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From Europe Tax & Legal News October 13, 2011 12 Supreme Tax Court judgment V R 44/09 of April 7, 2011 published on August 31 No requirement to exempt foreign service allowances for work in country of residence on same terms as those paid abroad A German resident French national taught in a local Franco-German school. She had civil service status and was paid from the French public purse. Her emoluments were taxable in France under the double tax treaty, but were taken into account when setting the rate to be applied to her other, taxable income in Germany. They consisted of scale rate pay and two foreign service allowances. The pay was taxable under French law, but the allowances were exempt. She claimed that they should also be fully exempt in Germany, that is they should left out of account when setting her other income rate. She based her claim on the free movement of workers requirement for equal treatment in the light of the full exemption in German law of corresponding payments to government servants abroad, but taxable in Germany under the relevant double tax treaty. The ECJ has now held that there has been no discrimination, despite initial appearances. As a German resident French citizen, she has not been treated any worse than a German resident German citizen. That a German civil servant resident in another EU member state enjoyed complete German exemption on his foreign service allowances was not a relevant comparison as it ignored the secondary effects in the foreign state, in this case, the effect on the tax charge on the other, locally taxable income. The ECJ case reference is C-240/10 Schulz-Delzers judgment of September 15, 2011. SWIFT services subject to VAT A Finnish bank claimed a refund of the VAT it had paid by reverse charge on its SWIFT costs in connection with processing national and international transfers of cash and securities. Its basis was that SWIFT effected a transfer service; thus its charges were exempt under the Sixth Directive as remittance business or securities dealing as the case might be. As against this, the tax authorities maintained the services were taxable as technical support, as they did not effect the actual transfer of funds or instruments. The ECJ has now held the SWIFT charges for its services to banks to be taxable. SWIFT bears responsibility to its banking members for the correct transmission of messages, but has no access to their content. It bears no responsibility for the correct execution of the instructions it transmits. It does not therefore effect the actual transfer, but merely passes the necessary information for the transfer to be effected by the receiving bank. This applies to dealings in both cash and securities. The service is thus a support service for banks, rather than an outsourcing of banking business. The ECJ case reference is C-350/10 Nordea judgment of July 28, 2011. Personal residence not immediately relevant to VAT place of business A German trader hiring drivers to haulage companies moved his business to Austria, but continued to service his German customer base. He also moved his main personal residence to Austria, but retained accommodation in Germany. On re-registering his business in Austria, he started billing his German customers free of VAT but with a note on the invoice to the effect that the customer should account for the VAT as a reverse charge. The German tax office challenged this position, saying that the trader continued to live in Germany. His business therefore continued to be established in Germany. As a domestic business providing a service to a domestic customer, his invoices were not open to reverse charge. Rather he should have charged the VAT and accounted for the amount to the tax office. The ECJ has now held that the business establishment is the relevant criterion for determining a VAT filing obligation. A personal residence of the proprietor is of no moment, unless there is doubt as to where the business was located. Even then, its significance was that of an indicator as to where the business might be, rather than as part of the definition of a domestic/foreign business. Since there was no doubt in this particular case that the business had genuinely been established in Austria, there was no
Tax & Legal News October 13, 2011 13 need to examine the proprietor's personal residence. The customer invoices issued by the business were reverse-chargeable in Germany, regardless of where the proprietor lived. The ECJ case reference is C-421/10 Stoppelkamp judgment of October 6, 2011. Dutch exit tax excessively burdensome? A Dutch captive finance subsidiary of a UK group replaced its Dutch management personnel with UK employees. At the same time, it closed it offices in Holland. However, it remained in existence as a BV, albeit managed from the UK. It thus became resident in the UK within the meaning of the double tax treaty by reference to its place of management. Dutch law allows companies to move abroad, but imposes a “final settlement tax” on the hidden reserves in undervalued assets and off-balance sheet intangibles. This final settlement tax is justified on the grounds that the hidden reserves had accumulated in Holland, but could not be taxed there once the company had relocated its tax residence. However, the company protested that the tax was a hindrance of its freedom of establishment, given that a company moving within Holland would not be subject to it. It also made the point that the only significant item subject to the tax (in this case) was the unrealised exchange gain on a loan in sterling to a UK associated company. Once the company took up UK tax residence, the pound became its functional currency and euro/sterling exchange rate movements ceased to be relevant to its taxation. The company’s reference to the freedom of establishment brought the case before the ECJ. The advocate general has just published her opinion supporting, in principle, the Dutch concept of exit taxation manifested in the final settlement tax, whilst objecting to the immediate levy as being unnecessarily harsh. As such, the tax is discriminatory, because a company moving its place of management within Holland would not be subject to it. However, the discrimination is justified by the need to preserve the international allocation of taxing rights as agreed in the double tax treaties. On the other hand, actually collecting the tax at the moment of departure goes beyond what is necessary to achieve a legitimate object. The company remains registered in Holland and thus continues to be subject to Dutch accounting and reporting formalities. It is therefore not exceptionally difficult for the Dutch authorities to follow its affairs to the extent necessary to be sure of collecting the tax on disposal of the asset or other form of release of the hidden reserves. The advocate general also suggests the court rule that the taxation, when finally levied, should take losses between the dates of exit and asset realisation into account. The tax burden is thus reduced to the level that a domestic taxpayer would bear on realisation of a hidden reserve. However, she rejects the company’s argument that the hidden reserve disappears once the company’s functional currency changes to the currency of the debt as not being a matter for Dutch taxation. The tax should therefore be payable when the asset is realised (repayment of the loan) and the taxable gain should be the lower of the unrealised gain on change of residence and the gain that the company would have realised on loan repayment had its functional currency remained the euro. This case has a number of parallels in German law - the taxation levied on the transfer of a function as a prime example. It is therefore of possibly wider interest than might at first sight appear. The ECJ case reference is C-371/10 National Grid Indus, opinion of September 8, 2011.
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