Direct Taxation: Eliminating the Obstacles to the mobility of SMEs wihin the EU; the Greek experience and EU trends

2 October 2009AVRIO net meeting Athens
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Direct TaxationDirect Taxation
Eliminating the obstacles to theEliminating the obstacles to the
mobility of SMEs within the EU:mobility of SMEs within the EU:
the Greek experience and EUthe Greek experience and EU
trendstrends
Katerina Perrou

01/28/15AVRIO net meeting Athens
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Introduction - AgendaIntroduction - Agenda
 A. General
– Definition of SMEs
– EC Treaty freedoms that promote Mobility
– National rules that create Obstacles
– Procedure for the Elimination of obstacles
 B. Specific examples from the Greek experience
– Preliminary rulings
– Infringement procedures
 C. EU trends: ECJ pending cases attacking
obstacles
– Various Member States

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Definition of SMEsDefinition of SMEs
 Recommendation 2003/361/EC – legally secure
and user friendly definition in order to avoid
distortions
 Criterion: economic strength measured by size
and independence
 Size: (a) headcount ceilings and (b) financial
ceilings
 Independence: not part of larger groupings that
benefit from a stronger economic backing than
genuine SMEs (less than 25% of capital or
voting rights)

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Definition of SMEsDefinition of SMEs
Enterprise Category Headcount Turnover or Balance Sheet total
Medium - sized < 250 ≤ € 50 million ≤ € 43 million
small < 50 ≤ € 10 million ≤ € 10 million
micro < 10 ≤ € 2 million ≤ € 2 million

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Why are SMEs important?Why are SMEs important?
2. Importance of SMEs for the EU
 they represent around 99% of all
enterprises in the EU
 they provide around 65 million jobs
 they contribute to entrepreneurship and
innovation

01/28/15AVRIOnet Athens Meeting
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Mobility of SMEs within the EUMobility of SMEs within the EU
2. The EC Treaty Freedoms guarantee
MOBILITY of SMEs within the EU
- There are 4+1 Fundamental freedoms
- Goods
- Services - Direct Effect
- Persons - Rights for the companies
- Capital - Obligations for MS
- (Residence – inherent in the free movement of
persons)

Free Movement of PersonsFree Movement of Persons
Obligations for both the Origin (Home) State and
the Host State:
“Freedom of establishment aims to guarantee
the benefit of national treatment in the host
Member State, by prohibiting any
discrimination based on the place in which
companies have their seat”
“Acceptance of the proposition that the M S of
residence may freely apply different treatment
merely by reason of the fact that the registered
office of a company is situated in another
Member State would deprive Article 52 of the
Treaty of all meaning (Truck Center, C-282/07)01/28/15AVRIO net meeting Athens
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Free Movement of PersonsFree Movement of Persons
- Freedom to choose the appropriate legal form in
which to pursue activities: branch or subsidiary:
“The freedom of establishment would be
deprived of all its meaning if companies of other
MS establishing themselves in France in the form
of an agency or a branch could be treated
differently on the basis of their nationality
(Avoir Fiscal, C-270/83; CLT-UFA, C-253/03)
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Free movement of personsFree movement of persons
- Not hindering the establishment in another
MS (origin state) [exit taxes]:
The freedom of establishment prohibits the
MS of origin from hindering the
establishment of one of its own nationals
in another MS
(Lasteyrie de Saillant, C-9/02)
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Relationship between theRelationship between the
Fundamental FreedomsFundamental Freedoms
Relationship between the Fundamental
Freedoms: NO general rule of precedence
“When a national measure relates to more than
one freedoms, which of the freedoms is
affected and which one prevails over the other
has to be considered on a case by case basis”
(Fidium Finanz, C-52/04)
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Relationship between theRelationship between the
Fundamental FreedomsFundamental Freedoms
Once the applicable freedom is identified,
normally
“it is not needed to examine the measure in
the light of another freedom, since if there
are any restrictions, such restrictions are a
direct consequence of the applicable
freedom, to which they are inextricably
linked”
Golden Shares, C-282/04
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Freedom of Establishment andFreedom of Establishment and
Free Movement of CapitalFree Movement of Capital
Relationship between the Freedom of
Establishment and the Free movement of
Capital:
- Definite influence over the company’s
activities / control or management of a
company (Baars, C-251/98)
- Sole shareholder: freedom of establishment
(Asscher, C-107/94)
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Freedom of Establishment andFreedom of Establishment and
Free Movement of CapitalFree Movement of Capital
- Portfolio holdings: holdings that do not result
in the control or management of the company
>> free movement of capital (CFC, C-201/05)
- Third country nationals: always free
movement of capital (Holboeck, C-15705), as
freedom of establishment does not apply to
non-EU persons
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What constitutes an obstacle?What constitutes an obstacle?
Sea-Land Service (NL), C-430 and 431/99:
“ None the less the VTS system at issue in the main
proceedings, in that it requires the payment of a
tariff by sea-going vessels longer than 41 meters
is liable to impede or render less attractive the
provisions of those services to which the levy
applies and therefore constitutes a restriction on
their free circulation”.
This means that ANY and EVERY tax is an
obstacle?

- Discrimination: directly based on
nationality
- The application of different rules to
comparable situations and
- The application of the same rule to different
situations
Futura, C-250/95: Luxembourg rules of
evidence that applied indiscriminately to both
residents and nonresidents
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- Distinction: measures that result in covert or
indirect discrimination (criterion is not
nationality): a Luxembourg rule that made
“the refund of excess tax withheld on income
conditional on permanent residency within a
MS constitutes a covert form of discrimination
contrary to the free movement of workers”
(Biehl, C-175/88)

- Measures without distinction that make
free movement less attractive:
“legislation containing a number of elements
liable to dissuade individuals from taking
out and insurance companies from offering
insurance is contrary to the freedom to
provide services” (Jessica Safir, C-118/96)
– in this case the Swedish measure was
designed to take away discrimination,
yet…
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Disparities are not obstacles!
“If unequal treatment is due to differences of
the tax systems between the MS, it results
from a disparity for which EC law is not
concerned - Schempp (D), C-403/03
Adverse consequences of the application of
the same tax rule to both domestic and
cross-border situations that result from the
parallel exercise by two MS of their fiscal
sovereignty (Kerckhaert-Morres (B), C-
513/04)
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How to get rid of ObstaclesHow to get rid of Obstacles
A. “Automatic”
i. Positive integration – limited in direct
taxation
ii. Member States initiatives
B. “Forced”
Two available mechanisms:
i. Preliminary rulings (Art. 234 EC-)
i. National courts’ role
ii. Result: negative integration

How to get rid of ObstaclesHow to get rid of Obstacles
“Forced” – (cont.)
ii. Infringement procedures (Art. 226 EC)
- Action of the Commission on its own
initiative or after a complaint
- Three stages of Infringement Procedure:
- Letter of Formal Notice (first written warning)
- Reasoned Opinion (final written warning)
- Case referred to the ECJ
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B. The Greek Experience - 1B. The Greek Experience - 1
 A. Preliminary rulings – 2 cases
i. Royal bank of Scotland plc; C – 311/97
i. The incompatible rule: Banks that had their seat in
Greece were taxed at 35% whereas branches of foreign
Banks established in Greece were taxed at 40%
ii. The Court’s decision (29-4-99): this rule constitutes a
discrimination incompatible with the freedom of
establishment
iii. Compliance (law 2836/2000): ITC was amended – all
SAs taxed at 35%; effect: 30-9-2000.

The Greek Experience - 2The Greek Experience - 2
i. Athinaiki Zythopoiia; C- 294/99
i. The incompatible rule: When distributing
tax-free income, the Greek subsidiary
suffered a withholding tax that did not
apply in cases the profits were retained
by the sub.
ii. The Court’s decision (4-10-2001): Such
withholding was deemed contrary to the
PSD 90/435/EC.
iii. Compliance: The domestic provisions
have NOT been amended; no-one is
interested or wrong decision? 01/28/15
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B. Infringement procedures – 3 cases
i. Capital duty (Dir 69/335/EEC); C-178/05
ii. The Incompatible rules: Greece levied capital duty
in cases of transfer of the real seat of a company in
another MS; it also granted a tax exemption to
shipping companies.
iii. The Court’s decision (7-6-2007): the Greek rules
are incompatible with the Capital duty Directive
iv. Compliance: Greece failed to comply with C-
178/05 and a second infringement was opened in
January 2009. It finally complied in May 2009
(law 3763/2009). 01/28/15
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ii. Taxation of Inbound Dividends; C-406/07
i. The incompatible rule: Domestic dividends
are tax exempt whereas inbound dividends
received by individuals are taxed according
to the individual progressive tax rates
ii. The Courts decision (23-4-2009): Less
favorable treatment of inbound dividends
makes it less attractive for Greek residents
to invest in foreign companies.
iii. Compliance (law 3697/2008): as from 1-1-
2009 all dividends are taxed at 10%.
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iii. Taxation of Foreign Partnerships; C-406/07
i. The incompatible rule: Greek partnerships are
taxed at a rate of 20% whereas foreign
partnerships established in Greece are taxed at
25%
ii.The Court’s decision (23-4-2009): The higher
tax rate that applies to branches of foreign
partnerships constitutes less favorable
treatment liable to dissuade partnerships
established in other MS from pursuing
economic activities in Greece through a
branch
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iii. Compliance (law 3763/2009): As from 1-1-2009
branches of foreign partnerships that are
established in Greece are taxed in the same way
as Greek partnerships, under the condition that
the foreign partnership’s nature is substantially
similar to the nature of Greek partnerships.
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C. EU Trends – Pending casesC. EU Trends – Pending cases
Currently pending: cases from 12 MS
- Austria - Italy
- Belgium - Netherlands
- France - Poland
- Germany - Portugal
- Greece - Spain
- Hungary - UK
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Hot TopicsHot Topics
1. Dividend taxation: Austria, Belgium, France, Germany, Spain
2. Depreciation rates for buildings: Germany (2 cases)
3. Immovable property taxes (acquisition, registration): Belgium,
France, Hungary and Greece
4. Deductibility of non-domestic expenses: School Fees (Italy),
Social Security levies: Hungary, Poland, Foreign losses
(Germany)
5. Capital duty directive: UK, Poland
6. Credit or Exemption Method? Austria
7. Transfer pricing rules: Belgium
8. Group taxation: Netherlands
9. Interest payments: Spain
10. Exit taxation: Spain

1. Austria1. Austria
C-70/09: Hengartner and Gasser – Art. 43 EC – is
the carrying on of hunting, if the person licensed
to hunt sells the shot wildlife within the country
concerned a self employed activity within the
meaning of Art. 43 EC, even if that activity is not
intended to make an overall profit?
C-436/437/09: Haribo – Art.56 EC - credit
or exemption method for inbound
dividends from portfolio investments?
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2. Belgium2. Belgium
C-250/08: Comm v. Belgium - Art. 18, 43,
56 EC - Flemish house registration tax –
relief for Flemish house registration tax
only if previous house in Flanders.
C-307/08: Comm v. Belgium – Art. 56 EC,
43 EC - refusal of credit for withholding
tax levied on inbound dividends – foreign
dividends are taxed more heavily than
domestic dividends
C-311/08: Societe de gestion industrielle
(SGI) – Art. 43 EC, 56EC – transfer
pricing rules 01/28/15AVRIO net meeting Athens
30

3. France3. France
C-72/09: Etablissments Rimbaud – Art. 40
EEA – 3% tax on the market value of
immovable property situated in France –
exemption for companies situated in France –
exemption under conditions for companies
situated in EEA (non-EU)
C-310/09: Accor: Art. 43 and 56 EC –
dividends taxation
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4. Germany4. Germany
 C-510/08: Mattner – Art. 39 EC, 43 EC, 56 EC -
gift tax allowance for nonresidents lower than
gift tax allowance for residents
 C-244/09: Comm. v. Germany - buildings
abroad – free movement of capital – Art. 56 EC
– higher percentages of depreciation for building
situated in Germany than for buildings situated
abroad
 C-262/09: Meilicke (2nd) – Art. 56 EC
(dividends)
 C-35/08: Busley/Cibrian: - Art.56 – limited
deductibility of losses abroad and different
depreciation rates 01/28/15
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5. Greece5. Greece
 C-155/09: Comm. v. Greece: Art. 18 EC, 39 EC,
43 EC, 12 EC - real estate transfer tax for the
acquisition of first residential real estate in
Greece – exemption under stricter conditions for
residents of EU nationality – no exemption for
nonresidents of EU nationality
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6. Hungary6. Hungary
 C-253/09: Comm. v. Hungary: Art. 18 EC, 39
EC, 43 EC - Discriminatory tax provisions
concerning the duty levied on the purchase of
residential property – the value of the previous
property sold is not taken into account if not in
Hungary
 C-96/08: CIBA: Art. 43 and 48 EC; companies
established in Hungary have to pay vocational
training levy on the total amount of wage costs
(Hungary and abroad) although social security
obligations are satisfied in the host state
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7. Italy7. Italy
 C-172/08: Pontina Ambiente – regional levy on
waste disposal sites (ecotax)
 C-56/09: Zanotti – deductibility of tuition fees
abroad
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8. Netherlands8. Netherlands
 C-337/08: X Holding – Art. 43 EC, 48 EC –
cross-border group taxation – group taxation
rules only apply if all members of the group are
companies of the same State
 C-352/08: Zwijnenburg – Merger directive in
connection with scheme to avoid NL property
transfer tax – must the benefits of the directive be
withheld from a taxpayer when a series of legal
transactions is aimed at preventing the levying of
a tax other than those taxes to which the benefits
set out in that directive relate? Abuse
01/28/15
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8. Netherlands – cont.8. Netherlands – cont.
C-440/08: Gielen – Art.43 – foreign
taxable person taxed in the NL – the rule is
indeed making a distinction contrary to art
43 EC – BUT the taxable person had the
opportunity to opt to be treated as
domestic taxable person and did do so for
reasons of his own
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9. Poland9. Poland
C-314/08: Filipiak: – Art. 43 -
deductibility of compulsory social
security contributions only if paid based
on provisions of polish legislation
C-441/08: Elektrownia Patnow – capital
duty directive – loans converted into
shares – transition – the loans were taxed
before the accession, the conversion takes
place after the accession
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10. Portugal10. Portugal
 C-105/08: Comm. v. Portugal: Art 49 EC
(services), 56 EC – outbound interest payments -
higher taxation of interest for mortgage from
foreign banks – discrimination of foreign banks
 C-20/09: Comm. v. Portugal: Discriminatory
2005 tax amnesty legislation (RERT) - Art. 56
EC – Rule: penalty of 5% on the value of the
investment – penalty of only 2,5% if the funds
were reinvested in Portuguese government bonds
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11. Spain11. Spain
 C-153/08: Comm. v. Spain: Art. 49 EC –
freedom to provide services - discriminatory tax
treatment on some foreign lottery winnings –
certain domestic lottery winnings are exempt
from taxation – the exemption does not apply to
non-Spanish lottery winnings
 C-487/08: Comm. v. Spain: Art. 43 EC
(establishment ), 56 EC (capital) - outbound
dividends – withholding tax on dividends
received by foreign shareholders higher than tax
due by residents
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11. Spain – cont.11. Spain – cont.
C-269/09, Comm. v. Spain: exit tax
provisions for individuals
41

12. UK12. UK
C-569/07: HSBC – Capital duty – [Art. 43
EC, (49 EC – N/A according to
Mengozzi), 56 EC (primarily applicable)] -
StampDutyReserveTax rules (tax on
clearance services) – contrary to the
capital duty directive
42
Judgment of Oct.1st
, 2009: the rule is
contrary to the Capital Duty Directive
WSJ: Effective yesterday UK Govt
wont apply 1,5% SDRT

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