Case C-168/01
Lessons Applicable: Treaty as Soft Law
FACTS:
Bosal Holding BV, a limited liability holding company which
engages financing and licensing/royalty related activities subjected to
corporate tax in the Netherlands. For
the financial year of 1993, it wished to offset its profits with the costs of
NLG 3,969,339 in relation to the
financing of its holdings in subsidiary companies established in 9 other European
Union Member States. Bosal’s claim was disallowed and dismissed by the
inspector of Arnhem Tax Office/Large Undertakings who dismissed Bosal’s claim
on the ground that Article 13(1) of the Law on Corporation Tax of 1969 ─
1993 version provides: In determining profit no account shall be taken of gains
acquired from a holding or of the costs relating to a holding, unless it is
evident that such costs are indirectly instrumental in making profit that is
taxable in the Netherlands xxx
Bosal appealed to the Court
of Justice-Arnhem by arguing that
Article 13(1) restricts the freedom of establishments provided for in Article
52 of the Treaty par 1 (now Article 43 EC) which states that restrictions on
the freedom of establishments of
nationals of a Member State in the territory of another Member State shall be
prohibited and Article 58 of the Treaty par 1 (now Article 48 EC) which states
that companies formed in accordance with the law of a Member State and having
their registered office shall be treated in the same way as natural persons who
are nationals of Member States. The Court
of Justice-Arnhem Netherlands upheld the Arnhem Tax Office’s decision.
Thus, Bosal appealed to the Supreme Court of the
Netherlands. Since the interpretation of Community law is necessary, the
Supreme Court of the Netherlands referred the matter to the European Court of
Justice. The Netherlands together with
the UK and the Commission
of the European Communities countered Bosal based on the
following:
First, Netherlands argued that Article 13(1) did not discriminate
because the subsidiaries of parent companies established in the Netherlands
which do make taxable profits in that Member State and those which do not are
not in an objectively comparable situation. For those profits made by
subsidiaries themselves, it is not the whole profit that is subjected to
Netherlands tax unlike those whose parents and subsidiaries that derive profit
only in Netherlands. Therefore, the
distinction between the two groups is appropriate and did not violate the
freedom of establishment.
Second, Netherlands argued that Article 13(1) must be
upheld to maintain the coherence of the Netherlands tax system wherein there is
a direct link between tax benefit and its related tax liability. In this case, costs have to be instrumental
to profit before there can be deductions.
Third, Netherlands Government and the Commission argue that
the limitation of the deductibility of costs incurred in relation to holdings
is justified by the objective of avoiding an erosion of the tax base going
beyond a mere diminution in tax receipts.
Finally, the Netherlands and United Kingdom Governments and
the Commission argue that the 1969 Law is compatible with Article 4 of the
directive that it is lawful for Member States to provide that costs in relation
to holdings are not in any way deductible from the taxable profits of the
parent company
ISSUE: Article 13(1) of the Law on Corporation Tax of
1969 can be upheld as it is not against the freedom of establishments.
HELD: NO. Council
Directive 90/435/EEC of 23 July 1990 on the common system of taxation
applicable in the case of parent companies and subsidiaries of different Member
States, interpreted in the light of Article 52 of the EC Treaty (now, Article
43 EC) precludes a national provision which, when determining the tax on the
profits of a parent company established in one Member State, makes the
deductibility of costs in connection with that company's holding in the capital
of a subsidiary established in another Member State subject to the condition
that such costs be indirectly instrumental in making profits which are taxable
in the Member State where the parent company is established.
For the first point, by discouraging parent companies from
establishing subsidiaries in other Member States, it violated the freedom of
establishment. For the second point on
the coherence of tax system, the court cited Baars v. Inspecteur for the
proposition that there can be no direct link where the law involves two
different taxpayers or two different taxes or tax treatments. In this case, there is no link between granting
of a tax deductions on the costs connected with their subsidiaries from their
taxable profit of the parent company and the tax system relating to the
subsidiaries of parent companies where they are established in that Member
State. Under the principle of
territoriality, the difference in tax treatment in question concerns parent
companies according to whether or not they have subsidiaries making profits
taxable in the Netherlands. Moreover, unlike
operating branches or establishments, parent companies and their subsidiaries
are distinct legal persons. It could
also result to over taxation since the limitation of the deductibility of costs
is not compensated for by a corresponding advantage. Third, such a justification does not differ in
substance from that concerning the risk of a diminution in tax revenue. It does not appear amongst the grounds listed
in Article 56(1) of the EC Treaty (now, Article 46(1) EC) and does not
constitute a matter of overriding general interest which may be relied upon in
order to justify a restriction on the freedom of establishment. Last, the directive does not provide for any
exception concerning the territory where the profits of the subsidiaries might
be taxed. In those circumstances, the directive cannot be interpreted as
authorising a law such as the 1969 Law.
NOTES
In this case, the treaty is ruled over the domestic
law.
In the Philippine setting, treaties are only considered as a
soft law. It is not exactly treated as
the international law mentioned in Article II, Section 2 of the Constitution
provides, among others, that the Philippines adopts the generally accepted
principles of international law as part of the law of the land. Thus, it is not binding nder the doctrine of
incorporation.
In the Philippine setting, a subsidiary is also a juridical
entity separate and distinct from that of its parent company. Thus, the computation of income tax of the
principal and subsidiary is also separate and distinct. There is no allocation of profit and expenses.