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ECJ Upholds Freedom Of Establishment In Bosal Case

by Ulrika Lomas, For Law, Brussels

22 September 2003

The Dutch government has been left to ponder new revenue raising measures to plug a 1.6 billion euro tax shortfall, following a landmark ruling by the European Court of Justice last week which could have implications for governments across the union.

The ECJ ruling found that the Netherlands' domestic tax law on 'exempt participations' was discriminatory and as a consequence, unlawful. The ruling relates to a case involving Bosal Holdings, a Dutch manufacturer of car exhausts which acquired a number of European firms during the 1990s, and was prevented from claiming tax relief for interest paid on borrowings financing subsidiaries which did not generate income taxable in Holland.

The ECJ found that this breached Bosal's fundamental 'freedom of establishment' rights, laid down in the founding Treaty of Rome, and therefore upheld its claim against the Dutch government.

Speaking to the Financial Times, Peter Cussons of PricewaterhouseCoopers observed that the ruling dealt "yet another heavy blow to the tax systems of the EU member states, and since direct tax issues being referred to the ECJ are becoming more fundamental and frequent it would appear it's a trend that looks set to continue".

The ECJ decision is expected to benefit many firms elsewhere in the union which have similar claims pending against national governments. One such company is UK retail firm Marks and Spencer. M&S has argued that under Article 43 of the European Union Treaty, it should be allowed to offset losses of around 160 million euros made by its French, Belgian, and German subsidiaries between 1997 and 2001 against UK profits, claiming a tax refund of £30 million.

Although a panel of Special Commissioners dismissed the retail group's claim last December, arguing that the "denial of UK relief...can be justified as being for the maintenance of the coherence of the UK tax system", tax experts in the Bosal case believe that the recent ruling appears to curb the ability of tax authorities to use this type of reasoning in the future.

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