Double taxation: The Court of Justice of the European Union considers that the authorities of a Member State responsible for the recovery of aid may apply, for the purposes of determining the amount to be recovered, a national provision providing for a mechanism to prevent double taxation (Fossil)

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Under a 2010 Income Tax Act [hereinafter "ITA 2010"], passive interest income and intellectual property royalties [hereinafter "relevant income"] were not considered taxable income in Gibraltar. The same Act also introduced a mechanism for the avoidance of double taxation in section 37. Following an amendment to this law in 2013, the income in question was subject to tax in Gibraltar. By its decision 2019/700 of 19 December 2018 (OJ 2019, L 119, p. 151), the Commission found that the state aid resulting from the tax exemptions applied during the period prior to the 2010 amendment of the ITA was incompatible with the internal market and had to be recovered. In order to implement this decision, the 2010 ITA was amended in 2019 to tax the income in question retroactively. Since Fossil(Gibraltar), a subsidiary of the Fossil Group, active in the field of consumer fashion accessories, had received intellectual property royalties during the relevant period, it was required to pay the related tax. However, having paid tax at a rate of 35% in the United States on this income, it applied for the application of section 37 of the ITA 2010, in order to be granted a tax reduction equal to that paid in the United States. This request was rejected and recovery orders were issued. Fossil(Gibraltar) therefore challenged these orders before theIncome Tax Tribunal of Gibraltar.

In those circumstances, that court asked the Court to determine whether Decision 2019/700 precluded the national authorities responsible for recovering unlawful and incompatible aid from the beneficiary from applying a national provision providing for a mechanism for setting off the taxes paid by that beneficiary abroad against those for which it is liable in Gibraltar.

In order to answer this question, the Court, assuming that the conditions for the application of Article 37 of the ITA 2010 were met (as the referring court presupposed, but which it will nevertheless have to verify), examines whether the granting of a reduction in the amount to be returned by Fossil(Gilbraltar) is such as to jeopardize the effective execution of the recovery ordered by Decision 2019/700.

To this end, the Court first recalls the principles guiding the recovery of unlawful aid. In particular, summarizing the considerations arising from the judgment of 15 December 2005 in Unicredito Italiano (C-148/04, EU:C:2005:774, comm. J-Y Chérot, Concurrences, No 1-2006, pp. 169-170), it emphasizes that "the beneficiaries of an aid scheme may, at the recovery stage, rely on the deductions and reductions provided for by national law if it is established, having regard to the transactions actually carried out, that they were actually entitled to benefit from them. Restoration of the previous situation requires only that, at the stage of recovery of the aid by the national authorities, account be taken of the tax treatment, if any, which is more favourable than that under ordinary law which, in the absence of the unlawful aid and by virtue of domestic rules compatible with Union law, would have been granted in respect of the transaction actually carried out’ (paragraph 43).

Applying those principles to the present case, the Court finds, first, that while Decision 2019/700 requires the national authorities to recover the tax which would have been levied in the absence of the exemption applicable to the income in question, it does not deal with the possibility of relying on the deductions and reductions provided for by Gibraltar’s legislation, which could have been applied when calculating the tax due (paragraph 48).

The Court therefore concludes that this decision does not preclude the invocation of a mechanism such as that provided for in Article 37 of the ITA 2010, in accordance with the possibility opened up by the Unicredito Italiano case law, nor does it preclude the possibility, in application of that mechanism, of deducting taxes relating to intellectual property royalties paid abroad from the tax on those royalties to be paid in Gibraltar.

However, in several letters, the Commission’s DG Competition had expressly indicated to the Gibraltar authorities that they could not take into account the tax paid in the United States by Fossil(Gilbraltar) in order to adjust the amount of aid to be recovered. Despite their content, the Court denies any relevance to these letters, stressing (i) that they do not fall within the scope of the acts that may be adopted on the basis of Regulation 2015/1589, (ii) that they cannot result in supplementing or amending the content of that decision, and therefore (iii) that they are devoid of any binding force (paragraph 49). This solution is in line with the case law according to which the positions expressed by the Commission in the context of the implementation of a decision such as the one at issue in the present case cannot be regarded as binding on the national court (judgment of 13 February 2014, Mediaset, C-69/13, EU:C:2014:71, paragraph 28, comm. J. Derenne, Concurrences, No. 2-2014, pp. 152-153). The fact remains that, according to the same case law, the national court "must" take into consideration those statements as an element of assessment in the context of the dispute before it, which the Court fails to recall in the judgment under comment. In the present case, however, such a consideration could have led, in the absence of a reference for a preliminary ruling, to a result opposite to that reached by the Court...

Second, the Court examines whether taking into account, at the recovery stage, a tax credit granted on the basis of Article 37 of the ITA 2010 would undermine the effectiveness of Decision 2019/700, inasmuch as that taking into account would place Fossil(Gibraltar) in a more advantageous situation than that which would have prevailed without the grant of the aid concerned. In that regard, the Court states that the requirement that the Member State in question must achieve effective recovery of the sums due for the purpose of eliminating the distortion of competition caused by the competitive advantage conferred by the unlawful aid ’does not a priori compromise the implementation of a mechanism (....) allowing, with a view to avoiding double taxation of the same income, the granting of a tax reduction in respect of the tax paid by a legal or natural person in a country or territory in which that income is generated or has its origin" (point 53). This wording is not free of ambiguity in that it suggests that the Court is examining whether the obligations arising from Union law "jeopardize" the application of national law, whereas it is in fact examining whether that application jeopardizes those obligations (or whether the latter preclude that application). Nevertheless, it is perfectly clear that the Court considers that the implementation of the double taxation mechanism does not contravene the requirement of effective recovery.

Finally, the Court considers whether the application of Article 37 of the ITA 2010 is capable, in itself, of constituting prohibited State aid within the meaning of Article 107(1) TFEU. In order to provide the necessary guidance to the national court in this regard, it establishes the principle that a measure "which seeks to avoid double taxation by providing for a mechanism for setting off the taxes paid by a taxpayer abroad against those for which he is liable [in his Member State of establishment], is, in principle, a matter for the fiscal autonomy of the Member States and cannot, unless it is established that it is based on discriminatory parameters, be classified as prohibited State aid within the meaning of Article 107(1) TFEU’ (paragraph 61). This position of the Court is in line with that of Advocate General Kokott, who considered that "deciding which foreign taxes may be set off against the domestic tax debt and under what conditions such a set-off is possible is a general decision falling within the discretion of the Member States (...)". It also agrees with the case law that the elimination of double taxation is one of the objectives of the Union, the achievement of which depends on the Member States (CJEU, 11 Sept. 2008, Arens-Sikken, C-43/07, EU:C:2008:490, paragraph 62).

In short, therefore, the Court considers that Decision 2019/700 does not preclude the national authorities responsible for the recovery of unlawful and incompatible aid from the beneficiary from applying a national provision providing for a mechanism for setting off the taxes paid by that beneficiary abroad against those for which it is liable in Gibraltar, if it appears that that provision was applicable at the time of the transactions at issue. Thus, the judgment under commentary provides useful clarifications and additions to the principles deriving from the Unicredito case law, confirming the possibility of implementing a mechanism to avoid double taxation for the purpose of determining the amount of aid, which is fiscal in nature, that must be recovered.

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Author

  • European Court of Justice (Luxembourg)

Quotation

Raphaël Vuitton, Double taxation: The Court of Justice of the European Union considers that the authorities of a Member State responsible for the recovery of aid may apply, for the purposes of determining the amount to be recovered, a national provision providing for a mechanism to prevent double taxation (Fossil), 15 September 2022, Concurrences N° 4-2022, Art. N° 109606, pp. 107-108

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