AG opinion advocates strict interpretation of EU directive, but confirms discriminatory nature of Bulgarian legislation contrary to freedom of establishment

The opinion of Advocate General Hogan (the “Opinion”) of the Court of Justice of the European Union (the “CJEU”) was issued on 24 October 2019 as regards the preliminary reference in GVC Services (Bulgaria) EOOD v Direktor na Direktsia Obzhalvane I danacha asigurieina praktika - Sofia (Case C-458/18). The hearing before the CJEU took place on 11 September 2019 and the judgment of the CJEU is awaited.

The preliminary reference concerned the important question of whether a Member State can impose withholding tax on the payment of dividends from a company within its territory to a parent company situated in Gibraltar. In particular, it concerned the interpretation and applicability of Directive 2011/96/EU (the “Directive”) and also whether there was an impermissible restriction on freedom of establishment as regards the application of the Law on Corporation Tax in Bulgaria (the “Bulgarian Legislation”).

The Directive

The Directive provides for a common system of taxation applicable in the case of parent companies and subsidiaries of different Member States and as part of that, it prohibits the imposition of withholding tax of dividends distributed by a subsidiary to a parent company where that parent company is a “company of a Member State”.

As per Article 2(a) of the Directive, a “company of a Member State” must:

  1. take one of the forms listed in Annex I, Part A; and
  2. be subject to one of the taxes listed in Annex I, Part B;

The relevant forms of company and taxes listed in Annex I, Parts A and B respectively are:

  1. companies incorporated under the law of the United Kingdom”; and
  2. corporation tax in the United Kingdom”.

There is no express reference in Annex I to any companies incorporated in or corporation tax of Gibraltar.

The Bulgarian Legislation

Article 194(3) of the Bulgaria Legislation provides an exemption on the payment of withholding tax where dividends are distributed to a “foreign legal person which is resident for tax purposes in a Member State of the European Union”.


By way of background, GVC Services (Bulgaria) EOOD (“GVC”), established in Bulgaria, allotted dividends to its parent, PGB Limited (“PGB”), established in Gibraltar, without making payment of withholding tax.

It did so on the basis that Gibraltar could be considered to be a “foreign legal person resident for tax purposes in a Member State” in accordance with the withholding tax exemption under Bulgarian Legislation and that the references to the companies and taxes in the United Kingdom would be interpreted to include Gibraltar, meaning the Directive would prevent the imposition of withholding tax on dividends distributed to a parent company established in Gibraltar. That accords with Gibraltar’s status within the European Union, in particular, the fact that:

  • Gibraltar has the status of a European territory for whose external relations the United Kingdom is responsible;
  • EU law is applicable to that territory as per Article 355(3) of the Treaty on the Functioning of the European Union (the “TFEU”);
  • Articles 28 to 30 of 1972 Accession Act stipulate the derogations to the applicability of EU law to Gibraltar and there is no derogation which relates to direct taxation; and
  • the Directive follows the form of many other EU legislative instruments, for example the Merger Directive 90/434/EEC and Directive 2003/49/EC on the taxation of cross-border interest and royalty payments, in making no express reference to or provision for Gibraltar.

The Bulgarian tax authority and the Administrative Court in Sofia however disagreed. It was asserted that Gibraltar could not be regarded a Member State (whether under the Directive or the Bulgarian Legislation) and that the Directive contained an express and exhaustive list of both of the companies (Annex I, Part A) and of the taxes (Annex I, Part B) to which it applied.

The Administrative Court therefore referred two questions to the CJEU for a preliminary ruling:

  1. should Article 2(a)(i) of, in conjunction with Annex I, Part A of the Directive be interpreted as meaning that “companies incorporated under the law of the United Kingdom” covers companies incorporated in Gibraltar?
  2. should Article 2(a)(iii) of, in conjunction with Annex I, Part B of the Directive be interpreted as meaning “corporation tax in the United Kingdom” covers the corporation tax that has to be paid in Gibraltar?

As well as dealing with the questions referred to the CJEU, within written and oral observations, arguments were also advanced as regards the four freedoms. In particular, GVC argued that the exclusion of the application of the tax advantage, i.e. the withholding tax exemption, to Gibraltar under the Bulgarian Legislation would hinder the exercise of freedom of establishment under Article 49 TFEU and would plainly be discriminatory. That is because PGB (alongside other companies established in Gibraltar) is in an objectively comparable situation to parent companies established in other Member States, yet, different rules were being applied to that comparable situation.

Accordingly, after having dealt with the questions of interpretation of the Directive (as referred), Advocate General Hogan also found it necessary to consider in the Opinion the resulting issues as regards freedom of establishment. We will consider each in turn.

Interpretation of the Directive

Having regard to Article 355(3) TFEU and 1972 Accession Act (as set out above), the Opinion accepted that EU legislative measures should, in principle, apply to Gibraltar as a European territory. It also recognised that there was no express provision in the Directive excluding Gibraltar from its territorial scope.

However, the Opinion went on to consider the decision in Gaz de France - Berliner Investissement (C‑247/08) in which the CJEU had previously interpreted the scope of the provisions of the Directive and found that Annex I included an exhaustive list of the legal forms covered by the Directive. The CJEU considered that the “fundamental principle of legal certainty” prevented Annex I from being interpreted as merely indicative.

The Opinion adopted (and somewhat extended the application of) that view in finding that it would not be appropriate to depart from the language in Annex I in favour of a teleological interpretation. It did not acknowledge the fact that Gaz de France concerned the specific legal forms under French law to which the Directive was explicitly applicable[1] and that in contrast, general wording, “companies in the United Kingdom”, was used as regards the United Kingdom.

The Opinion also emphasised the importance of the context of the Directive, in particular, that some Member States were reluctant to conclude double taxation agreements with the territory of Gibraltar (owing to its preferential taxation), which provided an explanation for the narrow scope of Annex I.

The Opinion therefore concluded that the Directive was not applicable to companies incorporated in Gibraltar as Annex 1 requires that companies are “incorporated under United Kingdom law” and not under Gibraltar law, and the term “corporation tax in the United Kingdom” does not include the equivalent tax in Gibraltar.

Freedom of establishment

However, importantly, the Opinion went on to evaluate whether the application of withholding tax to dividends paid only to parent companies resident in Gibraltar (as per the Bulgarian Legislation) would constitute a discriminatory restriction on the freedom of establishment.

Accepting that the principle of freedom of establishment was applicable to Gibraltar by virtue of Article 355(3) TFEU (as confirmed in Fisher (C‑192/16) and The Gibraltar Betting and Gaming Association (C‑591/15)), the Opinion emphasised that a difference in the tax treatment of dividends between parent companies, based on the location of their registered office, constitutes a restriction on freedom of establishment, which is, in principle prohibited by Article 49 TFEU.

In this regard, the Opinion found that if the Bulgarian Legislation were to apply to all Member States excluding Gibraltar without reference to any distinguishing factor, the difference in tax treatment (specifically, the application of withholding tax) to all parent companies incorporated in Gibraltar would be based purely on geographical location and would therefore be discriminatory.

Whilst the Opinion asserted that it was difficult to go much further with the analysis, it did recognise that the exclusion of parent companies in Gibraltar from the exemption under the Bulgarian Legislation appeared to be based on the low tax rate applied in Gibraltar and on (alleged) difficulties with obtaining tax information from the authorities in Gibraltar. In this regard, it was accepted that a restriction on freedom of establishment may be justified in order to prevent tax evasion and avoidance, but only where that restriction specifically targets wholly artificial arrangements which do not reflect economic reality. The Opinion found that such a justification could not apply as regards the Bulgarian Legislation, which plainly does not involve any analysis of the structure and purpose of companies established in Gibraltar on a case-by-case basis.

To exclude all parent companies established in Gibraltar in such a general way was also considered to be disproportionate, in going beyond what was necessary to prevent tax evasion and avoidance.

The Opinion therefore concluded that freedom of establishment, Article 49 TFEU, must be “interpreted as precluding legislation of a Member State which excludes from the exemption from withholding taxes, in a general way on the basis of a territorial criterion, dividends paid by subsidiary companies incorporated in that Member State to their parent companies incorporated in Gibraltar”.

The decision of the CJEU is expected to be handed down in the New Year.

CMS Cameron McKenna Nabarro Olswang LLP acted for GVC at the CJEU.