On October 26, 2016 on the website of the Court of Justice of the European Union (CJEU) the opinion of Advocate General Campos Sánchez-Bordona in Case C-448/15, Belgische Staat versus Wereldhave Belgium Comm. VA, Wereldhave International NV and Wereldhave NV (ECLI:EU:C:2016:808) was published.
Once again, the Court of Justice has before it a case in which dividends distributed by a subsidiary (in this case, a Belgian company) to its (Netherlands) parent company are subject to a withholding tax levied at source by the tax authorities of the Kingdom of Belgium, in respect of tax on income from investments.
The first of the questions on which the referring court seeks a preliminary ruling relates to the interpretation of Directive 90/435/EEC. In view of the particular status of the parent company in the Netherlands, it is necessary first of all to establish whether it should be treated as falling under ‘companies of a Member State’ to which the directive applies (Article 2).
If that is the case, then the question arises whether the withholding at source is compatible with Article 5 of Directive 90/435, which in principle exempts the profits distributed by a subsidiary to its parent company from such a withholding tax.
If, on the other hand, Directive 90/435 is not applicable in this case, then the referring court asks whether the Belgian legislation which renders the dividends in question subject to tax is consistent with Articles 49 and 63 TFEU.
Facts of the main proceedings and questions referred for a preliminary ruling
· Wereldhave Belgium is a commanditaire vennootschap op aandelen/société en commandite par actions (limited partnership with a share capital) governed by Belgian law, in which the Netherlands-law companies Wereldhave International and Wereldhave are shareholders (holding 35% and 45%, respectively), Wereldhave Belgium being their subsidiary.
· Wereldhave International and Wereldhave are collective investment undertakings, incorporated as public limited companies, which distribute their profits directly to their shareholders and which, under Netherlands law, are liable to corporation tax (vennootschapsbelasting, in the Netherlands), but are subject to a ‘zero rate’ of tax.
· In 1999 and 2000 Wereldhave Belgium distributed profits to Wereldhave International and Wereldhave and paid withholding tax on that investment income at the rate of 5%.
· The two companies each applied to the Belgian tax authorities seeking exemption from the withholding tax levied on the dividends paid. They did so on the basis of Article 5(1) of Directive 90/435 and Article 106(5) of RD/ITC 1992, which was the measure that transposed the directive into Belgian law.
· When the Belgian authorities failed to deliver a decision within six months, Wereldhave Belgium, Wereldhave International and Wereldhave brought an action before the rechtbank van eerste aanleg te Brussel (Court of First Instance, Brussels, Belgium).
· On 20 November 2012, the rechtbank van eerste aanleg te Brussel (Court of First Instance, Brussels) delivered two judgments in which it held that the dividends distributed by Wereldhave Belgium in the 1999 and 2000 tax years to the Netherlands companies Wereldhave International and Wereldhave should not have been subject to withholding tax on investment income and ordered the Belgische Staat (Belgian State) to repay the amounts paid, with interest.
· The Belgian State lodged appeals against the two judgments in the Hof van beroep te Brussel (Court of Appeal, Brussels, Belgium), arguing, essentially, that the recipients of the dividends were Netherlands CIUs which were not eligible for the exemption from withholding tax on investment income since they did not meet the conditions set out in Article 2(c) of Directive 90/435, in conjunction with Article 106(5) of RD/ITC 1992, as they were subject to a zero rate of tax in the Netherlands.
· In the Hof van beroep te Brussel (Court of Appeal, Brussels), Wereldhave Belgium, Wereldhave International and Wereldhave maintained that CIUs taking the legal form of a public limited company are, as a rule, liable to Netherlands corporation tax (Article 1 of the Netherlands Law on corporation tax, 1969), which, they claim, means that the withholding tax in question is not applicable. In support of this, they cited Article 266 of the ITC 1992, Article 106(5) of RD/ITC 1992 and Article 5 of Directive 90/435, arguing that the fact of being subject to tax (‘taxability’) to which Directive 90/435 refers does not require actual payment of tax.
· In the event that Directive 90/435 is not applicable, they argue in the alternative that Articles 49 and 63 TFEU preclude the provisions of Belgian law relied on, as follows, in their view, from the order of the Court of Justice of 12 July 2012, Tate & Lyle Investments (C‑384/11, EU:C:2012:463).
· In those circumstances, the Hof van beroep te Brussel (Court of Appeal, Brussels) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
‘(1) Is Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States to be construed as precluding a national rule that does not waive Belgian withholding tax on investment income in respect of dividend payments made by a Belgian subsidiary to a parent company established in the Netherlands that fulfils the condition of a minimum participating interest and the holding of such an interest, on the ground that the Netherlands parent company is a fiscal investment undertaking that is required to distribute all its profits to its shareholders and, subject to that proviso, is eligible for the zero rate of corporation tax?
(2) If the answer to the first question is in the negative, are Articles 49 (ex Article 43 EC) and 63 (ex Article 56 EC) of the Treaty on the Functioning of the European Union (in the version in force since the amendment and renumbering by the Treaty of Lisbon) to be construed as precluding a national rule that does not waive Belgian withholding tax on investment income in respect of dividend payments made by a Belgian subsidiary to a parent company established in the Netherlands that fulfils the condition of a minimum participating interest and the holding of such an interest, on the ground that the Netherlands parent company is a fiscal investment undertaking that is required to pay all its profits to its shareholders and, subject to that proviso, is eligible for the zero rate of corporation tax?’
· Wereldhave Belgium, Wereldhave International, Wereldhave, the Belgian, Czech, French and Italian Governments and the European Commission have submitted written observations. No hearing was held.
From the assessment made by the Advocate General
The first question referred for a preliminary ruling
· Directive 90/435 is intended to avoid double taxation on the distribution of dividends between subsidiaries and parent companies with residence in different Member States, which is deemed to hinder the creation of undertakings or the grouping together of companies on a Community scale. According to the first and third recitals of the directive, read together, in order to facilitate this grouping together of companies, it is necessary to remove ‘restrictions, disadvantages or distortions arising in particular from the tax provisions of the Member States’ which discriminate against or ‘disadvantage’ relationships between parent companies and subsidiaries which are not resident in the same Member State.
· To that end, two particular types of action are to be taken under Directive 90/435. First, the State of the parent company must either refrain from taxing profits received from its subsidiary, or tax such profits ‘while authorising the parent company to deduct from the amount of tax due that fraction of the corporation tax paid by the subsidiary which relates to those profits’. Secondly, the directive exempts profits or dividends distributed by a subsidiary to its parent company from withholding tax, provided certain conditions are met. The second of these provisions is at the heart of the dispute in the main proceedings.
· This ‘common system’ does not apply in every case or to all parent/subsidiary relationships. The scope of Directive 90/435 is limited by the definition (in Article 2) of which ‘compan[ies] of a Member State’ it affects. Specifically, it lays down a series of mandatory conditions which must be met in order to qualify for that designation, which include the company being ‘subject to one of the following taxes, without the possibility of an option or of being exempt: … vennootschapsbelasting in the Netherlands …’ (Article 2(c)).
· The dispute arises because the parent companies in the main proceedings pay corporation tax (vennootschapsbelasting) at a zero rate in the Netherlands. Does this mean that they are ‘exempt’ from payment of the tax in their State of residence? If so, the application of Article 2(c) of Directive 90/435 would automatically mean that the system established in that directive does not affect this case, since that provision requires not only that the company be subject to corporation tax but also that it not be exempt.
· The argument put by the appellants in the main proceedings is that the mere fact that they are taxable persons is enough to satisfy the requirement in question. Taxability does not necessarily require actual levying of the tax and it still exists even if there is also an exemption or taxation at a reduced rate.
· The appellants’ approach might have been a valid one if Article 2(c) of Directive 90/435 had mentioned only taxability. That is not the case though: the provision introduces a positive requirement (being subject to tax) and a further negative one (not being able to rely on an exemption), which must both be met at the same time. It is significant that the arguments made by the appellants focus on taxability, almost completely to the exclusion of exemption. Exemption implies that, despite the fact that the taxable event has occurred (in other words, taxability), no payment of the relevant tax is required as the legislature has deemed fit to release a particular class of companies from the obligation to pay the tax.
· As I see it, when Netherlands tax law makes certain bodies (in this case CIUs) subject to corporation tax and then immediately provides, in abstracto, that they should pay at a zero rate, it is in fact granting them an exemption from the tax burden. By doing so, it is removing them from the scope of Directive 90/435.
· I fail to see that there are any solid grounds for disputing this assessment. By definition, a ‘zero rate’ of corporation tax is equivalent to a complete absence of tax, in other words, a full exemption. Where this outcome has been achieved by means of an express legal provision, which establishes permanently and in advance that it is the case for a certain class of bodies, irrespective of the profits received, I think it is incontrovertible that this is a true exemption from the tax, within the meaning of Article 2(c) of Directive 90/435.
· A further line of reasoning confirms that the Netherlands companies involved in this case fall outside the scope of Directive 90/435. As I have already mentioned, that directive seeks to prevent two Member States both levying the same type of tax (on the profits of companies) in the context of the relationships between parent companies and subsidiaries. As the other participants in the proceedings have argued, it is precisely in order to achieve this aim that Directive 90/435 does not apply to bodies that are not subject to, or are exempt from, the tax. Both an absence of taxability and a total exemption of their income (in this case investment income) remove the risk that a company to which either of these scenarios applies will be charged corporation tax twice, so that the need to apply the common system under the directive disappears.
· The Commission’s observations recount how, at the meeting of the Council on 11 June 1990, prior to the adoption of Directive 90/435, several statements, intended to be included in the minutes, were prepared at the request of different governments, which expressly excluded certain classes of entity (including Netherlands CIUs) from the scope of the directive. Although these statements are not binding, they are still of interest from an interpretative point of view. Although the proposals did not form part of the final text, this was not because their content was rejected but because of the certainty that the wording of Article 2(c), in so far as it related to exemption from tax, itself covered those exclusions.
· In conclusion, Directive 90/435 is not applicable to a situation of the kind that is at issue in the main proceedings, in view of the fact that the parent companies cannot be considered ‘companies of a Member State’ within the meaning of Article 2(c) of the directive. It is therefore not necessary to assess whether there is a conflict between the directive and the Belgian legislation introducing withholding at source of corporation tax (at the rate of 5%) on dividends distributed by the subsidiary to its parent companies.
The second question referred for a preliminary ruling
· The answer to the first question does not, however, foreshadow the answer to the second. As the Court has already held, for example in the judgment inAberdeen Property Fininvest Alpha, in situations not covered by Directive 90/435 (where ‘it is for the Member States to determine whether, and to what extent, economic double taxation of distributed profits is to be avoided and, for that purpose, to establish, either unilaterally or by conventions concluded with other Member States, procedures intended to prevent or mitigate such economic double taxation’), measures that are contrary to the freedoms of movement guaranteed by the Treaty must not be introduced. The referring court’s second question concerns precisely this issue.
· The Italian and Czech Governments and the Commission submit that the second question may be inadmissible, since the factual and legislative context of the dispute is not sufficiently well described by the referring court. The French Government does not even address this question in its observations.
· The order for reference is indeed flawed in this way. First, it does not explain how the Belgian tax legislation is supposed to lead to non-resident companies being treated less favourably than resident companies such that a fundamental freedom guaranteed by the TFEU is infringed. Then, more importantly, it fails to explain in any detail the national or treaty-based rules which would be relevant when assessing whether there is any infringement of these freedoms.
· These omissions are particularly significant when considered in the light of the method that the Court of Justice frequently uses when tackling references for preliminary rulings in similar cases relating to the scope of direct taxation. The method is to proceed in stages or steps, seeking first of all to identify the relevant freedom and the possible restriction which might have occurred. The second step is for the Court to compare the situations at issue to see if they have been treated differently, which requires a detailed examination of the domestic legislation giving rise to this. Lastly, the Court will investigate any possible justifications based on overriding reasons in the public interest and the proportionality of the national legislation restricting the relevant freedom.
· For each of these stages it is essential for the Court of Justice to have adequate information, provided by the referring court, concerning the applicable national law. This is not the case here. For example, in order to evaluate whether there is any unequal corporation tax treatment in the main proceedings, the comparison should not be between companies that are resident in Belgium and those that are not, speaking generally, but between Netherlands CIUs and their Belgian equivalents (investment companies), yet the order for reference contains no specific mention of the legal regime applying to the latter.
· Nor does the order contain any legislative references which might indicate with any clarity whether or not Belgian tax legislation provides for mechanisms which would mitigate the imposition of a series of tax charges, or shift the tax charge, exclusively with regard to CIU-type companies that are resident in Belgium and not with regard to other companies. Furthermore, the referring court does not take into consideration the double tax convention between Belgium and the Netherlands, the provisions of which may, where relevant, cancel out or mitigate the negative effects on Netherlands companies that supposedly result from the restriction on the free movement of capital (Article 56 TFEU) produced by the Belgian tax legislation. Finally, the order for reference makes no reference to any possible justifications, based on overriding reasons in the public interest, or to the lack of proportionality of the alleged restriction.
· Particularly notable is the fact that the order for reference lacks information, which cannot simply be supplied by referring to the submissions of the parties, concerning the tax rules applicable to Belgian investment companies at the relevant time, as opposed to those governing Netherlands CIUs, despite the fact that this is the fundamental issue in the case. Very different perspectives on this point emerge from the observations of the Belgian Government and those of the appellants and the Court of Justice is unable to settle this dispute given that it is for the national court alone to identify, interpret and apply domestic law.
· Specifically, the Belgian Government submits that, under the Belgian tax rules applying to resident investment companies (which are different from the general rules), the withholding tax was a ‘final tax, since it could not be offset against tax payable by those companies and was not refundable’. In support of this approach it relies on Article 123 of RD/ITC 1992, in conjunction with Article 143(1) and (2) of the Law of 4 December 1990. It goes on to state that, although the problem at issue is similar to that which gave rise to the judgment of 25 October 2012, Commission v Belgium, the tax rules on which the Court ruled in that instance, which concerned investment companies with no permanent establishment in Belgium, were different from those applied to the dividends distributed by Wereldhave Belgium to its parent company, since the former rules allowed for the amount withheld to be offset or refunded, but this was not permitted under the latter.
· If these assertions on the part of the Belgian Government were to be borne out by the facts (which is something that the referring court must ascertain), this would establish that investment companies resident in Belgium were not able to neutralise the tax burden relating to the withholding tax paid on their investment income. In other words, it would demonstrate that Netherlands CIUs and Belgian investment companies receive the same tax treatment in Belgium with respect to the withholding for corporation tax. The tax is not waived for either the former or the latter, because it is final and not refundable, which means that there is no discrimination against the former.
· If this were to be the case, there would, I should stress, be no doubt that the national legislation making the withholding tax applicable to investment companies is compatible with Articles 49 and 56 TFEU. The Court of Justice has already held, specifically in relation to the Kingdom of Belgium, that the State in which the company making the distribution is resident cannot be required ‘to ensure that profits distributed to a non-resident shareholder are not liable to a series of charges to tax or to economic double taxation, either by exempting those profits from tax at the level of the company making the distribution or by granting the shareholder a tax advantage equal to the tax paid on those profits by the company making the distribution’. It went on to say that such a requirement would mean that ‘that State would have to abandon its right to tax a profit generated by an economic activity carried on in its territory’.
· It could, however, be the case that the legislation applied in this case to the investment companies was not precisely the same as the version given by the Kingdom of Belgium in its observations. Had the referring court considered this legislation, an analysis of its provisions might, hypothetically, have led to a finding that the legislative parameters in force in the 2009 and 2010 tax years do not differ from those considered by the Court of Justice in the order of 12 July 2012, Tate & Lyle Investments or in the judgment of 25 October 2012, Commission v Belgium, both of which predate the order for reference and relate specifically to the Belgian tax rules governing corporation tax.
· Under these conditions, the Court of Justice cannot be expected to resolve the dispute (between Wereldhave and the Belgian Government) as to what is actually the domestic legal framework to be used to compare the tax rules applicable to Netherlands CIUs and Belgian investment companies. This is a task which falls to the referring court and the Court of Justice cannot take over this task or provide a satisfactory preliminary ruling on the basis of conjecture.
· In view of these circumstances, I think that there is no alternative but to hold that the second question referred for a preliminary ruling is inadmissible, since it does not meet the minimum requirements set out in Article 94 of the Rules of Procedure of the Court of Justice.
· If the Court decides, nevertheless, to look at the substance of the question and finds that the tax treatment accorded to Netherlands CIUs was less favourable in terms of withholding tax on dividends than that enjoyed by Belgian investment companies, I fear that I cannot do much more than to repeat in very general terms the previous case-law in this area, or to refer specifically to the order of 12 July 2012, Tate & Lyle Investments (C‑384/11, EU:C:2012:463), with such adjustments as may be necessary to suit the circumstances under consideration.
· In effect, just as in Tate & Lyle Investments, the Belgian Government has clearly chosen to exercise its power of taxation over dividends distributed by resident companies to companies resident in other Member States. Consequently, non-resident companies in receipt of those dividends find themselves in a situation equivalent to that of resident companies as regards the risk of a series of charges to tax on dividends distributed, so that in this respect they must receive the same treatment as that received by resident companies.
· In the same vein, the Court of Justice should make the referring court aware that a less favourable treatment would be liable to deter companies established in another Member State from investing in Belgium and thus constitutes a restriction on the free movement of capital prohibited, in principle, by Article 63 TFEU.
· Since the possibility cannot be excluded that a Member State might ensure compliance with its Treaty obligations by concluding a convention with another Member State for the purposes of avoiding double taxation, the application of which allows the effects of the difference in treatment under national legislation to be compensated for, the referring court would have to assess the effect of the double tax convention between Belgium and the Netherlands, which I have mentioned previously, and decide whether it ensures that non-resident companies are treated in the same way as resident companies under Belgian law.
· Finally, in accordance with the existing decisions in this area, the Court of Justice should remind the referring court that if, despite the mitigation of the tax by virtue of the double tax convention, it believes that non-resident companies are still treated less favourably, it should consider whether there are overriding reasons in the public interest which justify such rules. Even if such reasons did exist, it would be necessary, finally, to consider whether the national measures restricting the free movement of capital are appropriate for the purpose of attaining the objective which they pursue and do not go beyond what is necessary in order to attain it, as indicated in the judgment of 25 October 2012, Commission v Belgium.
Conclusion
The Advocate General suggests that the Court declare the second question referred by the Hof van beroep te Brussel (Court of Appeal, Brussels) inadmissible and reply as follows to the first question:
Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States is not applicable to a dispute concerning withholding tax levied in Belgium on the profits distributed by a subsidiary to its parent company where the latter is a Netherlands collective investment undertaking that makes use of the zero rate of corporation tax.
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