eu harmonization: an obstacle for alternative corporate income tax systems?

(c) G.M.M. Michielse - 2002(c) G.M.M. Michielse - 2002 11

EU Harmonization:EU Harmonization:

An Obstacle for Alternative An Obstacle for Alternative Corporate Income Tax Systems?Corporate Income Tax Systems?

Geerten M.M. MichielseGeerten M.M. MichielseTechnical Assistance Advisor, IMFTechnical Assistance Advisor, IMFAdjunct-Professor, Georgetown University Law CenterAdjunct-Professor, Georgetown University Law Center


Estonian Distribution TaxEstonian Distribution Tax

Income tax liability deferred to Income tax liability deferred to distribution:distribution:

ProfitProfit 300300

Distribution out of net profitDistribution out of net profit 100100 Distribution tax (26/74Distribution tax (26/74thth)) 35 35 Dividend withholding tax (26%)Dividend withholding tax (26%)

26 26


Tax Treatment of PETax Treatment of PE

‘‘Distributions’ to HQ:Distributions’ to HQ:

Property movements beyond Property movements beyond original property allocated to PE;original property allocated to PE;

Payment made by or on account Payment made by or on account of PE;of PE;

Payments made under order of Payments made under order of HQ through PE to third parties.HQ through PE to third parties.


European UnionEuropean Union

Parent-Subsidiary directiveParent-Subsidiary directive Freedom of establishment/ Free Freedom of establishment/ Free

movement of capitalmovement of capital Code of conductCode of conduct

Merger directiveMerger directive Arbitration conventionArbitration convention


Parent-Subsidiary DirectiveParent-Subsidiary Directive

No ‘dividend withholding tax’ No ‘dividend withholding tax’ on distribution of profit to EU on distribution of profit to EU parent company (>25%);parent company (>25%);

No profit tax on distribution of No profit tax on distribution of profit from EU subsidiary (>25%). profit from EU subsidiary (>25%).


‘‘Withholding Tax’Withholding Tax’

Epson Case / Athinaiki Case:Epson Case / Athinaiki Case:

Labeling of tax = irrelevantLabeling of tax = irrelevant Chargeable event = distribution of profitChargeable event = distribution of profit Taxable amount = income attributable Taxable amount = income attributable

to sharesto shares Taxpayer = shareholder (Epson Taxpayer = shareholder (Epson

Case)Case) Loss carry over = characteristic of Loss carry over = characteristic of

profit tax (Athinaiki Case)profit tax (Athinaiki Case) Treatment under DTA = Article 10 Treatment under DTA = Article 10

(Athinaiki Case)(Athinaiki Case)


Implementation Implementation RequirementsRequirements

Does distribution tax qualifies as Does distribution tax qualifies as ‘withholding tax’ ?‘withholding tax’ ?

Abolish limitation of 12-months Abolish limitation of 12-months period for application of indirect period for application of indirect tax credittax credit


‘‘Freedoms’ in EC TreatyFreedoms’ in EC Treaty

Freedom of establishmentFreedom of establishment– No different tax treatment between No different tax treatment between

pe and foreign-owned subsidiarype and foreign-owned subsidiary

Free movement of capitalFree movement of capital– Place of investmentPlace of investment– Place of residence of investorPlace of residence of investor


Free Movement of CapitalFree Movement of Capital

Estonian company with:Estonian company with:

(a) Resident corporate shareholders(a) Resident corporate shareholders No tax on distribution of profitNo tax on distribution of profit

(b) Non-resident corporate (b) Non-resident corporate shareholdersshareholders

Tax of 26/74Tax of 26/74thth on distribution of profit on distribution of profit


EU Code of ConductEU Code of Conduct

Advantageous measures only for non-Advantageous measures only for non-residents or transactions with non-residents or transactions with non-residents;residents;

Ring-fenced from domestic marketRing-fenced from domestic market No real economic activity or presenceNo real economic activity or presence Profit determination departs from Profit determination departs from

inter-national standards (OECD)inter-national standards (OECD) Lack of transparencyLack of transparency


Ring-fenced IncentiveRing-fenced Incentive

Distribution tax not allowed under Distribution tax not allowed under Parent-Subsidiary DirectiveParent-Subsidiary Directive

Estonian Companies owned by Estonian Companies owned by foreign EU companies are tax foreign EU companies are tax exemptexempt

Preferential regime applicable only Preferential regime applicable only to non-residentsto non-residents


Final Statement:Final Statement:

““These Arguments Make These Arguments Make The Spanish Inquisition The Spanish Inquisition Look Dangerously Look Dangerously Liberal”Liberal”

eu harmonization: an obstacle for alternative corporate income tax systems?

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