Parent and Subsidiary Directive: C-284/06 Burda

1. Parent and Subsidiary Directive: C-284/06 Burda European Tax Law/ Spring 2013 Karoliina Kyläkoski Laura Vapola

2. Agenda • Legal context • Burda GmbH • Case in short • Tax Audit • The questions referred to the Court • Parent-Subsidiary Directive • Ruling • Court’s Conclusion • Overview

3. Legal context • Community rules: Directive 90/435 • Intended to introduce ‘tax rules which are neutral from the point of view of competition, in order to allow enterprises to adapt to the requirements of the common market, to increase their productivity and to improve their competitive strength at the international level’. • in particular, to eliminate the fiscal disadvantage suffered by groups of companies of different Member States in comparison with groups of companies of the same Member State • National legislation: KStG 1996 (Körperschaftsteuergesetzt)

4. Burda GmbH Parent company RCS Burda Holding company 50% 50% Burda GmbH

5. Case in short • Burda is a limited liability company governed by German law • It has registered office and management in Germany • Owned in equal shares by RCS (company established in Netherlands) and Burda International Holding GmbH (situated in Germany) • Burda decided to carry out profit distribution in 1998 to RCS and Burda International in equal shares • The distribution was taxed under Paragraph 27(1) of the KStG 1996 at the rate of 30% • Under paragraph 44 of the KStG 1996 only Burda International received a certificate of deductibility of corporation tax in respect of profit distribution by Burda

6. Tax Audit • According to Tax audit, Burda distributed profits more than the taxable income was • Corrective accounting mechanism was applied under German tax law •  Increase in corporate tax in order to avoid granting tax credit for taxes not paid •  Burda suffered a tax uplift of 30 % which would have been less if the parent company was German • Burda challenged the ruling and the matter was referred to the ECJ for a preliminary ruling

7. The questions referred to the Court by German Supreme Court •  Preliminary Ruling • 1. Do German tax rules in question constitute withholding tax under article 5(1) of the PSD • 2. Are German tax rules incompatible with the free movement of capital or freedom of establishment

8. Parent Subsidiary Directive (90/435) • Intent to eliminate ”any disadvantage to cooperation between companies of different Member States as compared with cooperation between companies of the same Member State, and thereby facilitate cross-border cooperation” • Article 5(1) provides that profits that a subsidiary distributes to its parent company are exempt from withholding tax if the parent company holds a minimum shareholding in the subsidiary • Within the meaning of Article 5(1) three conditions for the existence of withholding tax must be met cumulatively

9. Ruling • The first question • 3 conditions must be met (cumulatively) • 1. the chargeable event for the tax must be the payment of dividends or other income from shares • 2. the taxable amount must be the income from those shares • 3. the taxable person must be the holder of the shares •  3rd condition is not fulfilled. The parent company (holder of the shares) is not taxable person (taxable person is the subsidiary)

10. Ruling • The second question • Free movement of capital •  Not predominant factor in this case • Unavoidable consequence if freedom of Establishment has been infringed •  It is not necessary to have independent examination on free movement of capital

11. Ruling • Referred to the second question the Court decided that Freedom of Establishment was the predominant freedom at stake • This is because RCS owned a 50% shareholding in Burda, which allowed RCS “to exercise definite and decisive influence over its subsidiary’s activities” • Burda argued that German rules restricted its right of establishment because the same corrective accounting mechanism was applied regardless of whether the parent company was resident in the same member state or in another member state even though unlike a resident parent company a non-resident parent company is not granted a tax credit by the member state in which its subsidiary is resident

12. Ruling • The Court rejected this argument stating that: • The corrective mechanism was to ensure that the amount tax paid by the company making the distribution corresponds after correction to the amount of tax credit erroneously granted to the shareholder • Another point was that the correction does not relate to the amount of the tax credit but to the amount of the tax paid by the company making the distribution • And the corrective mechanism applied to a German resident company regardless of whether it is a subsidiary of a parent company which is also resident in Germany or of a parent company resident in another member state

13. Court’s Conclusion • So, the Court stated that the application of the corrective mechanism did not alter Burda’s tax burden on the basis of whether its parent company is resident in Germany or in another Member State • The purpose of the corrective accounting mechanism was to ensure that the amount of the tax paid by Burda correspond to the amount of tax credit erroneously granted to the parent companies •  e.g. to avoid a tax credit being granted for tax not paid • The Court determined that the fact that Germany does not grant a tax credit to the non-resident parent company (RCS) does not constitute discriminatory treatment against Burda on the grounds of residence of the parent company

14. Overview • Dividend distribution to the parent company did not consititute withholding tax exemption under article 5(1) of the Parent Subsidiary Directive • German Tax law did not infringe any fundamental freedoms