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European Community Law and Direct Taxation - Case study - European Focus Group, Canberra March 2007. Submitted by Dr. Michael Rosenthal Rechtsanwalt – Fachanwalt für Steuerrecht German-Australian-Pacific Lawyers Association Deutsch-Australisch-Pazifische Juristenvereinigung e.V. (DAPJV).

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  1. European Community Law and Direct Taxation- Case study -European Focus Group, Canberra March 2007 Submitted by Dr. Michael RosenthalRechtsanwalt – Fachanwalt für Steuerrecht German-Australian-Pacific Lawyers AssociationDeutsch-Australisch-Pazifische Juristenvereinigung e.V. (DAPJV)

  2. Case Description The base case would be an Australian Ultimate Shareholder (A) having an Irish Company (I) which in turn holds shares in a company in Germany (D) and pharmaceutical related patents. I´s prime activity is doing R & D which is outsourced to various hospitals to undertake clinical studies. I receives dividends from the German subsidiary and royalties from customers in Germany.

  3. Case Structure

  4. Income streams A receives • Dividends from I/Ireland I receives • Dividends from D/Germany • Royalties from Customers in Germany D pays withholding taxes in Germany • on royalties? • on dividends?

  5. Withholding tax on royalties • Treaty Law: None • (Art. VII sec. 1 DTT Germany/Ireland) • Taxation right for the state of residency of recepient only, i.e. Ireland! • „Treaty Overriding“: 20 %! • (§ 50 d sec. 3 EStG, i.e. German Income Tax Code) • (1) No Treaty Protection of Shareholders • and • (2) 1. Alt.: No economicial or other significant reasons • or 2. Alt.: 90 % „Outsourcing“ • or 3. Alt.: No adequate substance

  6. Withholding tax on dividends • Treaty Law: 15 % • EU Directive: 0 • „Treaty Overriding“: 20 %(§ 50d sec. 3 EStG, i.e. German Income Tax code)

  7. Treaty Overriding and Community Law Applicable Community Law I) EC Treaty 1) Freedom of establishment (Art. 43 EC) 2) Free movement of capital (Art. 56 EC) 3) Other guaranteed „freedoms“ (rendering services etc.) II) EU Directives 1) Directive regarding parent companies and subsidiaries 2) Other Directives (mergers etc.)

  8. Treaty Overriding and Community Law B) Protection of the Irish Company - Freedom of establishment! I) Right to establish and run companies II) Right to pursue activities without discrimination based on the seat in another member state, i.e. Ireland ECJ dated 14 December 2006 (Denkavit) ECJ dated 12 December 2006 (Test Claimants)

  9. Treaty Overriding and Community Law C) Protection of the Australian Company? I) General principle EC Treaty Law applies to EU residents onlyII) Exceptions 1) Free movement of capital without discretionary discriminiation (Art. 56, 58 EC) ECJ dated 19 January 2006 (Bouanich) 2) „Treaty extension“ to residents of a third country • ECJ dated 21 September 1999 (Saint Gobain) • ECJ dated 5 July 2005 (D./Netherlands)

  10. Treaty Overriding and Community Law D) Justification of discrimination I) Abuse of law doctrine“ 1) No general presumption of tax evasion 2) No acceptance of wholly artificial arrangements („no reflection of economical reality“) ECJ dated 12 September 2006 (Cadburry Schweppes) ECJ dated 2 May 2006 (Eurofood IFSC)

  11. Treaty Overriding and Community Law II) „Low Taxation“ in Ireland „The need to prevent the reduction of tax revenue cannot justify a restriction ...“ ECJ from dated 12 September 2006 (Cadbury Schweppes) III) „Ultimate taxation power“ of Germany? „Member states retain competence for determining ... the connecting factors for the allocation of fiscal jurisdiction by means of bilateral agreements.“ ECJ dated 12 December 2006 (Test Claimants)

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