by Davide Anghileri
The European Court of Justice (ECJ) has concluded that the ECJ has jurisdiction to resolve a dispute between Member States which relates to the subject matter of the Treaties of the European Union if the dispute is submitted under a special agreement between the parties, in a ruling (case C-648/15) released 12 September.
In the same decision, the court ruled that certificates at issue in the present case are not “debt-claims with participation in profits,” as referred to in Article 11(2) Austria-Germany tax convention.
Background
Between 1996 and 1998, the Bank of Austria, an Austrian resident company, acquired certificates from a German resident company, which, as noted by the court, may be regarded as a particular class of debt.
According to their terms of issue, the certificates are remunerated by interest at a fixed percentage of their nominal value. Nevertheless, the particularity of the certificates is, in essence, that the payment of interest is limited, or even suspended, if, as a result of such payment, the issuing company would end its financial year with a loss. An adjustment is made subsequently to include the arrears when that company returns to profitability, provided that such an adjustment does not cause any loss.
Austria claimed that the certificates at issue do not constitute a participation in profits within the meaning of Article 11(2) of the Austria-Germany tax convention, and therefore, Austria has the exclusive right to tax the interest. The Federal Republic of Germany took the contrary view.
The Bank Austria lodged a request to initiate mutual agreement procedure with the Austrian tax authorities, which was unsuccessful.
Bank Austria then asked the Republic of Austria to bring the dispute before the EU court pursuant to Article 25(5) of the Austria-Germany tax convention, which provides:
‘In the case of difficulties or doubts concerning the interpretation or the application of this convention, for which no solution can be found during a mutual agreement procedure between the competent authorities arranged in accordance with the preceding paragraphs of this article within a period of three years from the initiation of that procedure, the States Parties are obliged, at the request of the person referred to in paragraph 1, to submit the dispute to the Court of Justice [of the European Union] under an arbitration procedure pursuant to Article [273 TFEU]’.
Jurisdiction
The ECJ concluded that it has jurisdiction to rule on the application under Article 273 TFEU because the dispute was submitted to the court under a special agreement between the parties. The court did not find it relevant that the case was not lodged pursuant to an arbitration clause.
ECJ also added that the court’s jurisdiction is confirmed as the dispute is related to the subject matter of the Treaties and has an objectively identifiable link with the subject matter of the Treaties.
In the case at stake, the purpose and effect of the conclusion between two Member States of a convention avoiding double taxation is to eliminate or mitigate certain consequences resulting from the uncoordinated exercise of their powers of taxation, which is, by its nature, capable of restricting, discouraging or rendering less attractive the exercise of the freedoms of movement provided for in the TFE.
Debt-claims with participation in profits
The ECJ concluded that the concept of “debt-claims with participation in profits,” referred to in Article 11(2) of the Austria-Germany convention, must be interpreted as excluding certificates such as those at issue in the present case.
The ECJ said that the concept of “debt-claims with participation in profits” was intended to cover financial products that have a variable (or partially variable) remuneration based on the debtor’s annual profits.
This is confirmed by the Austria-Germany convention, which illustrates the meaning of the concept using three types of financial instrument that have, as common characteristics, a variable remuneration based on the annual profits of the issuer, the court said.
The ECJ said the certificates at issue are remunerated annually on the basis of a fixed percentage of their nominal value, which is itself fixed, both values being predetermined at the time of issue.
In fact, the reduction or the suspension of the remuneration of those certificates is affected by the presence of sufficient net profit for that financial year. Thus, the certificate at stake do not confer entitlement, in addition to annual interest, to a share in those profits, the ECJ concluded.
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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