INTERNATIONAL TAX PLAZA - European Court of Justice rules in case C-47/12 Kronos International (Artt. 49, 54, 63 & 65 TFEU)

(September 11, 2014)

On September 11, 2014 the European Court of Justice (ECJ) ruled in case C-47/12 Kronos International Inc. versus Finanzamt Leverkusen (ECLI:EU:C:2014:2200). The following questions were referred to the ECJ for a preliminary ruling:

Is the exclusion of the set-off of corporation tax as a consequence of the tax exemption of dividend distributions by capital companies in third countries to German capital companies, for which the German legislation requires only that the capital company receiving the dividends has a holding of not less than 10% in the distributing company, subject only to freedom of establishment within the meaning of Article 49 TFEU in conjunction with Article 54 TFEU or also to the free movement of capital within the meaning of Articles 63 TFEU to 65 TFEU, if the actual holding of the capital company receiving the dividends is 100%?
Are the provisions concerning freedom of establishment (now Article 49 TFEU) and, as the case may be, also concerning the free movement of capital (Article 67 EEC/EC until 1993, now Articles 63 TFEU to 65 TFEU) to be interpreted as meaning that they preclude a provision which, where the dividends of foreign subsidiaries are exempt from tax, excludes the set-off and refund of corporation tax on those dividend distributions even where the parent company makes a loss, if, for distributions by German subsidiaries, there is provision for relief by setting of corporation tax?
Are the provisions concerning freedom of establishment (now Article 49 TFEU) and, as the case may be, also concerning the free movement of capital (Article 67 EEC/EC until 1993, now Articles 63 TFEU to 65 TFEU) to be interpreted as meaning that they preclude a provision which excludes the set-off and refund of corporation tax on dividens of second and third-tier subsidiaries which are exempted from tax in the country of the subsidiary and which are (re)distributed to the German parent company and likewise exempted from tax in Germany, but in the case of purely domestic situations, as the case may be by means of the set-off of corporation tax on the second-tier subsidary's dividends in the hands of the subsidiary and the set-off of corporation tax on the subsidiary's dividends in the hands of the parent company, enables a refund in the event of a loss by the parent company?
If the provisons on the free movement of capital are also applicable, a further question, depending on the reply to question 2, arises with regard to the Canadian dividends: Is the present Article 64(1) TFEU to be understood as meaning that it permits the application by the Federal Republic of Germany of German legislation, and provisions of double taxation conventions, which have remained unchanged in substance since 31 December 1993 and, therefore, that it permits the continuing exclusion of the offsetting of Canadian corporation tax on dividends exempted from tax in Germany?

The ECJ ruled as follows:

The compatibility with EU law of national rules, such as those at issue in the main proceedings, under which a company resident in a Member State cannot set off corporation tax paid in another Member State or in a third State by capital companies distributing dividends, because of the exemption of those dividends from tax in the first Member State when they stem from shareholdings representing at least 10% of the capital of the company making the distribution and, in the case in point, the actual shareholding of the capital company receiving the dividends exceeds 90% and the recipient company has been incorporated in accordance with the law of a third State, must be assessed in the light of Articles 63 TFEU and 65 TFEU.
Article 63 TFEU must be interpreted as not precluding application of the exemption method to dividends distributed by companies resident in other Member States and in third States, when the imputation method is applied to dividends distributed by companies resident in the same Member State as the company receiving them and, if the latter company records losses, the imputation method results in the tax paid by the resident company that made the distribution being fully or partially refunded.