German cases pending with the ECJ

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German cases pending with the ECJ
Professor Jürgen Lüdicke International Tax
Institute, University of Hamburg and Pricewaterhou
seCoopers, HamburgNew-York-Ring 13 22297
HamburgTel 49 (0) 40 6378 8423E-Mail
Juergen.Luedicke_at_de.pwc.com
PwC
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Agenda

• Groups of cases
• Corporation tax /imputation system cases
• Meilicke, C-292/04
• CLT-UFA, C-253/03
• Keller Holding, C-471/04
• Lasertec, C-492/04
• Treatment of foreign income
• Negative foreign income, Ritter-Coulais, C-152/03
• Negative passive foreign income, Rewe
  Zentralfinanz, C-347/04
• Passive foreign income, Kolumbus Container
  Services, C-298/05
• Charitable organisations
• Centro di Musicologia Walter Stauffer, C-386/04

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The former German imputation system, example
Tax
Profit Tax Net
100 ./.40 60
DE subsidiary
40
Reduction upon distribution
./.10 70
./.10 30
Dividend received Imputation credit Taxable
income Tax Net
70 30 100 ./.40 60
DE parent
./.30
40
Reduction upon distribution
./.10 70
./.10 0
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The former German imputation system, example cont.
Tax
Dividend received Imputation credit Taxable
income Tax Net
70 30 100 ./.45 55
DE individual shareholder 1 (Tax rate 45 )
./.30
45 15
Dividend received Imputation credit Taxable
income Tax Net
70 30 100 ./.0 100
DE individual shareholder 2 (Tax rate 0 )
./.30
0 ./. 30
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Meilicke, C-292/04

• Manninen look-alike
• German imputation system only worked
  domestically
• No imputation credit on foreign dividends
• Breach of the free movement of capital in Art 56
  EC/the freedom of establishment in Art 43 EC?
• Additional issues
• Differences in tax rate on underlying profits
• Temporal restriction of ECJ judgments
• Credit of foreign or refund or foreign tax
• Third country dividends

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CLT-UFA, C-253/03

• Different tax rates for residents and
  non-residents with PE in DE
• Choice of right form of secondary establishment
• Comparison PE and subsidiary
• Lower tax rate for residents only upon
  distribution
• Tax rate 33, 5 or 30 ?
• Additional issues
• Tax exemption of domestic dividends through
  imputation system, Fokus Bank ASA E-1/04
• Right comparison?

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CLT-UFA, C-253/03, cont.
a
b
c
d
e
f
?
?
CLT
CLT
?
CLT
PE
PE
PE
PE
sub
sub
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Keller Holding, C-471/04

• Bosal Holding look-alike
• Non-deductibility of expenses connected with tax
  exempt foreign dividends
• German dividends technically taxed under former
  German imputation system expenses deductible
• Technique of imputation system led to economic
  tax exemption of domestic dividends, thus
  restriction on foreign shareholdings
• Additional issue
• Several cases to different versions of this rule
  pending in Germany

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Lasertec, C-492/04

• Thin capitalisation rule that was subject to
  decision in Lankhorst-Hohorst
• Shareholder in Switzerland Free movement of
  capital to and from Third States
• German rule enacted September 1993, but
  applicable as of 1994 Art 57 EC and
  stand-still applicable?
• Additional issue
• Applicability of non-discrimination article in
  DTC between Germany and Switzerland not
  answered by the referring court

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Rewe Zentralfinanz, C-347/04

• Write-down on foreign passive shareholdings not
  immediately tax deductible
• Foreign holding company with active
  subsidiaries treated as active company
• Foreign holding company with active second-tier
  subsidiaries treated as passive
• Additional issue
• Disposal of foreign shareholdings tax neutral,
  but write-down tax effective coherence
  argument possible? Probably not, since
  write-down only non-deductible for certain
  foreign shareholdings

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Ritter-Coulais, C-152/03

• Negative foreign passive income does not reduce
  German tax base and does not reduce applicable
  tax rate (negative progression)
• Facts of this specific case might lead to
  taxpayers defeat
• BUT
• AG opined that negative foreign income (only
  expenses connected with own real estate?) must
  be deductible for non-residents (where major
  part of income is derived in the Source State -
  Schumacker formula?)
• Additional issue
• Deductibility of negative foreign income
  required where DTC states exemption method?

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Kolumbus Container Services, C-298/05

• German CFC-legislation regularly only applicable
  to foreign corporations, but through exception
  applicable also to foreign PEs
• Consequence Instead of exemption method under
  DTC, foreign PE taxed in Germany with credit
  for foreign tax
• Result Foreign PE taxed as domestic PE, so no
  regular worse treatment of foreign investment
• BUT
• treaty override, as switch from exemption method
  to credit method only in cases of foreign low
  taxed, passive income
• leads to investment control within the internal
  market!

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Centro di Musicologia Walter Stauffer, C-386/04

• Exemption from German corporation tax only for
  resident charitable organisations
• Italian charitable organisation thus subject to
  corporation tax in Germany with its German
  income
• Freedom of establishment applicable to
  non-profit making organisations (keinen
  Erwerbszweck verfolgen)?
• Free movement of capital contains no restriction
  on profit making or non-profit making
  organisations, i.e. applicable in any case