Reduced VAT rate on e-books
European Commission takes Luxembourg and France to the European Court of Justice
The European Commission (“EC”) has decided to take its dispute with Luxembourg and France over the application of the super-reduced VAT rate of 3% in Luxembourg and the reduced VAT rate of 7% in France on e-books to the next level and has referred both States to the Court of Justice of the European Union (“CJEU”).
The EC argues that the provision of e-books is an electronically provided service and as such cannot benefit from a reduced VAT rate. Also, the application of 3% VAT on e-books in Luxembourg and of 7% in France is creating serious distortions of competition, which are damaging economic operations in the Member States with less favorable VAT rates.
Both Luxembourg and France have applied reduced VAT rates of respectively 3% and 7% on e-books since January 2012 arguing that similar goods and services such as books and e-books should be subject to VAT at the same rates and that technological progress should be taken into account.
Should the CJEU decide that Luxembourg and France have contravened EU Law, this could lead to the imposition of fines.
Deductibility of cross-border losses
On 21 February 2013, the Court of Justice of the European Union (CJEU) rendered its decision in the A Oy case (C-123/11). The Court concluded that freedom of establishment precludes national legislation preventing a company resident in one Member State from deducting the losses suffered by a subsidiary with which it has merged and which is resident in another Member State, if it can be demonstrated that the subsidiary has exhausted all possibilities within its Member State to utilise its accumulated tax losses. The Court thereby confirmed its ‘Marks & Spencer exception’.
The case concerned a Finnish resident company with a 100% owned Swedish resident subsidiary that had suffered losses over a six-year period. The Finnish parent company merged with its Swedish subsidiary, dissolving the Swedish company and acquiring its assets. Under Finnish tax rules, the loss of a merged company with its registered office in another country is not deductible, whereas the loss of a merged resident company is deductible. The Finnish company argued that this was not compatible with the freedom of establishment.
In her opinion on this case dated 19 July 2012, Advocate General (AG) Kokott took the position that neither the freedom of establishment nor the Tax Merger Directive (2009/133) would preclude the national legislation as described above, even if the subsidiary had exhausted all possibilities within its Member State to utilise its tax losses.
The Court noted that the Tax Merger Directive does not provide for the situation whereby tax losses are taken over by the absorbing company in another Member State, while no permanent establishment would remain in the Member State of the absorbed company after the merger. It concluded that the freedom of establishment principle applied. The Court stated that cross-border mergers are a particular method of exercising the freedom of establishment, even if solely tax-motivated.
The Court noted the difference in treatment between the situation of a domestic and that of a cross-border merger. In light of the objective of domestic tax legislation to grant a tax benefit to the resident parent company by way of taking into account the subsidiary’s losses, the Court concluded that these situations were objectively comparable and that the national legislation was therefore contrary to EU law, unless it could be justified.
As in the Marks & Spencer case (C-446/03), the Court took into account a triple justification, i.e. the balanced allocation of taxing powers, the risk of a double use of tax losses and the risk of tax avoidance. The Court considered that these three grounds for justification, taken together, meant that the Finnish legislation was justified.
It concluded that the different treatment applied to cross-border mergers went beyond what was necessary to attain the “essential part of the objectives pursued” by the Finnish legislation where the non-resident subsidiary has exhausted all possibilities to utilise its tax losses in its own Member State (the ‘Marks & Spencer exception’). It is for the national courts to determine whether the parent company has proved this.
Addressing the second question posed by the referring court, i.e. which country’s legislation should be used in order to compute the losses, the CJEU merely pointed out that the calculation in itself may not lead to an unequal treatment vis-à-vis the losses that would be deductible in a domestic merger.
By confirming the Marks & Spencer exception, the Court has acted consistently in respect of cross-border loss relief. In the Marks & Spencer case, the Court also expressly stated that the three justification grounds should be taken together. In this respect, it should be noted that AG Kokott’s view that the balanced allocation of taxing powers would be the only ground for justification in the current case was not followed by the Court.
It is unfortunate that the Court failed to address the uncertainty surrounding how a parent company should demonstrate that all possibilities have been exhausted. Furthermore, the Court only addressed the second question in general terms, and questions can be expected as to how this should be applied in practice.
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