tax notes international - Tuck School of Business - Dartmouth College

EUROPEAN UNION
ensure that there is a connection between, on the one
hand, the granting of that tax advantage and, on the
other hand, the taxation of profits generated through
the use of those assets.’’
The ECJ replied that the rental income at issue is
taxable in Austria; therefore, Austria’s right ‘‘to exercise
its taxing powers in relation to activities carried on
in its territory’’ was not jeopardized.
Coherence of the Tax System
In response to arguments about the need to safeguard
the coherence of the tax system, the ECJ noted
that there was no direct link between the investmentpremium
tax advantage granted to the lessor and the
subsequent taxation of the lessee’s income generated
through the use of the leased assets.
Need to Prevent Abuse
The Austrian government argued that the tax rules
at issue were aimed at preventing ‘‘wholly artificial arrangements
involving transfers for remuneration.’’ One
concern mentioned by the government was that ‘‘the
lessor could hand over all or part of the premium to
the lessee which, for its part, could use that asset to
generate profits in other Member States. Thus, it would
be possible to circumvent the fact that the advantage is
limited to Austria.’’ Without the tax rules at issue, ‘‘it
would be possible, merely by setting up the leasing
company for a corporate group in Austria, to claim the
investment premium for all the acquisitions made by
that group, irrespective of where those assets are
used,’’ it said.
The ECJ agreed that the member states can have
national tax rules that restrict the freedom to provide
services, provided that those rules specifically target
‘‘wholly artificial arrangements which do not reflect
economic reality and whose only purpose is to obtain a
tax advantage.’’ However, it said the leasing of assets
to another undertaking for use in other member states
‘‘cannot be the basis of a general presumption of abusive
practice and justify a measure which compromises
the exercise of a fundamental freedom guaranteed by
the Treaty.’’
The ECJ observed that the Austrian tax rules affected
every lessor eligible for the investment-premium
tax advantage that hired out assets for remuneration to
undertakings operating cross-border activities, ‘‘and
does so even where nothing points towards the existence
of such an artificial arrangement. Furthermore,
the legislation does not allow lessors to adduce evidence
that no abuse is taking place.’’
The Judgment
Accordingly, the ECJ held that because the Austrian
tax rules did not make it possible to limit the denial of
the investment-premium tax advantage to cases involving
wholly artificial arrangements, the rules could not
be justified by overriding reasons of public interest and,
consequently, were precluded by article 49 of the EC
Treaty.
The ECJ further stated that there was no need to
examine whether the EC Treaty provisions on freedom
of establishment might also preclude the rules.
Analysis
This case is particularly interesting because of the
ECJ’s comments on justifications — particularly the
need to prevent tax abuse. The judgment appears to
take the ECJ’s previous reasoning in this context one
step further. The judgment also represents the latest in
a line of cases concerning the taxation of leasing services
and how the tax rules interact with the fundamental
freedoms.
Balancing the Allocation of Taxing Rights
In Jobra, that justification of the Austrian rules was
unsuccessful because Austria failed to take into account
the rental income received by Jobra from its subsidiary
in relation to the leased assets. That income remained
taxable in Austria. Thus, even though the leased assets
might be used outside Austria, the income received
from the leased assets remained within Austria’s tax
jurisdiction. Consequently, the argument that there was
an impact on the allocation of taxing rights was rejected,
because although Austria granted an
investment-premium tax advantage for the leased assets,
which in this case were not used mainly in Austria,
that did not impinge on Austria’s right to tax the
income from those assets.
Preventing Tax Abuse
The ECJ acknowledged that the member states retain
the right to prevent abuse in situations when the
national rules specifically target ‘‘wholly artificial arrangements
which do not reflect economic reality and
whose only purpose is to obtain a tax advantage.’’ This
was, in many respects, a repeat of its mantra from earlier
cases such as Marks & Spencer (C-446/03), in which
the ECJ noted that the member states were ‘‘free to
adopt or to maintain in force rules having the specific
purpose of precluding from a tax benefit wholly artificial
arrangements whose purpose is to circumvent or
escape national tax law.’’ 1 (For the ECJ judgment in
Marks & Spencer, see Doc 2005-25015 or 2005 WTD 239-
16.)
The word ‘‘specific’’ should be emphasized because,
as the ECJ explained once again in Jobra, problems
1 This harks back to the much earlier ECJ judgment in ICI v.
Colmer (C-264/96), in which the ECJ held that the U.K. rules
were precluded by the freedom of establishment because they
applied generally to all situations in which most of the group’s
subsidiaries were established for whatever reason outside the
United Kingdom.
392 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.