The CJEU embraces a ‘per-element approach’ and considers the limitation of certain tax advantages to purely national situations of tax-integrated groups to be a violation of the freedom of establishment.
On 2 September 2015, the CJEU rendered its judgment in the case Groupe Steria (C-386/14) (reported in Tax Journal, 11 September). The CJEU decided that the French rule that only grants a full tax exemption on dividend income if such income is received from a company belonging to the same tax-integrated group (i.e. fiscal unity), is an unjustifiable restriction to the freedom of establishment. Since French parent companies cannot form a fiscal unity with their foreign subsidiary companies under French tax law, the full tax exemption is effectively unavailable for dividends from subsidiaries established in other member states.
The case involved a French company that received dividends from its subsidiaries established in France and other member states. Under the French tax rules at issue, dividend income received from a subsidiary within the same fiscal unity is eventually fully exempt by means of a so-called add-back, while dividend income received from a subsidiary outside the fiscal unity is exempt for only 95%. As French law does not allow for the formation of a fiscal unity in cross-border situations, such a full exemption is unavailable for dividends received from foreign subsidiaries. In consequence, French law required French companies to resort instead to a 95% exemption under the French participation exemption regime. The CJEU considered this to be a restriction to the freedom of establishment that cannot be justified by an overriding reason in the general interest.
The judgment may be considered to be a major development in EU law. The CJEU held that member states are by no means free to disallow foreign subsidiary companies access to an element of a fiscal unity, such as full participation exemption as in the present case, by merely referring to the national scope of its fiscal unity systems. The CJEU explicated that such a perceived freedom of the member states cannot be inferred from the court’s observations in X Holding (C-337/08).
In X Holding, the CJEU held that the ineligibility to form a cross-border fiscal unity under Dutch tax law did not infringe the fundamental freedoms. In Groupe Steria, however, the CJEU represents its judgment in X Holding as merely addressing the issue of cross-border loss imports, so as to justify the non-eligibility of forming a cross-border tax group.
It may be inferred from the CJEU’s judgment in Groupe Steria that the scope of the X-Holding judgment is limited to the element of cross-border loss relief. In practice, this means that any tax advantage that has been unavailable because of the ineligibility to form a cross-border fiscal unity can now be examined as to its compatibility with the freedom of establishment.
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Groupe Steria and freedom of establishment
The CJEU embraces a ‘per-element approach’ and considers the limitation of certain tax advantages to purely national situations of tax-integrated groups to be a violation of the freedom of establishment.
On 2 September 2015, the CJEU rendered its judgment in the case Groupe Steria (C-386/14) (reported in Tax Journal, 11 September). The CJEU decided that the French rule that only grants a full tax exemption on dividend income if such income is received from a company belonging to the same tax-integrated group (i.e. fiscal unity), is an unjustifiable restriction to the freedom of establishment. Since French parent companies cannot form a fiscal unity with their foreign subsidiary companies under French tax law, the full tax exemption is effectively unavailable for dividends from subsidiaries established in other member states.
The case involved a French company that received dividends from its subsidiaries established in France and other member states. Under the French tax rules at issue, dividend income received from a subsidiary within the same fiscal unity is eventually fully exempt by means of a so-called add-back, while dividend income received from a subsidiary outside the fiscal unity is exempt for only 95%. As French law does not allow for the formation of a fiscal unity in cross-border situations, such a full exemption is unavailable for dividends received from foreign subsidiaries. In consequence, French law required French companies to resort instead to a 95% exemption under the French participation exemption regime. The CJEU considered this to be a restriction to the freedom of establishment that cannot be justified by an overriding reason in the general interest.
The judgment may be considered to be a major development in EU law. The CJEU held that member states are by no means free to disallow foreign subsidiary companies access to an element of a fiscal unity, such as full participation exemption as in the present case, by merely referring to the national scope of its fiscal unity systems. The CJEU explicated that such a perceived freedom of the member states cannot be inferred from the court’s observations in X Holding (C-337/08).
In X Holding, the CJEU held that the ineligibility to form a cross-border fiscal unity under Dutch tax law did not infringe the fundamental freedoms. In Groupe Steria, however, the CJEU represents its judgment in X Holding as merely addressing the issue of cross-border loss imports, so as to justify the non-eligibility of forming a cross-border tax group.
It may be inferred from the CJEU’s judgment in Groupe Steria that the scope of the X-Holding judgment is limited to the element of cross-border loss relief. In practice, this means that any tax advantage that has been unavailable because of the ineligibility to form a cross-border fiscal unity can now be examined as to its compatibility with the freedom of establishment.
