Highlights in this edition
CJ judgment on the compatibility of UK group transfer rules with the freedom of establishment (Gallaher, Case C-707/20)
On 16 February 2023, the CJ delivered its judgment in the case Gallaher (C-707/20). The case addresses the question of whether the United Kingdom (UK) group transfer rules which impose an immediate tax charge on the disposal of assets to a group company established in a third country, are restrictive of the freedom of establishment in circumstances where such a disposal would be made on a tax-neutral basis if the group company receiving the assets were resident or had a PE in an EU Member State. The case also addresses the issue of whether these rules are proportional in light of the impossibility of the company to defer the payment of this tax when it has obtained, by way of consideration for the disposal of the assets, an amount equal to their full market value.
The case concerns Gallaher (GL), a UK resident company indirectly own by a company resident for tax purposes in the Netherlands ('the Netherlands company') which is the head of the group for Europe. In addition to its UK's subsidiaries, the Netherlands company also has a Swiss subsidiary named JTISA. As a consequence of two disposals of assets made from GL to JTISA and to the Netherlands parent company, the tax authorities of the UK (HMRC) adopted two partial closure notices determining the amount of the chargeable gains and profits that accrued to GL in the context of those disposals. As the assignees were not resident for tax purposes in the UK, the gains on the assets were the subject of an immediate tax charge, as no provision of UK law provides for the deferral of that charge or for payment of the tax in instalments. GL appealed these closure notices arguing that there was a difference in treatment between the disposals of assets at issue and the disposals made between group members established in the UK, given that under the UK transfer group, the latter would be made on a tax-neutral basis, GL claimed, that the fact that it could not defer payment of the tax charge constituted a restriction on the Netherlands company's freedom of establishment or, alternatively, its free movement of capital. It further argued that the requirement to pay the tax immediately, without an option to defer payment, was disproportionate.
Following an appealed decision of a first-tier tribunal, the case was referred to the upper tribunal (Tax and Chancery Chamber) which asked the CJ whether: (i) Article 63 TFEU (free movement of capital) must be interpreted as meaning that national legislation which applies only to groups of companies falls within its scope; (ii) Article 49 TFEU (the freedom of establishment) is restricted by national rules such as those in the present case, in circumstances where the disposal of assets would be made on a tax-neutral basis if the sister company receiving the assets were resident or had a PE in an EU Member State; and (iii) whether the aforementioned rules are proportional in light of the impossibility of GL to defer the payment of this tax when it has obtained, by way of consideration for the disposal of the assets, an amount equal to their full market value.
In its ruling, the CJ first considered that a national rule applying only to groups of companies does not fall within the scope of the free movement of capital. The CJ came to this judgment by referring to existing case law showing, inter alia, that if national rules deal only with relations between group companies, those rules primarily affect freedom of establishment.
The CJ then considered whether the UK group transfer rules infringed the freedom of establishment. The CJ first noted that the case concerned a situation where a parent company (i.e., the Netherlands company) exercises its freedom of establishment by setting up a subsidiary in the UK (GL). The CJ then ruled that the tax liability imposed by the national rule at issue in the situation where assets are transferred by a UK resident subsidiary of a parent company established outside the UK to a third country is the same tax liability in the comparable situation of a disposal of assets by a UK tax-resident subsidiary of a parent company resident in the UK to a third country. On this basis, the CJ ultimately concluded that a national rule imposing immediate taxation on the transfer of assets from a company resident in a Member State to a sister company resident in a third country, (whereas such a transfer would take place in a tax-neutral manner if the sister company were also resident in the UK), does not constitute a restriction on the freedom of establishment within the meaning of Article 49 TFEU.
Finally, the CJ addressed the issue of proportionality in the context of GL's disposal of assets in favour of the Netherlands company. In this regard, the Court first noted that the UK group transfer rules constitute a restriction on GL's freedom of establishment because they provide for a different tax treatment between national and crossborder transfers of assets within a group of companies. Second, the Court found that difference in treatment to be justified under the need to maintain the balanced allocation of taxing powers between Member States. Finally, the Court considered the immediately recoverable tax charge without the possibility of deferring payment to be proportionate on the grounds that, first, GL did not face liquidity problems (capital gains were realised at the time of the taxable event), second, the tax authorities must ensure the tax on the capital gains realised during the period the assets are within their tax jurisdiction is paid and, last, the risk that the tax will not be paid may increase with the passage of time.
CJ judgment on VAT implementing regulation for electronic services platforms (Fenix International Limited, Case C-695/20)
On 28 February 2023, the CJ delivered its judgment in the case Fenix International Limited (C-695/20). This case concerns the application of the undisclosed agent regulations for persons involved in the provision of electronic services.
Fenix International is the operator of the online content platform Only Fans. Fenix collects and distributes the payments made by users to content creators that are active on the platform. Fenix withholds 20% of the remuneration paid by the user for its own services. In dispute was whether VAT was due by Fenix based on the withheld remuneration or over the full remuneration paid by the user.
The undisclosed agent provisions of Article 28 of the VAT Directive stipulate that, where a commissionaire is acting in its own name but for the account of its principal, that principal is deemed to sell its product to the commissionaire and that the commissionaire is deemed to on-sell this product to the customer. Article 9a of the VAT Implementing Regulation stipulates that a taxable person taking part in the provision of electronic services is presumed to be acting in its own name, but on behalf of the electronic service provider (unless that service provider is explicitly assigned as the person liable for VAT and this is also reflected in the various contractual arrangements).
This case concerns the validity of Article 9a of the VAT Implementing Regulation. The CJ argued that the aim of implementing measures is to provide further details on the application of a legislative act (in this case, Article 28 of the VAT Directive). This Article requires that the implementing measure complies with the essential general aims of the legislative act and that this measure does not supplement or amend the legislative act (even with regard to non-essential elements).
The CJ ruled that Article 9a of the VAT Implementing Regulation is lawful because it provides further details on when a person is considered to act in its own name, but on behalf of the provider of the electronic service. The provision in the VAT Implementing Regulation thereby respects the essential general aims pursued by Article 28 of the VAT Directive. The CJ further ruled that an online interface that has the power to charge for and define the essential elements of electronic services must be regarded for VAT purposes as the supplier of those services based on Article 28 of the VAT Directive. For this purpose, it does not matter that the customer is aware of the identity of the content creator (i.e., no undisclosed principal).
The Council updates the EU-list of non-cooperative jurisdictions
On 14 February 2023, the Economic and Financial Council configuration of the Council of the European Union (ECOFIN) approved the updated Council's conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes.
In this document, the Council added four jurisdictions - British Virgin Islands, Costa Rica, Marshall Islands and Russia - to the list of non-cooperative jurisdictions for tax purposes (Annex I). The number of jurisdictions in the EU tax blacklist currently amounts to 16 and includes the aforementioned four jurisdictions plus American Samoa, Anguilla, Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands and Vanuatu.
The Annex II of the Council conclusion (also known as the EU grey list) was also updated and now includes Aruba, Albania, Armenia, Belize, Botswana, Curaçao, Dominica, Eswatini, Hong Kong, Israel, Malaysia, Montserrat, Jordan, Qatar, Seychelles, Thailand, Turkey and Vietnam. North Macedonia, Barbados, Jamaica and Uruguay were removed from this list for fulfilling their commitments.
The EU list of non-cooperative jurisdictions includes countries that have not engaged in constructive dialogue with the EU on tax governance or have not implemented promised reforms. Such reforms are needed to meet a set of objective criteria for good fiscal governance, including tax transparency, fair taxation and the application of international standards to prevent base erosion and profit shifting.
CJ judgment on VAT implications of association without legal personality (ASA, Case C-519/21)
On 28 February 2023, the CJ delivered its judgment in the case Fenix International Limited (C-695/20). This case concerns the application of the undisclosed agent regulations for persons involved in the provision of electronic services.
Fenix International is the operator of the online content platform Only Fans. Fenix collects and distributes the payments made by users to content creators that are active on the platform. Fenix withholds 20% of the remuneration paid by the user for its own services. In dispute was whether VAT was due by Fenix based on the withheld remuneration or over the full remuneration paid by the user.
The undisclosed agent provisions of Article 28 of the VAT Directive stipulate that, where a commissionaire is acting in its own name but for the account of its principal, that principal is deemed to sell its product to the commissionaire and that the commissionaire is deemed to on-sell this product to the customer. Article 9a of the VAT Implementing Regulation stipulates that a taxable person taking part in the provision of electronic services is presumed to be acting in its own name, but on behalf of the electronic service provider (unless that service provider is explicitly assigned as the person liable for VAT and this is also reflected in the various contractual arrangements).
This case concerns the validity of Article 9a of the VAT Implementing Regulation. The CJ argued that the aim of implementing measures is to provide further details on the application of a legislative act (in this case, Article 28 of the VAT Directive). This Article requires that the implementing measure complies with the essential general aims of the legislative act and that this measure does not supplement or amend the legislative act (even with regard to non-essential elements).
The CJ ruled that Article 9a of the VAT Implementing Regulation is lawful because it provides further details on when a person is considered to act in its own name, but on behalf of the provider of the electronic service. The provision in the VAT Implementing Regulation thereby respects the essential general aims pursued by Article 28 of the VAT Directive. The CJ further ruled that an online interface that has the power to charge for and define the essential elements of electronic services must be regarded for VAT purposes as the supplier of those services based on Article 28 of the VAT Directive. For this purpose, it does not matter that the customer is aware of the identity of the content creator (i.e., no undisclosed principal).
The Council updates the EU-list of non-cooperative jurisdictions
On 14 February 2023, the Economic and Financial Council configuration of the Council of the European Union (ECOFIN) approved the updated Council's conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes.
In this document, the Council added four jurisdictions - British Virgin Islands, Costa Rica, Marshall Islands and Russia - to the list of non-cooperative jurisdictions for tax purposes (Annex I). The number of jurisdictions in the EU tax blacklist currently amounts to 16 and includes the aforementioned four jurisdictions plus American Samoa, Anguilla, Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands and Vanuatu.
The Annex II of the Council conclusion (also known as the EU grey list) was also updated and now includes Aruba, Albania, Armenia, Belize, Botswana, Curaçao, Dominica, Eswatini, Hong Kong, Israel, Malaysia, Montserrat, Jordan, Qatar, Seychelles, Thailand, Turkey and Vietnam. North Macedonia, Barbados, Jamaica and Uruguay were removed from this list for fulfilling their commitments.
The EU list of non-cooperative jurisdictions includes countries that have not engaged in constructive dialogue with the EU on tax governance or have not implemented promised reforms. Such reforms are needed to meet a set of objective criteria for good fiscal governance, including tax transparency, fair taxation and the application of international standards to prevent base erosion and profit shifting.
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