By Davide Anghileri, University of Lausanne. Switzerland
The Advocate General (AG) in an opinion issued 24 October (Case C-458/18) stated that a company incorporated in Gibraltar and subject to Gibraltar corporation tax cannot be considered to be a “company of a Member State” within the meaning of the parent-subsidiary directive (Directive 2011/96).
In the same opinion, the AG affirmed that legislation that excludes from the exemption from withholding taxes, in a general way on the basis of a territorial criterion, dividends paid by subsidiary companies incorporated in a Member State to their parent companies incorporated in Gibraltar is contrary to the freedom of establishment (articles 49 and 52 TFEU).
The facts
A company resident in Gibraltar owned a Bulgarian company involved in providing services in connection with information technology (IT services).
The Bulgarian company distributed dividends to the parent company and paid them out without withholding and paying over tax in Bulgaria, as provided by the parent-subsidiary directive.
The Bulgarian competent tax authority disagreed with this treatment, concluding that withholding tax on dividends distributed should have been applied and issued a tax assessment notice.
Hence, an action was then brought before the Sofia Administrative Court. The Court referred the decision to Court of Justice of the EU to determine whether parent-subsidiary directive is applicable to companies incorporated in Gibraltar.
The opinion
The AG concluded that companies incorporated in Gibraltar are not covered by Directive 2011/96. In fact, a company incorporated in Gibraltar and subject to Gibraltar corporation tax cannot be considered to be a ‘company of a Member State’ within the meaning of that directive, as Gibraltar is not included in the exhaustive list both of the companies (Annex I, Part A) and of the taxes (Annex I, Part B) to which the directive applies., the AG said.
The AG added its opinion on the refusal to exempt withholding tax in respect of freedom of establishment issues so far as Gibraltar is concerned, even though this was not proposed by the referring court. In fact, the Court of Justice can provide the referring court with all the elements of interpretation of EU law which may be of assistance in adjudicating on the case before it, whether or not that court has specifically referred to them in the questions, the AG said.
In the present case, the tax measure at issue in the main proceedings makes it less attractive for companies established in Gibraltar to exercise freedom of establishment and they may, consequently, refrain from acquiring, creating or maintaining a subsidiary in the State which adopts that measure.
In this context, it is settled case-law that national rules which are not applicable to companies without distinction, irrespective of their place of establishment, and which are therefore discriminatory, are compatible with EU law only if they can be based on one of public policy, public security or public health the (article 52 TFEU), the AG affirmed.
Furthermore, the AG added that a national measure restricting the free movement of capital or freedom of establishment may be justified by the need to prevent tax evasion and avoidance where it specifically targets wholly artificial arrangements which do not reflect economic reality and the purpose of which is to avoid the tax normally payable on the profits generated by activities carried out in the territory of the Member State concerned.
In the case at stake, in the opinion of the AG, the national legislation appears to be disproportionate, as it goes beyond what is necessary to prevent tax evasion and avoidance. In fact, the exclusion from a tax benefit cannot be applied in a general way on the basis of a territorial criterion, but only be the result of the application of an anti-abuse measure to the circumstances of an individual case.
Therefore, the AG concluded that the refusal to exempt dividends paid by subsidiaries established in a Member State to their parent companies incorporated in Gibraltar from withholding tax cannot be stated by way of a general rule such as has apparently happened in the case at issue.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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