Only a few months after the conclusions of Advocate-General Maduro in the "the case of the year" (Marks & Spencer), the full court of the ECJ gave the member states some time to breathe again in the battle between international tax law and EU law. In the D case it decided on the application of the most-favoured nation doctrine to double tax treaties. This decision will be known as one of "these cases" setting the rules of international taxation in the EU.
The essence of the problem can be explained in a few lines. Two member states enter into a bilateral agreement to avoid double taxation. Only qualifying persons residing in one of those member states are liable to the advantages of this agreement. Despite the OECD Model Treaty, many differences exist between the double tax treaties that are in place between the 25 member states. Those differences do not stimulate the establishment of an internal market. This was exactly the argument of the proponents of the application of the doctrine. They argued that the unequal treatment stemming from those differences is not in line with the principle of non-discrimination which is the cornerstone of Community law. The opponents, on the other hand, believed that this application would create chaos in the EU because of taxpayers cherry picking the best provisions of the various double tax treaties.
On July 5 the ECJ gave its view on this intriguing topic in the D case. This case was about an individual residing in Germany, Mr D, who owned property in the Netherlands. As such he was liable to Dutch wealth tax as a non-resident taxpayer. As a general rule in the Dutch Wealth Tax Act, only taxpayers resident in the Netherlands are entitled to a personal allowance. Based on the double tax treaty between the Netherlands and Belgium, residents of Belgium owning property in the Netherlands are also in the position to claim this personal allowance. The double tax treaty between the Netherlands and Germany does not provide for this benefit, so D was in a less favourable position than a Belgian resident owning the same property in the Netherlands.
The ECJ turned down the application of the most-favoured nation doctrine to double tax treaties. It did so in a surprisingly short line of reasoning. It simply argued that D was not in the same situation as a taxable person in Belgium as far as it concerns wealth tax in the Netherlands. The double tax treaty between Belgium and the Netherlands is founded on reciprocal rights and obligations. That balance would be hampered if a person such as Mr. D could pick one of the benefits of this treaty without fulfilling its obligations. In short, a German resident is not in the same position as a Belgian resident.
The decision is a clear statement of the ECJ. The member states are free to lay down any provision in their double tax treaties. As such, this is a not exactly a new development. It is established case law that it is up to the member states to set bilateral allocation rules (compare the Gilly case) What is surprising is that even a provision in a double tax treaty that does not show the characteristics of a clear allocation rule, but the characteristics of a gift or subsidy instead, is in line with the requirements of the EC Treaty. How exactly would this be of benefit to the internal market?
Although this decision of the ECJ is in line with the wishes of the (intervening) member states (and apparently of the European Commission), it should not be able to stop the process of integration in the field of direct taxation. The European Commission should continue its efforts to create an EU version of the OECD Model Convention or a multilateral EU tax treaty. Once the institutional storm in Europe is over, this step on the brake will hopefully be followed by some steps forward again. There can be little doubt that – like in the area of cross-border loss relief to be dealt with in the Marks and Spencer case – the European Commission has an essential role to play.
Cees Peters (cees.peters@nl.pwc.com), Rotterdam
