EC Tax Rules / Court Cases

European principle of freedom of establishment vs internal restrictions.
The European Court of Justice (ECJ) ruled on May 15th 2008 (C-414/06, Lidl Belgium), on whether a national tax regime which does not allow a resident company to deduct losses incurred in another Member State by its permanent establishment (PE), but allows losses incurred by a resident PE to be deducted, is incompatible with the EC Treaty.
Based on a comparison between a company with a foreign PE and a company with a domestic PE, the ECJ considered that a tax regime which does not allow deduction of losses incurred by a foreign PE represents a restriction of the freedom of establishment principle. However, the ECJ considered such restriction may be justified by the need to safeguard the balanced allocation of taxing rights between Member States and in order to avoid the same losses being taken into account twice.
In a decision dated December 22nd 2008 (C-282/07, Truck Center), the ECJ has consolidated its position affirming that the principle of free flow of capital was not opposed to a national tax regulation providing for a withholding on interest paid to a company from another Member State while similar interest paid to a company residing in the same Member State could be exempt from withholding tax.
This can be justified by the fact that interest is subjected to corporation tax in the Member State where both companies are located.

VAT Package
1. Directive 2008/8/CE concerning the place of taxation of services
The directive 2008/8/CE, which amends the rules relating to the place of taxation of services, will progressively come into force between 2010 and 2015, depending on the nature of the service. It discontinues the taxation in the Member State where the supplier is established and now implements two solutions: B to B services are taxed in the State of the buyer whereas B to C services are taxed in the State of the supplier. It allows for some exceptions with respect to transport, cultural and immaterial services.
2. Directive 2008/9/CE concerning VAT reimbursement to non European businesses
The directive upholds the condition of reimbursement which is the absence of any establishment and operation in the State of reimbursement, but refuses the reimbursement for VAT invoiced by error and limits it for subjects partially liable to VAT. Moreover, it implements new practical rules, imposing electronic application for reimbursement via the internet portal available in the State of establishment. The directive updates the list of compulsory mentions that must be given for the application and creates a codification of goods and services. With respect to procedural points, the directive makes it possible for the reimbursing Member State to request the provision of copies of the invoices amounting to 1,000 Euros or more (250 Euros for fuel) and consequently extends the reimbursement lead-time to 8 months.

Business tax (“Taxe Professionnelle”): exemption of new investments
The companies which acquired new fixed assets that are not subject to property tax, or which created such fixed assets between October 23rd 2008 and December 31st 2009 may be eligible to a total and final business tax exemption on those fixed assets.

Tax consolidation
The French tax consolidation system applies to French resident companies – or to French permanent establishments – which control, directly or indirectly, at least 95 %, of a subsidiary.
Pursuant to decision dated November 27th 2008 (C-418/07 Société Papillon), the European Court of Justice ruled that this tax consolidation applied to French companies, even if there was between them an intermediate holding company resident of another Member State.

Deutsche Shell GmbH case (EJC C-293/06)
Further to the European Court of Justice's decision issued on February 28h 2008, a Member State’s tax legislation violates the freedom of establishment by considering a currency exchange loss resulting from the repatriation of start-up capital granted to a foreign permanent establishment as part of the latter’s profits, and disallowed its deduction from the taxable basis in the head-office’s Member State. In addition, the fact that, should such loss be deductible, according to the general loss relief rule it could only apply insofar as no tax-free profits are obtained from the foreign permanent establishment, has been considered as incompatible with the freedom of establishment.

Real estate tax of 3%
According to French tax rules, French or foreign companies whose assets mainly comprise real estate in France can be subjected to a 3% tax on the market value of these real estate assets if the company is resident in a jurisdiction which has not concluded with France a Treaty including an Exchange of Information or Administrative Assistance Clause, or if it fails to communicate information relating to its final shareholders, or undertake to do so, upon request of the French Tax authorities. The French Tax authorities released comments (Ruling August 7th 2008, 7 Q-1-08) and stated that the commitments to communicate some information to the French Tax authorities which were made prior to January 1st 2008, must be repeated before December 31th 2009.

Possibility for joint stock companies to opt for eligibility to personal income tax
Unlisted joint stock companies can now opt for eligibility to personal income tax if they have been incorporated for less than 5 years and abide by some conditions regarding shareholding and activity thresholds. They can then renounce this option in the first 3 months of each tax period. This waiver is final. After 5 years, the company is automatically subjected to corporation tax.

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