Opinion Statement ECJ-TF 4/2019 on the CJEU Decision of February 26, 2019, in Case C-135/17, X-GmbH, Concerning the Application of the German CFC Legislation in Relation to Third Countries

Abstract

This article deals with case, X-GmbH (Case C-135/17) concerning the compatibility of German CFC legislation with regard to third countries. In Germany, CFC legislation only applies in cross-border situations and not in purely domestic situations. In general, the application of CFC legislation requires that the shareholders have control over the foreign subsidiary, that the foreign subsidiary be taxed at a lower rate and that it earn passive income. Concerning a special type of passive income, there is even no control requirement. In relation to other EU and EEA countries, Germany does not apply its CFC legislation if the taxpayer proves that the company carries on a genuine economic activity. However, this "Cadbury Schweppes exception" does not apply in relation to third countries. The referring German Court asked whether the relevant German tax rules were compatible with the TFEU provisions on the free movement of capital. The first and second question concerned the interpretation of the standstill clause in article 64(1) of the Treaty on the Functioning of the European Union (TFEU) (2007). With its third question, the German Court inquired whether the Cadbury Schweppes jurisprudence can be transferred to the free movement of capital.

The CFE Tax Advisers Europe note that the Court's decision in X GmbH constitutes a continuation of the Court's prior case law regarding the meaning of the standstill clause. The CFE welcomes the clarification with regard to the question of whether a restriction already existed on 31 December 1993.

The Court further developed its Cadbury Schweppes (Case C-196/04) jurisprudence, illustrating how to interpret the phrase "wholly artificial arrangements" in relation to the free movement of capital. The Court held that this concept has to be interpreted in a broader way in relation to third countries. It would be helpful if the Court were to give further guidance in a future decision on the meaning of "artificial transfer of profits".

X GmbH is also likely to be relevant in respect of domestic legislation implementing articles 7 and 8 of the EU Anti-Tax Avoidance Directive (2016/1164) (ATAD) in that Member States will also have to apply the "substance escape" to third countries with an exchange of information clause.

Keywords: Taxation, Tax law, European taxation

JEL Classification: K33, K34, F13, E62, D78, E62, F02, F23, F42, H20, H22, H23, H25, H26, H87, O19, O23, O24