Jacques Malherbe Professoremeritus of the CatholicUniversity of Louvain

1. UNIVERSITY OF SÃO PAULOInstitutoBrasileiro de DireitoTributário4th BrazilianCongress of International Tax Law22-23 August 2011Taxation of movements of capital between the European Union and Third Countries Jacques Malherbe Professoremeritus of the CatholicUniversity of Louvain Avocat (Partner, Liedekerke, Brussels) E-mail : j.malherbe@liedekerke.com

2. Table of contents • Limits to liberalisation of capital movements 1. Grandfathering of restrictions existing in 1993 2. Possibility to distinguishbetweenresidents & non-residents 3. Otherjustified restrictions II. Relations withothertreatyfreedoms • Application to practical situations 1. Golden Share 2. Limitation on benefits of treaties (LOB) 3. Withholding on dividends 4. Most-favoured nation treatment • Treatiessigned by EU 1. EuropeanEconomic Area 2. TreatywithSwitzerland 26.10.2004 3. Treaties on interestfromsavings

3. European Union and Third Countries • Transactions of EU operatorswiththird countries (TC) may not berestricted • Transactions of TC operatorswith EU operators are governed by treaties • signed by EU • bilateral

4. Exception Treaty on the Functioning of the European Union (TFEU) art. 63 (former treatyinstituting the EuropeanCommunity – TEC art. 56) Restrictions of movements of capital betweenMember States (MS) between MS and TC are prohibited

5. Exception Example An exemption for dividendsreceived must apply to dividendsfrom TC Comp. ECJ, 6.06.2000 Verkooijen

6. Purpose See Schoueri (2006) Attractinvestmentfrom TC in EU Favour EURO as currency Concl. Exception shouldbeinterpretedbroadly

7. I. Limits to liberalisation of capital movements • Grandfathering of restrictions existing in 1993 re direct investment (incl. real property) establishment financial services vis-à-vis TC (not MS) ex. restriction to purchase of buildings in Vienna ECJ, 11.02.2000 FokusInvest

8. I. Limits to liberalisation of capital movements 2. Possibility to distinguishbetween residents non-residents but withoutarbitrary discrimination ex. Braziliandrawing all hisincomefrom Germany must benefit of familyreductions Comp. ECJ, 14.02.1993 Schumacker

9. I. Limits to liberalisation of capital movements ex. PE must benefit of treatiessignedwith TC Comp. ECJ, 21.09.1999 Saint-Gobain Applicable to TC ? Schoueri : invest in DTT’s ILADT proposal of model treaty for Latin America : scope of DTT extended to PE’s

10. I. Limits to liberalisation of capital movements • Otherjustified restrictions • Tax Control Between MS : no : directive on exchange of info (16.10.2010) With TC : yes exchange of info : id. ex. ECJ, 14.12.2007 A Swedish exemption of dividendsdistributedunder the form of shares of subsidiary not applicable to Swisssub

11. I. Limits to liberalisation of capital movements b. Anti-abuse measures Presumptions : must berebuttable show that not inspired by tax motives ex. interposition of EU subbenefiting of parent-subsidiary directive (no WHG) between French sub and TC parent CGI (France), art. 119ter

12. II. Relations withothertreatyfreedoms Freedom to render services Freedom of establishment do not apply to TC If movement of capital isconsequence of rending of services or establishment, freedom of capital movementwill not applywhenmovement of capital is « unavoidableconsequence » of service or establishment

13. II. Relations withothertreatyfreedoms Examples ECJ, 3.10.2006 FidiumFinanz Swisscompanygrantingconsumptioncredits in Germany Authorizationdenied Granting of credit = service + movement of capital

14. II. Relations withothertreatyfreedoms ECJ, 10.05.2007 Lasertec Germanthincapitalizationrule if debttowards parent > 3 x equity of parent in sub : interest = profit distribution 2/3 participation of Swissshareholder and lender = exercise of control = freedom of establishment not of capital movement Provision applies

15. II. Relations withothertreatyfreedoms But Freedom of capital movementswillapply if provision appliesindifferently to controlling and non-controlling participations ex. ECJ, 24.05.2007 Hölböck Austriantax rate reduced to half for Austrianshareholders of Austriancompanies Full rate for dividends of foreigncompanies Freedom of capital movementwould have applied But the restriction existed in 1993. It wasgrandfathered

16. III. Application to practical situations • « Golden Share  » non-taxfield voting right in Volkswagen limited to 20 % by privatisation law requiredmajority in general meeting : 80 % federal State and lowerSaxonyownedeach 20 % of shares restriction to investment by shareholders of other States not justifiedunderproportionalityrule

17. III. Application to practical situations • Limitation on benefits of treaties (LOB) Bilateraltreaty not applicable to companies of Contracting State owed by residents of other States payingdeductibleamounts to residents of other States Comp. Open Skies Judgment ECJ, 5.11.2002 Commission v UK air traffic agreement between UK and US not applicable to airlines of UK owned by nationals of other MS restriction to freedom of establishment : no reason of public policy

18. III. Application to practical situations But In the taxfield ECJ, 12.12.2006 ACT Group Litigation UK DTT’sgrants partial reimbursement of ACT paidupon distribution of dividend to shareholders of otherContracting State Not applicable to companyowned by non-residentsresident in country having no suchtreatywith UK Upheld : no discrimination companies not in same situations whole of DTT must beviewed

19. III. Application to practical situations • Withholding on dividends • Parent-subsidiary directive no WHG if 10 % participation of parent in sub applicable to third countries ? secondarylaw, not treaty (primarylaw) Seedomesticlaw of Belgium / Netherlands applies exception above 10 % to all treaty countries with exchange of information good platform as holding company to invest in EU

20. III. Application to practical situations • Treaty Within EU, withholding on dividendpaid to company in other MS owninglessthan 10 % isdiscriminatory if dividendpaid to domesticcompanyis not taxed, i.e. no withholding / justification exemption ECJ, 19.11.2009 Commission v Italy ECJ, 3.06.2010 Commission v Spain Wouldapply to Third Countries ? Probably not if differencebased on absence of exchange of information similar to the one provided by mutual assistance directive But :DTT providesin casusimilar exchange of information

21. III. Application to practical situations • Most-favoured nation treatment Not imposed by EU Treaty MS maye.g. granttaxsparing to third country But PE must have in MS sametreatment as domesticcompany Tax sparingunderFinland-China treatywasextended to PE in Finland of Luxembourg company SAD, Supr. Adm. Court of Finland, 9.05.2007

22. IV. Treatiessigned by EU • EuropeanEconomic Area (EEA) : Iceland, Liechtenstein, Norway samefreedoms as in EU – Treaty But freedom of movement of capital not extended to third countries (art. 40) ex. Liechtenstein as a third country ECJ, 28.10.2010 Ets Rimbaud French tax of 3 % on real propertycompanies Not applicable if DTT exchange of information Return disclosingshareholders Applies to Liechtenstein company in spite of freedom of movement of capital because no exchange of information

23. IV. Treatiessigned by EU • TreatywithSwitzerland 26.10.2004 Taxation of savings : WHG in Switzerland Extension of treatmentaccording to directives of dividend interest royalties Condition of participation of 25 %

24. IV. Treatiessigned by EU • Treaties on interestfromsavings Varioustaxhavens in Europe : Andorra, Liechtenstein, Monaco, San Marino UK territories

25. Conclusion for TC’s De legelata invokefreedom of movement of capital use « bases » such as Belgium, Netherlands De legeferenda in negotiatingtaxtreaties : request application of treaty to PE request application of all freedoms to residents of Contracting State at least to PE’s in EU and EEA