EU Harmonization: An Obstacle for Alternative Corporate Income Tax Systems?

EU Harmonization:An Obstacle for Alternative Corporate Income Tax Systems? Geerten M.M. Michielse Technical Assistance Advisor, IMF Adjunct-Professor, Georgetown University Law Center

Estonian Distribution Tax Income tax liability deferred to distribution: • Profit 300 • Distribution out of net profit 100 • Distribution tax (26/74th) 35 • Dividend withholding tax (26%) 26

Tax Treatment of PE ‘Distributions’ to HQ: • Property movements beyond original property allocated to PE; • Payment made by or on account of PE; • Payments made under order of HQ through PE to third parties.

European Union • Parent-Subsidiary directive • Freedom of establishment/ Free movement of capital • Code of conduct • Merger directive • Arbitration convention

Parent-Subsidiary Directive • No ‘dividend withholding tax’ on distribution of profit to EU parent company (>25%); • No profit tax on distribution of profit from EU subsidiary (>25%).

‘Withholding Tax’ Epson Case / Athinaiki Case: • Labeling of tax = irrelevant • Chargeable event = distribution of profit • Taxable amount = income attributable to shares • Taxpayer = shareholder (Epson Case) • Loss carry over = characteristic of profit tax (Athinaiki Case) • Treatment under DTA = Article 10 (Athinaiki Case)

Implementation Requirements • Does distribution tax qualifies as ‘withholding tax’ ? • Abolish limitation of 12-months period for application of indirect tax credit

‘Freedoms’ in EC Treaty • Freedom of establishment • No different tax treatment between pe and foreign-owned subsidiary • Free movement of capital • Place of investment • Place of residence of investor

Free Movement of Capital Estonian company with: (a) Resident corporate shareholders • No tax on distribution of profit (b) Non-resident corporate shareholders • Tax of 26/74th on distribution of profit

EU Code of Conduct • Advantageous measures only for non-residents or transactions with non-residents; • Ring-fenced from domestic market • No real economic activity or presence • Profit determination departs from inter-national standards (OECD) • Lack of transparency

Ring-fenced Incentive • Distribution tax not allowed under Parent-Subsidiary Directive • Estonian Companies owned by foreign EU companies are tax exempt • Preferential regime applicable only to non-residents

Final Statement: “These Arguments Make The Spanish Inquisition Look Dangerously Liberal”

EU Harmonization: An Obstacle for Alternative Corporate Income Tax Systems?