European Tax Law - JKU

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tion of tax jurisdiction on the basis of nationality cannot,
in itself, be considered discriminatory because, as
such, that criterion is totally neutral and does not disadvantage
or favour foreign taxpayers.
In discussing Marks & Spencer, Ghosh wrote that the
consequence of this reasoning should be that “[i]n relation
to a non-resident person, with no source of profits
within the jurisdiction of the taxing State, the State has
not exercised jurisdiction at all”. 16 And then comes the
essence of his criticism of Marks & Spencer: “To require a
State to treat a non-resident as a resident is to extend its
legislative jurisdiction by force and to use the negative
integrative tools of the freedom as a positive integration
mechanism.” 17
The correct decision in principle would have been that the freedoms
... were not breached by the UK group relief provisions.
This conclusion results from the negative integrationist nature
of the freedoms. This conclusion would also have been consistent
with the Court’s previous case law. However the Court held
that there was a prima facie breach but which breach was justified
(and proportional). ... [T]he finding of a prima facie breach
was an error. 18
What the fundamental freedoms do not require is that a
Member State assert jurisdiction where it has not previously
done so. It is the illegitimate exercise of (here fiscal)
jurisdiction, not its existence, that is the subject of
the application of the freedoms. This is a shorter and
more radical formulation of the same criticism made by
Weber and García Prats – that the ECJ is creating positive
rights for taxpayers where there are none.
2.3. Two examples of inconsistency: the wrong
decisions in Bosal Holding and Marks & Spencer
In Bosal Holding, the ECJ’s error is based on the argument
that it wrongly rejected the arguments of coherence
and territoriality and that it did not accept the economic
link between the profits of the foreign subsidiary
and the costs of the share acquisition incurred by the
parent company.
In Marks & Spencer, the error is based on a variation of
the same argument. As Weber put it: 19
Despite the fact that the UK chose not to tax non-resident subsidiaries
(which choice it has the fullest right to make), the
Court has actually created a tax liability for the losses of nonresident
subsidiaries in the UK, since, in principle, the losses of
the subsidiaries have to be taken into account at the level of the
parent company. This is a major breach of Member States’ sovereignty.
Because the United Kingdom relinquished tax jurisdiction
over foreign subsidiaries, it had no obligation whatever
under the fundamental freedoms of the EC Treaty
to take into account the losses of foreign subsidiaries,
and there was no legal basis for creating rights for foreign
taxpayers over which the UK has no jurisdiction.
2.4. Conclusions
The result of this analysis is fairly devastating for the ECJ
case law. The ECJ is exceeding its judicial mandate, it
does not heed the basic principles of national and inter-
national tax policy and, by unlawfully extending its
powers, it creates taxing rights in cases where there
should be none, in particular in “outbound” cases. It is
clear that such fundamental criticisms deserve some
answers, although the answer here concentrates mainly
on the issue of how far the powers of the ECJ reach
under the fundamental freedoms.
3. Answering the Criticisms: What Should the
ECJ Do?
3.1. The ECJ’s consistency in applying the basic
principles
3.1.1. Bosal Holding
Was the ECJ not coherent in the Bosal Holding decision?
From an economic point of view, the argument has been
made that there was a direct link between the profits of
the foreign subsidiary and the interest deduction on the
loan contracted by the Dutch parent company to acquire
the shares of the subsidiary. Since the subsidiary’s profits
were not subject to tax, the interest deduction should not
be allowed against the parent company’s profits. It was
argued that the interest deduction should be taken by
the subsidiary, not by the parent company.
This reasoning overlooks the fact that there is no direct
link, even from an economic point of view, between the
interest expense and the profits of the subsidiary. Economically,
there are indeed two steps, not one, to be
made between the interest deduction and the profits of
the subsidiary. The direct link is between the interest due
on the loan and the acquisition of the shares of the subsidiary.
The acquisition of the shares does not by itself
result in profits either for the subsidiary or for the parent.
In the case of a purchase of the shares for cash, the
cash paid does not even belong to the subsidiary. It
belongs to the parent. The subsidiary is obliged to
finance its current operations by sources other than the
loan contracted for the acquisition of the shares. Therefore,
it would not be economically correct to deduct the
interest expenses paid for the acquisition of the shares of
the subsidiary from its profits. The interest should be
deducted only from the income distributed on the
shares. According to international tax principles, such
dividend distributions to the foreign parent company
can be made subject to the corporate income tax in its
residence country, but not in the residence country of
the subsidiary. Therefore, the interest deduction should
be accounted for in the residence country of the parent
company.
The same reasoning also overlooks the existence of two
legal dividing lines between the Dutch parent and the
foreign subsidiary. The companies are two distinct legal
entities and therefore two distinct taxpayers. In a consolidation
regime, this dividing line could of course be
16. Ghosh, supra note 7, at 81.
17. Id.
18. Id. at 82.
19. Weber, supra note 12, at 124.
92 BULLETIN FOR INTERNATIONAL TAXATION MARCH 2008 © IBFD