ec
†he Bosal Holding Case: Analysis and
Critique
Dr. Dennis Weber*
1. Introduction
On 18 Sep›ember 2003, ›he European Cour› of Jus›ice
(hereaf›er: ECJ) delivered ›he Bosal Holding judgmen›.1
Yhis case concerned ›he ques›ion of whe›her a Du›ch
limi›a›ion of ›he deduc›ibili›y of in›eres› cos›s in rela›ion
›o ›he financing of a holding in companies es›ablished in
o›her Member S›a›es was in accordance wi›h ›he Paren›~
Subsidiary Direc›ive and ›he freedom of es›ablishmen›
(Ar›icle S2 of ›he EC Yrea›y; now, af›er amendmen›,
Ar›icle P3 EC). Yhis case is deal› wi›h fur›her in ›his
ar›icle. Yirs›, in paragraph 2, ›he fac›s and ›he Ne›her~
lands regula›ion are se› ou›, and ›he ques›ions referred
and ›he answer of ›he ECJ are reflec›ed. ln paragraph 3,
›he judgmen› is analysed and an apprecia›ion is given.
Subsequen›ly in paragraph P, a brief accoun› is given of
›he consequences of ›he judgmen› for ›he special group
regimes wi›hin ›he EU. Yinally in paragraph S, a number
of closing remarks are made.
2. Background
2.1. †he facts and the Netherlands regulation
Bosal Holding BV (hereaf›er: Bosal) is a limi›ed liabili›y
company (besloten vennootschap) es›ablished in ›he
Ne›herlands which carries on holding, financing and
licensing/royal›y rela›ed ac›ivi›ies and which, in ›he
Ne›herlands, is subjec› ›o corpora›ion ›ax (ven~
nootschapsbelasting). Bosal is holder of S0 ›o 100%
shareholdings in, among o›hers, a number of compa~
nies es›ablished wi›hin ›he European Communi›y. ln
1993, i› wan›ed ›o deduc› from i›s ›axable profi›s
almos› P million Du›ch guilders (1.82 million Euro) of
in›eres› cos›s made in rela›ion ›o ›he financing of i›s
holdings in companies in o›her EC Member S›a›es.
Yhe ›ax inspec›or, however, refused ›his deduc›ion
because Ar›icle 13 of ›he Du›ch Corpora›ion Yax Ac›
1969 (hereaf›er: CYA 1969), which regula›es ›he
Du›ch par›icipa›ion exemp›ion, did no› allow such
deduc›ion for ›ha› year.
lf a paren› company es›ablished in ›he Ne›herlands
is a S% shareholder of a company, ›he par›icipa›ion
exemp›ion is applicable. Yhis exemp›ion applies ›o
holdings bo›h in companies es›ablished in ›he Ne›her~
lands and in companies es›ablished in o›her Member
S›a›es. Under ›he par›icipa›ion exemp›ion provisions,
exemp›ion is gran›ed for dividends received and for
220
TAX
REVIEW
2003-P
genera›ed capi›al gains ob›ained from ›he sale of
shares in ›he subsidiary. Ar›icle 13(1) CYA 1969 reads:
‘in de›ermining profi› no accoun› shall be ›aken of
gains acquired from a holding or of ›he cos›s rela›ing
›o a holding’. Yhus on balance, in ›he de›ermina›ion of
›he ›axable profi› of ›he paren› company, bo›h ›he
posi›ive and ›he nega›ive resul›s (losses2) acquired
from a holding and ›he cos›s rela›ing ›o a holding
(par›icularly in›eres› cos›s for ›he financing of a
holding) remain ou›side considera›ion.
Yhe essence in ›he subjec› case is ›ha› ›he cos›s
rela›ing ›o a holding are no› deduc›ible (hereaf›er:
holding cos›s). Yhere is an exemp›ion ›o ›his non~
deduc›ibili›y: holding cos›s are deduc›ible if i› should
appear ›ha› such cos›s are indirec›ly ins›rumen›al in
making profi›s ]of ›he subsidiary] ›ha› are ›axable in
›he Ne›herlands (›he Member S›a›e where ›he paren›
company is es›ablished).3
Yhus in brief, holding cos›s ›ha› are indirec›ly
ins›rumen›al in ›axable profi›s being made in ›he
Netherlands are deduc›ible and holding cos›s which
are indirec›ly ins›rumen›al in ›axable profi›s being
made abroad are no› deduc›ible.
2.2. †he questions referred and the ansner of the ECJ
ln ›he Ne›herlands, ›he ques›ion of whe›her ›he non~
deduc›ibili›y of holding cos›s is in accordance wi›h
European law has considerably occupied ›he minds
bo›h in prac›ice and in ›he doc›rine.P Yhe ques›ion has
* Assis›en› professor of European Yax Law a› ›he Universi›y of
Ams›erdam (Ams›erdam Cen›er for ln›erna›ional Law); Of
counsel on European Yax Law ›o Loyens ð Loeff and depu›y
judge in ›he High Cour› (of Appeal) of ‘s~Her›ogenbosch.
1
Case C~168/01, Bosal Holding BV v. Staatssecretaris van Financiën.
2
Yor example, a loss ›ha› is made a› ›he sale of ›he shares of ›he
subsidiary.
3
See: Ar›icle 13(1) CYA 1969.
P
See for example: Y.C. de Hosson, De kos›en van de deelneming,
WYR 199P/6111, pp. 996-1008, C.W. van Noordenne, Enige
recen›e arres›en op he› gebied van non~discrimina›ie en hun
weerslag op ar›ikel 13 van de We› op de vennoo›schapsbelas›ing,
MBB 199S/S, pp. 1P2-1P6, P.G.H. Alber›, De kos›enaf›rekbe~
perking van ar›ikel 13, eers›e lid, We› Vpb. 1969: pro›ec›ionisme,
maar geen discrimina›ie, Weekblad Yiscaal Rech› 199S/6133, pp.
1693-1302, W. Bruins Slo›, Naar een bespreking van de nie›~
af›rekbaarheid van financieringskos›en in verband me› bui›en~
landse deelnemingen, Weekblad Yiscaal Rech› 1993/60P6,
p. 31S ff; R.A. van der Jag›, Bosman ze› Nederlandse fiscus
EC TAX REVIEW 2003/P
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
been pu› ›o various Du›ch Cour›s of Appeal, bu› none
of ›hese Cour›s had ruled ›ha› ›here was a conflic› wi›h
EC law or had pu› ›he ques›ion ›o ›he EC Cour› of
Jus›ice. Yhe Bosal Holding case is ›he firs› ›o have been
brough› before ›he Du›ch Supreme Cour› (Hoge Raad
der Nederlanden). Ano›her similar case is pending
before ›he Hoge Raad in which ›he compa›ibili›y of ›he
deduc›ion limi›a›ion of holding cos›s in rela›ion ›o a
holding es›ablished in Norway (›hus, no› ›he EC) wi›h
›he EEA Yrea›y is a› issue.
ln a judgmen› of 11 April 2001,S ›he Hoge Raad
reques›ed ›he ECJ for a preliminary ruling on ›he
following ques›ions:
1. Does Ar›icle S2 of ›he EC Yrea›y, read in conjunc~
›ion wi›h Ar›icle S8 ›hereof . . ., or any o›her rule of
EC law, preclude a Member S›a›e from gran›ing a
paren› company subjec› ›o ›ax in ›ha› Member S›a›e
a deduc›ion on cos›s rela›ing ›o a holding owned by
i› only if ›he relevan› subsidiary makes profi›s which
are subjec› ›o ›ax in ›he Member S›a›e in which ›he
paren› company is es›ablished?
2. Does i› make any difference ›o ›he answer ›o
Ques›ion 1 whe›her, where ›he subsidiary is
subjec› ›o ›ax based on i›s profi›s in ›he Member
S›a›e concerned bu› ›he paren› company is no›, ›he
relevan› Member S›a›e ›akes accoun› of ›he above~
men›ioned cos›s in levying ›ax on ›he subsidiary?
ln his Opinion of 2P Sep›ember 2002, Advoca›e
General Alber deemed ›ha› ›here was a conflic› wi›h
›he righ› of es›ablishmen›. Yhe ECJ examined ›he ›wo
ques›ions ›oge›her and reformula›ed ›hem in›o one
ques›ion ›ha› reads:
‘›he referring cour› effec›ively asks whe›her Communi›y
law precludes a na›ional provision which, when de›ermin~
ing ›he ›ax on ›he profi›s of a paren› company es›ablished
in one Member S›a›e, makes ›he deduc›ibili›y of cos›s in
connec›ion wi›h ›ha› company’s holding in ›he capi›al of a
subsidiary es›ablished in ano›her Member S›a›e subjec› ›o
›he condi›ion ›ha› such cos›s are indirec›ly ins›rumen›al in
making profi›s which are ›axable in ›he Member S›a›e
where ›he paren› company is es›ablished’.
Yhe ECJ’s answer ›o ›his ques›ion was:
‘Council Direc›ive 90/P3S/EEC of 23 July 1990 on ›he
common sys›em of ›axa›ion applicable in ›he case of
paren› companies and subsidiaries of differen› Member
S›a›es, in›erpre›ed in ›he ligh› of Ar›icle S2 of ›he EC
Yrea›y (now, af›er amendmen›, Ar›icle P3 EC) precludes a
na›ional provision which, when de›ermining ›he ›ax on
›he profi›s of a paren› company es›ablished in one
Member S›a›e, makes ›he deduc›ibili›y of cos›s in
connec›ion wi›h ›ha› company’s holding in ›he capi›al
of a subsidiary es›ablished in ano›her Member S›a›e
subjec› ›o ›he condi›ion ›ha› such cos›s be indirec›ly
ins›rumen›al in making profi›s which are ›axable in ›he
Member S›a›e where ›he paren› company is es›ablished’.
3. Analysis of the ruling
3.1. †he parent-subsidiary directi¬e
Yhe ECJ firs› approached ›he issues from ›he
EC TAX REVIEW 2003/P
perspec›ive of ›he Paren›~Subsidiary Direc›ive, 6 ›he
specific ›ax rules ›ha› are applicable ›o ›his si›ua›ion. lf
a dis›ribu›ion of profi›s ›akes place be›ween a
subsidiary and a company es›ablished wi›hin ›he EC,
firs›, ›his Direc›ive (Ar›icle S) forbids, under cer›ain
condi›ions, ›he Member S›a›e of ›he subsidiary from
levying a wi›hholding ›ax on ›his dis›ribu›ion of
profi›s. Second, ›he Direc›ive imposes ›he obliga›ion
(Ar›icle P) on ›he Member S›a›e of ›he paren› company
›o exemp› ›he received dis›ribu›ion of profi›s (exemp~
›ion me›hod), or ›o deduc› ›he amoun› of ›ax due from
›ha› frac›ion of ›he corpora›ion ›ax paid by ›he
subsidiary which rela›es ›o ›hose profi›s (credi›
me›hod).
Yhe ECJ firs› brings back ›o mind ›he objec› of ›his
Direc›ive which is basically ›ha› ›he Direc›ive endea~
vours ›o elimina›e ›he difference be›ween profi›
dis›ribu›ions made in domes›ic si›ua›ions compared
wi›h profi› dis›ribu›ions in foreign si›ua›ions.3 Yhe ECJ
›hen deals fur›her wi›h ›he ›ax ›rea›men› of ›he
holding cos›s under ›his Direc›ive. Yhe ECJ firs›
observes ›ha› Ar›icle P(2) of ›he Direc›ive leaves each
Member S›a›e ›he op›ion of providing ›ha› any charges
rela›ing ›o ›ha› holding may no› be deduc›ed from ›he
›axable profi›s of ›he paren› company. l› ›hen observes
›ha› ›he deduc›ion refusal ‘is no› accompanied by any
condi›ion or special rule concerning ›he des›ina›ion or
purpose of ›he profi›s ob›ained by ›he paren› company
or i›s subsidiary, or concerning ›he applicabili›y in
›ime of Ar›icle P(2)’. Yhere besides i› observes, and l
can find no reason for ›his, ›ha› ›he deduc›ion refusal
of Ar›icle P(2) always remains applicable, even af›er
›he effec›ive en›ry in›o force of a common sys›em of
company ›axa›ion, and ›ha› ›his does no› apply ›o ›he
obliga›ion under Ar›icle P(1) ›o gran› a par›icipa›ion
exemp›ion or par›icipa›ion credi›, given ›ha› pursuan›
›o Ar›icle P(3), af›er ›he en›ry in›o force of a common
cont.
bui›enspel, Weekblad Yiscaal Rech› 1996/P1P; J.P. Linders and
B. Wagenaar, De EU~my›he rond non~discrimina›ie, een vere~
delde Pavlov~reac›ie, Weekblad Yiscaal Rech› 1996/6222, pp.
130S-1318; R.H. Boon and M.J. Pelinck, De lCl~zaak en ar›ikel
1S en 13, eers›e lid, We› Vpb. 1969, Weekblad Yiscaal Rech›
1998/6321, pp. 1823-1833, H.Y.P.M. van den Hurk, Reik› he›
gemeenschapsrech› he› volkenrech› de hand?, YYO 1998/39,
D.M. Weber, Enige opmerkingen naar aanleiding van de
discussie inzake de (on)verenigbaarheid van de kos›enaf›rekbe~
perking van ar›ikel 13, eers›e lid, We› Vpb. 1969 me› he› rech›
van ves›iging, YED 1999/261, pp. 103S-1082; J.J. van den Broek,
Bosal Holding: een rech›vaardiging voor de kos›enaf›rek bij
bui›enlandse deelnemingen? YYB, no. 10, pp. S-10 and H. van
den Broek, Bosal Holding and ›he confusion surrounding ›he
›erri›oriali›y principle, ln›erna›ional Yransfer Pricing Journal,
May/June, 2003, pp. 116-123.
S
Hoge Raad 11 April 2001, no. 3S329, BNB 2001/2S3, wi›h no›e
van der Geld; YED 2001/3P1, wi›h no›e Weber.
6
Direc›ive of 23 July 1990 on ›he common sys›em of ›axa›ion
applicable in ›he case of paren› companies and subsidiaries of
differen› Member S›a›es, 90/P3S/EEC.
3
See paragraph 22 of ›he judgmen›; see also Joined Cases C~283/
9P, C~291/9P and C~292/9P Denhavit International and Others v
Bvndesamt ∫v̈r Finanzen ]1996] ECR l~S063, paragraph 22; Case
C~33S/98, Ministério Pv́blico, Fazenda Pv́blica and Kpson Kvrope
BV, ]2000] ECR l~P2P3, paragraph 20; Case C~29P/99 Athina¨jhi
Zythopoij̈a ]2001] ECR l~6393, paragraph 2S.
221
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
sys›em of company ›axa›ion, ›he firs› paragraph will
no longer be applicable.
Yhe ECJ ›hen ruled: ‘l› follows ›ha›, in so far as
Ar›icle 13(1) of ›he 1969 Law merely implemen›s ›he
possibili›y offered by Ar›icle P(2) of ›he Direc›ive ›o
refuse ›he deduc›ion of cos›s incurred by paren›
companies in connec›ion wi›h holdings in ›he capi›al
of ›heir subsidiaries, i› is compa›ible wi›h ›he Direc›ive’
(see paragraph 2S of ›he judgmen›). Yhe ECJ ›hus
rules ›ha›, in principle, Ar›icle P(2) of ›he Paren›~
Subsidiary Direc›ive allows ›he deduc›ion limi›a›ion of
holding cos›s, al›hough i› immedia›ely adds ›o ›his in
paragraph 26: ‘However, ›ha› possibili›y may be
exercised only in compliance wi›h ›he fundamen›al
provisions of ›he Yrea›y, in ›his case Ar›icle S2 ›hereof.
l› is ›herefore in rela›ion ›o ›ha› provision ›ha› i› is
necessary ›o examine ›he ques›ion whe›her ›he
Direc›ive au›horises a Member S›a›e only par›ially ›o
allow, as does Ar›icle 13(1) of ›he 1969 Law, ›he
deduc›ibili›y of cos›s in rela›ion ›o holdings’. Because
Ar›icle P(2) of ›he Direc›ive is no› clear as ›o ›he
ques›ion of whe›her in ›he even› a subsidiary in ›he
Ne›herlands makes profi› ›he holding cos›s may be
allowed ›o be deduc›ed (which is logical given ›ha› ›he
Direc›ive only covers cross border EC dis›ribu›ion of
profi›s and no› domes›ic si›ua›ions), ›he ECJ examines
whe›her ›his op›ion is allowed by ›he EC Yrea›y
freedoms. Accordingly, ›he Direc›ive is explained in
conformi›y wi›h ›he Yrea›y. Yhe ECJ has followed ›his
me›hod of in›erpre›a›ion before. ln ›his sense, i›
considered in Commission v. Germany,8 ‘when ›he
wording of secondary Communi›y law is open ›o more
›han one in›erpre›a›ion, preference should be given ›o
›he in›erpre›a›ion which renders ›he provision con~
sis›en› wi›h ›he Yrea›y ra›her ›han ›he in›erpre›a›ion
which leads ›o i›s being incompa›ible wi›h ›he Yrea›y.
Consequen›ly, ›he Direc›ive should no› be cons›rued
in isola›ion and i› is necessary ›o consider whe›her or
no› ›he requiremen›s in ques›ion are con›rary ›o ›he
abovemen›ioned provisions of ›he Yrea›y and ›o
in›erpre› ›he Direc›ive in ›he ligh› of ›he conclusions
reached in ›ha› respec›’.
3.2. Applicability of the right of establishment
Yhe ECJ and ›he Hoge Raad assume, wi›hou› fur›her
subs›an›ia›ion, ›ha› ›here is an es›ablishmen› in
ano›her Member S›a›e by means of a subsidiary and
›hus, ›he righ› of es›ablishmen› is applicable. Yhis
assump›ion is correc›, given ›ha› ›he Ne›herlands
paren› company only held majori›y in›eres›s in
holdings es›ablished in o›her Member S›a›es such
›ha›, on ›he basis of ›he Baars and ›he Überseering
cases, only ›he righ› of es›ablishmen› is of impor~
›ance.9 ln ligh› of ›he convergence concerning ›he
explana›ion of ›he EC Yrea›y freedoms i› can be
assumed in principle ›ha› ›he judgmen› will also apply
›o si›ua›ions in which ›he free movemen› of capi›al is
applicable (›hus by minori›y holdings).
3.3. Restriction of the right of establishment
A› ›he beginning of ›he judgmen› (paragraph 13), ›he
222
ECJ correc›ly es›ablished ›ha› ›he ques›ion of whe›her
holding cos›s are deduc›ible is no› dependen› on ›he
place of es›ablishmen› of ›he subsidiary bu› on ›he
ques›ion of whe›her ›he subsidiary has Du›ch or
foreign profi›. Holding cos›s can, for example, be
deduc›ed by ›he paren› company es›ablished in ›he
Ne›herlands from i›s profi› if a subsidiary es›ablished
in ano›her Member S›a›e makes profi› by means of a
permanen› es›ablishmen› in ›he Ne›herlands. Yhus, no
dis›inc›ion is made according ›o ›he place of es›ablish~
men› bu› according ›o ›he place where ›he profi› is
made, in o›her words, on ›he basis of a ‘profi›
jurisdic›ion cri›erion’.
Yhe Hoge Raad had already ruled ›ha› ‘›his
difference in ›ax ›rea›men› - by ›he same Member
S›a›e - of ›he cos›s made by a Du›ch paren› company
(. . .) has a res›raining influence on ›he decision of ›he
paren› company ›o es›ablish a subsidiary ou›side ›he
Ne›herlands’. Referring ›o ICI10 and Baars11 ›he Hoge
Raad ruled ›ha› ›here is a hindrance of ›he free
movemen› of es›ablishmen›. ln ›hese judgmen›s ›here
was also, jus› as ›here is in ›he subjec› case, a ma››er of
hindrance by ›he Member S›a›e of origin, ›hus from
›he Member S›a›e from which (in ›his case, ›he
Ne›herlands) a na›ional of a Member S›a›e make ›heir
es›ablishmen› in ano›her Member S›a›e. Yhe ECJ
follows ›he Hoge Raad in ›his and adds ›ha› ‘a paren›
company migh› be dissuaded from carrying on i›s
ac›ivi›ies ›hrough ›he in›ermediary of a subsidiary
es›ablished in ano›her Member S›a›e since, normally,
such subsidiaries do no› genera›e profi›s ›ha› are
›axable in ›he Ne›herlands’. l› ›hen goes on ›o refer ›o
›he objec›ive se› for›h by ›he Direc›ive ›ha› endeavours
›o elimina›e ›he difference be›ween domes›ic and
foreign si›ua›ies.12
We see here ›ha› ›he ECJ does no› consider ›he
holding cos›s deduc›ion limi›a›ion an (in)direc›
disrimina›ion agains› na›ionali›y bu› as a measure ›ha›
draws a dis›inc›ion be›ween domes›ic and foreign
si›ua›ies (by differen›ia›ing be›ween profi› genera›ed in
›he Ne›herlands and ›ha› genera›ed abroad) which
hinders ›he free movemen›.
Yhis approach ›o ›he issue would seem ›o be ›he
only correc› one. Yhe Du›ch deduc›ion limi›a›ion
namely makes no (indirec›) dis›inc›ion according ›o
na›ionali›y. As is remarked above, ›he ques›ions of
whe›her holding cos›s of a paren› company es›ab~
8
See Case 218/82, Commission v. Covncil ECR ]1983] P063 and
Case 20S/8P, Commission v. Germany ECR ]1986] 33SS,
paragraph 62.
9
Cf. Case C~2S1/98, Baars ]2000] ECR l~2383, paragraph 22 and
Case 208/00, Überseering BV and NCC ]2002] ECR l~9919,
paragraph 33. Yor ›ha› ma››er, ›here is more nuance in ›he
cri›erion for ›he dis›inc›ion be›ween es›ablishmen› and capi›al
movemen›, bu› as a rule es›ablishmen› is wi›h a majori›y in›eres›
and capi›al movemen› is wi›h minori›y in›eres›s.
10
Case C~29P/96, ICI ]1998] ECR l~P69S.
11
Case C~2S1/98, Baars ]2000] ECR l~2383.
12
More specifically: ›ries ›o elimina›e ‘›he disadvan›age due ›o ›he
applica›ion of ›ax provisions governing rela›ions be›ween paren›
companies and subsidiaries of differen› Member S›a›es which are
less advan›ageous ›han ›hose applicable ›o paren› companies
and subsidiaries of ›he same Member S›a›e’.
EC TAX REVIEW 2003/P
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
lished in ›he Ne›herlands are deduc›ible is dependen›
on ›he ques›ion of whe›her ›he subsidiary has Du›ch
or foreign profi› (profi› jurisdic›ion cri›erion). Yhis
dis›inc›ion does no›, in principle, differen›ia›e be›ween
na›ionali›ies. Yhere is no direct discrimina›ion agains›
na›ionali›y: ›he law does no› de›ermine ›ha› only
companies formed under Dvtch law may enjoy cos›
deduc›ions.13 Yhere is also no ques›ion of indirect
discrimina›ion agains› na›ionali›y. By pu››ing compa~
nies residen› ou›side ›he Ne›herlands a› a disadvan~
›age ›here could be a ques›ion of indirec›
discrimina›ion agains› na›ionali›y given ›ha› compa~
nies es›ablished ou›side ›he Ne›herlands are usually
companies ›ha› were formed under ›he laws of ano›her
Member S›a›e.1P Given ›ha› Ar›icle 13(1), CYA 1969,
does no› de›ermine ›ha› only companies resident
abroad may fall under ›he holding cos›s deduc›ion
limi›a›ion, ›here is no ques›ion of indirec› discrimina~
›ion agains› na›ionali›y.1S
Under ›he EC Yrea›y freedoms, however, measures
are also forbidden ›ha› al›hough ›hey do no›
discrimina›e be›ween na›ionali›ies, ›hey do hinder
›he exercising of fundamen›al freedoms. Yrom a
European law poin› of view, such dissuading measures
are divided in›o discriminatory measvres (or measures
wi›h dis›inc›ion) and eqvally applicable measvres (or
measures wi›hou› dis›inc›ion). 16 A discrimina›ory
measure is a measure ›ha› differen›ia›es be›ween
domes›ic si›ua›ions and si›ua›ions in which use is
made of ›he free movemen› whereby i› is liable ›o
hinder or make less a››rac›ive ›he exercise of funda~
men›al freedoms.13 ln ›his case, we are dealing wi›h a
discrimina›ory measure (›he difference be›ween Ne›h~
erlands or foreign profi›) ›ha› hinders ›he free move~
men› (›o wi›, ›he es›ablishmen› of subsidiaries in o›her
Member S›a›es).
Al›hough ›he Du›ch deduc›ion limi›a›ion is equally
applicable ›o each paren› company residen› in ›he
Ne›herlands, ›here is no ques›ion of an equally
applicable measure. ln ›his case, a dis›inc›ion is made
by ›he profi› jurisdic›ion cri›erion. Equally applicable
measures are domes›ic provisions ›ha› do no› (also no›
indirec›ly) discrimina›e be›ween domes›ic and foreign
si›ua›ions.18 A forbidden non~discrimina›ory measure
was examined in, for example, ›he Bosman judgmen›.19
ln ›his judgmen›, ›ransfer rules for foo›ball clubs were
a› issue ›ha› applied bo›h ›o ›ransfers of players
be›ween various foo›ball clubs wi›hin ›he same
Member S›a›e, and ›o ›ransfers be›ween a domes›ic
and a foreign foo›ball club.20 ln direc› ›axa›ion equally
applicable measures were examined in ›he Fvtvra
Participation case21 and in ›he more recen› De Coster
case.22
3.4. Justifications
S.4.1. Discricinatory ceasures and ouerriding
reasons based on tke generat interest
According ›o ›he case law of ›he ECJ, equally
applicable measures can only be jus›ified by overriding
reasons based on ›he general in›eres›. Yhese are ›he
grounds for jus›ifica›ion ›ha› are permi››ed by ›he ECJ,
EC TAX REVIEW 2003/P
such as ›he need ›o preserve ›he coherence of ›he ›ax
sys›em, ›he preven›ion agains› ›ax avoidance and ›he
effec›iveness of fiscal supervision. Discrimina›ory
measures canno› be jus›ified by such unwri››en
reasons based on ›he general in›eres›. Yhis is apparen›
from ›he landmark Gebhard case, in which ›he ECJ
summed up four condi›ions which a hindering
na›ional measure mus› mee› if i› is ›o be jus›ified.
Yhe firs› condi›ion was ›ha› ‘›hey mus› be applied in a
non~discrimina›ory manner’.23 Discrimina›ory mea~
sures can only be invoked by ›he excep›ions lis›ed in
›he EC Yrea›y concerning public policy, public securi›y
or public heal›h (see: Ar›icle 30 EC, Ar›icle 39(3) EC,
Ar›icle PS EC and Ar›icle P6 EC).
Problema›ic, and a ›horn in ›he flesh for many
wri›ers in ›he doc›rine and of advoca›es General,2P is
›ha› ›he ECJ i›self does no› adhere ›o i›s case law. ln
many ›ax judgmen›s where indirec› discrimina›ion of
na›ionali›y was clearly a› issue, ›he ECJ s›ill examined
›he jus›ifica›ion grounds raised when i› could have
sufficed by pronouncing ›ha› because of ›he discrimi~
na›ion ›he measure canno› be jus›ified. ln his Opinion
in ›he Bosal Holding case, Advoca›e General Alber ›ries
›o resolve ›hese issues by s›a›ing ›ha› only ‘inheren›
discrimina›ion’ canno› be jus›ified by reasons based
on ›he general in›eres›. He unders›ands ‘inheren›
discrimina›ion’ as ›he si›ua›ion where ›here is a
13
Wi›h companies, ›he ECJ pu›s ‘›he sea›’ of a company on equal
foo› wi›h ›he ‘na›ionali›y’ of ›he company. See Case 230/83, Avoir
∫iscal, ]1986] ECR 233, paragraph 18.
See for a firs› applicabili›y of indirec› discrimina›ion agains›
1P
na›ionali›y of companies: Case C~330/91, Commerzbanh ]1993]
ECR l~P013, paragraph 1S.
1S
ln ›he Du›ch li›era›ure, i› is no›ed ›ha› ›here is an inferred
indirec› discrimina›ion agains› na›ionali›y (in ›he second degree):
foreign profi›, is vsvally made by subsidiaries es›ablished abroad.
A subsidiary es›ablished abroad is vsvally incorpora›ed under
foreign law, ›hus ›here is an (indirec›) discrimina›ion agains›
na›ionali›y (see: J.A.G van der Geld, Verslag van he› EYS~seminar
van 23 november 2000, WYR 2001/6P2P, pp. 291-293 (a› p.
29P). Yhe above s›ance is defendable, bu› in my view a far~
reaching reasoning ›o arrive a› indirec› discrimina›ion agains›
na›ionali›y. Yur›hermore i› is unnecessary, given ›ha› discrimi~
na›ory measures ›ha› have a nega›ive influence on ›he free
movemen› are forbidden anyway under ›he Yrea›y freedoms.
16
See also: Kap›eyn - VerLoren van Yhemaa›, ln›roduc›ion ›o ›he
law of ›he European Communi›ies, ›hird edi›ion, Kluwer Law
ln›erna›ional, London, 1998, pp. S8P-S86.
13
See case C~SS/9P, Gebhard, ]199S] ECR l~P16S, paragraph 33.
18
See for such measures in ›he area of ›axes: P. Yarmer, Yhe Cour›’s
case law on ›axa›ion: a cas›le buil› on shif›ing sands?, EC Yax
Review 2003/2, pp. 3S-81, a› 38-80.
19
Case C~P1S/93, Bosman ]199S] ECR l~P921.
20
See explici›ly paragraph 98~100 of ›he Bosman case.
21
Case C~2S0/9S, Fvtvra Participations, ]1993] ECR l~2P31, in ›his
case an accoun›ing obliga›ion for a permanen› es›ablishmen› in
Luxembourg was considered a hindrance, because ›here was a
double burden (accoun›ing records in ›he Member S›a›e of ›he
headquar›ers and in ›he Member S›a›e of ›he permanen›
es›ablishmen› mus› be kep› up ›o da›e).
22
Case C~13/00, De Coster, ]2001] ECR l~9PPS. ln ›his case, ›here
was a sa›elli›e dish ›ax ›ha› according ›o ›he ECJ ‘applies wi›hou›
dis›inc›ion ›o na›ional providers of services and ›o ›hose of o›her
Member S›a›es’, bu› which does cons›i›u›e a hindrance of ›he free
movemen›.
23
See: case C~SS/9P, Gebhard, ]199S] ECR l~P16S, paragraph 33.
2P
See e.g. Advoca›e General Yesauro, in case C~118/96, Sa∫ir,
]1998] ECR l~1893, poin› 23~3P.
223
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
dis›inc›ion on ›he basis of na›ionali›y or sea›. ‘Differen›
›rea›men› on o›her grounds may, like o›her obs›acles,
be jus›ified by impera›ive requiremen›s in ›he general
in›eres›’, according ›o ›he Advoca›e General. He also
sugges›ed only using ›he word ‘discrimina›ion’ for
inheren› discrimina›ion and in all ›he o›her cases, such
as ›he subjec› one, ›o use ‘differen› ›rea›men›’.
Yhe ECJ did no› follow Alber’s sugges›ions. Yor ›ha›
ma››er, l can read no›hing in ›he sugges›ion of ›he
Advoca›e General. Yirs›, his sugges›ion is wordplay
which gives rise ›o grea› lack of clari›y. ln a gramma›ical
sense ›here is no dis›inc›ion be›ween ›he ›erms
‘discrimina›ion’ and ‘differen› ›rea›men›’. Bo›h ›erms
indica›e ›ha› ›here is a measure wi›h me› dis›inc›ion (›o
use ano›her word wi›h ›he same meaning). ln addi›ion,
his sugges›ion does no› solve ›he problem. He sugges›s
›ha› only inheren› discrimina›ion, ›ha› is discrimina›ion
on ›he basis of na›ionali›y or sea›, can be jus›ified by
overriding reasons based on ›he general in›eres›.
Apparen›ly wi›h ›his, he refers ›o direc› and indirec›
discrimina›ion of na›ionali›y. Yhe problem in fac› is ›ha›
›he ECJ always examines ›he jus›ifica›ion grounds for
indirect discrimina›ion agains› na›ionali›y and has even
applied ›his i›self.2S l am of ›he view ›ha› i› follows from
›he case law ›ha›, for ›he free movemen› of persons, a
domes›ic measure on direct discrimina›ion agains›
na›ionali›y (for companies under ›he righ› of es›ablish~
men›) can no longer be jus›ified on ›he basis of reasons
based on ›he general in›eres›, bu› only on ›he
excep›ions lis›ed in ›he EC Yrea›y. See for a recen›
example, ›he Überseering case.26 ln my view, ›he ECJ
would do well ›o rule ›ha› in ›he even› of direct
discrimina›ion agains› nationality, a Member S›a›e may
no longer apply ›he reasons based on ›he general
in›eres›, i› may only resor› ›o ›he excep›ions lis›ed in ›he
EC Yrea›y. Such an opinion would render ›he ECJ case
law more consis›en›. Yur›hermore, l empa›hise wi›h ›he
sugges›ion of Advoca›e General Jacobs in ›he Danner
case,23 who proposes ›o declare ›he overriding reasons
based on ›he general in›eres› applicable ›o each
res›ric›ion ›hus, ›o bo›h (i) a discrimina›ory (direc› or
indirec›) res›ric›ion no ma››er wha› cri›eria (also in
discrimina›ion agains› na›ionali›y), and (ii) non~discri~
mina›ory res›ric›ions. l am of ›he view ›ha› ›his is no› in
conflic› wi›h ›he Yrea›y ›ex› and moreover, as ›he
Advoca›e General no›ed, ›here are serious jus›ifica›ions
nowadays (pro›ec›ion of ›he environmen›, consumer
pro›ec›ion, coherence of ›he ›ax sys›em) ›ha› mus› be
pro›ec›ed.
S.4.2. Cokerence oJ tke tax systec
ln i›s judgmen›, ›he Hoge Raad firs› examined whe›her
›he holding cos›s deduc›ion limi›a›ion could be
jus›ified by ›he need ›o preserve ›he coherence of ›he
›ax sys›em known from ›he Bachmann judgmen› 28
(hereaf›er also called ‘coherence~jus›ifica›ion’). Yhis
jus›ifica›ion can be invoked, such as ›he ECJ repea›ed
in ›his judgmen›, if ›here is ‘a direc› link, in ›he case of
one and ›he same ›axpayer, be›ween ›he gran› of a ›ax
advan›age and ›he offse››ing of ›ha› advan›age by a
fiscal levy, bo›h of which ]are] rela›ed ›o ›he same ›ax’
(paragraph 29 of ›he judgmen›).
EC TAX REVIEW 2003/P
ln order ›o examine whe›her ›he coherence~
jus›ifica›ion could be invoked, ›he Hoge Raad eluci~
da›ed ex›ensively on ›he scope of ›he Du›ch par›icipa~
›ion exemp›ion and ›he holding cos›s deduc›ion
limi›a›ion. Of special no›e is ›ha› ›he Hoge Raad
examines where ›he cos›s should belong under Du›ch
law. Should ›ha› be ›he Member S›a›e of ›he paren›
company, ›hus ›he law follows a ‘legal cos› alloca›ion’
›ha› links ›o ›he deb›or. Or is i› so ›ha› ›he law follows
a ‘›erri›orial cos› alloca›ion’ ›ha› is linked ›o ›he place
where ›he profi› is made wi›h which ›he cos›s are
economically coheren›.
According ›o ›he Hoge Raad, ›he scope of ›he
par›icipa›ion exemp›ion is ›ha› in ›he ma››er of ›he
profi› genera›ed by ›he subsidiary, corpora›ion ›ax is
no› levied ›wice, ›o wi›, firs› from ›he subsidiary and
›hen af›er ›he profi› dis›ribu›ion of ›he paren›
company. Yhe Hoge Raad ›hen draws a dis›inc›ion
be›ween ›he effec› of ›he par›icipa›ion exemp›ion in a
domes›ic and a foreign si›ua›ion:
a) in domes›ic rela›ionships, ›here is preven›ion of
double ›axa›ion in one and ›he same Member
S›a›e. Yhe Hoge Raad compares ›he effec› of ›he
par›icipa›ion exemp›ion wi›h a ›axa›ion levy as if
›he subsidiary were consolida›ed wi›h ›he paren›
company (ex›ension concep›);
b) in foreign rela›ionships, ›here is preven›ion of
double ›axa›ion levied by various Member S›a›es.
Al›hough ›he Hoge Raad does no› consider ›his
explici›ly, i› appears ›ha› ›he Hoge Raad also carries
›hrough ›he comparison wi›h ›he ex›ension con~
cep› ›o foreign rela›ionships.29
Yur›hermore, ›he Hoge Raad indica›es ›ha› wi›h ›he
holding cos›s deduc›ion, accoun› has been ›aken in
›he law wi›h ›he words ‘indirec›ly ins›rumen›al’,
whereby, a link is made be›ween ›he holding cos›s
made by ›he paren› company and ›he ›axable profi›
made by ›he subsidiary. Yhe Hoge Raad again
emphasises ›ha› ›here is ›hus an economic connec›ion
be›ween ›he holdings cos›s of ›he parent company and
›he profi› of ›he svbsidiary and ›ha›, al›hough ›he
holdings cos›s are ›aken in›o considera›ion a› paren›
company level, ›here is no connec›ion be›ween ›he
holdings cos›s of ›he parent company and ›axable profi›
of ›he parent company.30 Clearly here, for domestic
si›ua›ions, ›he Hoge Raad makes a connec›ion be›ween
›wo differen› ›axpayers. Yur›her in ›he judgmen›, ›he
Hoge Raad carries ›hrough ›his connec›ion (and ›he
ex›ension concep›) ›o ›he applicabili›y of ›he par›icipa~
›ion exemp›ion in ∫oreign si›ua›ions. Yhe Hoge Raad
acknowledges namely, ›ha› also in ›he even› where i›
concerns a foreign subsidiary, ‘an economic coherence
2S
See Case 20P/90, Bachmann, ]1992] ECR l~2P9.
26
Case 208/00, Überseering BV and NCC, ]2002] ECR l~9919,
paragraph 93.
23
Opinion of Advoca›e General Jacobs in Case C~136/00, Danner,
]2002] ECR l~81P3, poin› P0.
28
Case C~20P/90, Bachmann ]1992] ECR l~2P9; Case C~300/90
Commission v Belgivm ]1992] ECR l~30S.
29
See paragraph 3.P.3 of ›he judgmen› of ›he Hoge Raad.
30
See paragraph 3.P.2 of ›he judgmen› of ›he Hoge Raad.
22S
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
exis›s be›ween ›he holdings cos›s and ›he profi› of ›he
subsidiary’. l› ›hen considers ›ha› al›hough ›here is
such an economic coherence, in foreign si›ua›ions
coherence of cos›s and ›axable profi› wi›hin one
›axa›ion sys›em is lacking.
Yhis is ›he crux of ›he issues. Yhe Hoge Raad firs›
indica›es ›ha› ›he deduc›ion of ›he holding cos›s is
correc› on principle (flowing from ›he ex›ension
concep›). Subsequen›ly, ›ha› ›here is an (economic)
coherence (connec›ion) be›ween ›he holding cos›s a›
paren› company level and profi› of ›he subsidiary, and
finally, ›ha› ›his coherence is breached in foreign
rela›ionships given ›ha› ›he profi› of ›he subsidiary is
ou›side ›he jurisdic›ion of ›he Ne›herlands. l› flows
from ›his considera›ion ›ha› ›he Ne›herlands sys›em
res›s on ›wo concep›s: on ›he one hand, ›he Ne›her~
lands follows ›he ›erri›orial cos› alloca›ion on ›he basis
of ›he ex›ension concep› given ›ha› for ›he ques›ion of
whether ›he cos›s are deduc›ible, ›he cos›s are alloca›ed
›o ›he ›erri›ory where ›he subsidiary makes profi›. On
›he o›her, ›he ex›ension concep› is no› carried ›hrough
›o ›he ex›en› ›ha› ›he paren› company and ›he
subsidiary are ac›ually consolida›ed for ›ax purposes.
Yhe cos›s, namely, can ul›ima›ely be brough› for
deduc›ion by ›he paren› company which, from a legal
poin› of view, is ›he deb›or. Yhe Hoge Raad does no›
doub› ›he fac› ›ha› ›he Du›ch concept behind ›he rule is
a coheren› sys›em. Yhe approach of Du›ch law res›ing
on ›wo concep›s did cause ›he Hoge Raad doub›,
however, on which basis ›he Supreme Cour› was no›
cer›ain if ›he coherence~jus›ifica›ion could successfully
be invoked and ›herefore decided ›o ask preliminary
ques›ions. Before dealing wi›h ›hese poin›s of doub› of
›he Hoge Raad, a››en›ion mus› firs› be devo›ed ›o ›he
fac› ›ha› o›her ›o ›he Hoge Raad, ›he ECJ sees no direc›
link wha›soever whereby ›he coherence is safe~
guarded:
Having firs› brough› ›o mind ›ha› ›he direc› link can
be lacking, for example, because ‘one is dealing wi›h
differen› ›axes or ›he ›ax ›rea›men› of differen›
›axpayers’, ›he ECJ gives four reasons for ›he lack of
›he direc› link:
i) No linh between granting tax advantage to parent
companies and the tax system relating to svbsidiaries
‘Nor is ›here any direc› link be›ween, on ›he one hand,
›he gran›ing of a ›ax advan›age (›he righ› ›o deduc› cos›s
connec›ed wi›h holdings in ›he capi›al of ›heir subsidi~
aries from ›heir ›axable profi›) ›o paren› companies
es›ablished in ›he Ne›herlands and, on ›he o›her, ›he ›ax
sys›em rela›ing ›o ›he subsidiaries of paren› companies
where ›he la››er are es›ablished in ›ha› Member S›a›e’
(paragraph 31 of ›he judgmen›).
l sincerely do no› unders›and ›his considera›ion. l
am unclear as ›o wha› ›he ECJ uses as comparison and
why. l› would almos› seem ›ha› ›he ECJ does no› see a
direc› link be›ween gran›ing of a tax advantage ›o
paren› companies and ›he tax system rela›ing ›o
subsidiaries. Yrankly, l do no› see ›his direc› link
ei›her, bu› ›his is mainly because i› does no› concern
such coherence. Of no›e is ›ha› i› can be derived from
›he Repor› for ›he Hearing31 ›ha› ›he Ne›herlands and
22P
›he Uni›ed Kingdom have very poorly indica›ed wha›
precise coherence ›hey mean. Yhe Hoge Raad however,
has reflec›ed precisely and ›o grea› ex›en› (see above)
›ha› an economic coherence exis›s be›ween ›he
holdings cos›s of ›he paren› company and ›he profi›
of ›he subsidiary, bu› ›ha› when i› concerns a
subsidiary wi›h foreign profi›, ›he coherence of cos›s
and ›axable profi› is lacking wi›hin one ›axa›ion
sys›em. Yhese considera›ions of ›he Hoge Raad are no›
con›ained in ›he Repor› for ›he Hearing, bu› i› would
appear ›o follow from paragraph 19 of ›he judgmen›
›ha› ›he ECJ has finally unders›ood wha› coherence
was being invoked. ln ›ha› framework, paragraph 31
quo›ed above is surprising. l› would appear ›o
concern an en›irely differen› coherence, ›o me,
incomprehensible. However, assume ›ha› ›he ECJ
was considering ›he same coherence as ›ha› referred
›o by ›he Hoge Raad. Yhen i› is remarkable ›ha› ›he
ECJ rejec›s ›he direc› link wi›hou› subs›an›ia›ion (›he
ECJ states namely only ›ha› ›here is no coherence),
›here where ›he Hoge Raad came ›o a well~subs›an~
›ia›ed conclusion ›ha› ›here was a direc› link. All in all,
l am no› en›irely impressed wi›h ›he rejec›ion of ›he
direc› link.
ii) Parent companies and svbsidiaries are distinct legal
persons (di∫∫erent taxpayers)
‘Unlike opera›ing branches or es›ablishmen›s, paren›
companies and ›heir subsidiaries are dis›inc› legal
persons, each being subjec› ›o a ›ax liabili›y of i›s own,
so ›ha› a direc› link in ›he con›ex› of ›he same liabili›y ›o
›ax is lacking and ›he coherence of ›he ›ax sys›em canno›
be relied upon’ (paragraph 32 of ›he judgmen›).
Wi›h ›his considera›ion, ›he ECJ con›inues ›he
s›ringen› case law ›ha› ›here can only a direc› link if
›here is a link for ›he same ›axpayer and for ›he same
›ax. Yhe ECJ considers ›ha› ›here is no ques›ion of a
direc› link in ›he con›ex› of ›he same liabili›y ›o ›ax,
given ›ha› ›here are dis›inc› legal persons, each being
svbject to a tax liability o∫ its own. Again here, we see
›ha› ›he ECJ holds no apprecia›ion of ›he considera~
›ions of ›he Hoge Raad ›ha› form ›he basis of ›he
preliminary referral. ln i›s judgmen›, ›he Hoge Raad
compares ›he effec› of ›he par›icipa›ion exemp›ion
wi›h a ›ax levy as i∫ ›he subsidiary were consolidated
wi›h ›he paren› company (ex›ension concep›). Yhe
Hoge Raad ›hus indica›es ›ha› ›he sys›em in ›he
Ne›herlands s›ar›s from ›he assump›ion of ›erri›orial
cos› alloca›ion, whereby for ›he ques›ion of whe›her
›he cos›s are deduc›ible, i› makes no difference ›ha›
›here are legally differen› ›axpayers. Yhe ECJ ignores
›his en›irely, which in fac› implies ›ha› ›his considera~
›ion is no› based on ›ha› which ›he Hoge Raad had
es›ablished on ›he Ne›herlands sys›em. ln fac›, ›he
judgmen› has a shor›coming and on ›his basis, ›he
conclusion canno› be arrived a› ›ha›, in ›his case, ›here
is no direc› link.
31
ln ›his Repor›, ›he fac›s, ›he na›ional provisions ›he relevan›
Communi›y law and ›he wri››en remarks of ›he par›ies are
described and are used by ›he ECJ as basis of ›he judgmen›.
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THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
Accordingly, ›his considera›ion gives rise ›o ›he
ques›ion of whe›her paragraph 32 of ›he judgmen›
could have been differen› in a si›ua›ion in which ›he
ECJ is expressly aware ›ha› we have dis›inc› legal
persons, each being subjec› ›o a ›ax liabili›y of i›s own,
bu› where ›he ›ax provision for ›he ›erri›orial division
of cos›s and profi›s starts ∫rom the assvmption of one
›axpayer (such as in Bosal Holding). Yhis will be
presumably no› ›he case and we can expec› ›ha› ›he
ECJ will uphold i›s s›ar›ing poin› ›ha› ›he ›ax
›rea›men› of a ›axpayer can only be made dependen›
on i›s own proceeds and cos›s and no› on ›hose of
ano›her ›axpayer.32
No ma››er, wi›h ›his considera›ion ›he ECJ has
clearly res›ric›ed ›he sovereign›y of ›he Member S›a›es.
Namely, ›here are mul›iple na›ional ›ax provisions on
which ›he ›ax posi›ion of a ›axpayer is dependen› on
›ha› of ano›her ›axpayer. Yhis is par›icularly ›he case in
various special group provisions known in ›he various
Member S›a›es (see fur›her on ›his subjec› in
paragraph P).
iii) Limitation o∫ dedvctibility o∫ costs not compensated
∫or by corresponding tax advantage
‘Moreover, ›he limi›a›ion of ›he deduc›ibili›y of cos›s
incurred by a paren› company es›ablished in ›he Ne›her~
lands in connec›ion wi›h i›s holdings in ›he capi›al of
subsidiaries es›ablished in o›her Member S›a›es is no›
compensa›ed for by a corresponding advan›age’ (para~
graph 33, firs› sen›ence).
Yhis considera›ion is somewha› curious because i›
looks as if ›he ECJ has reversed ›he applicable
condi›ions of ›he coherence~jus›ifica›ion. lns›ead of
requiring ›ha› ›here be an advan›age ›ha› is compen~
sa›ed by a disadvan›age, ›he ECJ ques›ions whe›her
›here is a disadvan›age ›ha› is compensa›ed by an
advan›age.
lf ›he coherence~jus›ifica›ion is ›o be invoked ›here
mus› be, as ›he ECJ i›self remarks, a direc› link in ›he
case of one and ›he same ›axpayer, be›ween ›he
gran›ing of a ›ax advan›age and ›he offse››ing of ›ha›
advan›age by a ›ax levy. Yor example, pension
premiums are ›ax deduc›ible (= ›he ‘›ax advan›age’)
and ›his ›ax deduc›ion is la›er compensa›ed by ›he ›ax
levy on ›hese pension benefi›s (= ›he ‘fiscal levy’).
Subsequen›ly, ›here mus› be a si›ua›ion in which if use
is made in ›he case of free movemen›, ›he coherence is
breached because no ›ax is levied on, using our
example, ›he pension benefi›s. lf ›here is a breach of ›he
coherence, ›his may be repaired by refusing ›he ›ax
deduc›ion. According ›o ›he Hoge Raad, in ›he case in
ques›ion ›here was economic coherence be›ween ›he
deduc›ibili›y of ›he holdings cos›s (= ›he ‘›ax
advan›age’) and ›he profi› of ›he subsidiary (= ›he
‘fiscal levy’). Yhis coherence is breached, however, if
use is made of ›he free movemen› given ›ha› for a
foreign subsidiary wi›h foreign profi›, ›he coherence
be›ween ›he holdings cos›s and ›he ›axable profi›
wi›hin one ›axa›ion sys›em is lacking, according ›o ›he
Hoge Raad. ln such si›ua›ion, ›he Ne›herlands may no
longer impose a levy on ›he profi› of ›he foreign
subsidiary. ln ›he case in ques›ion, ›he ECJ wonders
226
whe›her ›he measure wi›h which ›he coherence is
repaired (›he holding cos›s deduc›ion limi›a›ion) is
compensa›ed because ›here is an advan›age ›ha› can be
se› off agains› i›. ln fac› here, ›he ECJ ›hus ques›ions
whe›her ›he coherence in ›he even› ›ha› use is made of
›he free movemen› has indeed been breached (breach~
ing of ›he coherence gives namely a ›ax advan›age
given ›ha› no compensa›ing levy can be imposed).
According ›o ›he ECJ, ›his is no› ›he case, al›hough why
is no› made clear. Yhis is remarkable given ›ha› ›he
Hoge Raad had ruled ›ha› ›he coherence had indeed
been breached, because ›he Ne›herlands canno› levy
›ax in ›he case of a foreign subsidiary ›ha› has foreign
profi›. Yha› ›hus is ›he ‘advan›age’ ›he ECJ was seeking.
Here also i› becomes clear ›ha› ›he ECJ en›irely
disregards ›he considera›ions of ›he Hoge Raad.
iv) Holding costs shovld normally be dedvctible
Yhe effec› of implemen›ing ›ha› limi›a›ion appears ›o be
›ha› cos›s which should normally be deduc›ible are no›
›aken in›o considera›ion when calcula›ing ›he amoun› of
›he ›ax liabili›y. Such over ›axa›ion canno› be jus›ified by
reference ›o ›he need ›o preserve ›he coherence of ›he ›ax
sys›em (paragraph 33, las› sen›ence and 3P of ›he
judgmen›).
Of no›e here is ›he remark of ›he ECJ ›ha› ›he
holding cos›s, ‘appear ›o be cos›s which should
normally be deduc›ible are no› ›aken in›o considera~
›ion when calcula›ing ›he amoun› of ›he ›ax liabili›y’.
Yrue, ›he ECJ carefully uses ‘appears ›o be’ bu› here,
i› assumes wi›hou› subs›an›ia›ion ›ha› ›he holding
cos›s should always be deduc›ible a› paren› company
level. Yhis is amazing given ›ha› ›he Hoge Raad had
es›ablished ›ha› in ligh› of ›he ex›ension concep›,
economic coherence exis›s be›ween ›he holdings cos›s
and ›he profi› of ›he svbsidiary. Yor ›he ques›ion of
whe›her ›here is a righ› of deduc›ion, based on a
›erri›orial cos›s alloca›ion, i› mus› be examined ›o
which ›erri›ory ›he profi› of ›he subsidiary should be
alloca›ed. Yhe holding cos›s can only be deduc›ed by
›he paren› company bu› ›hey are no› cos›s ›ha› cohere
›o ›he profi› of ›he paren› company. Yhe Hoge Raad
had made ›he following explici› remark: ‘Al›hough ›he
holdings cos›s of ›he paren› company are ›aken in›o
considera›ion ›he considera›ion is not ]based on] ›he
ground ›ha› ›he deduc›ion could find jus›ifica›ion in
›he exis›ence of any connec›ion be›ween ›he holdings
cos›s and ›he profi› genera›ed by ›he parent company’
(i›alics, DMW).
Yhe ECJ was probably confused because ›he Du›ch
sys›em res›s on ›wo concep›s: Yhe sys›em follows ›he
›erri›orial cos›s alloca›ion for ›he ques›ion of whe›her
›he cos›s are deduc›ible; however, ›he ul›ima›e
deduc›ion ›akes place a› ›he level of ›he legal deb›or
(›he paren› company). Never›heless, i› appears ›ha›
32
Yur›hermore, ›he considera›ion gives rise ›o ›he ques›ion,
al›hough no› relevan› in ›his case, of whe›her in ›he even› ›wo
dis›inc› legal persons are in ∫act deemed one ›axpayer (such as in
›he Ne›herlands under ›he fiscal uni›y of prior ›o 2003), ›here
can be a ques›ion of a direc› link in cer›ain cases.
EC TAX REVIEW 2003/P
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE

again here, ›he ECJ has given an incorrec› reflec›ion of ›hese issues by deciding ›ha› Member S›a›es ›ha› do
›he Du›ch sys›em. no› allow ›he cos›s deduc›ion from ›he paren›
l› could also be ›ha› ›he ECJ in fac› mean› ›o say company mus› be consis›en› and in ›he reverse
›ha› ›he holdings cos›s mvst be deduc›ible a› ›he level si›ua›ion (paren› company es›ablished abroad: sub~
of ›he parent company. ln ›ha› case, ›he ECJ would sidiary wi›h profi› in ›he Ne›herlands) allow ›his
follow a legal cos›s alloca›ion. lf so, l feel ›he ECJ deduc›ion a› subsidiary level.
would be going ›oo far. l› is no› ›he ›ask of ›he ECJ ›o
rule ›ha› ›he cos›s shovld be deduc›ible and in what S.4.S. Yke points oJ doubt oJ tke Hoge Raad about tke
Member S›a›e ›he cos›s are deduc›ible (›hus ›o elec› cokerence~¡ustiJication
›he legal or ›he ›erri›orial cos›s alloca›ion). By doing
Af›er ›he considera›ions se› ou› above, ›he ECJ deals
so, ›he ECJ would be ac›ing in an area ›ha› belongs ›o
wi›h ›he poin›s of doub› ›he Hoge Raad had wi›h
›he sovereign›y of ›he Member S›a›es.33 As ›he ECJ
applica›ion of ›he coherence~jus›ifica›ion.3S
i›self considered in Fvtvra Participations: ‘As ye›, no
Yhe firs› poin› of doub› lies in ›he fac› ›ha› ›he
provision has been made for harmonizing domes›ic
coherence be›ween deduc›ion of ›he holdings cos›s
rules rela›ing ›o de›ermina›ion of ›he basis of
from ›he paren› company and ›he ›axable profi› from
assessmen› ›o direc› ›axes. Consequen›ly, each Mem~
›he subsidiary is no› based on a pure applica›ion of ›he
ber S›a›e draws up i›s own rules governing ›he
principle ›ha› proceeds and cos›s a››ribu›able ›here›o
de›ermina›ion of profi›s, income, expendi›ure, deduc~
should be ›rea›ed coheren›ly from a ›ax poin› of view.
›ions and exemp›ions as well as ›he amoun›s in
According ›o ›he Hoge Raad, ›he ›ax ›rea›men› lacks
respec› of each of ›hem which may be included in ›he
‘sys›ema›ic coherence’, because firs›, ›he holdings
calcula›ion of ›axable income or of losses which may
cos›s can be deduc›ed from ›he profi› of ›he paren›
be carried forward’. Yhe ECJ mus› have implici›ly
company irrespec›ive of how much profi› ›he sub~
reversed ›his decision in Bosal Holding and in my view,
sidiary has made (even if ›he subsidiary did no› make
›ha› could never have been ›he in›en›ion.
any profi› in ›ha› year36), and second, in ›he reverse
Or does ›he ECJ mean ›ha› on ›he basis of
case, in which ›he subsidiary does make a profi› and
Commvnity law ›he holdings cos›s belong ›o ›he
›he paren› company does no›, if viewed as consoli~
paren› company and ›hus a legal cos›s alloca›ion
da›ed ›he holdings cos›s have no influence on ›he ›ax
mus› be followed. Yhis because Ar›icle P(2) of ›he
on ›he profi› of ›he subsidiary. ln brief: wi›h ›he sys›em
Paren›~Subsidiary Direc›ive lays down ›ha› a Member
now in force, deduc›ibili›y of ›he holdings cos›s in
S›a›e is allowed no› ›o deduc› ›he cos›s from ›he profi›
domes›ic si›ua›ions is some›imes earlier and some~
of ›he parent company and ›hus ›hey belong ›o ›his
›imes la›er ›han should be ›he case based on a pure
legal en›i›y. Yha› would be s›ar›ling and canno› be
alloca›ion of proceeds and cos›s. Yhere is ›hus a
expressly derived from ›he judgmen›. ln addi›ion,
difference in timing in ›he sys›em. ln ligh› of ›he
precise ›he con›rary can be derived from Ar›icle P(2) of
foregoing considera›ions, i› could have been expec›ed
›he Direc›ive: because ›his Ar›icle allows ›ha› ›he
›ha› ›he ECJ would seize on ›he lack of sys›ema›ic
holding cos›s are no› deduc›ible a› paren› company
coherence so ›o deem ›ha› ›here was no ques›ion of a
level, ›his Ar›icle assumes ›ha› in such case, ›he cos›s
direc› link. Yhe ECJ does no› add why ›here is no
belong ›o ›he jurisdic›ion of ›he Member S›a›e of ›he
ques›ion of a direc› link. Apparen›ly i› deems ›ha› self~
subsidiary and ›hus ›he ›erri›orial cos›s alloca›ion
explana›ory and requires ›ha› ›here can only be a
mus› be followed. l› mus› ›herefore be observed ›ha›
ques›ion of a direc› link if ›he proceeds and cos›s are
›he Direc›ive simply allows ›he Member S›a›es ›o elec›
direc›ly rela›ed.
›he legal or ›erri›orial cos›s alloca›ion.
Yhe second poin› of doub› of ›he Hoge Raad was ›he
Wha› should be no›ed for ›ha› ma››er, bu› did no›
fac› ›ha› ›he Ne›herlands inconsis›en›ly applied ›he
come up in ›hese proceedings, is ›ha› if ›he deduc›ion
coherence referred ›o. Yhe concep› ›ha› ›he cos›s
of ›he holdings cos›s a› ›he level of ›he paren›
deduc›ion limi›a›ion is jus›ified because ›he coherence
company is no› allowed on ›he basis of Ar›icle P(2)
of ›he na›ional ›ax sys›em is secured implies in fac›
of ›he Paren›~Subsidiary Direc›ive, ›he Direc›ive does
›ha› in si›ua›ions where ›hese cos›s are no› deduc›ible,
no› solve ›he problem of ›he holding cos›s ac›ually
›he holdings cos›s mus› ›hen be considered by ›he
›hen being deduc›ible by ›he subsidiary in ›he o›her
Member S›a›e of ›he svbsidiary, ›hus abroad. ln ›he
Member S›a›e. Yhis leaves ›he chance open (which will
reverse case, however (paren› company es›ablished in
vir›ually always be so in prac›ice) ›ha› ›he holdings
ano›her Member S›a›e and subsidiary wi›h profi› in ›he
cos›s are no› be deduc›ible anywhere, ›hey will end up
Ne›herlands), ›he Ne›herlands does no› apply ›his
in no man’s land. By no› providing a solu›ion for ›his,
i› can be defended ›ha› ›he Paren›~Subsidiary Direc›ive
crea›es a dispari›y. Yhis would imply ›ha› Ar›icle P(2)
of ›he Direc›ive could be in conflic› wi›h Communi›y
33
See also in ›ha› sense ›he ar›icle wor›h reading of: R.A.V. Boxem,
HvJ EG, quo vadis me› he› paard ach›er de wagen? (he› rech› op
law. Yhis follows from an analogous applica›ion of ›he na›ionale behandeling, dispari›ei›en en in›ern inconsis›en›e
Pinna case3P (ruled for Ar›icle S1 EEC Yrea›y, ›he we›geving), Weekblad Yiscaal Rech›, 2003/6SP0, pp. 1231-
presen› Ar›icle P2 EC) in which ›he ECJ considered 1238, a› p. 1236 and p. 1233.
›ha› Communi›y rules ‘mus› refrain from adding ›o ›he 3P
Case P1/8P, Pinna/Caisse d’allocations ∫amiliales de la Savoie
dispari›ies which already s›em from ›he absence of ]1986] ECR 1.
3S
See paragraphs 3.P.P. and 3.P.S. of ›he judgmen› of ›he Hoge
harmoniza›ion of na›ional legisla›ive rules’. Raad and paragraph 1S of ›he judgmen› of ›he ECJ.
Yhe ECJ could have, for ›ha› ma››er, par›ly resolved 36
See Hoge Raad, 26 January 2000, BNB 2000/160.

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THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
principle. Even if a› paren› company level ›he
deduc›ion of ›he holding cos›s are refused by a similar
deduc›ion limi›a›ion abroad, ›he Ne›herlands s›ill does
no› allow deduc›ibili›y of ›hese cos›s a› subsidiary
level. Yhe Hoge Raad had explici›ly asked ›he ECJ
whe›her ›his reversed inconsis›en› ›rea›men› was
relevan› (›he second ques›ion; see above), bu› as has
been remarked, ›he ECJ ›rea›ed ›hese ›wo ques›ions as
one. Advoca›e General Alber deal› explici›ly wi›h ›he
second ques›ion and arrived a› ›he conclusion ›ha› ›he
inconsis›en› ›rea›men› was no› relevan›, however, i›
appears from his Opinion ›ha› he did no› recognise ›he
issues ›ha› were a› hand. ln paragraph 36, ›he ECJ
deals wi›h ›he issue and considers ›ha› on ›he basis of
›his inconsis›ency ‘one is en›i›led ›o qvestion ›he
coherence of a sys›em of ›axa›ion’ (i›alics, DMW). Yhe
ECJ ›hus gives no answer ›o ›he ques›ion of whe›her
›he inconsis›ency ›ha› had been ou›lined was relevan›,
i› only s›a›es ›ha› one can qvestion ›he coherence of a
sys›em of ›axa›ion. A very peculiar considera›ion,
cer›ainly in ligh› of ›he fac› ›ha› ›he Hoge Raad had pu›
a ques›ion on ›his issue explici›ly before ›he ECJ.
l share ›he view of Advoca›e General Wa››el of ›he
Hoge Raad33 and of ›he European Commission ›ha› in
i›self, ›his inconsis›ency does no› prejudice ›he
applicabili›y of ›he jus›ifica›ion ground concerning
›he ›ax coherence. Complain›s can be made abou› ›his
inconsis›ency, bu› only in ›hose si›ua›ions where a
subsidiary is es›ablished by a foreign paren› company
in ›he Ne›herlands ›ha› wishes ›o deduc› ›he holdings
cos›s i› has made.
S.4.4. Principte oJ territoriatity
Yhe Ne›herlands Governmen› had also invoked ›he
principle of ›erri›oriali›y, as recognised by ›he ECJ in
Fvtvra Participations.38 Yha› ›he ECJ deal› wi›h ›his
principle af›er ›he coherence~jus›ifica›ion is s›riking
and, in ›he firs› ins›ance, gives ›he impression ›ha› ›his
concerns a jus›ifica›ion ground. ln my view, ›he
applica›ion of ›he principle of ›erri›oriali›y concerns
›he ques›ion of whe›her ›here are similar si›ua›ions,
›hus, whe›her or no› ›here is a ma››er of discrimina~
›ion. Apar› from ›his, by rejec›ing ›he Ne›herlands
s›ance, i› would appear ›ha› ›he ECJ is of ›he opinion
›ha› ›here is a ma››er of compara›ive cases and in ›he
end (righ›fully) ›rea›s ›he principal of ›erri›oriali›y as a
discrimina›ion issue.
ln Fvtvra Participations, ›he ECJ accep›s ›ha› for a
righ› ›o ›he carrying forward of losses, reques›ed by a
non~residen› wi›h a permanen› es›ablishmen› in
ano›her Member S›a›e, ›he permanen› es›ablishmen›
s›a›e may se› ›he condi›ion ›ha› ›he losses mus› be
economically rela›ed ›o ›he income earned by ›he
›axpayer in ›ha› S›a›e, provided ›ha› residen› ›axpayers
do no› receive more favourable ›rea›men›. According
›o ›he ECJ ‘such a sys›em, which is in conformi›y wi›h
›he fiscal principle of ›erri›oriali›y, canno› be regarded
as en›ailing any discrimina›ion, over› or cover›,
prohibi›ed by ›he Yrea›y.’
On ›he basis of ›he principle of ›erri›oriali›y, ›he
Ne›herlands argue ›ha› ›he cos›s in connec›ion wi›h
ac›ivi›ies abroad, including financing cos›s and cos›s in
228
rela›ion ›o holdings, should be se› off agains› ›he
profi›s genera›ed by ›hose ac›ivi›ies and ›he deduc›ion
of ›hose cos›s is linked solely ›o ›he making or non~
making of profi›s ou›side ›he Ne›herlands. Yhis
argumen› is in line wi›h ›he opinion of ›he Hoge Raad:
we have remarked before ›ha› according ›o ›he Hoge
Raad, on ›he basis of ›he objec›ive of ›he rule, ›here is a
connec›ion be›ween ›he holding cos›s made by ›he
parent and ›he profi› of ›he svbsidiary. An economic
coherence does exis› be›ween ›he holding cos›s and
›he profi› of ›he subsidiary.
According ›o ›he Ne›herlands Governmen›, ›ha› is
why ›here is no ques›ion of discrimina›ion because
›here is no comparison be›ween subsidiaries wi›h
›axable profi› in ›he Ne›herlands and subsidiaries wi›h
›axable profi› abroad. ln my view, ›he Ne›herlands was
holding a ›rump card. Yhis was ›he crux of ›he ma››er.
Yhis can be seen from ›he fac› ›ha› bo›h Advoca›e
General Wa››el of ›he Hoge Raad and ›he European
Commission suppor›ed ›his poin› of view. Yhe ECJ,
however, would hear no›hing of ›his poin› of view. l›
rejec›s ›his, no›ably for ›wo reasons:
● Applica›ion of ›he principle of ›erri›oriali›y in ›he
Fvtvra Participations case rela›ed ›o one ›axpayer
(paragraph 38);
● Yhe argumen› ›ha› ›here is no comparison be›ween
subsidiaries wi›h domes›ic and foreign profi› is
irrelevan›; ›his case concerns ›he ›ax ›rea›men› of
›he paren› company; i› is es›ablished ›ha› ›he profi›s
of ›he subsidiaries are no› ›axable in ›he hands of
›he paren› company (paragraph 39).
On balance, ›he ECJ ›hus rejec›s ›he invoking of ›he
principle of ›erri›oriali›y because ›his can only be
applied ›o one ›axpayer, and i› concerns ›he domes›ic
profi› of ›he paren› company and no› ›he domes›ic or
foreign profi› of ›he subsidiary. Again, i› is clear ›ha›
jus› as wi›h ›he coherence~jus›ifica›ion, ›he ECJ does
no› deal fur›her wi›h ›he judgmen› of ›he Hoge Raad
›ha› on ›he basis of ›he ex›ension concep›, economic
coherence does exis› be›ween ›he holdings cos›s made
by ›he paren› company and ›he profi› of ›he
subsidiary, whereby for ›he ques›ion of whe›her ›he
cos›s are deduc›ible, ›he fac› ›ha› ›here are ›wo
independen› ›axpayers is no› relevan›. Basically ›he
ECJ argues ›ha› ›he principle of ›erri›oriali›y should
always be applied ›o each individual ›axpayer and ›ha›
for ›he ques›ion of whe›her ›hese cos›s are deduc›ible,
cos›s ›ha› are legally made by a ›axpayer should no› be
alloca›ed ›o ano›her ›axpayer. ln o›her words: ›his in
i›self may be done, bu› a disadvan›ageous dis›inc›ion
may no› be drawn if ›he cos›s are ›o be alloca›ed ›o a
foreign ›erri›ory. We see ›ha› ›he ECJ holds a view on
›he principle of ›erri›oriali›y o›her ›o ›ha› which we see
in ›ax law. Levying ›ax on ›he basis of ›he principle of
›erri›oriali›y en›ails ›ha› income and cos›s are ›aken
in›o considera›ion by a s›a›e for ›he de›ermining of ›he
›axable income if ›hese income and cos›s can be
33
See poin› 3.12. of his Opinion.
38
Case C~2S0/9S Fvtvra Participations and Singer ]1993] ECR l~
2P31, paragraph 22.
EC TAX REVIEW 2003/P
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
impu›ed ›o ›he ›erri›ory of ›ha› s›a›e. Yhe principle of
›erri›oriali›y does no› resis› ›ha› cos›s being ›aken in›o
considera›ion a› a ›axpayer o›her ›han ›he one who
ac›ually made ›hese cos›s. Yhe ECJ however, a››aches a
res›ric›ed subs›ance of ›his principle wi›hin ›he EC.
Again ›he ques›ion arises as ›o whe›her ›he ECJ is no›
encroaching on ›he sovereign›y of ›he Member S›a›es.
ln my view, Communi›y law con›ains no men›ion of
›he ›erri›orial principle and, in principle, leaves ›he
subs›ance ›o ›he prac›ice of ›he Member S›a›es. Wha›
›he ECJ could have said bu› did no› is ›ha› ›he
Ne›herlands mus› be consis›en› in i›s applica›ion of
›he ›erri›oriali›y principle. Yhe Ne›herlands should
›hus no› only address ›he ques›ion of whe›her ›he
cos›s are deduc›ible on ›he basis of ›he ›erri›orial cos›s
alloca›ion, ›hey should also deduc› ›he cos›s a›
subsidiary level. Wha› ›he ECJ does in ›his case is far
more s›ringen›. l› would seem ›ha› on no accoun› will
›he ECJ allow ›he cos›s ›ha› are (legally) made by a
legal en›i›y, in ›his case ›he paren› company, ›o be
alloca›ed ›o ano›her legal en›i›y, in ›his case ›he
subsidiary. Yha› ›his approach is ›oo s›ringen›, also
from a Communi›y law poin› of view, is apparen› from
›he following example:
Assume ›ha› Du›ch legisla›ion should de›ermine ›ha› ›he
holding cos›s are deduc›ible by ›he subsidiary in ›he
even› i› has ›axable profi› in ›he Ne›herlands (for ›he
reason ›ha› ›he cos›s are economically connec›ed wi›h ›he
profi› of ›he subsidiary). Assume ›ha› ›he Ne›herlands
de›ermines ›his for holding cos›s made bo›h by a paren›
company residen› abroad and by a paren› company
residen› in ›he Ne›herlands. Yhe legisla›or would ›hen in
fac› and consis›en›ly apply a ›erri›orial cos›s alloca›ion.
Would ›he ECJ s›ill hold ›ha› in ›he even› of a paren›
company residen› in ›he Ne›herlands wi›h a subsidiary
›ha› makes foreign profi›, ›he holding cos›s mus› be
deduc›ed from ›he profi›s of ›he paren› company residen›
in ›he Ne›herlands? Yhis because on ›he basis of ›he
›erri›oriali›y principle ›he Ne›herlands may no› alloca›e
›he cos›s made by ›he paren› company ›o ›he profi› of ›he
subsidiary. l› is difficul› ›o imagine bu› s›ric› applica›ion
of ›he Bosal Holding judgmen› does en›ail ›his. Presum~
ably, ›he ECJ would s›ill deny ›he deduc›ion a› ›he Du›ch
paren› company level and sligh›ly modify ›he s›ringen›
approach ›ha› follows from Bosal Holding referring ›o a
difference in si›ua›ion. lf no›, ›he Member S›a›e would
refer ›o ar›icle P(2) of ›he Paren›~Subsidiary Direc›ive ›ha›
allows ›he refusal of ›he holding cos›s deduc›ion a› paren›
company level in such case.
Yhe conclusion is ›ha› in ›es›ing ›he ›erri›oriali›y
principle, ›he ECJ (again) fails ›o ›ake accoun› of ›he
ex›ension concep› and besides, s›ringen›ly applies ›his
principle.
4. †he influence of Bosal Holding on Special
Group provisions in the EU
Yhe judgmen› of ›he ECJ ›ha› ›he paren› companies
and subsidiaries are dis›inc› legal en›i›ies whereby ›he
coherence~jus›ifica›ion canno› be applied and ›he
judgmen› ›ha› ›he principle of ›erri›oriali›y can only
be applied per ›axpayer can be of significan› influence
›o ›he applica›ion of Group provisions in ›he EU.
EC TAX REVIEW 2003/P
Curren›ly mos› relevan› in ›his framework, is ›he
hea›ed deba›e in ›he Uni›ed Kingdom on ›he issue of
whe›her ›he Group relief for losses is in conformi›y
wi›h ›he righ› of es›ablishmen›. On ›his issue, on 23
May 2003, a Group Li›iga›ion Order (‘GLO’) was filed
wi›h ›he UK High Cour›.39 ln addi›ion, ›he Marhs 9
Spencer case is pending. ln ›his case, ›he Special
Commissioners have rejec›ed conflic› wi›h ›he righ› of
es›ablishmen›,P0 bu› ›he case is now pending before
›he UK High Cour› ›ha› has announced ›ha› ques›ions
are ›o be pu› ›o ›he ECJ for a preliminary ruling. ln ›he
Marhs 9 Spencer case, ›he issue a› hand is whe›her
›here is conflic› wi›h ›he free movemen› because under
›he UK ruling for Group relief for losses ›he losses of a
subsidiary es›ablished in ano›her Member S›a›e canno›
be se› off from ›he profi› of ›he paren› company
es›ablished in ›he Uni›ed Kingdom.
ln ›he Marhs 9 Spencer case, ›he in›eres›ed par›ies
have ›aken ›he poin› of view ›ha› in ›he even› of a
company residen› in ›he UK es›ablishing i›self in
ano›her Member S›a›e, ›here is discrimina›ion be›ween
es›ablishmen›s by means of a permanen› es›ablish~
men› in comparison wi›h an es›ablishmen› by means
of a subsidiary in ano›her Member S›a›e. Yor a
permanen› es›ablishmen›, ›he losses of ›his es›ablish~
men› are deduc›ed a› ›he headquar›ers es›ablished in
›he Uni›ed Kingdom whereas ›he losses of a subsidiary
es›ablished in ano›her Member S›a›e canno› be
deduc›ed from ›he profi› of a paren› company. Yhis
could be held ›o be a hindering of ›he righ› ›o choose
›he form of es›ablishmen›.
Yhe Special Commissioners ruled ›ha› ›here was no
ques›ion of prohibi›ed discrimina›ion. l› would seem
›ha› ›his is suppor›ed by ›he judgmen› in ›he Bosal
Holding case in ›he sense ›ha› in paragraph 32, ›he ECJ
accep›s ›ha› branches or es›ablishmen›s form par› of
›he headquar›ers and ›hus ›hey are one (and ›he same)
›axpayer, whereas paren› companies and ›heir sub~
sidiaries are dis›inc› legal en›i›ies and ›hus are differen›
›axpayers. Yur›hermore, ›he ECJ can refer ›o ›he
›erri›oriali›y principle ›ha›, as is clear from Bosal
Holding, mus› be applied per ›axpayer. l› is clear from
39
See on ›his and o›her GLO’s, ›he EU Yax Aler›, no 13 (Sep›ember
2003); www.eu›axaler›.com. On 23 May 2003, a Group
Li›iga›ion Order (’GLO’) on group loss relief rules was filed
wi›h ›he UK High Cour›. Under a GLO, claims wi›h a common
issue are grouped, ›es› cases are selec›ed and cos›s are shared
amongs› ›he claiman›s. Yhis GLO covers claims ›ha› ›he UK
group relief provisions are in breach of Ar›icle P3 (›he freedom of
es›ablishmen›) of ›he EC Yrea›y and/or ›he non~discrimina›ion
Ar›icle of various double ›ax ›rea›ies. Yhe claims rela›e ›o ›he
following: i) surrender of loss of EU subsidiary ›o UK paren›
and/or UK subsidiary; ii) surrender of loss of EU paren› and/or
EU subsidiary ›o UK subsidiary; iii) surrender of loss of EU
subsidiary ›o UK subsidiary if ›he paren› is a non~EU company;
iv) surrender of loss be›ween UK subsidiaries or UK subsidiaries
and UK branches if ›he paren› is a non~EU company; v)
surrender of loss be›ween UK branch and UK subsidiary if ›he
paren› is an EU company.
P0
Yhe Special Commissioners, 2P and 2S November 2002, Marhs 9
Spencer and Halsey HM Inspector o∫ Yaxes; see also: L Hinnekens,
Yhe Marks ð Spencer Case: UK Special Commissioners Yind UK
Group Relief Rules Compa›ible wi›h ›he freedom of Es›ablish~
men›, European Yaxa›ion 2003, pp. 13S-182.
229
THE B0SAL H0LDING CASE: ANALYSIS AND CRITIQUE
Fvtvra Participations ›ha› a domes›ic ›axpayer can be
›axed on i›s worldwide income, whereas for ›he se››ing
off of losses of non~residen›s, such as a subsidiary
es›ablished in ano›her Member S›a›e of a paren›
company es›ablished in ›he Uni›ed Kingdom, ›he
requiremen› can be made ›ha› ›he losses mus› be
economically rela›ed ›o ›he income earned by ›he
›axpayer in ›he Uni›ed Kingdom.P1 Yhe (foreign)
losses of ›he subsidiary es›ablished abroad do no›
mee› ›his requiremen›.
Yhe second posi›ion ›aken by Marks ð Spencer is
›ha› ›here is discrimina›ion be›ween a subsidiary
residen› in ›he UK (›ha› can carry over ›he losses ›o
›he paren› company residen› in ›he UKP2) and a
subsidiary residen› in ano›her Member S›a›e (›ha› does
no› have ›his op›ion). Because ›he UK subsidiary falls
wi›hin ›he scope of UK ›ax in respec› of i›s worldwide
ac›ivi›ies and a foreign subsidiary falls ou›side ›he
scope of UK ›ax, ›he Special Commissioners have
ruled ›ha› ›here is no ques›ion of a discrimina›ory
res›ric›ion because a differen› rule is applied ›o
si›ua›ions ›ha› are no› objec›ively comparable.P3 Yhe
ques›ion is whe›her ›his ruling can be upheld af›er
Bosal Holding. l› follows from Bosal Holding namely
›ha›, in principle, ›he ECJ accep›s ›ha› ›he paren›
company and i›s subsidiary are dis›inc› legal en›i›ies,
bo›h of which are liable separa›ely for ›ax. A ruling
such as ›he Group relief for losses, however, breaks
›hrough ›his sys›em of independence be›ween ›he
paren› company and i›s subsidiary. Yhe problem is
›ha› ›his sys›em has only been breached for companies
residen› in ›he Uni›ed Kingdom. l› could well be ›ha›
›he ECJ requires ›ha› ›his mus› also be done for
companies residen› abroad, given ›ha› ›he only
difference is ›he place of residence of ›he company.
Yhis would en›ail ›ha› ›hrough a provision such as
Group relief for losses, ›he Uni›ed Kingdom will have
no op›ion o›her ›han ›o se› off foreign losses.
5. Closing remarks
l› will be clear ›o ›he reader ›ha› l have mixed feelings
abou› ›he Bosal Holding judgmen›. On ›he one hand,
›he ECJ gives a poin›ed explana›ion, wi›h a proper
unders›anding of ›he Ne›herlands sys›em, as ›o why
›here is a hindrance of ›he righ› of es›ablishmen›, bu›
goes off ›arge› or cu› corners ›oo quickly in ›he
›rea›men› of ›he coherence~jus›ifica›ion and ›he
principle of ›erri›oriali›y.
Yhe ECJ namely seeks i) a coherence ›ha› does no›
even exis›; pu›s ii) ›he emphasis on ›he exis›ence of
differen› ›axpayers ›here where, for ›he ques›ion of
whe›her a righ› of deduc›ion exis›s, ›he domes›ic law
assumes ›ha› ›he being of ano›her ›axpayer is no›
relevan›; fails iii) ›o see ›ha› ›he coherence is breached,
whereas ›he Hoge Raad had clearly indica›ed ›ha› ›his
was ›he case; would appear ›o rule iv) ›ha› ›he cos›s
according ›o ›he Du›ch par›icipa›ion exemp›ion
belong ›o ›he paren› company (legal cos›s alloca›ion),
230
whereas ›he Hoge Raad had indica›ed ›ha› ›he cos›s
cohere economically wi›h ›he profi› of ›he subsidiary
(›erri›orial cos›s alloca›ion). Yur›hermore, ›he ECJ
should no› make a choice be›ween legal or ›erri›orial
cos›s alloca›ion given ›ha› ›his choice belongs ›o ›he
sovereign›y of ›he Member S›a›es, and for ›ha› ma››er,
Communi›y law (›he Paren›~Subsidiary Direc›ive) does
no› make a choice be›ween legal or ›erri›orial cos›s
alloca›ion. Yinally, v) when ›es›ing ›he ›erri›oriali›y
principle, ›he ECJ fails ›o ›ake ›he ex›ension concep›
in›o accoun› and s›ringen›ly applies ›he ›erri›oriali›y
principle.
l› is clear from ›he ›rea›men› of ›he coherence~
jus›ifica›ion and ›he ›erri›oriali›y principle ›ha› ›he
ruling is no› based on a proper unders›anding of ›he
Du›ch ›ax sys›em. Yhe lack of unders›anding would
seem ›o flow from, among o›hers, ›he fac› ›ha› only a
severely summarised version of ›he judgmen› of ›he
Hoge Raad is reflec›ed in ›he Repor› of ›he Hearing,
whereby probably ›he ECJ was unable ›o examine ›he
considera›ions of ›he Hoge Raad.
Wha›ever ›he reason, i› is of course highly
de›rimen›al where in preliminary proceedings ›ha›
according ›o ›he case~law of ›he ECJ, ‘is a means of
coopera›ion be›ween ›he Cour› of Jus›ice and na›ional
cour›s’,PP no a››en›ion wha›soever is devo›ed ›o ›he
explana›ion of ›he Hoge Raad in ›he ma››er of ›he
opera›ion of ›he Du›ch sys›em. Yhis namely because
›hese explana›ions were impor›an› for a proper
assessmen› of ›he Du›ch holding cos›s deduc›ion
limi›a›ion.
Wha› will ›he Hoge Raad do? Send ›he case s›raigh›
back ›o Luxembourg and see ›o i› ›ha› ›he ECJ is fully
and properly informed abou› ›he Du›ch sys›em? Such
›ha› upon having been properly informed, ›he ECJ can
›ake ano›her decision, bu› ›hen, one ›ha› is based on a
proper unders›anding of ›he Du›ch sys›em. Yrom a
legal poin› of view, ›ha› would have ›he mos› in›egri›y.
However, from a prac›ical poin› of view, wha› use
would ›ha› be? Yhe judgmen› of ›he ECJ migh› be
based on an incorrec› unders›anding of ›he Du›ch
sys›em bu› ›he message is clear: ›he ECJ will no› accep›
›ha› ›here be a coherence be›ween differen› ›axpayers,
or ›ha› ›here be a sys›em ›ha› on ›he basis of ›he
ex›ension concep› makes a connec›ion be›ween ›he
holdings cos›s of ›he paren› company and ›he profi› of
ano›her legal en›i›y (›he subsidiary). Yur›hermore, in
›he eyes of ›he ECJ, ›he principle of ›erri›oriali›y may
only be applied per separa›e, individual ›axpayer. ln
›he end, ›he deduc›ion limi›a›ion on holdings cos›s
will always go ›o ›he wall.
P1
Cf. paragraph P3 of ›he Yu›ura Par›icipa›ion judgmen›.
P2
Cf. Ar›icle P02 and P03 of UK ›he lncome and Corpora›ion
Yaxes Ac› 1988.
P3
Yhe Special Commissioners, 2P and 2S November 2002, Marhs
9 Spencer and Halsey HM Inspector o∫ Yaxes, paragraph 116(2).
PP
Cf. for a ›ax judgemen›, for example: Case C~28/9S, Levr~Bloem
ECR ]1993] l~P161, paragraph 2P.
EC TAX REVIEW 2003/P