJ• Article 11 (a) of Council Directive 69/335/EEC of 17

July 1969 concerning indirect taxes on the raising of capital, as amended by Council Directive 85/303/EEC of 10 June 1985, must be interpreted as meaning that it prohibits the levying of a duty, such as that at issue in the main proceedings, on the issue of shares into a clearance service.

HSBC Holdings (4)

Comments:• ECJ was not obliged to answer the second question• AG Mengozzi stipulated about the election mechanism:

“It is indeed an “option”. In other words, its application requires the taking of positive action, failing which rules conflicting with Community Law are applied”“The situation would be different if the mechanism (….) normally applied, rather than being available on election”.

Gielen

• Gielen lives in Germany is enterpreneur in Germany– p.e. in The Netherlands

• Dutch enterpreneurs are entitled to certain deductions on their profits under certain provisions regarding time spent as an enterpreneur

• Gielen does meet this provisions with regard to his aggregate activities in Germany and NL.

• Gielen however does not meet this provisions with respect to his activities in NL separately.

Gielen (2)

• High court decided that the Dutch rules are in contradiction to EC Law and prohibited because of art 43 EC Treaty

• Gielen however can apply for the Dutch resident scheme• High Courts asks ECJ for a preliminary judgment

Gielen (3)

• Question of the Dutch High Court:Is Article 43 EC to be interpreted as meaning that it does not preclude the application of a provision in a Member State’s tax legislation to profits which a national of another Member State (foreign taxable person) has derived from a part of his undertaking operated in the first Member State, if that provision, when interpreted in a particular way, indeed makes a distinction between domestic and foreign taxable persons which – viewed in isolation – is contrary to Article 43 EC, but the foreign taxable person concerned has had an opportunity to opt for treatment as a domestic taxable person and has not done so for reasons of his own?

Gielen (4)

Opinion of AG D. Ruiz-Jarobo Colomer• All animals are equal, but some are more equal• Referring to HSBC Holdings the AG concludes that

contradicting rules can not be saved by means of an option scheme

Conclusion

• It seems that EC member states are obliged to make rules directly in accordance with EC Law

• An optional scheme possibly is not enough• Although optional schemes are available non-resident tax

payers could be directly entitled to profitable domestic law in the case that their situations are comparable with resident tax payers

• The decision to be given by the ECJ in the Gielen-case possibly is very of interest with regard to other comparable domestic rules in other EC-countries.