Advocate General Jääskinen released his opinion on the second reference in FII on 19 July. Many of the issues are really only of specific relevance to the esoterics of the now long defunct ACT system. Two however have a more general relevance.
The second reference asks the ECJ to clarify what it had decided in the first reference regarding the compatibility with EU law of the UK’s previous dividend taxation system (the “DV tax” charge) which exempted domestic dividends but, for holdings over 10%, taxed non resident dividend income but while granting a credit up to the UK CT level for any foreign withholding tax or corporation tax paid on the underlying profits. Essentially the first question of the reference asked whether in concluding it the first reference that such a system would not be precluded if the same rate and level of tax applied to domestic and non resident profits save in exceptional circumstances,
The Advocate General’s answer is not straightforward. In basic terms his opinion is that:
- Advocate General Geelhoed was correct in his opinion in the first reference that DV tax is unlawful because the exemption method allowed reductions in the effective rate of tax to be passed through to the parent with the distribution of those profits but the credit method did not;
- However it is not possible to reconcile that opinion with the judgment in the first reference. The judgment was referring only to nominal rates of tax. Therefore if the Court were to answer the question by confirming the answer to the first reference, then it will follow that DV tax is lawful and the taxpayer loses
- However in his view the first decision was wrong and being only of recent invention he invites the court to adopt the approach of the Advocate General in the first reference
- He rejects the Commission’s proposal that credit be given to the nominal rate of tax in the foreign jurisdiction
The conclusion of his discussion is therefore to invite the Court simply to say that the DV system was contrary to EU law (i.e. paragraph 56 of the previous opinion) or to accept that the Court’s earlier decision permits dual exemption and credit systems accepting that in doing so this will inevitably lead to an element of discrimination.
The other point of more general relevance addresses the much debated borderline between the free movement of capital (art 63) and the other fundamental freedoms. The ECJ had held in the first FII reference that where national legislation was focused on a particular freedom, then only that freedom was invoked even if other freedoms were indirectly effected. The significance arises in third country contexts where the only available freedom is article 63. Even if a movement of capital is effected, if the focus of the legislation is on the right to establish, this leaves third country claims unprotected by EU law.
The question confronted here is what if the legislation (like dividend taxation) has no establishment focus but factually the circumstances would about to a controlling interest invoking the right to establish? Will article 63 still be excluded in those circumstances? According to the Advocate General it will not.
Judgment is expected later this year. The FII case has now been the subject of a third reference to the ECJ on the lawfulness of the retrospective reduction in the limitation period for claims issued after September 2003 which is currently being drafted by the Supreme Court.