Dr Mario Tenore Vienna University of Economics and Business Brussels , 28 September 2009

1. La tassazione dei dividendi transnazionale in EuropaTaxationof cross borderdividends in Europe Dr Mario Tenore Vienna University of Economics and Business Brussels, 28 September 2009

2. The content of my thesis • Taxation of cross-border dividends under the general tax law principles • Taxation of cross-border dividends under international tax law principles • Taxation of cross-border and European law • Primary Law and secondary Law • Taxation cross-border dividends from an Italian perspective.

3. Taxation of cross-border dividends under OECD MC • Why do we go into art. 10 OECD MC? • Role of art. 7(7) and 10(4) OECD MC • Art. 10 OECD MC • Shared allocation of taxing rights between the Contracting States • General Issues: consistency within the Model and particularly with art. 13.5 OECD MC • Technical Issues: definition of dividends

4. Taxation of cross-border dividends under OECD MC Art. 10.1: bilateral reach of the provision Art. 10.2: (il)limited taxation by S State Art. 10.3: definition  3 parts (interrelationship) Art. 10.4: PE proviso Art. 10.5: denial of extraterritorial taxation

5. Taxation of cross-border dividends under OECD MC The reading of paragraphs 1 and 3 suggests that three elements are required: • a cross-border flows of dividends (para. 1); • the payment of such dividends by a company which is resident of a contracting State (para 1); • the income to be qualified as “dividends” according to the definition provided in article 10(3) OECD MC • N.B: If either of these elements is not met, Art. 7 (Business Profits) will apply

6. Taxation of cross-border dividends under OECD MC Art. 10(3): Definition of dividends The term “dividends”as used in this Article means • income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares - - • or other rights, not being debt-claims, participating in profits, • as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

7. Taxation of cross-border dividends under OECD MC • Entrepreneurial risk (commentary on art. 10 OECD MC) • No holding requirement in the definition • Holding requirement in art. 10.2(a): aimed at the application of the reduced rate (5%) • Residual part of the dividend definition: “….income from other corporate rights which is subjected to the same taxation treatment as income from shares” • Usufruct right? • Securities loan agreement (manufactured dividends)? • Comparison with the income covered by the Parent Subsidiary Directive

8. OECD MC vs. Parent Subsidiary Directive • Comparison with the income covered by the Parent Subsidiary Directive • Les Vergers du Vieux Tauves SA (Case C-48/07),22 December2008: article 4(1) of the Directive does not apply in the case of a usufruct agreement as the position of the parent in respect of its subsidiary “is not such as to endow it with the status of the shareholder, as that position results solely from the right of usufruct that has been transferred to it by the owner of the shares in the capital of the subsidiary..:”.

9. OECD MC vs. Parent Subsidiary Directive Indispensable status ofshareholder: holding in the capital of the subsidiary • Reduce the scope ofavoidanceschemesbased on usufructagreements • Manufactureddividends? • Consistencywith the aimofeliminatingeconomicdoubletaxation? • (re) qualifiedincome? E.g. thincaprules • Impact ofPrimaryLaw: no discriminatorysituations are allowed

10. Taxation of cross-border dividends the Parent Subsidiary Directive Art. 2: subject to tax requirement? • Subjective tax requirement • with no possibility of being exempt: domestic law or Treaty law exemption? • Treaty law exemption should not be taken into account: treaty law exemption is “objective” • Treaty law exemption looks at the income from a specific source (bilateral scope of the tax treaties) • Reference to treaty law is not made with respect in 1.2 c)

11. Taxation of cross-border dividends the Parent Subsidiary Directive Dualresidentsituationsinvolvingthirdcountries • Dualresidentparent company • Dualresidentsubsidiary company If the EU countryis the losercountry, bothscenarios are excludedfrom the ParentSubsidiary regime • However…… • EU Parent company with a PE in a thirdcountry (PE incomeexempt) • EU Subsidary company with a PE in a thirdcountry (PE incomeexempt)

12. Taxation of dividends and in the case law European Court of Justice Non-Resident Shareholders Resident Shareholders

13. Pan-European approach vs. unilateral approach • The Court used the pan-europeanapproach in some cases (Manninen, Denkavit, Amurta) butrejectedit in manyothers (e.g. Kerckhaert, FII GLO) • Whyisthat? • Source State cases • Cases wherethereis a breachof EU law (e.g. in Kerckhaert and FII the ECJ found no breach)

14. Pan-European approach vs. unilateral approach Three typespfpan-europeanapproach • based on the same treatment (first type: M&S) • based on a substantiallysimilar treatment (secondtype: Manninen) • based on the applicationof a DTC or on the interactionbetweendomesticlaw (thirdtype: Denkavit and Amurta)

15. Pan-European approach vs. unilateral approach First typepan-europeanapproach: • M&S: State of residence perspective • Interactionofdomesticlaw: sameruleswhich eliminate the discrimination • Pan-europeanapproachused at the levelofjustifications

16. Pan-European approach vs. unilateral approach Secondtypepan-europeanapproach: • Manninen: State of residence perspective • Pan-europeanapproachused at the levelofcomparability • Interactionofdomesticlaw: in the other State the discriminationis (partiallyeliminated)

17. Pan-European approach vs. unilateral approach Thirdtypepan-europeanapproach (I): • Denkavit: State of Source • used at the levelofcomparability • based on the applicationof a DTC • isa DTC alwaysrelevanttoascertain the existenceof a breach? • Bouanich (para. 46)

18. Pan-European approach vs. unilateral approach Thirdtypeofpan-europeanapproach (II): • Amurta: State of source • SimilartoDenkavitbutbased on the interactionbetweennationallaw • Both AG and the Court denied the applicationof the secondtypepan-europeanapproach (debatable!)

19. Pan-European approach vs. unilateral approach Thirdtypeofpan-europeanapproach (III): • Amurta: State of source perspective • Differencewith DTC law: usually DIE eliminatedby the State ofSource

20. Pan-European approach vs. unilateral approach Proceduralobstacles in the applicationof the thirdtypepan-europeanapproach: • The burdenofproofis on the taxpayer • Whatif the creditisnoteffectivelygranted • Partialcredit? Absenceoftaxcapacity (e.g. losses in the State of residence) • Cash flow disadvantages?

21. Grazie, Thanks, Merci….. Dr. Mario Tenore, LL.M Vienna UniversityofEconomics and Business Mario.tenore@gmail.com