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UNIVERSITY OF SÃO PAULOINSTITUTOBRASILEIRO DE

DIREITOTRIBUTÁRIO

4TH BRAZILIANCONGRESS OF INTERNATIONAL TAX LAW

22-23 AUGUST 2011

Taxation of movements of capital between the European Union and

Third CountriesJacques Malherbe

Professoremeritus of the CatholicUniversity of LouvainAvocat (Partner, Liedekerke, Brussels)

E-mail : j.malherbe@liedekerke.com

Table of contentsI. Limits to liberalisation of capital movements

1. Grandfathering of restrictions existing in 1993

2. Possibility to distinguishbetweenresidents & non-residents

3. Otherjustified restrictions

II. Relations withothertreatyfreedoms

III. Application to practical situations

1. Golden Share

2. Limitation on benefits of treaties (LOB)

3. Withholding on dividends

4. Most-favoured nation treatment

IV. Treatiessigned by EU

1. EuropeanEconomic Area

2. TreatywithSwitzerland 26.10.2004

3. Treaties on interestfromsavings

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European Union and Third Countries

• Transactions of EU operatorswiththird countries (TC) may not berestricted

• Transactions of TC operatorswith EU operators are governed by treaties– signed by EU– bilateral

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Exception

Treaty on the Functioning of the European Union (TFEU) art. 63 (former treatyinstituting the EuropeanCommunity – TEC art. 56)

Restrictions of movements of capital betweenMember States (MS)

between MS and TC

are prohibited4

Exception

Example

An exemption for dividendsreceived must apply to dividendsfrom TC

Comp. ECJ, 6.06.2000 Verkooijen

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Purpose

See Schoueri (2006)

Attractinvestmentfrom TC in EU

Favour EURO as currency

Concl. Exception shouldbeinterpretedbroadly

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I. Limits to liberalisation of capital movements

1. Grandfathering of restrictions existing in 1993 re

direct investment (incl. real property)

establishment

financial services

vis-à-vis TC (not MS)

ex. restriction to purchase of buildings in Vienna

ECJ, 11.02.2000 FokusInvest 7

I. Limits to liberalisation of capital movements

2. Possibility to distinguishbetween

residents

non-residents

but withoutarbitrary discrimination

ex. Braziliandrawing all hisincomefrom Germany must benefit of familyreductions

Comp. ECJ, 14.02.1993 Schumacker 8

I. Limits to liberalisation of capital movements

ex. PE must benefit of treatiessignedwith TC

Comp. ECJ, 21.09.1999 Saint-Gobain

Applicable to TC ?

Schoueri : invest in DTT’s

ILADT proposal of model treaty for Latin America : scope of DTT extended to PE’s 9

I. Limits to liberalisation of capital movements

3. Otherjustified restrictions

a. Tax Control

Between MS : no : directive on exchange of info (16.10.2010)

With TC : yes

exchange of info : id.

ex. ECJ, 14.12.2007 A

Swedish exemption of dividendsdistributedunder the form of shares of subsidiary

not applicable to Swisssub10

I. Limits to liberalisation of capital movements

b. Anti-abuse measures

Presumptions :

must berebuttable

show that not inspired by tax motives

ex. interposition of EU subbenefiting of parent-subsidiary directive (no WHG) between French sub and TC parent

CGI (France), art. 119ter 11

II. Relations withothertreatyfreedoms

Freedom to render services

Freedom of establishment

do not apply to TC

If movement of capital isconsequence of rending of services or establishment, freedom of capital movementwill not applywhenmovement of capital is « unavoidableconsequence » of service or establishment

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II. Relations withothertreatyfreedoms

Examples

ECJ, 3.10.2006 FidiumFinanz

Swisscompanygrantingconsumptioncredits in Germany

Authorizationdenied

Granting of credit = service + movement of capital

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II. Relations withothertreatyfreedoms

ECJ, 10.05.2007 Lasertec

Germanthincapitalizationrule if debttowards parent > 3 x equity of parent in sub :

interest = profit distribution

2/3 participation of Swissshareholder and lender = exercise of control = freedom of establishment

not of capital movement

Provision applies14

II. Relations withothertreatyfreedoms

But

Freedom of capital movementswillapply if provision appliesindifferently to controlling and non-controlling participations

ex. ECJ, 24.05.2007 Hölböck

Austriantax rate reduced to half for Austrianshareholders of Austriancompanies

Full rate for dividends of foreigncompanies

Freedom of capital movementwould have applied

But the restriction existed in 1993. It wasgrandfathered 15

III. Application to practical situations

1. « Golden Share  »

non-taxfield

voting right in Volkswagen limited to 20 % by privatisation law

requiredmajority in general meeting : 80 %

federal State and lowerSaxonyownedeach 20 % of shares

restriction to investment by shareholders of other States

not justifiedunderproportionalityrule16

III. Application to practical situations

2. Limitation on benefits of treaties (LOB)

Bilateraltreaty not applicable to companies of Contracting State

owed by residents of other States

payingdeductibleamounts to residents of other States

Comp. Open Skies Judgment

ECJ, 5.11.2002 Commission v UK

air traffic agreement between UK and US not applicable to airlines of UK owned by nationals of other MS

restriction to freedom of establishment : no reason of public policy

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III. Application to practical situations

But

In the taxfield

ECJ, 12.12.2006 ACT Group Litigation

UK DTT’sgrants partial reimbursement of ACT paidupon distribution of dividend to shareholders of otherContracting State

Not applicable to companyowned by non-residentsresident in country having no suchtreatywith UK

Upheld :

no discrimination

companies not in same situations

whole of DTT must beviewed18

III. Application to practical situations

3. Withholding on dividends

a. Parent-subsidiary directive

no WHG if 10 % participation of parent in sub

applicable to third countries ?

secondarylaw, not treaty (primarylaw)

Seedomesticlaw of Belgium / Netherlands

applies exception above 10 % to all treaty countries with exchange of information

good platform as holding company to invest in EU19

III. Application to practical situations

b. Treaty

Within EU, withholding on dividendpaid to company in other MS owninglessthan 10 % isdiscriminatory if dividendpaid to domesticcompanyis not taxed, i.e. no withholding / justification exemption

ECJ, 19.11.2009 Commission v Italy

ECJ, 3.06.2010 Commission v Spain

Wouldapply to Third Countries ?

Probably not if differencebased on absence of exchange of information similar to the one provided by mutual assistance directive

But :DTT providesin casusimilar exchange of information20

III. Application to practical situations

4. Most-favoured nation treatment

Not imposed by EU Treaty

MS maye.g. granttaxsparing to third country

But PE must have in MS sametreatment as domesticcompany

Tax sparingunderFinland-China treatywasextended to PE in Finland of Luxembourg company

SAD, Supr. Adm. Court of Finland, 9.05.200721

IV. Treatiessigned by EU

1. EuropeanEconomic Area (EEA) : Iceland, Liechtenstein, Norway

samefreedoms as in EU – Treaty

But freedom of movement of capital not extended to third countries (art. 40)

ex. Liechtenstein as a third country

ECJ, 28.10.2010 Ets Rimbaud

French tax of 3 % on real propertycompanies

Not applicable if

DTT exchange of information

Return disclosingshareholders

Applies to Liechtenstein company in spite of freedom of movement of capital because no exchange of information

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IV. Treatiessigned by EU

2. TreatywithSwitzerland 26.10.2004

Taxation of savings : WHG in Switzerland

Extension of treatmentaccording to directives of

dividend

interest

royalties

Condition of participation of 25 %23

IV. Treatiessigned by EU

3. Treaties on interestfromsavings

Varioustaxhavens

in Europe : Andorra, Liechtenstein, Monaco, San Marino

UK territories

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Conclusion for TC’s

De legelata

invokefreedom of movement of capital use « bases » such as Belgium, Netherlands

De legeferenda

in negotiatingtaxtreaties :

request application of treaty to PE

request application of all freedoms to

residents of Contracting State

at least to PE’s in EU and EEA 25