Any reader interested in international taxation will agree that we currently face challenging times for legal certainty. For this reason, I allow myself to recall the story of Lon L. Fuller on Eight ways to fail to make law, a lesson which is given by good professors in the first year of any law degree and which our legislators would seem to forget when taking up their office. By doing so, I do not seek to criticize solely our politicians, since the laws emanating from the EU are often worse than our national laws.
Fuller tells how Rex was a good ruler, who endeavored to create a fair and enduring legal climate. However, his reform of the justice system failed eight times, the last time because he created a legislative code that was so ambiguous that its interpretation required a command of encyclopedias of case law.
Tax advisors are confronted each day with the nightmare of legal uncertainty in which we can never predict what will happen next. We find ourselves wrestling with retrospective rules (making the fictitious recovery of value of subsidiaries taxable is a good example, as is the case under Royal Decree-Law 3/2016), rules with unfair results (paying capital gains tax when money is lost) and, above all, with many rules which are so ambiguous that it is impossible to determine what their correct application is.
Such problems are more accentuated in international taxation. When a company ventures into foreign markets, it is aware that it will likely have to pay more taxes than it pays in its local market. The reason is quite simple: trading in a foreign country means dealing with two tax authorities keen to tax the same income.
The European Union is aware of the problems of double taxation and almost thirty years ago approved the famous Parent Company-Subsidiary Directive, aimed at removing the double taxation of dividends within EU business groups.
Some legislations, like our own, chose to adopt the benefits of this Directive strictly, establishing that a European company controlled by non-EU shareholders is in principle abusive, having the ultimate purpose of illegal tax savings. This is even more the case when such company is a hold company, i.e., a parent company used for concentrating the governance and management of subsidiaries. I say that it is abusive in principle because such presumption does not stand when the taxpayer is able to show the inspector that it is intended for valid economic reasons.
For thirty years we have suffered from the defects of this rule; an objective fact (non-EU shareholders) allows the inspector to deem that fraud exists, unless the citizen is able to show their good intentions.
The confrontation could not be more unfair: the stronger party (the State) is able to issue a tax assessment and enforce it without proving any intent of fraud on the part of the weaker party (the citizen). It is simply necessary to deny the validity of the reasons given by the taxpayer in order to levy the tax.
Accordingly, since the entry into force of the Parent Company-Subsidiary Directive and its non-application clause, we have seen reams of inspection reports, consultations to the Tax Authorities, case law and articles by legal scholars attempting to address the issue of what constitutes sufficiently valid grounds to justify an exemption.
Once again, as has occurred with so many unfair tax rules, the solution will be given by the Court of Justice of the European Union. Right now, the judges of this court have on their table in Luxembourg a dispute regarding a French rule which is identical to ours. The case in question is Eqiom (C‑6/16), in which the Advocate General Kokott has requested the judges to limit the power of national tax inspectors, so that they may only refuse the exemption when they are able to provide clear proof of the existence of fraud (a wholly artificial arrangement, to use the jargon of the EU).
If, as is likely, the judges adopt the criterion of their Advocate General, they will throw some light on a rule designed to the benefit of taxpayers whose ambiguity, together with the tax authority’s powers, had rendered it almost unenforceable. We should thank Kokott for reminding us of a lesson which we should never forget: ambiguous rules with changing effects left to the discretion of the authorities are unfair and unacceptable.