Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and The Commissioners for Her Majesty’s Revenue & Customs.
Date: 2012-11-13
37. It should be recalled that, in the context of tax rules, such as those at issue in the main proceedings, which seek to prevent the economic double taxation of distributed profits, the situation of a corporate shareholder receiving foreign-sourced dividends is comparable to that of a corporate shareholder receiving nationally-sourced dividends in so far as, in each case, the profits made are, in principle, liable to be subject to a series of charges to tax ( Test Claimants in the FII Group Litigation , paragraph 62, and Joined Cases C‑436/08 and C‑437/08 Haribo Lakritzen Hans Riegel and Österreichische Salinen [2011] ECR I‑305, paragraph 59).
38. That being so, Articles 49 TFEU and 63 TFEU require a Member State which has a system for preventing economic double taxation as regards dividends paid to residents by resident companies to accord equivalent treatment to dividends paid to residents by non-resident companies (see Test Claimants in the FII Group Litigation , paragraph 72, and Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 60).
39. It is to be recalled, next, that the Court has held that a Member State is, in principle, free to prevent the imposition of a series of charges to tax on dividends received by a resident company by opting for the exemption method when the dividends are paid by a resident company and for the imputation method when they are paid by a non-resident company. Those two methods are in fact equivalent provided, however, that the tax rate applied to foreign-sourced dividends is not higher than the rate applied to nationally-sourced dividends and that the tax credit is at least equal to the amount paid in the State of the company making the distribution, up to the limit of the tax charged in the Member State of the company receiving the dividends (see Test Claimants in the FII Group Litigation , paragraphs 48 and 57; Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 86; Case C‑310/09 Accor  [2011] ECR I‑8115, paragraph 88; and the order in Case C‑201/05 Test Claimants in the CFC and Dividend Group Litigation  [2008] ECR I‑2875, paragraph 39).
40. It should be noted in this regard that, since European Union law, as it currently stands, does not lay down any general criteria for the attribution of areas of competence between the Member States in relation to the elimination of double taxation within the European Union (Case C‑513/04 Kerckhaert and Morres  [2006] ECR I‑10967, paragraph 22, and Case C‑157/10 Banco Bilbao Vizcaya Argentaria  [2011] ECR I‑13023, paragraph 31 and the case‑law cited), each Member State remains free to organise its system for taxing distributed profits, provided, however, that the system in question does not entail discrimination prohibited by the FEU Treaty. An obligation on the Member State where the company receiving dividends resides to exempt foreign-sourced dividends from corporation tax would affect the competence of the Member State concerned to tax, in compliance with the principle of non-discrimination, the profits thereby distributed at the rate prescribed by its own legislation.
41. As is apparent from paragraph 54 of the judgment in Test Claimants in the FII Group Litigation , the claimants in the main proceedings disputed that the exemption and imputation methods are equivalent by submitting that when, under the relevant United Kingdom legislation, a nationally-sourced dividend is paid, it is exempt from corporation tax in the hands of the company receiving it, irrespective of the tax paid by the company making the distribution, that is to say, also when, by reason of the reliefs available to the company making the distribution, that company has no liability to tax or pays corporation tax at a rate lower than that which normally applies in the United Kingdom.
42. The Court thus called upon the referring court, in paragraph 56 of the judgment in Test Claimants in the FII Group Litigation , to determine whether the tax rates are indeed the same and whether different levels of taxation occur only in certain cases by reason of a change to the tax base as a result of certain exceptional reliefs.
46. Second, exemption from tax of dividends paid by a resident company and application to dividends paid by a non-resident company of an imputation method which, like that laid down in the rules at issue in the main proceedings, takes account of the effective level of taxation of the profits in the State of origin also cease to be equivalent if the profits of the resident company which pays dividends are subject in the Member State of residence to an effective level of taxation lower than the nominal rate of tax which is applicable there.
49. Accordingly, the determination which the referring court was called upon to make by the Court, in paragraph 56 of its judgment in Test Claimants in the FII Group Litigation , relates both to the applicable nominal rates of tax and to the effective levels of taxation. The ‘tax rates’ to which paragraph 56 refers relate to the nominal rate of tax and the ‘different levels of taxation … by reason of a change to the tax base’ relate to the effective levels of taxation. The effective level of taxation may be lower than the nominal rate of tax by reason, in particular, of reliefs reducing the tax base.
50. As regards any difference between the nominal rate of tax and the effective level of taxation to which the resident company paying dividends is subject, it is admittedly apparent from paragraph 56 of the judgment in Test Claimants in the FII Group Litigation  that the exemption and imputation methods do not immediately cease to be equivalent as soon as exceptional cases exist in which nationally-sourced dividends are exempt although the profits out of which those dividends have been paid have not been subject in their entirety to an effective level of taxation corresponding to the nominal rate of tax. The Court made it clear, however, that it was for the referring court to determine whether or not the difference between the effective level of taxation and the nominal rate of tax was exceptional in nature.
51. It is apparent from the order of the referring court that the latter made the determination asked of it in paragraph 56 of the judgment in Test Claimants in the FII Group Litigation . It found that, in the main proceedings, the same nominal rate of tax applies both to the profits of the resident company paying dividends and to those of the resident company receiving them. On the other hand, it is apparent from the order for reference that the circumstance referred to in paragraph 46 of the present judgment is present, and not by way of exception: according to the referring court, in the United Kingdom the effective level of taxation of the profits of resident companies is lower than the nominal rate of tax in the majority of cases.
53. Since, in the context of a tax rule, such as that at issue in the main proceedings, which seeks to prevent the economic double taxation of distributed profits, the situation of a corporate shareholder receiving foreign-sourced dividends is comparable to that of a corporate shareholder receiving nationally-sourced dividends in so far as, in each case, the profits made are, in principle, liable to be subject to a series of charges to tax (see Test Claimants in the FII Group Litigation , paragraph 62, and Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 59), the difference in the tax treatment of the two categories of dividends is not justified by a relevant difference in situation.
54. Therefore, legislation such as that at issue in the main proceedings constitutes a restriction on freedom of establishment and on capital movements that is in principle prohibited by Articles 49 TFEU and 63 TFEU.
55. In accordance with settled case‑law, such a restriction is permissible only if it is justified by an overriding reason in the public interest. It is further necessary, in such a case, that the restriction be appropriate for ensuring the attainment of the objective in question and not go beyond what is necessary to attain that objective (see Case C‑371/10 National Grid Indus  [2011] ECR I‑12273, paragraph 42, and Case C‑250/08 Commission  v Belgium  [2011] ECR I‑12341, paragraph 51).
57. It should be recalled that the Court has already accepted that the need to preserve the cohesion of a tax system may justify a restriction on the exercise of the freedoms of movement guaranteed by the Treaty (Case C‑204/90 Bachmann   [1992] ECR I‑249, paragraph 21; Case C‑319/02 Manninen  [2004] ECR I‑7477, paragraph 42; Case C‑157/07 Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt  [2008] ECR I‑8061, paragraph 43; and Commission  v Belgium , paragraph 70).
58. However, in accordance with settled case‑law, the existence of a direct link must be established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy ( Commission  v Belgium , paragraph 71 and the case‑law cited), the direct nature of that link falling to be examined in the light of the objective pursued by the rules in question (Case C‑418/07 Papillon  [2008] ECR I‑8947, paragraph 44, and Case C‑303/07 Aberdeen Property Fininvest Alpha  [2009] ECR I‑5145, paragraph 72).
62. For the purpose of ensuring the cohesion of the tax system in question, national rules which took account in particular, also under the imputation method, of the nominal rate of tax to which the profits underlying the dividends paid have been subject would be appropriate for preventing the economic double taxation of the distributed profits and for ensuring the internal cohesion of the tax system while being less prejudicial to freedom of establishment and the free movement of capital.
63. It is to be observed in this connection that in Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 99, the Court, after pointing out that the Member States are, in principle, allowed to prevent the imposition of a series of charges to tax on dividends received by a resident company by applying the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends, noted that the national rules in question took account, for the purpose of calculating the amount of the tax credit under the imputation method, of the nominal rate of tax applicable in the State where the company paying dividends was established.
64. It is true that calculation, when applying the imputation method, of a tax credit on the basis of the nominal rate of tax to which the profits underlying the dividends paid have been subject may still lead to a less favourable tax treatment of foreign-sourced dividends, as a result in particular of the existence in the Member States of different rules relating to determination of the basis of assessment for corporation tax. However, it must be held that, when unfavourable treatment of that kind arises, it results from the exercise in parallel by different Member States of their fiscal sovereignty, which is compatible with the Treaty (see, to this effect, Kerckhaert and Morres , paragraph 20, and Case C‑96/08 CIBA  [2010] ECR I‑2911, paragraph 25).
72. As is clear from paragraph 62 of the present judgment, the obligation imposed on a resident company by national rules, such as those at issue in the main proceedings, to pay ACT when profits from foreign-sourced dividends are distributed is, in fact, justified only in so far as that advance tax corresponds to the amount designed to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends have been subject compared with the nominal rate of tax applicable to the profits of the resident company.
76. This meant that, whereas the dividends were passed up the group structure without any liability to pay ACT, when the final resident parent company came to pay the dividends to the shareholders outside the group, it did not have any tax credit to offset against its liability for ACT and was, consequently, obliged to pay ACT on the dividends. The provisions of the ACT system permitted the final parent company, however, to surrender any surplus ACT that it had to its resident subsidiaries and to offset it against the group’s overall tax liability (see Joined Cases C‑397/98 and C‑410/98 Metallgesellschaft and Others  [2001] ECR I‑1727, paragraphs 21 to 25).
84. It is to be remembered that the right to a refund of charges levied by a Member State in breach of European Union law is the consequence and complement of the rights conferred on individuals by provisions of European Union law prohibiting such charges. The Member State is therefore required in principle to repay charges levied in breach of European Union law (Case C‑398/09 Lady & Kid and Others  [2011] ECR I‑7375, paragraph 17 and the case‑law cited).
89. The tax treatment of dividends may fall within Article 49 TFEU on freedom of establishment and Article 63 TFEU on the free movement of capital ( Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 33, and Accor , paragraph 30).
90. As regards the question whether national legislation falls within the scope of one or other of the freedoms of movement, it is clear from well established case‑law that the purpose of the legislation concerned must be taken into consideration (Case C‑196/04 Cadbury Schweppes and Cadbury Schweppes Overseas  [2006] ECR I‑7995, paragraphs 31 to 33; Case C‑374/04 Test Claimants in Class IV of the ACT Group Litigation  [2006] ECR I‑11673, paragraphs 37 and 38; Case C‑524/04 Test Claimants in the Thin Cap Group Litigation  [2007] ECR I‑2107, paragraphs 26 to 34; Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 34; and Accor , paragraph 31).
91. National legislation intended to apply only to those shareholdings which enable the holder to exert a definite influence on a company’s decisions and to determine its activities falls within the scope of Article 49 TFEU on freedom of establishment (see Test Claimants in the FII Group Litigation , paragraph 37; Case C‑81/09 Idrima Tipou  [2010] ECR I‑10161, paragraph 47; Accor , paragraph 32; and Case C‑31/11 Scheunemann  [2012] ECR, paragraph 23).
92. On the other hand, national provisions which apply to shareholdings acquired solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking must be examined exclusively in light of the free movement of capital ( Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 35; Accor , paragraph 32; and Scheunemann , paragraph 23).
93. The national rules at issue in the main proceedings apply not only to dividends received by a resident company on the basis of a shareholding that confers definite influence over the decisions of the company paying the dividends and enables its activities to be determined, but also to dividends received on the basis of a shareholding not conferring such influence. In so far as the national legislation relates to dividends which originate in a Member State, it cannot therefore be determined from its purpose whether it falls predominantly within the scope of Article 49 TFEU or Article 63 TFEU.
94. In such circumstances, the Court takes account of the facts of the case in point in order to determine whether the situation to which the dispute in the main proceedings relates falls within the scope of one or other of those provisions (see, to this effect, Test Claimants in the FII Group Litigation , paragraphs 37 and 38; Case C‑284/06 Burda  [2008] ECR I‑4571, paragraphs 71 and 72; and Case C‑311/08 SGI  [2010] ECR I‑487, paragraphs 33 to 37).
95. It was thus that, in paragraph 37 of its judgment in Test Claimants in the FII Group Litigation , the Court established that the cases chosen as test cases in the proceedings before the referring court concerned United Kingdom-resident companies which received dividends from companies established in other Member States that were wholly owned by them. As the nature of the interest in question would confer on the holder definite influence over the decisions of the company paying the dividends and allow it to determine the company’s activities, the Court held that the Treaty provisions on freedom of establishment would apply in those test cases.
96. However, in a context such as that at issue in the main proceedings which relates to the tax treatment of dividends originating in a third country, it is sufficient to examine the purpose of national legislation in order to determine whether the tax treatment of such dividends falls within the scope of the Treaty provisions on the free movement of capital.
97. Since the chapter of the Treaty on freedom of establishment does not contain any provision which extends the application of its provisions to situations concerning the establishment of a company of a Member State in a third country or the establishment of a company of a third country in a Member State (see Holböck , paragraph 28; Case C‑452/04 Fidium Finanz  [2006] ECR I‑9521, paragraph 25; Scheunemann , paragraph 33; the order in Case C‑102/05 A and B  [2007] ECR I‑3871, paragraph 29; and the order in Test Claimants in the CFC and Dividend Group Litigation , paragraph 88), legislation relating to the tax treatment of dividends originating in third countries is not capable of falling within the scope of Article 49 TFEU.
98. Where it is apparent from the purpose of such national legislation that it can only apply to those shareholdings which enable the holder to exert a definite influence on the decisions of the company concerned and to determine its activities, neither Article 49 TFEU nor Article 63 TFEU may be relied upon ( Test Claimants in the Thin Cap Group Litigation , paragraphs 33, 34, 101 and 102, and the order in Case C‑492/04 Lasertec  [2007] ECR I‑3775, paragraphs 22 and 27; see also the order in A and B , paragraphs 4 and 25 to 28).
99. On the other hand, national rules relating to the tax treatment of dividends from a third country which do not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends must be assessed in the light of Article 63 TFEU. A company resident in a Member State may therefore rely on that provision in order to call into question the legality of such rules, irrespective of the size of its shareholding in the company paying dividends established in a third country (see, to this effect, A , paragraphs 11 and 27).
100. Since the Treaty does not extend freedom of establishment to third countries, it is important to ensure that the interpretation of Article 63(1) TFEU as regards relations with third countries does not enable economic operators who do not fall within the limits of the territorial scope of freedom of establishment to profit from that freedom. Such a risk does not exist in a situation such as that at issue in the main proceedings. The legislation of the Member State in question does not relate to the conditions for access of a company from that Member State to the market in a third country or of a company from a third country to the market in that Member State. It concerns only the tax treatment of dividends which derive from investments which their recipient has made in a company established in a third country.
103. According to the case‑law, the restrictions on capital movements involving establishment or direct investment within the meaning of Article 64(1) TFEU extend not only to national measures which, in their application to capital movements to or from third countries, restrict establishment or investment, but also to those which restrict payments of dividends deriving from them ( Test Claimants in the FII Group Litigation , paragraph 183, and Holböck , paragraph 36).
104. Having regard to the foregoing, the answer to the fourth question is that European Union law must be interpreted as meaning that a company that is resident in a Member State and has a shareholding in a company resident in a third country giving it definite influence over the decisions of the latter company and enabling it to determine its activities may rely upon Article 63 TFEU in order to call into question the consistency with that provision of legislation of that Member State which relates to the tax treatment of dividends originating in the third country and does not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends.
Question 5
110. As regards, on the other hand, ACT which corresponds to the additional corporation tax which the Member State concerned was entitled to impose, it is to be recalled that ACT is an advance payment of corporation tax in the United Kingdom. The right to surrender surplus ACT to subsidiaries ensures that a group of companies that are subject to tax in the United Kingdom does not – by reason only of the existence of the ACT – pay tax of an amount exceeding the aggregate tax liability that has arisen in the United Kingdom. The extension of that right to non-resident companies that are not taxable in the United Kingdom, which would result in the surplus ACT being repaid, would in effect deny the United Kingdom the right to levy additional tax on foreign-sourced dividends paid out of profits which were subject to a nominal rate of tax lower than that applicable in the United Kingdom and would thus jeopardise a balanced allocation of the power to impose taxes between Member States (see, to this effect, Case C‑262/09 Meilicke and Others [2011] ECR I‑5669, paragraph 33 and the case‑law cited).