# C_2008010EN.01011301.xml

| 15.1.2008 | EN | Official Journal of the European Union | C 10/113 |
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15.1.2008

EN

Official Journal of the European Union

C 10/113

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Opinion of the European Economic and Social Committee on the

| — | ‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Coordinating Member States' direct tax systems in the Internal Market’ on the |
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‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Coordinating Member States' direct tax systems in the Internal Market’ on the

| — | ‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Tax Treatment of Losses in Cross-Border Situations’ and on the |
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‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Tax Treatment of Losses in Cross-Border Situations’ and on the

| — | ‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Exit taxation and the need for coordination of Member States' tax policies’ |
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‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Exit taxation and the need for coordination of Member States' tax policies’

COM(2006) 823 final

COM(2006) 824 final — {SEC(2006) 1690}

COM(2006) 825 final

(2008/C 10/25)

On 19 December 2006 the Commission decided to consult the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the abovementioned proposals.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 4 September 2007. The rapporteur was Mr Nyberg.

Mr Nyberg

At its 438th plenary session, held on 26 and 27 September 2007 (meeting of 26 September), the European Economic and Social Committee adopted the following opinion by 168 votes to 2 with 4 abstentions.

1.   Conclusions and recommendations

| 1.1 | With regard to the aims and approach of efforts in the field of taxation and the internal market, the EESC endorses the Commission's view that tax objectives can be achieved and the tax base protected through coordination and cooperation between the Member States. It could also reduce compliance costs and remove obstacles such as discrimination and double taxation. |
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1.1

With regard to the aims and approach of efforts in the field of taxation and the internal market, the EESC endorses the Commission's view that tax objectives can be achieved and the tax base protected through coordination and cooperation between the Member States. It could also reduce compliance costs and remove obstacles such as discrimination and double taxation.

| 1.2 | The Commission chooses its words carefully in these communications, with expressions such as ‘proposes to present’, or ‘proposes to examine ... in the near future ...’, etc. The EESC believes that the Commission's proposed initiatives are a logical part of a taxation work programme. These are problem areas when cross-border activity is involved. |
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1.2

The Commission chooses its words carefully in these communications, with expressions such as ‘proposes to present’, or ‘proposes to examine ... in the near future ...’, etc. The EESC believes that the Commission's proposed initiatives are a logical part of a taxation work programme. These are problem areas when cross-border activity is involved.

| 1.3 | However, the Commission's cautious approach puts the reader to the test. The descriptions of the various situations are very brief and the legal interpretations tentative. Consequently, any reactions to the ideas expressed in the Commission's communications must concern themselves more with the fundamentals rather than adopting any specific position. Discussions with Commission representatives have also revealed that the communications can be seen more in terms of a report on the Commission's wider work. |
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1.3

However, the Commission's cautious approach puts the reader to the test. The descriptions of the various situations are very brief and the legal interpretations tentative. Consequently, any reactions to the ideas expressed in the Commission's communications must concern themselves more with the fundamentals rather than adopting any specific position. Discussions with Commission representatives have also revealed that the communications can be seen more in terms of a report on the Commission's wider work.

| 1.4 | The Commission takes the view that while it is not ideal to apply domestic loss relief systems to cross-border situations, it does constitute an improvement. It is, however, extremely dubious both legally and socio-economically, as what it involves in practice is using a foreign firm to apply the national rules of that firm's country in another country's territory. The different legal and economic problems involved in loss relief for firms with cross-border activity could, in the long term, be solved via a common consolidated corporate tax base (CCCTB). Given that the Commission is currently dealing with this issue in a special working group with the Member States, it should focus the group's efforts on finding a rapid solution and use these communications more as a means of addressing the general problems. |
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1.4

The Commission takes the view that while it is not ideal to apply domestic loss relief systems to cross-border situations, it does constitute an improvement. It is, however, extremely dubious both legally and socio-economically, as what it involves in practice is using a foreign firm to apply the national rules of that firm's country in another country's territory. The different legal and economic problems involved in loss relief for firms with cross-border activity could, in the long term, be solved via a common consolidated corporate tax base (CCCTB). Given that the Commission is currently dealing with this issue in a special working group with the Member States, it should focus the group's efforts on finding a rapid solution and use these communications more as a means of addressing the general problems.

| 1.5 | The Commission is attempting to solve a problem without providing — at least in this communication — any assessment of its scale, or of the actual implications of introducing the right to transfer losses across borders. Moreover, the Commission's argument does not take sufficient account of the fact that losses can be carried forward. In most cases there is not always a need to transfer losses across borders. |
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1.5

The Commission is attempting to solve a problem without providing — at least in this communication — any assessment of its scale, or of the actual implications of introducing the right to transfer losses across borders. Moreover, the Commission's argument does not take sufficient account of the fact that losses can be carried forward. In most cases there is not always a need to transfer losses across borders.

| 1.6 | The treatment of transfers of corporate unrealised gains between Member States can hardly be exclusively based on a case involving transfers for private individuals. The rule that exit tax may not be levied on unrealised gains makes considerable demands in terms of information. Cooperation between the tax authorities should be sufficient to ensure that both countries get their rightful share of the tax revenue when it is eventually paid. Some transferred assets, such as intangibles, are never disposed of, or simply expire. The Commission's description of such cases is unclear. |
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1.6

The treatment of transfers of corporate unrealised gains between Member States can hardly be exclusively based on a case involving transfers for private individuals. The rule that exit tax may not be levied on unrealised gains makes considerable demands in terms of information. Cooperation between the tax authorities should be sufficient to ensure that both countries get their rightful share of the tax revenue when it is eventually paid. Some transferred assets, such as intangibles, are never disposed of, or simply expire. The Commission's description of such cases is unclear.

| 1.7 | Generally speaking, it is important to extend cooperation and coordination on corporation tax. At the same time, the subsidiarity principle requires that the Member States' prerogative to take independent decisions based on national conditions must be respected. |
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1.7

Generally speaking, it is important to extend cooperation and coordination on corporation tax. At the same time, the subsidiarity principle requires that the Member States' prerogative to take independent decisions based on national conditions must be respected.

2.   Introduction

| 2.1 | On 19 December 2006 the Commission presented three communications on the coordination of Member State tax policies. These include a more general communication and two communications addressing specific problems: losses in cross-border situations and exit taxation. The aim is to improve coordination between the different national tax systems rather than to propose any harmonisation. |
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2.1

On 19 December 2006 the Commission presented three communications on the coordination of Member State tax policies. These include a more general communication and two communications addressing specific problems: losses in cross-border situations and exit taxation. The aim is to improve coordination between the different national tax systems rather than to propose any harmonisation.

| 2.2 | Although the communications refer to direct taxation systems, they deal almost exclusively with company taxation. The communications have been presented in part in an attempt to find quick solutions to the problems involved when companies are active across borders, which can — in the long-term — be solved through a CCCTB; and in part to solve any problems that might remain after the consolidated tax base is introduced. |
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2.2

Although the communications refer to direct taxation systems, they deal almost exclusively with company taxation. The communications have been presented in part in an attempt to find quick solutions to the problems involved when companies are active across borders, which can — in the long-term — be solved through a CCCTB; and in part to solve any problems that might remain after the consolidated tax base is introduced.

| 2.3 | The EESC has commented positively on the introduction of a CCCTB, and stated a number of principles that should apply if one is introduced (1). |
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2.3

The EESC has commented positively on the introduction of a CCCTB, and stated a number of principles that should apply if one is introduced (1).

1

| 2.4 | The Commission states quite clearly that the discussion and proposals are not limited to merely removing discriminatory obstacles for firms and the risk of double taxation, but also aim to enable the Member States to protect their tax bases. |
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2.4

The Commission states quite clearly that the discussion and proposals are not limited to merely removing discriminatory obstacles for firms and the risk of double taxation, but also aim to enable the Member States to protect their tax bases.

3.   Coordinating Member States' direct tax systems in the Internal Market COM(2006) 823 final

| 3.1 | According to the Commission, coordination of tax systems is needed to remove discrimination and double taxation, preventing non-taxation and abuse, and reducing compliance costs for businesses and persons who have to work with several tax systems. Bilateral agreements tend to be the instrument of choice where there is a mismatch between two tax systems. Court proceedings have been developed as an alternative in order to assess whether the provisions comply with Community legislation. According to the communication, tax rules that can conflict with Community legislation include rules on exit taxes, withholding tax on dividends, group loss relief, and taxation of branches. |
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3.1

According to the Commission, coordination of tax systems is needed to remove discrimination and double taxation, preventing non-taxation and abuse, and reducing compliance costs for businesses and persons who have to work with several tax systems. Bilateral agreements tend to be the instrument of choice where there is a mismatch between two tax systems. Court proceedings have been developed as an alternative in order to assess whether the provisions comply with Community legislation. According to the communication, tax rules that can conflict with Community legislation include rules on exit taxes, withholding tax on dividends, group loss relief, and taxation of branches.

| 3.2 | European Court of Justice (ECJ) case law in the area is constantly evolving, but it generally concerns specific cases and can rarely be interpreted broadly. The Commission believes there is a need for guidance so that case law can be interpreted more comprehensively. With these communications the Commission is attempting to help the Member States to find coordinated solutions. |
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3.2

European Court of Justice (ECJ) case law in the area is constantly evolving, but it generally concerns specific cases and can rarely be interpreted broadly. The Commission believes there is a need for guidance so that case law can be interpreted more comprehensively. With these communications the Commission is attempting to help the Member States to find coordinated solutions.

| 3.3 | An important objective for the Commission is the removal of double taxation, which can be an obstacle to cross-border activity. In order to prevent non-taxation and abuse, the Commission proposes to examine existing rules with a working group from the Member States. Apart from the fact that the rules are essentially different, they must also be applied in 27 different administrative systems. The Commission proposes to examine how administrative cooperation between the Member States can be improved. |
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3.3

An important objective for the Commission is the removal of double taxation, which can be an obstacle to cross-border activity. In order to prevent non-taxation and abuse, the Commission proposes to examine existing rules with a working group from the Member States. Apart from the fact that the rules are essentially different, they must also be applied in 27 different administrative systems. The Commission proposes to examine how administrative cooperation between the Member States can be improved.

| 3.4 | The Commission also announces subjects for future communications, such as measures to combat abuse, definitions of debt and equity, and to extend recourse to arbitration procedures for tax disputes between Member States. |
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3.4

The Commission also announces subjects for future communications, such as measures to combat abuse, definitions of debt and equity, and to extend recourse to arbitration procedures for tax disputes between Member States.

Comments

| 3.5 | In commenting on the three communications, the EESC would reiterate its support for efforts to secure a common consolidated corporate tax base, or CCCTB. One of the principles posited in the EESC's opinion on the subject was that the CCCTB should be mandatory if it is to be fully effective. Political reservations have been expressed about a CCCTB. The Committee takes the view, however, that efforts to secure such a tax base cannot be called into question. It is needed in the long-term if the internal market is to function properly. It would also facilitate implementation of the proposals addressed in the Commission communications. On the other hand, there can, of course, be different views as to how this tax base should be constructed, but this debate must be resumed when a concrete proposal has been presented. |
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3.5

In commenting on the three communications, the EESC would reiterate its support for efforts to secure a common consolidated corporate tax base, or CCCTB. One of the principles posited in the EESC's opinion on the subject was that the CCCTB should be mandatory if it is to be fully effective. Political reservations have been expressed about a CCCTB. The Committee takes the view, however, that efforts to secure such a tax base cannot be called into question. It is needed in the long-term if the internal market is to function properly. It would also facilitate implementation of the proposals addressed in the Commission communications. On the other hand, there can, of course, be different views as to how this tax base should be constructed, but this debate must be resumed when a concrete proposal has been presented.

| 3.5.1 | The EESC's opinion on CCCTB pointed out that there could be a case for gradually presenting proposals that could be implemented before the main proposal is finalised. The Committee sees the communications as a step in this direction. |
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3.5.1

The EESC's opinion on CCCTB pointed out that there could be a case for gradually presenting proposals that could be implemented before the main proposal is finalised. The Committee sees the communications as a step in this direction.

| 3.6 | The wording used by the Commission in the communication is extremely cautious: ‘The Commission proposes to present a number of initiatives’; ‘the Commission proposes to examine this area together with Member States in a working group in the near future’; ‘It is desirable to explore more generally the ways in which cross-border compliance costs can be reduced’. The Commission's cautious approach to tax issues is understandable given the prevailing negative attitude, not least on the part of finance ministers. If politicians are not prepared to work constructively on cooperation, coordination and, where appropriate, harmonisation (particularly on CCCTB), the ECJ will continue to be the institution that decides how national tax systems must work together. |
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3.6

The wording used by the Commission in the communication is extremely cautious: ‘The Commission proposes to present a number of initiatives’; ‘the Commission proposes to examine this area together with Member States in a working group in the near future’; ‘It is desirable to explore more generally the ways in which cross-border compliance costs can be reduced’. The Commission's cautious approach to tax issues is understandable given the prevailing negative attitude, not least on the part of finance ministers. If politicians are not prepared to work constructively on cooperation, coordination and, where appropriate, harmonisation (particularly on CCCTB), the ECJ will continue to be the institution that decides how national tax systems must work together.

| 3.7 | The EESC believes that the Commission's proposed initiatives are a logical part of a taxation work programme. These are problem areas when cross-border activity is involved. It is important that the Commission's forthcoming proposals should be accompanied by a statement of their expected impact on the achievement of the Lisbon Agenda objectives. |
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3.7

The EESC believes that the Commission's proposed initiatives are a logical part of a taxation work programme. These are problem areas when cross-border activity is involved. It is important that the Commission's forthcoming proposals should be accompanied by a statement of their expected impact on the achievement of the Lisbon Agenda objectives.

| 3.8 | The problems addressed in this communication and in the other two communications relate mainly to the cross-border activity of firms. Individuals are only dealt with in the communication on exit taxation. The EESC believes it is right to focus first on businesses when discussing the internal market and taxation. |
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3.8

The problems addressed in this communication and in the other two communications relate mainly to the cross-border activity of firms. Individuals are only dealt with in the communication on exit taxation. The EESC believes it is right to focus first on businesses when discussing the internal market and taxation.

| 3.9 | When a firm is contemplating starting up in another country, it needs detailed information about that country's tax system. Greater openness is required and information needs to be more readily available. The Commission could be an important link to Member State tax offices and the information they hold. Its role as an information provider for competition policy could serve as a model here. |
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3.9

When a firm is contemplating starting up in another country, it needs detailed information about that country's tax system. Greater openness is required and information needs to be more readily available. The Commission could be an important link to Member State tax offices and the information they hold. Its role as an information provider for competition policy could serve as a model here.

| 3.10 | There is a great need for cooperation and coordination in the field of corporate taxation. Although the Commission speaks of cooperation and coordination, some of the arguments used in the communications could lead in practice to national sovereignty being waived in the field of taxation. This must be avoided in any forthcoming specific proposals. |
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3.10

There is a great need for cooperation and coordination in the field of corporate taxation. Although the Commission speaks of cooperation and coordination, some of the arguments used in the communications could lead in practice to national sovereignty being waived in the field of taxation. This must be avoided in any forthcoming specific proposals.

4.   Tax treatment of losses in cross-border situations COM(2006) 824 final

| 4.1 | The treatment of tax relief on cross-border losses for firms and groups is mainly based on the ECJ decision in the Marks and Spencer case. In the absence of cross-border relief for losses, a firm operating in several countries will be taxed more heavily than one that operates in one country only. With CCCTB this problem could be solved for firms with operations in several countries. In the meantime, the Commission suggests various methods for providing cross-border relief for a parent company when losses are incurred by a subsidiary, and for companies with permanent establishments and branches in other countries. |
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4.1

The treatment of tax relief on cross-border losses for firms and groups is mainly based on the ECJ decision in the Marks and Spencer case. In the absence of cross-border relief for losses, a firm operating in several countries will be taxed more heavily than one that operates in one country only. With CCCTB this problem could be solved for firms with operations in several countries. In the meantime, the Commission suggests various methods for providing cross-border relief for a parent company when losses are incurred by a subsidiary, and for companies with permanent establishments and branches in other countries.

Marks and Spencer

| 4.2 | It is not possible to describe the EU situation in its entirety because the rules differ between Member States. |
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4.2

It is not possible to describe the EU situation in its entirety because the rules differ between Member States.

| 4.3 | Firms with several entities in one country can always offset losses between entities. A table in the communication shows that cross-border loss relief is generally available, but not in all Member States. The ECJ has ruled that the same conditions must apply to a firm with several activities in one country as to a firm that is active in several Member States. Consequently, the Commission believes that loss relief is pursuant to freedom of establishment. |
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4.3

Firms with several entities in one country can always offset losses between entities. A table in the communication shows that cross-border loss relief is generally available, but not in all Member States. The ECJ has ruled that the same conditions must apply to a firm with several activities in one country as to a firm that is active in several Member States. Consequently, the Commission believes that loss relief is pursuant to freedom of establishment.

| 4.4 | For groups (parent company-subsidiary), domestic loss relief is available in most Member States. Where there are subsidiaries in other countries, it is only available in exceptional cases. This was the situation in the Marks and Spencer case. The ECJ decided that a loss may only be offset by the parent company once every possibility to take account of the loss in the country where the subsidiary is located has been exhausted. Loss relief may only take place vertically, to the parent company. Moreover, it can only be temporary. |
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4.4

For groups (parent company-subsidiary), domestic loss relief is available in most Member States. Where there are subsidiaries in other countries, it is only available in exceptional cases. This was the situation in the Marks and Spencer case. The ECJ decided that a loss may only be offset by the parent company once every possibility to take account of the loss in the country where the subsidiary is located has been exhausted. Loss relief may only take place vertically, to the parent company. Moreover, it can only be temporary.

| 4.4.1 | Firms within a group are legally separate entities and are taxed individually. However, 19 Member States have domestic systems of group taxation. Most have opted for the pooling of tax results, whereas a few others only allow loss relief. Clearly, special rules are needed for cross-border loss relief, as the result must be taxed according to different systems. These rules differ across the Member States. With CCCTB, all these problems could be solved for firms with operations in several countries. What the Commission wishes to achieve are temporary common solutions for cross-border loss relief for groups. |
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4.4.1

Firms within a group are legally separate entities and are taxed individually. However, 19 Member States have domestic systems of group taxation. Most have opted for the pooling of tax results, whereas a few others only allow loss relief. Clearly, special rules are needed for cross-border loss relief, as the result must be taxed according to different systems. These rules differ across the Member States. With CCCTB, all these problems could be solved for firms with operations in several countries. What the Commission wishes to achieve are temporary common solutions for cross-border loss relief for groups.

Comments

| 4.5 | The communication deals with loss relief but the taxation of profits is, naturally, the point of departure. The best approach would have been to formally address both profits tax and loss relief in the same document. Loss relief cannot be dealt with independently of profits tax. In focusing on the option to transfer losses, the Commission avoids the other way to make up for the deficit: intra-group contributions. If an intra-group contribution can be made before tax is paid on profits, it has the same tax effect as loss transfers. |
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4.5

The communication deals with loss relief but the taxation of profits is, naturally, the point of departure. The best approach would have been to formally address both profits tax and loss relief in the same document. Loss relief cannot be dealt with independently of profits tax. In focusing on the option to transfer losses, the Commission avoids the other way to make up for the deficit: intra-group contributions. If an intra-group contribution can be made before tax is paid on profits, it has the same tax effect as loss transfers.

| 4.6 | The argument that a firm that is active in several countries must be treated in the same way as a firm that operates in several areas of the same country only addresses half the problem. The Commission wants firms with cross-border operations to be treated the same. Given that loss relief rules vary between the Member States, new discrepancies emerge between firms. If a firm comes from a country where cross-border loss relief is permitted and it can apply those rules in a country where loss relief between the parent company and the subsidiary is not permitted, then a discrepancy arises between national and foreign firms. As long as the rules differ there can be no equivalence between all three types of firm; the equivalence is merely transferred. The legal equivalence that used to exist between all firms operating in a given country thus becomes equivalence between all firms from the same country, regardless of where their operations are carried out. Put differently, the rules on transfers of losses are transferred from one country to another via a subsidiary or a branch in that country. This is unacceptable. In other words, the Commission's analysis does not include the potential impact on firms with no cross-border operations. |
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4.6

The argument that a firm that is active in several countries must be treated in the same way as a firm that operates in several areas of the same country only addresses half the problem. The Commission wants firms with cross-border operations to be treated the same. Given that loss relief rules vary between the Member States, new discrepancies emerge between firms. If a firm comes from a country where cross-border loss relief is permitted and it can apply those rules in a country where loss relief between the parent company and the subsidiary is not permitted, then a discrepancy arises between national and foreign firms. As long as the rules differ there can be no equivalence between all three types of firm; the equivalence is merely transferred. The legal equivalence that used to exist between all firms operating in a given country thus becomes equivalence between all firms from the same country, regardless of where their operations are carried out. Put differently, the rules on transfers of losses are transferred from one country to another via a subsidiary or a branch in that country. This is unacceptable. In other words, the Commission's analysis does not include the potential impact on firms with no cross-border operations.

| 4.6.1 | The Commission takes the view that while it is not ideal to apply domestic loss relief systems to cross-border situations, it does constitute an improvement. It is, however, extremely dubious, both from a legal and socio-economic point of view, as what it would involve in practice is using a foreign firm to apply that firm's national rules in another country's territory. The Committee believes that the most serious of the negative consequences that the Commission says result from the lack of cross-border loss relief are problems in establishment, as there are usually losses when an activity is launched. In the start-up phase, however, it is not possible to offset losses against profits in the firm's home country. This is a disincentive to establishment in other countries. Furthermore, it is SMEs that find it most difficult to bear these initial costs. Domestic firms also face these problems, so they are not just specific to establishment abroad. |
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4.6.1

The Commission takes the view that while it is not ideal to apply domestic loss relief systems to cross-border situations, it does constitute an improvement. It is, however, extremely dubious, both from a legal and socio-economic point of view, as what it would involve in practice is using a foreign firm to apply that firm's national rules in another country's territory. The Committee believes that the most serious of the negative consequences that the Commission says result from the lack of cross-border loss relief are problems in establishment, as there are usually losses when an activity is launched. In the start-up phase, however, it is not possible to offset losses against profits in the firm's home country. This is a disincentive to establishment in other countries. Furthermore, it is SMEs that find it most difficult to bear these initial costs. Domestic firms also face these problems, so they are not just specific to establishment abroad.

| 4.7 | Furthermore, the Commission's argument does not take sufficient account of the fact that losses can be carried forward. In most cases there is not always a need to transfer losses across borders. The difference between carry forward loss relief within a country and loss relief between countries is the time aspect. With cross-border loss relief, losses can be offset against profits immediately. The question that needs to be asked is whether the difficulties encountered in creating the special solutions needed to ensure cross-border loss relief can take place within the EU are warranted by the gains to be had from being able to apply loss relief immediately during loss-making years. A temporary intra-group contribution can be used to fund losses temporarily. The problem the Commission is attempting to solve is perhaps not as great as it might seem. The Commission's analysis should consider cross-border loss relief and loss relief over time as alternatives for firms with cross-border operations instead of focusing exclusively on just one of them. |
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4.7

Furthermore, the Commission's argument does not take sufficient account of the fact that losses can be carried forward. In most cases there is not always a need to transfer losses across borders. The difference between carry forward loss relief within a country and loss relief between countries is the time aspect. With cross-border loss relief, losses can be offset against profits immediately. The question that needs to be asked is whether the difficulties encountered in creating the special solutions needed to ensure cross-border loss relief can take place within the EU are warranted by the gains to be had from being able to apply loss relief immediately during loss-making years. A temporary intra-group contribution can be used to fund losses temporarily. The problem the Commission is attempting to solve is perhaps not as great as it might seem. The Commission's analysis should consider cross-border loss relief and loss relief over time as alternatives for firms with cross-border operations instead of focusing exclusively on just one of them.

| 4.8 | Furthermore, there is no assessment — at least in this communication — of the scale of the problem, or of the actual implications of introducing the right to transfer losses across borders. Such an analysis is essential before any decision can be taken on whether to allow losses to be transferred across borders. |
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4.8

Furthermore, there is no assessment — at least in this communication — of the scale of the problem, or of the actual implications of introducing the right to transfer losses across borders. Such an analysis is essential before any decision can be taken on whether to allow losses to be transferred across borders.

| 4.9 | The Commission's interpretation of the legal situation, i.e. that loss relief must be allowed in order to comply with freedom of establishment when activities are performed by permanent establishments or branches in other Member States, neglects to say whether the relief is to be temporary or otherwise. It would appear that only temporary loss relief is currently available. Consequently, it should be stated clearly that this is what is being advocated. |
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4.9

The Commission's interpretation of the legal situation, i.e. that loss relief must be allowed in order to comply with freedom of establishment when activities are performed by permanent establishments or branches in other Member States, neglects to say whether the relief is to be temporary or otherwise. It would appear that only temporary loss relief is currently available. Consequently, it should be stated clearly that this is what is being advocated.

| 4.10 | The Commission wishes to use the restrictions imposed in the Marks and Spencer case as a guide for future measures. The EESC also believes future proposals must be framed in a way that minimises the risk of tax avoidance in connection with loss relief. |
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4.10

The Commission wishes to use the restrictions imposed in the Marks and Spencer case as a guide for future measures. The EESC also believes future proposals must be framed in a way that minimises the risk of tax avoidance in connection with loss relief.

| 4.11 | The Commission has already submitted various proposals that allows for loss relief in years following the year in which the loss transfer was made. The loss is returned from the parent company as soon as there is a profit against which it can be offset. This would appear to be the best method here, as the tax base is only transferred temporarily between the countries concerned. |
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4.11

The Commission has already submitted various proposals that allows for loss relief in years following the year in which the loss transfer was made. The loss is returned from the parent company as soon as there is a profit against which it can be offset. This would appear to be the best method here, as the tax base is only transferred temporarily between the countries concerned.

| 4.12 | If an attempt were made to solve cross-border loss relief problems without first introducing CCCTB, then a broad-based problem — which the Commission does not seem to have addressed adequately — would remain: how are we to know the extent of the loss to be carried over from one country to another when profits and losses are based on different tax base calculations in the two countries? This means they cannot agree on the actual size of the loss. In short, it would seem that CCCTB is the only way to solve the various legal and economic problems involved in cross-border loss relief in the long-term. If this matter is resolved relatively quickly, it might be appropriate for the Commission to focus more on the other problems raised in these communications. |
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4.12

If an attempt were made to solve cross-border loss relief problems without first introducing CCCTB, then a broad-based problem — which the Commission does not seem to have addressed adequately — would remain: how are we to know the extent of the loss to be carried over from one country to another when profits and losses are based on different tax base calculations in the two countries? This means they cannot agree on the actual size of the loss. In short, it would seem that CCCTB is the only way to solve the various legal and economic problems involved in cross-border loss relief in the long-term. If this matter is resolved relatively quickly, it might be appropriate for the Commission to focus more on the other problems raised in these communications.

5.   Exit taxation and the need for coordination of Member States' tax policies COM(2006) 825 final

| 5.1 | The Commission believes that when unrealised gains are transferred between firms, the same tax deferral rules must apply whether the transfer is made within a single country or between countries. However, problems arise because the rules on taxation of unrealised gains differ. In addition, lack of information between tax authorities and the firms or individuals in question can also lead to uncollected taxes or double taxation. The Commission gives examples of how Member State rules could be coordinated better. More remains to be done if the problems are to be fully resolved. |
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5.1

The Commission believes that when unrealised gains are transferred between firms, the same tax deferral rules must apply whether the transfer is made within a single country or between countries. However, problems arise because the rules on taxation of unrealised gains differ. In addition, lack of information between tax authorities and the firms or individuals in question can also lead to uncollected taxes or double taxation. The Commission gives examples of how Member State rules could be coordinated better. More remains to be done if the problems are to be fully resolved.

| 5.2 | The Commission bases its argument on a case in which a private individual (2) was taxed on unrealised gains when leaving the country, whereas those who stay are taxed when the gain is realised. The ECJ felt that this discrepancy was a breach of the Treaty rules on free movement. But then comes the other problem: the country where the gain was made misses out on the tax revenue. In the absence of any specific rules, when realised it accrues to the country the taxpayer has moved to. The ECJ ruled that a tax declaration could be required on leaving the country, to be used as a basis for apportioning tax revenue when the gain is realised. |
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5.2

The Commission bases its argument on a case in which a private individual (2) was taxed on unrealised gains when leaving the country, whereas those who stay are taxed when the gain is realised. The ECJ felt that this discrepancy was a breach of the Treaty rules on free movement. But then comes the other problem: the country where the gain was made misses out on the tax revenue. In the absence of any specific rules, when realised it accrues to the country the taxpayer has moved to. The ECJ ruled that a tax declaration could be required on leaving the country, to be used as a basis for apportioning tax revenue when the gain is realised.

2

| 5.3 | Most Member States now follow the ECJ's ruling and have abolished exit tax. Uncertainty arises as to how or indeed whether tax on part of the gain is to accrue to the country from which residence is transferred. The Commission advocates a system whereby the new country of residence grants credit for that part of the gain that occurred before residence was transferred. This would require the tax authorities in the two countries concerned to coordinate their efforts. The Commission also interprets that ECJ case that applied to an individual as also applying to firms that transfer unrealised gains. |
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5.3

Most Member States now follow the ECJ's ruling and have abolished exit tax. Uncertainty arises as to how or indeed whether tax on part of the gain is to accrue to the country from which residence is transferred. The Commission advocates a system whereby the new country of residence grants credit for that part of the gain that occurred before residence was transferred. This would require the tax authorities in the two countries concerned to coordinate their efforts. The Commission also interprets that ECJ case that applied to an individual as also applying to firms that transfer unrealised gains.

| 5.4 | The EEA/EFTA countries constitute a special case, as they are bound by EU provisions on free movement but not on tax legislation. Here the Commission feels that, in order to ensure that revenue can accrue to the country being left, tax may be demanded on exit, unless bilateral agreements provide for other solutions. |
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5.4

The EEA/EFTA countries constitute a special case, as they are bound by EU provisions on free movement but not on tax legislation. Here the Commission feels that, in order to ensure that revenue can accrue to the country being left, tax may be demanded on exit, unless bilateral agreements provide for other solutions.

Comments

| 5.5 | When the Commission argues the different cases involving transfers between firms of assets comprising unrealised gains, the legal situation appears less certain than for private individuals. The Commission bases its interpretation for firms on the ECJ ruling for private individuals, but a ruling for private individuals cannot be applied wholesale to firms. The Commission therefore needs to flesh out its analysis by addressing the specific problems that can arise for firms. |
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5.5

When the Commission argues the different cases involving transfers between firms of assets comprising unrealised gains, the legal situation appears less certain than for private individuals. The Commission bases its interpretation for firms on the ECJ ruling for private individuals, but a ruling for private individuals cannot be applied wholesale to firms. The Commission therefore needs to flesh out its analysis by addressing the specific problems that can arise for firms.

| 5.6 | A more exhaustive text is needed to clarify what the Commission believes should apply in different situations, e.g. involving a parent company and subsidiary, or branches and permanent establishments. The Commission's communication also leaves the reader wondering whether unrealised assets should really be treated differently according to the type of relationship that exists between the firms concerned. |
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5.6

A more exhaustive text is needed to clarify what the Commission believes should apply in different situations, e.g. involving a parent company and subsidiary, or branches and permanent establishments. The Commission's communication also leaves the reader wondering whether unrealised assets should really be treated differently according to the type of relationship that exists between the firms concerned.

| 5.7 | The rule that exit tax may not be levied on unrealised gains leads to considerable demands for information. It seems unfair to require an annual declaration that the assets have not been disposed of, when cooperation between the tax authorities should be sufficient to ensure that both countries get their rightful share of the tax revenue when it is eventually paid. |
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5.7

The rule that exit tax may not be levied on unrealised gains leads to considerable demands for information. It seems unfair to require an annual declaration that the assets have not been disposed of, when cooperation between the tax authorities should be sufficient to ensure that both countries get their rightful share of the tax revenue when it is eventually paid.

| 5.8 | Some transferred assets, such as intangibles, are never disposed of, or simply expire. The Commission's description of such cases is not exhaustive. How is the Member State where the asset originates ever to be able to tax a previously unrealised gain if it is not allowed to do so when it is transferred? |
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5.8

Some transferred assets, such as intangibles, are never disposed of, or simply expire. The Commission's description of such cases is not exhaustive. How is the Member State where the asset originates ever to be able to tax a previously unrealised gain if it is not allowed to do so when it is transferred?

Brussels, 26 September 2007.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS

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(1)  OJ C 88, 11.4.2006, p. 48: Opinion of the EESC on the Creation of a common consolidated corporate tax base in the EU.

1

(2)  Case C-9/02 Hughes de Lasteyrie du Saillant v. Ministère de l'Economie, des Finances et de l'Industrie, OJ C 94, 17.4.2004, p. 5.

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