Tag: Economic activity

Netherlands vs “X S.à.r.l./B.V. “, January 2020, Supreme Court, Case No 18/00219 (ECLI:NL:HR:2020:21)

X S.à.r.l./B.V. filed corporate income tax returns for the year 2012 as a foreign taxpayer, declaring a taxable profit and a taxable amount of nil. No dividend distribution had been declared for income tax purposes Following an audit, the tax authorities included the dividend distribution in the taxable income and tax was levied on the dividend distribution at a rate of 2.5 per cent. In dispute before the Supreme Court was whether the dividend distribution was taxable to the X S.à.r.l./B.V. under Section 17(3) opening words and (b) of the Act. The dispute centred on the questions (i) whether X S.à.r.l./B.V. held the substantial interest in Holding with the main purpose or as one of the main purposes to avoid the levying of income tax or dividend tax on the DGA, and (ii) whether this substantial interest was not part of the business assets of X S.à.r.l./B.V.. Depending on the answers to those questions, the dispute was whether levying corporate income tax on the dividend distribution (a) was prevented by the operation of Directive 2011/96/EU (hereinafter: the Parent-Subsidiary Directive), or (b) was contrary to the freedom of establishment provided for in Article 49 TFEU. Judgement of the Supreme Court The Supreme Court upheld the assessment issued by the tax authorities. Excerpt “When examining whether an arrangement is abusive, it is not sufficient to apply predetermined general criteria. In each specific case, the arrangement in question must be examined as a whole. Automatic application of an anti-abuse measure of general scope without the inspector being required to produce even the slightest evidence or indications of abuse goes beyond what is necessary to prevent abuse (see Eqiom and Enka, paragraph 32). If it is sufficient for the inspector to produce such initial evidence or indications, the taxpayer must be given the opportunity to produce evidence showing the existence of economic reasons for the arrangement (cf. ECJ 20 December 2017, Deister Holding AG and Juhler Holding A/S, joined cases C 504/16 and C 613/16, ECLI:EU:C:2017:1009, para 70). 2.6.6. In applying the scheme, the starting point for the allocation of the burden of proof is that the inspector states the facts and circumstances from which it follows that the subjective condition has been fulfilled, and, in the event of reasoned challenge, makes them plausible (cf. Parliamentary Papers II 2011/12, 33 003, no. 10, p. 94). This principle is in line with Union law (cf. T Danmark judgment, paragraph 117). 2.6.7. When applying Union law, the fulfilment of the subjective condition merely provides a presumption of proof that abuse has occurred. This is confirmed by the T Danmark judgment, paragraph 101. If such a presumption of abuse exists, the taxpayer must be given the opportunity to rebut that presumption. The taxpayer may overcome this presumption by establishing, and if necessary demonstrating, facts indicating that the holding of the substantial interest does not constitute a wholly artificial arrangement unrelated to economic reality. A group of companies may be regarded as a wholly artificial arrangement if, in a group structure involving (a) non-EU resident, underlying shareholder(s) and a company resident in the Netherlands, a body resident within the Union has been interposed in order to avoid the levying of Dutch income or dividend tax, without this EU body or the body’s establishment in the EU Member State having any real significance (cf. Parliamentary Papers II 2011/12, 33 003, no. 3, pp. 105 and 106, and T Danmark judgment, paragraph 100). 2.6.8. The Court did not disregard the foregoing in 2.6.2 to 2.6.7 above. The judgments challenged by ground I do not show an error of law and, as interwoven with valuations of a factual nature, cannot otherwise be examined for correctness by the Supreme Court in the cassation proceedings. Nor are those judgments incomprehensible. For this reason plea I also fails.” Click here for English translation Click here for other translation Dutch-Case-No-18-00219-ORG ...

Germany vs Cyprus Ltd, June 2018, BFH judgment Case No IR 94/15

The Bundesfinanzhof confirmed prior case law according to which the provisions on hidden deposits and hidden profit distributions must be observed in the context of the additional taxation. On the question of economic activity of the controlled foreign company, the Bundesfinanzhof refers to the ruling of the European Court of Justice concerning Cadbury-Schweppes from 2006. According to paragraphs §§ 7 to 14 in the Außensteuergesetz (AStG) profits from controlled foreign companies without business activity can be taxed in Germany. In the case at hand the subsidiary was located in a rented office in Cyprus and employed a resident managing director. Her job was to handle correspondence with clients, to carry out and supervise payment transactions, manage business records and keep records. She was also entrusted with obtaining book licenses to order these sub-licenses for the benefit of three of Russia’s and Ukraine’s affiliates, which distributed the books in the Russian-speaking market. The license income earned by subsidiary was taxed at 10 percent in Cyprus. The Income was considered ‘passive’ as the subsidiary lacked the necessary ‘actual economic activity’. On that basis the Bundesfinanzhof rejected the appeal of the taxpayer. Click here for English translation Click here for other translation Bundesfinanzhof I R 94-15 ...