Freedom of Establishment and Direct Taxation - The Irish Context
| Author | Niall O'Hanlon |
| Pages | 1-27 |
Page 1
There has been much debate in political circles of late concerning the conflicting aims of harmonisation of direct taxation at Community level and the desire amongst certain Member States to maintain sovereignty in the area of direct taxation. 1However, notwithstanding that direct taxation does not currently fall within the scope of the Community's jurisdiction Member States must nevertheless exercise their retained powers in accordance with Community law.2
The impact of the requirement that Member States exercise retained powers in accordance with Community law has become particularly apparent in two recent decisions of the Court of Justice, namely Case C-9/02 Hughes de Lasteyrie du Saillant and Ministère de l'Économie, des Finances et de l'Industrie and Case C-470/04 N v. Inspecteur van de Belastingdienst Oost/kantoor Almelo3. In both cases issues arose regarding the permissibility Page 2 of rules of assessment centred on residence in the context of the principle of freedom of establishment.
Whilst Ireland did not intervene in either case this is not to say that the potential for conflict between the Irish system of direct taxation and the principle of freedom of establishment does not exist. This Paper will examine one particular provision of the Irish tax code, section 29A of the Taxes Consolidation Act 1997, in the context of Ireland's Community law obligations with regard to the principle of freedom of establishment.
In Case C-9/02 Hughes de Lasteyrie du Saillant and Ministère de l'Économie, des Finances et de l'Industrie the Conseil d'État referred, the following question to the Court of Justice for preliminary ruling:
Does the principle of freedom of establishment laid down in Article 52 of the E.C. Treaty (now, after amendment Article 43) preclude the introduction by a Member State, for the purpose of preventing the risk of tax avoidance, of arrangements for taxing capital gains in the case of transfer of tax residence, such as described above [?]
The question was referred to the Court in circumstances where the Conseil d'État took the view that the dispute before it raised a serious difficulty as to the scope of the applicable Community rules. The Member State legislation Page 3 under consideration by the national court was Article 167a of the Code Général des Impôts.4
The Court of Justice noted that Article 167a of the Code Général des Impôts established the principle that, on the date on which a taxpayer transferred his tax residence outside France, tax was to be charged on increases in value of company securities, such increases being determined by the difference between the value of those securities at the date of that transfer and their acquisition price. The taxation applied only to taxpayers who held directly or indirectly with members of their family, rights over the profits of a company exceeding 25% of such profits at any time during the five years preceding the above mentioned date. The special feature of that provision resided in the fact that it concerned the taxation of latent increases in value.
Article 43 states:
Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.
Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage Page 4 undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.
The Court of Justice examined firstly whether Article 167a of the Code Général des Impôts, which established taxation on latent increases in value solely on the ground that a taxpayer had transferred his tax residence outside France, was capable of restricting the exercise of freedom of establishment within the meaning of what is now Article 43 of the Treaty.
The Court of Justice noted5 that Article 43 constituted one of the fundamental provisions of Community law and had been directly applicable in Member States since the end of the transitional period. Under the Article freedom of establishment for nationals of a Member State on the territory of another Member State included the right to take up and pursue activities as self-employed persons and to set up and manage undertakings under the conditions laid down for its own nationals by the law of the country where such establishment was effected.6 Page 5
The Court was of the view7 that even if, like the other provisions concerning freedom of establishment, Article 43 of the Treaty was, according to its terms, aimed particularly at ensuring that foreign nationals were treated in the host Member State in the same way as nationals of that State, it also prohibited the Member State of origin from hindering the establishment in another Member State of one of its own nationals.8
The Court of Justice went on to state9 that a restriction on freedom of establishment was prohibited by Article 43 of the Treaty even if of limited scope or minor importance.10
The Court further stated11 that the prohibition on Member States establishing restrictions on the freedom of establishment also applied to tax provisions. According to consistent case law, even if, in the current state of Community law, direct taxation did not fall within the scope of the Community's jurisdiction, Member States must nevertheless exercise their retained powers in accordance with Community law.12
The Court was of the view that even if Article 167a of the Code Général des Impôts did not prevent a French taxpayer from exercising his right of establishment, the provision was nevertheless of such a kind as to restrict Page 6 the exercise of that right, having at least a dissuasive effect on taxpayers wishing to establish themselves in another Member State.
The Court of Justice observed13 that a taxpayer wishing to transfer his residence outside French territory, in exercise of the right guaranteed to him by Article 43, was subjected to disadvantageous treatment in comparison with a person who maintained his residence in France. The taxpayer became liable, simply by reason of such a transfer, to tax on income which had not yet been realised and which he therefore did not have, whereas, if he remained in France, increases in value would only become taxable when, and to the extent that, they were actually realised. That difference in treatment concerning the taxation of increases in value, which was capable of having considerable repercussions on the assets of a taxpayer wishing to transfer his tax residence outside France, was likely to discourage a taxpayer from carrying out such a transfer.
The Court of Justice noted14that an examination of the rules for the application of that measure confirmed that conclusion. Although it was possible to benefit from suspension of payment, this was not automatic and it was subject to strict conditions, including, in particular, conditions as to the setting up of guarantees. Those guarantees in themselves constituted a restrictive effect, in that they deprived the taxpayer of the enjoyment of the assets given as a guarantee.
Accordingly, the Court concluded that Article 167a of the Code Général des Impôts was liable to hinder freedom of establishment. Page 7
The Court of Justice went on to state15 that a measure which is liable to hinder the freedom of establishment laid down by Article 43 could only be allowed if it pursued a legitimate objective compatible with the Treaty and was justified by imperative reasons in the public interest. It was further necessary, in such a case, that its application must be appropriate to ensuring the attainment of the objective thus pursued and must not go beyond what was necessary to attain it.16
As regards justification based on the aim of preventing tax avoidance, the Court of Justice noted17 that Article 167a of the Code Général des Impôts was not specifically designed to exclude from a tax advantage purely artificial arrangements aimed at circumventing French tax law, but was aimed...
To continue reading
Request your trial