The Principle of Non-Discrimination in International and European Tax Law

Niels Bammens

Thesis submitted to the Katholieke Universiteit Leuven (Belgium)

in fulfilment of the requirements for the degree of Doctor of Laws (PhD)

Degree awarded on 18 October

Volume 24 Doctoral Series

Table of Contents

Introduction

Part I: Introduction 3

Chapter 1: Aristotle's Concept of Distributive Justice 5

Chapter 2: Basic Principles of Discrimination 9

Elements of the discrimination analysis 9 2.2. Proposal for an analytical framework 16 2.3. A brief note on ability to pay

Chapter 3: Overview of the Study 25

II Article 24 of the OECD Model Convention

Chapter 4: Origin of Article 24 of the OECD Model Convention 33

Historical roots of the provision 4.2. The League of Nations 38 4.3. The OEEC Fiscal Committee 41 4.3.1. The first report of Working Party no. 4 4.3.2. Reception of the first report 45 4.3.3. The second report 48 4.3.4. The third report 49 4.3.5. The final report 49 4.3.6. Conclusions 51 4.4. The genesis the OECD Model Convention 53 4.5. The current version of Article 24 of the OECD

Model Convention 56

Chapter 5: Article 24(1): Nationality Non-Discrimination 63

5.1. General 63 5.2. No taxation without discrimination? 64 5.3. Nationality 66

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5.3.1. Individuals 67 5.3.2. Other persons 68 5.3.2.1. General 68 5.3.2.2. The nationality of legal entities 69

The position taken in the Commentary 69 5.3.2.2.2. The 2008 update 73 5.3.2.2.3. Transvaal Special Income Tax Court decision of

10 March 1992 79 5.3.2.2.4. 's-Hertogenbosch Court of Appeal decision of

13 December 2002 80 5.4. Entitlement to article 24 81 5.5. The comparability test: "in the same

circumstances" 83 5.5.1. On sameness and similarity 83 5.5.2. Case law 93

Leeuwarden Court of Appeal decision of 7 April 2000 93

5.5.2.2. United Dominions Trust Ltd 94 5.5.2.3. Belgian Supreme Court decision of 30 June 1988 97 5.5.2.4. The Anglo-Swiss Land and Building Company Ltd. 99 5.5.2.5. Biso 109 5.5.2.6. 115 5.5.3. Discrimination "on the basis o f nationality? 5.6. The disadvantage test: "other or more burdensome" 122 5.6.1. General 122 5.6.2. Reverse discrimination 127 5.6.3. Other issues 133 5.6.4. Case law 134

Woodend Rubber and Tea 5.6.4.2. Dutch Supreme Court decision of June 137 5.6.4.3. decision of 14 March 1989 147 5.6.4.4. Conseil d'Etat decision of 28 May 1986 149 5.7. Reciprocity 151 5.7.1. General 151 5.7.2. Case law 155

American Trust Company 155 5.7.2.2. Brown & Williamson Ltd 157 5.7.2.3. Dutch Supreme Court decision of 2 September

1992 158 5.7.2.4. Dutch Supreme Court decision of 20 November

2009 162 5.7.3. Conclusion 163

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5.8. Comparability as a safety valve? 169 5.9. "Other or more burdensome" as a safety

Chapter 6: Article 24(2): Stateless Persons 179

6.1. The 1954 Convention relating to the Status of Stateless Persons

6.2. The OECD Model Convention 179

Chapter 7: Article 24(3): Permanent Establishments 185

7.1. Entitlement to article 24(3): what is "an enterprise"? 188

7.2. The comparability test: "an enterprise carrying on the same activities"

7.2.1. General 191 "Carrying on the same activities" 192

7.2.1.2. Separate entity approach 195 7.2.2. Case law 197 7.2.2.1. Case law on the subject of comparison 197 7.2.2.1.1. Reuters Ltd 197

Brussels Court of Appeal decision of 28 May 1993 204

7.2.2.1.3. Ghent Court of Appeal decision of 17 November 1994 208

Bundesfinanzhof decision of 22 April Bundesfinanzhof decision of 10 March 2005 212

7.2.2.1.6. Verwaltungsgerichtshof decision of 16 February 2006 and 28 November 2007 214

7.2.2.2. Case the object of comparison 219 Swiss Bundesgericht decision of 28 November

2005 220 7.2.2.2.2. Finanzgericht decision of 20 September

1995 222 7.2.2.2.3. AG 223 7.3. The disadvantage test: "taxation ... less favourably

levied" 227 7.3.1. "Taxation" 227 7.3.2. "Less favourably levied" 231 7.3.2.1. Assessment of tax 236 7.3.2.2. Structure and rate of tax 238

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7.3.2.2.1. Progressive scales and the non-resident's worldwide profits 238

7.3.2.2.2. Tax-free thresholds 244 7.3.2.2.3. Special taxes on a non-resident's PE 245 7.3.2.3. Dividends received in respect of holdings owned

by a permanent establishment 7.3.2.4. Withholding tax on dividends, interest and

royalties received by a permanent establishment 255 7.3.2.5. Credit for foreign tax and the extension to

permanent establishments of the benefit of tax treaties concluded with third states 257

7.3.3. Case law 264 7.3.3.1. Assessment of tax 264 7.3.3.1.1. Brussels June 1994 264 7.3.3.1.2. Commerzbank AG v. Revenue

Commissioners 265 7.3.3.1.3. Automated Securities Clearance 269 7.3.3.1.4. 275 7.3.3.2. Structure rate of tax 278 7.3.3.3. Dividends received in respect of holdings owned

by a permanent establishment: UBS AG 280 7.3.3.4. Credit for foreign tax and the extension to

permanent establishments of the benefit of tax treaties concluded with third states 295

Finanzgericht Hamburg decision of 9 August 295 7.3.3.4.2. Dutch Supreme Court decision of 8 February 2002 300 7.3.3.5. Disadvantages caused by the treaty of which

article 24(3) is invoked 309 7.3.3.5.1. Metchem Canada 309 7.3.3.5.2. Brussels Court of First Instance decision of

9 November 2006 311 7.3.4. No extension to personal allowances 317 7.3.4.1. Dutch Supreme Court decision of 19 December

1990 320 7.3.4.2. Dutch Supreme Court decision of September

1991 321 7.3.4.3. Dutch Supreme Court decision of 6 November

1996 323 Antwerp Court of Appeal decision of 2 February

2010 325 7.3.4.5. Conclusion 329

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Chapter 8: Article 24(4): Deductibility 335

8.1. General 335 8.2. The comparability test 338

No express comparability requirement 338 8.2.2. "Under the same conditions" as a comparability

requirement? 345 8.3. The disadvantage test 347 8.4. Domestic rules on thin capitalization 349 8.4.1. General 349 8.4.2. "Interest" 352 8.4.3. Examples 356

Article 54 of the Belgian Income Tax Code 356 8.4.3.2. Article 26 of the Belgian Income Tax Code 364 8.4.4. Case law 370 8.4.4.1. Millennium Infocom Technologies 370 8.4.4.2. Specialty Manufacturing 371

Chapter 9: Article 24(5): Foreign Ownership 377

9.1. Entitlement to article 24(5) 377 9.1.1. General 377 9.1.1.1. The wording of article 24(5) 377

Indirect ownership: Re A Oy and Oy 378 Only the resident company is protected 380

9.1.2.1. Example: imputation systems vs. split-rate systems 380 9.1.2.2. Group treatment 384

Discrimination on the basis of foreign ownership 388 9.1.3.1. the basis of 388

On the sole basis of? 389 9.1.3.3. Application these principles 391

Example: Decision of the Swedish Supreme Administrative Court on the interpretation of "solely" 394

9.2. The comparability test: "other similar enterprises" 400 Similarity as a reference to shareholders'

residence? 403 9.2.2. Similarity as a reference to the applicable tax

regime? 405 9.2.3. Similarity as a reference to all relevant

circumstances other than foreign ownership 408 9.2.4. Case law 409

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Swedish Supreme Administrative Court decision of November 409

9.2.4.2. Dutch Supreme Court decision of 23 December 1992 410

9.2.4.3. Dutch Supreme Court decisions 27 April 1994 411 9.2.4.4. Boake Allen 420 9.2.4.5. DaimlerChrysler India 435 9.2.4.6. UnionBanCal 439 9.2.4.7. Square D 442 9.2.4.8. 445 9.3. The disadvantage test: "other or more burdensome" 448 9.3.1. General 448 9.3.1.1. The origin of the expression 448 9.3.1.2. Interpretation 449 9.3.2. Case law 452 9.3.2.1. Delaware case 452 9.3.2.2. Luxembourg Administrative Court of Appeal

decision of 19 April 2007 460 9.3.2.3. The Swedish Supreme Administrative Court on

the interpretation of "other" 462 9.4. Relationship to article 24(4) 464 9.4.1. General 464 9.4.2. Case law: Andritz 467

Chapter 10: Article 24(6): Taxes Covered 479

10.1. General 479 10.2. Case law: Dutch Supreme Court decision of

November 2000 480

Chapter The Concurrent Application of Different Provisions of Article 24 of the OECD Model Convention 485

Article and article 24(3) 485 Article 24( 1) and article 24(4) 487 Article 24( and article 24(5) 487 Article 24(3) and article 24(4) 490 Article 24(3) and article 24(5) Conclusion 491

Table of Contents

III Non-Discrimination in European Tax Law

Chapter 12: General Overview of the Approach of the European Court of Justice to Non-Discrimination 495

12.1. The Court's Aristotelian understanding of non-discrimination 501

12.1.1. Overview 501 12.1.2. Methodology 503 12.2. Types of discrimination 505

Discrimination in form and discrimination in substance 505

12.2.2. Direct and indirect discrimination 506 12.2.3. Reverse discrimination 508 12.2.3.1. The Court's traditional position 508 12.2.3.2. Later evolution and criticism 510 12.2.4. Quantitative restrictions and measures having

equivalent effect 12.2.5. Dassonville freedoms 517 12.2.6. Conclusion 519

Chapter 13: Non-Discrimination in European Tax Law: General Remarks 521

13.1. Introduction 521 13.1.1. Purpose and scope of the study 521 13.1.2. The case law of the European Court of Justice on

direct taxation 522 13.2. Comparable situations 526 13.3. Equal treatment 527 13.4. Types of discrimination 528

Direct and indirect discrimination 528 13.4.2. Reverse discrimination 530

Is ECJ case law in direct tax matters still based on a discrimination analysis, or has it evolved towards a restriction-based reading of the Treaty? 530

Restrictions: a similar evolution in direct tax case law? 530

13.4.3.2. From discrimination to restriction and back 534 13.4.3.2.1. Introduction: three generations of cases 534

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13.4.3.2.2. The second generation: a restriction-based reading of the Treaty freedoms 535

13.4.3.2.3. The third generation: the return to discrimination 539 13.4.3.3. Most restriction cases are actually discrimination

cases in disguise 542 Discrimination on the basis of the exercise of the

free movement provisions 542 13.4.3.3.2. Examples 549 13.4.3.3.3. Futura 552 13.4.3.3.4. Commission v. Belgium 559 13.4.3.3.5. Conclusion 563 13.4.3.4. Restriction and discrimination are complementary

components of the freedoms 566 13.4.3.5. Conclusion 569

Chapter 14: Case Law on the Comparability Test

14.1. Constructing the comparison I: how to determine the subject and object of comparison 572

14.1.1. The taxation of inbound permanent establishments 572 14.1.1.1. AvoirFiscal 573 14.1.1.2. 579 14.1.1.3. Futura 581

Royal Bank of Scotland 582 14.1.1.5. Saint-Gobain 585 14.1.1.6. 591 14.1.1.7. Conclusion 593 14.1.2. Horizontal comparisons 595 14.2. Constructing the comparison II: what are the

relevant characteristics? 598 Person-related benefits: is the

general rule 600 14.2.1.1. The Schumacker doctrine 600 14.2.1.1.1. Schumacker 600 14.2.1.1.2. Wielockx 607 14.2.1.1.3. Asscher 608 14.2.1.1.4. 610 14.2.1.1.5. Gschwind 618 14.2.1.1.6. DeGroot 621 14.2.1.1.7. Gerritse 627 14.2.1.1.8. Wallentin 633 14.2.1.1.9. D case 635

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14.2.1.1.10. Turpeinen 641 Extension of the Schumacker doctrine to negative

income from immovable property 643 14.2.1.2.1. Ritter-Coulais 643 14.2.1.2.2. Lakebrink 647 14.2.1.2.3. Renneberg 650 14.2.1.3. Schumacker overturned? 656

The problem with Schumacker 656 14.2.1.3.2. The credit system as an alternative solution? 662 14.2.1.3.3. Fractionality and comparability 664 14.2.1.3.4. Conclusion 666 14.2.2. Income-related benefits: comparability is the

general rule 673 Biehl and Biehl II 673

14.2.2.2. Gerritse 674 14.2.2.3. Conijn 675 14.2.2.4. Scorpio 676 14.2.2.5. 677 14.2.2.6. Gielen 678 14.2.2.7. Conclusion 680 14.2.3. The taxation of outbound permanent

establishments 680 14.2.3.1. AMID: comparability is the general rale 681 14.2.3.2. Columbus Container Services 684 14.2.3.3. Belgium 684 14.2.3.4. 687 14.2.4. The tax treatment of resident parent companies

with non-resident subsidiaries: discrimination on the basis of the subsidiary's seat 689

14.2.4.1. IC1 689 14.2.4.2. 691 14.2.4.3. 694 14.2.4.4. Marks & Spencer 698 14.2.4.5. Keller and Rewe: Marks & Spencer confirmed 701 14.2.4.5.1. Keller 702 14.2.4.5.2. Rewe 704 14.2.4.6. 707 14.2.4.7. Holding 710 14.2.4.8. Conclusion 711 14.2.5. The tax treatment of resident subsidiaries with a

non-resident parent company: discrimination on the basis of the parent company's seat

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14.2.5.1. Metallgesellschaft 714 14.2.5.2. XandY 717 14.2.5.3. GLO 718 14.2.5.4. Conclusion 721 14.2.6. The taxation of dividends: the susceptibility to

double taxation as the relevant characteristic 14.2.6.1. Introduction 721 14.2.6.2. Inbound dividends: the susceptibility to double

taxation as the relevant characteristic 722 14.2.6.2.1. Verkooijen 722 14.2.6.2.2. Lenz 724 14.2.6.2.3. Manninen 728 14.2.6.2.4. Are Verkooijen, Lenz and Manninen identical?

Fiscal cohesion and inbound dividends 732 14.2.6.2.5. Kerckhaert-Morres 742 14.2.6.2.6. Orange European Smallcap 751 14.2.6.2.7. Test Claimants in the FII Group Litigation 757 14.2.6.2.8. Conclusion: the position of the European Court

of Justice on inbound dividends 765 14.2.6.3. Outbound dividends: the exercise of taxing

jurisdiction by the source state 767 Test Claimants in Class TV of the ACT Group

Litigation 767 14.2.6.3.2. Denkavit 783 14.2.6.3.3. 786 14.2.6.3.4. Orange European Smallcap 787 14.2.6.3.5. Aberdeen 788 14.2.6.3.6. Conclusion: the position of the European Court

of Justice on outbound dividends 14.2.7. Withholding taxes on other outbound payments 792 14.2.7.1. Scorpio 792 14.2.7.2. Truck Center 795 14.2.8. The influence of information exchange on the

comparability test 14.2.8.1. Talotta 810 14.2.8.2. Information exchange and third countries 817 14.2.8.2.1. FII: the inapplicability of the Mutual Assistance

Directive leads to incomparability 14.2.8.2.2. explained 818 14.2.8.2.3. Commission v. Netherlands: confusion

concerning EEA countries 825 14.2.8.2.4. Commission 828

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14.2.8.2.5. Conclusion 832 The influence of tax treaties on the comparability

test 833 14.2.9.1. D case 833 14.2.9.2. ACT 842 14.2.9.3. Orange European Smallcap 846 14.2.9.4. Interim conclusion: reciprocity and the balance

of tax treaties in the comparability test 850 The importance of the concepts of reciprocity

and the balance of tax treaties in case law of the European Court of Justice 850

14.2.9.4.2. Distinguishing D and ACT from the earlier case law 854

14.2.9.4.3. Has the possibility of horizontal discrimination been created by the evolution in case law of the European Court of Justice? 861

14.2.9.5. Horizontal comparability if the disadvantage is not caused by a tax treaty? 863

14.2.9.5.1. Schweppes 863 14.2.9.5.2. Columbus Container Services 868 14.2.9.6. Conclusion 874 14.2.10. The comparability of charitable organizations 878 14.2.10.1. 878 14.2.10.2. Persche 14.2.10.3. Conclusion 884 14.3. Conclusions on comparability 885

Chapter 15: Case Law on the Disadvantage Test

15.1. Introduction 891 The deceptive simplicity of the disadvantage test

15.1.2. The position of the test in the Court's case law 894 15.2. In general: what is a disadvantage? 895

FII: the disadvantage is inherent in a system that is compatible with the Treaty freedoms 898

15.2.2. Columbus Container Services: an application of the FII nuance 901

15.3. The relevance of offsetting advantages in the state tax system of which is under scrutiny 906

15.3.1. Avoir Fiscal ' 906 15.3.2. 909 15.3.3. Saint-Gobain 912

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15.3.4. CLT-UFA 912 15.3.5. Asscher 914 15.3.6. Talotta 917 15.3.7. Lakebrink 918 15.3.8. Cadbury Schweppes 919 15.4. The relevance of offsetting advantages in another

state 920 15.4.1. Eurowings 920 15.4.2. Verkooijen 922 15.4.3. Lenz 922 15.4.4. De Groot 923 15.5. The relevance of tax treaties in the disadvantage

test 924 15.5.1. AvoirFiscal 925 15.5.2. Manninen 925 15.5.3. 926 15.5.4. ACT 929 15.5.5. Denkavit 930 15.5.6. 932 15.5.7. Thin Cap GLO 933 15.5.8. Commission v. Italy 934 15.6. Conclusion: the Court's position on offsetting

advantages 935 15.7. Procedural remedies to remove the disadvantage 941 15.7.1. Biehl Biehl II 941 15.7.2. Schumacker 942 15.7.3. Gielen 943 15.7.4. Conclusion 946

Chapter 16: The Equal Treatment of Incomparable Situations 949

16.1. Comparability 949 16.1.1. Mertens 949 16.1.2. Burda 951 16.2. The disadvantage test 957 16.2.1. General 957

Deutsche Shell 958 16.3. Conclusion 960

Table of Contents

Chapter 17: Disparities 961

17.1. General 961 17.2. Dislocations 963 17.3. Case law 964 17.3.1. 964 17.3.2. Saint-Gobain 967 17.3.3. 975

Chapter 18: Conclusions on the Approach of the European Court of Justice to Non-Discrimination 985

18.1. On comparability: a plea for fractional taxation 985 18.2. Comparability should be distinguished from

proportionality 988 18.3. How to distinguish justification grounds from

elements of comparability 990 18.3.1. General 990 18.3.2. Fiscal cohesion 994 18.3.2.1. Bachmann 994 18.3.2.2. Later evolution: the requirement of a direct link 1000 18.3.2.3. relaxing the direct link requirement 1005 18.3.2.4. Conclusion 1007 18.3.2.5. From cohesion to comparability? 1009

IV Comparison and Interaction

Chapter 19: A Comparison of Article 24 of the OECD Model Convention and the Non-Discrimination Standard of the European Court of Justice

19.1. Scope of application 1013 Nationality a comparison with

article 24(1) 1015 Inbound PE cases: a comparison with

article 24(3) 1016 19.1.3. Outbound payments: comparison with

article 24(4) 1020

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Discrimination on the basis of the parent company's residence: comparison with article 24(5) 1022

19.1.4.1. General 1022 Boake Allen and

19.1.5. Disadvantage test 1026 19.1.6. Conclusion 1027 19.2. Justification grounds 1030

Chapter 20: The Interaction between the Standard of the European Court of Justice and Tax Treaties 1035

20.1. General 1035 20.2. The interpretation of article 24 of the OECD

Model Convention in EU Member States 1036 20.2.1. law 1037 20.2.1.1. General 1037 20.2.1.2. The comparability non-profit organizations 1044 20.2.1.3. Bundesfinanzhof decision 8 2010 1047

Dutch Supreme Court decision of 8 February 2002 1051

Verwaltungsgerichtshof decision of 16 February 2006 1051

20.2.1.6. The Delaware case 1055 20.2.1.7. Conclusion 1057 20.2.2. Should the interpretation of article 24 be

influenced by ECJ case law? 1057

Summary and Conclusions

Chapter Overview of the Study, Summary and General Conclusions 1067

Analysis of the two standards 21.1.1. Article OECD Model Convention 1067

The standard developed by the ECJ 1070 21.2. Identifying a common principle 1073

The influence of the standard of the European Court of Justice on the interpretation of article 24

Table of Contents

Annex 1: Direct Tax Cases Decided by the ECJ since 1986 1077

Annex 2: Cases Decided by National Courts under Article 24 1081

References 1093