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Blog Fiscalidad Internacional

17 de Marzo de 2020

Aline Berbari

Tax Advisor

Freedom of establishment reviewed by the European Court of Justice

As the first quarter of 2020 is coming to an end, we are all witnessing an outbreak of the Covid-19 virus around the world. Although this situation is affecting the world global economy and tax measures in many countries, it did not stop the European Court of Justice (“ECJ”) from rendering very important decisions with respect to the principle of freedom of establishment.


For the purpose of this article, I will comment on only one of those decisions. However, the reader should examine the below-mentioned case law for more information regarding the principle.  

The ECJ Cases rendered in the last few days, on that particular subject:  

  • Tesco-Global Áruházak Zrt. v. Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága, Case C-323/18, dated March 3, 2020: progressive tax on store retail trade
  • Google Ireland Limited v. Nemzeti Adó- és Vámhivatal Kiemelt Adó- és Vámigazgatósága, Case C-482/18, dated March 3, 2020: advertisement tax
  • Vodafone Magyarország Mobil Távközlési Zrt. v. Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága, Case C-75/18, dated March 3, 2020: special tax on telecommunications
  • AURES Holdings a.s. v Odvolací finanční ředitelství (C-405/18), Case C-405/18, dated February 27, 2020: use of loss incurred in another member state.

The three first cases concern Hungarian law with respect to tax on turnover and advertising tax. The last case is about the submission of a loss-relief claim in the Czech Republic for losses incurred by the company while it was resident for tax purposes in another EU Member State. This case law is reexamining the principle of freedom of establishment of taxable persons in different taxation context.

Case C-323/18:

The request was made in proceedings between Tesco-Global Áruházak Zrt. ("Tesco") and the Nemzeti Adó-és Vámhivatal Fellebbviteli Igazgatósága (Resources Directorate of the National Tax and Customs Administration) ("the Resources Directorate") concerning payment of a turnover tax in the store retail trade sector ("the special tax").

Tesco is a public limited company constituted under Hungarian law whose main commercial activity is in store wholesale and retail trade. It is a member of a group with the mother company in the UK. Tesco was subject to tax audit by the Hungarian tax authorities, which resulted in a material amount of tax adjustment.  

Tesco submits that the obligation to pay the special tax imposed, in this case, progressive tax on store retail trades, has no legal basis, as that the legislation relating to that tax adversely affects freedom of establishment, the freedom to provide services and the free movement of capital. It adds that legislation is contrary to the principle of equal treatment, constitutes prohibited state aid and is contrary to Article 401 of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT.

Particularly, Tesco is claiming that due to the steeply progressive scale of the special tax and the structure of the Hungarian retail trade market, all the companies that fall within the lower bands are companies which are owned by Hungarians, and which operate within franchise systems. On the contrary, the companies that fall within the highest band are commercial activities linked to companies that have their registered office in another Member State. Accordingly, the companies owned by foreign persons bear a disproportionate share of the burden of that tax; thus, the discriminatory treatment.

The ECJ had to examine whether the use of a progressive tax rate to impose different levels of taxation on companies represents either direct or indirect discrimination and the rules on state aid which at the same time have particular importance for the turnover.

The Court states that in relation to state aid, an exemption from a tax is unlawful, that is not capable of affecting the lawfulness of the actual charging of that tax. Consequently, a person liable to pay that tax cannot rely on the argument that the exemption enjoyed by other persons constitutes state aid in order to avoid payment of that tax.

Furthermore, taxes do not fall within the scope of the provisions of the Treaty on the Functioning of the EU ("TFEU") concerning State aid unless they constitute the means of financing an aid measure, so that they form an integral part of that measure. To do so, it must be hypothecated to the aid measure under the relevant national rules, in the sense that the revenue from the tax is necessarily allocated for the financing of the aid and has a direct impact on the amount of that aid.

As for the progressive rate, it stated that the Member States are free, considering the EU tax laws harmonization, to establish the system of taxation that they deem the most appropriate, and consequently the application of progressive taxation falls within the discretion of each Member State. Also, it added that the special tax, contested by Tesco, does not exclusively affect taxable persons owned by Hungarians; nor makes the difference with taxable persons of other Member States.

As in any system of progressive taxation, any undertaking operating on the market concerned has the benefit of the reduction for the proportion of its turnover that does not exceed the maximum amount of that band. Thus, the special tax referred to does not create any discrimination, based on where companies have their registered office.

In relation to the State aid questions, the court recalled that if an exemption from tax is unlawful, it does not affect the lawfulness of the actual charging of that tax. As such, taxpayers may not rely on the argument that the exemption enjoyed by other persons constitutes state aid in order to avoid payment of that tax.

The position is different where the dispute concerns the legality of the rules relating to that tax, rather than an application for exemption.

The Court noted that taxes do not fall within the scope of the provisions of the Treaty on the Functioning of the EU (TFEU) concerning State aid unless they constitute the method of financing an aid measure, so that they form an integral part of that measure. For a tax to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid measure under the relevant national rules.

In this case, the court found, however, that the burden imposed on the applicant companies concern general taxes, the revenue from which is transferred to the state budget, those taxes not being specifically allocated to the funding of a tax advantage for which a particular category of taxable persons qualify.

The court concluded that the special taxes imposed on those applicant companies are not hypothecated to the exemption for which some taxable persons qualify, and consequently any illegality under EU rules relating to state aid of such an exemption is not capable of affecting the legality of those special taxes themselves. Accordingly, the court ruled that applicant companies could not rely, before the national courts, on that possible illegality in order to avoid payment of those taxes.

Tesco case is aligned with the other cases mentioned above. In those cases, the ECJ reiterated the freedom of establishment rule in a different context of claims. We will address those cases in future articles.


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