Court of Justice of the European Union

Judgment of 13 November 2014

Case C-112/14

In this Judgment, delivered within the scope of infringement proceedings concerning obligations provided for in the Treaties, namely the free movement of capital, the Court of Justice of the European Union ruled on the legislation of a Member -State which provides for a different tax treatment of profit of companies, whose share capital is held by a number of members not exceeding 5, or whose members are directors/managers of the company, depending on whether the company has its registered office in the Member State of the legislation in question or not.

In this sense, the legislation under consideration treats, for tax purposes, the taxable profits of the non-resident company as if such profits had been distributed to its shareholders, that have a registered office or domicile in the Member State of the legislation, who must pay taxes over the mentioned profits, regardless of whether such profits have actually been distributed or not. Resident transparent companies are treated differently, as their shareholders are only subject to tax for the profits that are actually distributed, or when they dispose of their company rights.

The Court of Justice decided that this difference in treatment limits the free movement of capital, which is not justified in the case under analysis, as the provisions in question are not merely intended to be applied in cases of tax evasion and tax avoidance, but also to situations where the transactions carried out coincide with the economic reality. Moreover, the provisions in question do not enable the participant of a non -resident transparent company to demonstrate the economic reality of his participation and the non-existence of any distributed profits, which should occur for the restriction, justified by the aim of combating tax evasion and tax avoidance, to be admissible.