A German company resolved a share capital reduction of €16 m in preparation for a capital repayment to avoid an IFRS consolidation requirement for its sole shareholder, a public utility. It took the reduction to capital reserve, waited as required by the German Company Act for one year after a public announcement to it’s creditors, reported the reduction to the German trade registry and repaid an amount of €4 m to the shareholder. This repayment was sufficient to reduce the assets below the level for the consolidation requirement. The tax administration recharacterised the payment to a “dividend distribution” subject to withholding tax under the German Corporate Tax Act provision to the effect that payments to shareholders are deemed to be made from retained earnings unless unambiguously specified as repayments of share capital. The Supreme Tax Court concluded that the unambiguous specification need not be solely in the capital reduction/repayment resolution itself. The reduction resolution stated being preparatory to a capital repayment to the shareholder, but did not state the (at the time unknown) amount. It was clear from all the circumstances that the repayment followed the capital reduction as soon as the German Company Act permitted. There was every indication that a capital payment was intended and nothing to suggest that anything else had ever been contemplated. Accordingly, the court accepted the payment as a tax-free repayment of share capital, despite the interim booking as a capital reserve. Click here for English translation Click here for other translation ...

The question in this case, was whether EU community law precluded Belgien statutory rules under which interest payments were reclassified as dividends, and thus taxable, if made to a foreign shareholder company. A Belgian subsidiary was established and the two shareholders of the Belgian subsidiary and the parent company, established in the Netherlands, were appointed as directors. The subsidiary paid interest to the parent which was considered by the Belgian tax authorities in part to be dividends and was assessed as such. The European Court of Justice was asked to rule on the compatibility of these Belgien statutory rules with EU Community law The Court ruled that art. 43 and 48 EC precluded national legislation under which interest payments made by a company resident in a member state to a director which was a company established in another member state were reclassified as taxable dividends, where, at the beginning of the taxable period, the total of the interest-bearing loans was higher than the paid-up capital plus taxed reserves, whereas, in the same circumstances, interest payments made to a director which was a company established in the same member state were not reclassified and so were not taxable. National legislation introduced, as regards the taxation of interest paid by a resident company in respect of a claim to a director which was a company, a difference in treatment according to whether or not the latter company had its seat in Belgium. Companies managed by a director which was a non resident company were subject to tax treatment which was less advantageous than that accorded to companies managed by a director which was a resident company. Similarly, in relation to groups of companies within which a parent company took on management tasks in one of its subsidiaries, such legislation introduced a difference in treatment between resident subsidiaries according to whether or not their parent company had its seat in Belgium, thereby making subsidiaries of a non resident parent company subject to treatment which was less favourable than that accorded to the subsidiaries of a resident parent company. A difference in treatment between resident companies according to the place of establishment of the company which, as director, had granted them a loan constituted an obstacle to the freedom of establishment if it made it less attractive for companies established in other member states to exercise that freedom and they might, in consequence, refrain from managing a company in the member state which enacted that measure, or even refrain from acquiring, creating or maintaining a subsidiary in that member state. The difference in treatment amounted to a restriction on freedom of establishment which was prohibited, in principle, by art. 43 and 48 EC. Such a restriction was permissible only if it pursued a legitimate objective which was compatible with the Treaty and was justified by overriding reasons of public interest. It was further necessary, in such a case, that its application was appropriate to ensuring the attainment of the objective thus pursued and did not go beyond what was necessary to attain it. “In order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory (Test Claimants in the Thin Cap Group Litigation, paragraph 74 and the case‑law cited” Even if the Belgian application of such a statutory limit sought to combat abusive practices, it went beyond what was necessary to attain that objective ...

Two inter-company loans were provided to Statoil Angola by it’s Norwegian parent company, Statoil Norway ASA, and a Belgian sister company, Statoil Belgium (SCC). Statoil Angola only had the financial capacity to borrow an amount equal to the loan from Statoil Belgium. Hence, no interest was paid on the loan from Statoil Norway. The tax authorities divided Statoil Angola’s borrowing capacity between the two loans and imputed interest payments on part of the loan from Statoil Norway in an assessment for the years 2000 and 2001. The Supreme Court, in a split 3/2 decision, found that Statoil’s allocation of the full borrowing capacity of Statoil Angola to the loan from the sister company in Belgium was based on commercial reasoning and in accordance with the arm’s length principle. The Court majority argued that Statoil Norway – unlike Statoil Belgium – had a 100% ownership of Statoil Angola, and the lack of interest income would therefore be compensated by an increased value of it’s equity holding in Statoil Angola. Click here for translation ...