TUTORIAL 7: Dividend and capital gains on shares

Part A: General questions

Question 1

Please read the CJEU decisions in the case Denkavit and the case Amurta. One of the
current academic debates with respect to compatibility of withholding taxes with the EU
freedoms concerns the so-called “internal market approach” and the “single country
approach”. Please give a description of both approaches and please indicate which
approach the CJEU is applying in the above two cases.

 The PSD requires a participation of at least 25% of the capital of the subsidiary. In
this case, the participation is 14% then the parent subsidiary directive does not does
not apply.

 Retailbox (NL) distributes dividends to Amurta (PT), applies a WHT in the NL. IF one
company distribute dividends to resident company then there is no tax. So the
resident and non-resident in the NL received the different tax treatment. Is there a
discrimination for non-resident taxpayer?

 According to the court in this specific situation, it is not possible to distinguish

between resident and non-resident taxpayer So, there is a discrimination and
according to the court that this discrimination cannot be justified.

 The single country approach says that a discrimination should simply be treated as
such regardless of the tax treatment in a second jurisdiction.

 The internal market approach In Amurta (or Denkavit) the Dutch authorities made
an argument that their WHT was not discriminatory because a credit would be
provided in Portugal, this will neutralize the difference in treatment.
  There is an exception; if both countries bilaterally agreed to on a credit. If the NL and
Portugal had agreed to fully relieve through a credit, then the EU also prefers the
internal market approach. But if it is simply based on national law, then we default to
the single country approach (the court has struggled with this issue, but the
justification for this is that without the agreement, there is no reciprocity 對等的 ).
So it is only if you create a bilateral agreement (giving up sovereignty) that we can
apply the internal market approach.

 The dividends from FR to NL, the PSD does not apply in this case either. Benkavit and
Agro are subjected the WHT in the FR, the same situation, there is a discrimination
between resident and non-resident.

 The difference in this case from the Amurta case is that the participation exemption
regime applied in the Netherlands, so dividends are taxed only in the hands of the
distributing company. Netherlands does not tax the dividends then there is no tax
credit and then the withholding tax remains, the discrimination remains. A
discrimination between the discrimination between residents and non-residents is
not neutralized because it is in fact not possible to recognize the credit in the
Netherlands.

Case Study 1
Question: Please give your opinion on the validity of corporate exit taxes within the EU in
light of the freedom of establishment.

 we want to evaluate the compatibility of extra taxes with EU law and with tax
treaties based on the OM 2017.

 Capital gains are normally taxed when they are realized with an exit tax they are
taxed regardless of realization, it is a restriction of the freedom of establishment but
we can justify this restriction on the basis of the need to guarantee the balanced
allocation of taxing right between states.

 The Court of Justice said that it's usually discrimination or an or discriminates people
under the Freedom of establishment. But under certain conditions, this
discrimination can be justified. And then they do this kind of like proportional test if
the exit test meets some certain conditions.

Was the immediate tax proportional? 立即課出走稅符合比例嗎

(1) Establishing the tax claim is proportionate 要求繳納出走稅合理

(2) Immediate payment was disproportionate 要求立即繳納不合理(established

for the first time in the National Grid Indus case.- the taxpayer can choose
between immediate payment and payment later upon realization)
 if the company is not given a choice between 如果企業不符合以下規定，
可以要求立刻繳納

 to defer payment under provision of security for later payment and

 the undertaking of tracing the assets administratively until their

realization abroad

(3) The State may impose interest during the term of deferral 企業可以課徵利
息

 For individual immigration case, payment can be required only upon realization.

(N case, Lasteyrie de Saillant Case and Indiana case(?))

(1) Provide choice to individual whether to pay it immediately (ease of compliance

duty), or in installment max 5/10 years

(2) Allowing the losses to be offset with income

(3) Shouldn't ask for bank guarantee

 With companies, it may be much more complex because companies may have a very
complex asset situation, they may have shares in different countries. Therefore, the
administrative burden of this preserving assessment may be complicated. the courts
decide for this reason need to give them to serve proportionality, we need to give
the taxpayer the possibility to choose between immediate payment and
postponement with interest

 So, in principle, from an EU perspective, exit tax infringe the freedom of

establishment but they can be justified because they need to preserve the balanced
allocation of taxi rise between states, but it must be proportionate and these are all
the criteria for proportionality.

Question: Does the tax treaty concluded between EU member states Z and EU member
states Y allow the application of an exit tax by EU member states Z?

 if we want to evaluate the compatibility of excise taxes within the international tax
treaties, what are the distributive rules which we have to take into consideration?

 Art 13 (5) OM-capital gain- Gains from the alienation of any property, other than that referred to in paragraphs
1, 2, 3 and 4, shall be taxable only in the Contracting State of which the alienator is a resident.
  if we interpret the concept of alienation as a very broad concept and not necessarily
implying transfer of ownership. therefore an exit tax may be included within the
scope of article 13 (5), in our case, the alienator is Z co.

 Austrian School said alienation is a limited concept, alienation is only something that
necessarily implies transfer of ownership. so exit tax is not allowed under Article 13
(5), we have to see the exit is applicable under art 7 or art 21 or 10,11 or 12. And
anyway, capital gains are still business profits. So something that it's not taxable
under Article 13. Maybe capital gains taxable in general as business profit because
capital gains are business profits,

 According to the Dutch Supreme Court, the exit tax in the Netherlands actually
applies a moment before immediately before the transfer over residence.

 The position of OECD: an exit tax is compatible with international tax treaties only
when the taxpayer is a still resident in the emigrating state. An exit tax actually
applies just before emigration.

 In our case, when Z Co is still the resident of state Z, z state can apply the exit tax

Case study 2

Mr. Roberts is a resident of State X. He holds shares corresponding to the 63% of the
capital of Z Co, which is a company incorporated and with its place of effective
management in State X. The domestic law of State X establishes taxation of gains derived
from the alienation of shares of a domestic company in which the alienator holds more
than 25 per cent of the capital if that alienator was a resident of State X for at least seven
of the 10 years preceding the alienation. The applicable individual income tax rate is 20%.
In 2021, mr Roberts, who was a resident of State X for the previous 10 years, becomes a
resident of State Y, which taxes capital gains from shares at a rate of 15%.
Shortly after becoming a resident of State Y, Mr Roberts sells the totality of the shares held
in ZCo. The tax administration of State X conducts investigations from which it results that
all the elements of the sale were finalised in 2020, that an interest-free “loan”
corresponding to the sale price was made by the purchaser to the seller at that time, that
the purchaser cancelled the loan when the shares were sold to the purchaser in 2020 and
that the purchaser exercised de facto control of the company from 2020.
As a consequence, the tax administration of State X taxes mr. Roberts on the capital gains
resulting from the alienation of his shares in ZCo.

a) Please explain the position of the tax administration in State X, also considering that
State X and State Y have concluded a tax treaty based on the 2017 OECD MTC.
b) Do you agree with the position of the tax administration in State X?

 First question would be which item of income relevant in this case: Art 13 OM,
capital gain.

 we don’t discuss exit tax now; we discuss which country has the right to tax these
capital gains. According to Art 13(5) OM, the taxing right is where the alienator is a
resident, in this case is state Y.

 but according to the behavior of Mr. R. State X can argue that Mr. R. try to abuse art
13(5) and use the Art 29(9) to verify whether there is actually an abuse. you need to
evaluate all these facts and circumstances as indicated in the case and give your
reasoned opinion in order to establish so whether one of the principal reasons on
the basis of article 29(9) for Mr. Roberts to move was actually to avoid taxation in
state x.
 what Mr. Roberts will try to do is to prove that there is a commercial reason to be in
a state Y, and he is able to prove that there is a commercial, real, substantive,
commercial reasons apart from taxation reason.
 we could say that maybe on the basis of this case, it is reasonable to conclude that
one of the principal purpose was but still the taxpayer has the possibility to
demonstrate that there are commercial reasons, which is that we are not speaking
so much I would say about the personnel condition, although I agree that it is indeed
there is a transfer so it is relevant to prove that is that this transfer is real.