(May 21, 2015)
On May 21, 2015 the European Court of Justice (CJEU) ruled in Case C‑560/13 Finanzamt Ulm versus Ingeborg Wagner-Raith (intervener: Bundesministerium der Finanzen) (ECLI:EU:C:2015:347).
· In the case of holdings in third-country funds, does the free movement of capital provided for in Article [63 TFEU] not preclude national legislation (in this instance Paragraph 18(3) of the AuslInvestmG) which provides that, in certain circumstances, national investors in foreign investment funds are deemed to have received, in addition to distributions, notional earnings in the amount of 90% of the difference between the first and the last redemption price of the year, but of at least 10% of the final redemption price (or of the stock exchange or market value), because that legislation, which has remained essentially unchanged since 31 December 1993, is concerned with the provision of financial services within the meaning of the rule on the protection of established rights contained in Article [64(1) TFEU]?
If the answer to Question 1 is in the negative:
· Does the holding in such an investment fund established in a third country always constitute a direct investment within the meaning of Article [64(1) TFEU] or is the answer to this question dependent on whether, under the national law of the State in which the investment fund is established or on other grounds, the holding allows the investor to be actually involved in the management or control of the investment fund?
The dispute in the main proceedings and the questions referred for a preliminary ruling
· In the years 1997 to 2003, Ms Schweier had an account with LGT Bank AG (‘LGT’) in Liechtenstein, containing, inter alia, holdings in investment funds which were established in the Cayman Islands. Those investment funds, which did not comply with the obligations regarding notification, authorisation and proof laid down in Paragraph 17(3) of the AuslInvestmG and which had not appointed an agent pursuant to the third sentence of Paragraph 18(2) of the AuslInvestmG, were, for that reason, regarded in Germany as ‘black’ funds, to which Paragraph 18(3) of the AuslInvestmG was liable to be applied.
· In 2008, Ms Schweier informed the Finanzamt Ulm for the first time that in the years in question she had received investment income from, inter alia, the account which she held with LGT. She thus declared that income to that tax authority by means of amended tax returns, after calculating its amount on the basis of the documents that LGT had made available to her, and then she determined a lump sum in respect of each of the tax years at issue pursuant to Paragraph 18(3) of the AuslInvestmG.
· The tax authority concerned amended Ms Schweier’s tax notices for those tax years, determining the amount of investment income from the holdings at issue as being EUR 44 970.69 for 1997, EUR 63 779.07 for 1998, EUR 106 826.16 for 1999, EUR 94 999.24 for 2000, EUR 96 055.10 for 2001, EUR 100 157.99 for 2002 and EUR 116 823.07 for 2003, that is to say, a total of EUR 623 611.32.
· Ms Schweier lodged an objection against that additional tax, arguing that the flat-rate taxation provided for in Paragraph 18(3) of the AuslInvestmG was incompatible with the principle of the free movement of capital. According to her, the additional taxation had to be based only on actual earnings, the amount of which had to be evaluated. Ms Schweier asked for her investment income to be taxed under Paragraph 18(1) of the AuslInvestmG and made available to the tax authority concerned the documents and the calculations necessary for that purpose.
· After the Finanzamt Ulm dismissed that objection, Ms Schweier brought an action before the Finanzgericht Baden-Württemberg (Finance Court, Baden-Württemberg, Germany). By judgment of 27 February 2012, that court essentially upheld the action, holding that Paragraph 18(3) of the AuslInvestmG infringed the principle of the free movement of capital; it consequently ruled that the investment income actually received by Ms Schweier in respect of the holdings in question was, for each of the tax years in question, lower than the sum determined in accordance with Paragraph 18(3) of the AuslInvestmG and amounted to a total of EUR 260 872.97. The Finanzamt Ulm brought an appeal on a point of law against that judgment before the Bundesfinanzhof (Federal Finance Court).
· In the appeal on a point of law, the Finanzamt Ulm submits that Paragraph 18(3) of the AuslInvestmG must apply to the main proceedings, as that provision is covered by the standstill clause laid down in Article 64(1) TFEU. First, since the conduct of an investment fund is inextricably linked with the taxation of the investors who have holdings in that fund, Paragraph 18(3) of the AuslInvestmG is directed at not only the investors but also the investment funds themselves and therefore relates to the provision of financial services within the meaning of Article 64(1) TFEU. Second, participation in an investment fund is a direct investment.
· According to the referring court, the flat-rate taxation provided for in Paragraph 18(3) of the AuslInvestmG is liable to deter German investors from investing in funds which do not satisfy the requirements laid down in Paragraphs 17 and 18(1) of the AuslInvestmG, since that flat-rate taxation is, generally, greater than the taxation borne by investors with holdings in resident funds who do not provide proof of the income which they derive from them. In addition, it is not possible for a person possessing holdings in a ‘black’ fund to provide proof of the amount of income actually received and thereby to avoid that flat-rate taxation, whereas the Law on Investment Management Companies does not provide for flat-rate taxation of that kind in the case of investment in a resident fund.
· The referring court explains that, essentially, the rule laid down in Paragraph 18(3) of the AuslInvestmG and applied by the Finanzamt Ulm to Ms Schweier in respect of the period in question already existed on 31 December 1993. It adds that the investment funds in which Ms Schweier possessed holdings had to be regarded as originating from a third country, since those funds had been set up on the basis of the rules governing authorisation and supervision in force in the Cayman Islands and the investment fund management companies concerned had their seat there.
· However, the referring court doubts that the substantive conditions for applying Article 64(1) TFEU are met and that Paragraph 18(3) of the AuslInvestmG relates to the provision of financial services or to direct investment.
· In those circumstances, the Bundesfinanzhof decided to stay proceedings and to refer the following questions to the Court for a preliminary ruling:
- ‘In the case of holdings in third-country funds, does the free movement of capital provided for in Article [63 TFEU] not preclude national legislation (in this instance Paragraph 18(3) of the AuslInvestmG) which provides that, in certain circumstances, national investors in foreign investment funds are deemed to have received, in addition to distributions, notional earnings in the amount of 90% of the difference between the first and the last redemption price of the year, but of at least 10% of the final redemption price (or of the stock exchange or market value), because that legislation, which has remained essentially unchanged since 31 December 1993, is concerned with the provision of financial services within the meaning of the rule on the protection of established rights contained in Article [64(1) TFEU]?
If the answer to Question 1 is in the negative:
- Does the holding in such an investment fund established in a third country always constitute a direct investment within the meaning of Article [64(1) TFEU] or is the answer to this question dependent on whether, under the national law of the State in which the investment fund is established or on other grounds, the holding allows the investor to be actually involved in the management or control of the investment fund?’
The CJEU ruled as follows:
Article 64 TFEU must be interpreted as meaning that national legislation, such as that at issue in the main proceedings, which provides for flat-rate taxation of the income of holders of units in a non-resident investment fund when the latter has not fulfilled certain statutory obligations constitutes a measure which relates to movement of capital involving the provision of financial services within the meaning of that article.
For further information click here to be forwarded to the text of the ruling as published on the website of the CJEU, which will open in a new window.
Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).
Our selection of CJEU Rulings regarding Free movement of capital can be found here.
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