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EU Member States In Court

by Ulrika Lomas,, Brussels

10 May 2010

The European Commission has referred Belgium, Finland and France to the European Court of Justice (ECJ) following the States’ failure to implement the Commission’s formal requests, which called for amendments to various tax provisions. Also on May 5, the Commission formally requested that Spain amend its inheritance and gift tax regime.

In its case against Belgium, the Commission has decided to refer the country to the ECJ over measures which allow tax exemptions for interest paid by domestic banks, but not for interest paid by foreign banks. The interest that Belgian residents receive on their savings is subject to different tax treatment depending on whether it is paid by a domestic bank or a foreign bank. Only interest paid by a domestic bank can benefit from a tax exemption. Thus, only Belgian residents who have a savings deposit account with a Belgian bank can benefit from the tax advantage. The Commission considers that the Belgian provisions restrict the free movement of capital and the freedom to provide services.

Finland is also being referred to the ECJ because of its failure to comply with a Reasoned Opinion on its legislation, which the Commission said discriminates against foreign pension funds. Dividends paid to a non-resident pension fund by a foreign company based in Finland for tax purposes are subject to a withholding tax on gross income at a rate of 19.5%. Finnish pension funds, on the other hand, are taxed under a special regime whereby there is no withholding tax, but 75% of dividend income is subject to corporation tax. Since the nominal corporate income tax rate is 26%, the resulting tax rate for dividends paid to Finnish pension funds is 19.5%. However, tax is calculated on their net income, i.e. after deduction of costs as well as current pension liabilities. In practice therefore, the effective tax rate on dividend income paid to a Finnish pension fund is lower than 19.5%.

In the case of France, the Commission’s complaint relates to the nation’s reverse-charge system, whereby a client receiving goods or services from a supplier or vendor not established in France is liable to pay value-added tax (VAT). This is in line with EU rules. However, by derogation from this system, the vendor is allowed to declare in his own tax statement the tax owed by his clients, in principle as reverse-charged, and to offset this from his own due VAT. To be able to do this, the Commission said, a non-established vendor must register for VAT in France and designate a tax representative ('répondant fiscal') to declare and pay the VAT on his behalf. The Commission maintains that this is incompatible with the VAT Directive which provides that taxable persons established in the EU and certain third countries should not have to designate a tax representative for VAT in another member state. As France has failed to comply with the reasoned opinion issued by the Commission, the matter is being referred to the ECJ.

Lastly, in its reasoned opinion to Spain, the European Commission has called on the nation to amend its tax provisions on inheritance and gift tax, which impose a higher tax burden on non-residents or assets held abroad. The Commission considers these provisions to be incompatible with the free movement of workers and capital. Spain has two months to react to the Reasoned Opinion.

TAGS: court | tax | European Commission | Belgium | interest | corporation tax | withholding tax | gift tax | Finland | France | Spain | tax breaks | dividends | Europe

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