Opinion Statement ECJ-TF 2/2021 on the CJEU Decision of 25 February 2021 in Case C-403/19, Société Générale, on the Calculation of the Maximum Amount of a Foreign Direct Tax Credit

Abstract

The Court’s judgment in Société Générale reinforces the established case law that EU law neither prohibits juridical double taxation as such nor does it put an obligation on the residence Member State to prevent the disadvantages which could arise from the exercise of competence thus attributed by the two Member States. The parallel existence of taxing jurisdiction, however, must be distinguished from the exercise of such jurisdiction by each Member State: While Member States are free to determine the connecting factors for the allocation of fiscal jurisdiction in tax treaties, “the exercise of the power of taxation, so allocated by bilateral conventions for the avoidance of double taxation, the Member States must comply with EU rules and, more particularly, observe the principle of equal treatment”.

It is generally accepted in the Court’s case law that both the ordinary credit and exemption (also with progression) are permissible methods to avoid double taxation, and the Court in Société Générale has confirmed this position specifically with regard to the “maximum deduction” in the ordinary credit method in tax treaties, even though it can result in a disadvantage for cross-border income as compared with domestic income. As the disadvantage in Société Générale was due to the difference between gross-basis taxation of dividends in the source Member States (Italy, the Netherlands and the UK) and net-basis taxation of those foreign-source dividends in the residence State (France), it remains to be seen if future cases will bring clarity in light of the EFTA-Court’s Seabrokers judgment as to which expenses can be lawfully allocated to foreign income from the perspective of the residence Member State.

The CFE Tax Advisers Europe stresses that in an Internal Market neither (unintended) double non-taxation nor double taxation is acceptable. It therefore calls on all EU institutions to analyze and address the remaining issues of juridical double taxation (including in the context of the upcoming actions amending current corporate tax directives).

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