From Brussels with love: EU Law. A Blessing or a Curse?
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Martie 2008 |
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DELOITTE ROMANIA |
Adresa
Şoseaua Nicolae Titulescu, Nr. 4-8
Cladirea America House, Etaj 3
011141 Bucureşti, Sector 1
Telefon
+40-21-222.16.61
Fax
+40-21-222.16.60
Website
www.Deloitte.ro
Member States complain about the enormous amount of legislation that flows out of Brussels. For Member States this has an enormous impact on their legislation since their national law needs to be brought in line with the principles of EU law. On the other hand, due to this EU legislation, opportunities can arise for companies, especially in the area of taxation. As Romania has come a long way since it joined the European Union as of 1 January 2007 there is still a lot of work that has to be done. Romania’s accession had and still has an enormous impact on the Romanian legislation as of that date, since it has to comply with obligations that arise from EU law. However, EU law not only prescribes obligations but also rights.
Romania’s accession affects, thus, every day-to-day business of all companies and individuals established in Romania. As EU law overrides national law companies and individuals established in Romania can now make use of the rights that are prescribed by EU law in order to optimize their company’s tax structure and fully benefit of EU law. As most Member States, especially the new acceded Member States, still have (a lot of) provisions in their fiscal legislation which are not in line with EU law, which ultimately needs to be harmonized, this creates opportunities.
Principles of EU law
As the European Union (EU) has been established as of 1957 by the six “founding fathers” the EU has evolved into a magnificent institution of already twenty-seven Member States, and still growing, with powerful instruments in order to realize its goals and objectives.
The EU shall have as its task, as it is stated in the Treaty establishing the European Communities, the establishment of a common market and an economic and monetary union and to implement common policies or activities in order to promote throughout the EU a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.
In order to achieve this task the activities of the EU shall include amongst others the prohibition, as between Member States, of customs duties and quantitative restrictions on the import and export of goods, and of all other measures having equivalent effect, a common commercial policy and maybe the most important one to reach an internal market that is characterized by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital which are often referred to as the four fundamental freedoms.
The EU has at its disposal legislation in order to realize its goals and objectives. Regarding this EU legislation a distinction has to be made between various sources of EU law. First of all there is primary EU law that consists of the Treaty establishing the European Communities containing the four fundamental freedoms. Secondly, there is secondary EU law that consists of regulations, directives, decisions and recommendations and opinions. A regulation has a general application and is binding in its entirety and is directly applicable in all Member States. A directive is binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods to achieve the result. A decision is binding in its entirety upon those to whom it is addressed. Recommendations and opinions have no binding force. Another important source of EU law is the case-law of the European Court of Justice of the European Communities (ECJ). This is of great importance since a lot of judgments of the ECJ have a great impact for other Member States that have similar provisions in their national legislation.
All these sorts of EU legislation are important for the following reason. As stated before, EU law overrides the national law and therefore companies and individuals established in Romania can now invoke EU law provisions which in certain cases are more beneficial then the national legislation of the Member States. In some cases the national legislation of Romania is in conflict with EU law and where that happens EU law could be invoked in certain situations for a more favorable treatment despite what the national legislation of Romania states. The Member States are bound to apply EU law since this is of a higher order then national law.
As a lot of areas are harmonized by EU law the area of taxation deserves special attention since this is not harmonized by EU law. As most judgments of the ECJ state that although direct taxation falls within the competence of the Member States, the Member States must, none the less, exercise that competence consistently with EU law. Thus, the Member States have to take EU law into account in the field of taxation as well.
As Romania has only acceded to EU as of 1 January 2007 the concept and applicability is still in its beginning phase. This raises a lot of questions regarding the interpretation and the application for the Romanian tax authorities as well for companies and individuals established in Romania. However, the positive side of all this is that companies and individuals established in Romania can now make use of EU law in order to fully benefit of it. In the area of EU law there a lot of opportunities of which many people are regretfully (still) not aware.
Discrimination of outbound dividend distributions
Last year the ECJ has given a judgment which is relevant for other Member States as well, and especially for Romania. The case was related to the compatibility of Dutch dividend withholding tax on outbound dividend distributions with EU law. The ECJ judged that the Dutch provisions were not compatible with EU law.
The case concerned a Portuguese resident company (Amurta) that held 14% of the shares in a Dutch resident company (Retailbox). The other shareholders were a Dutch resident company and also two other Portuguese resident companies. Later on, the Dutch resident company distributed dividends to the shareholders of which Amurta was one. In the Netherlands dividend withholding tax of 25% was due in respect of this distribution. In the EU there are certain Directives applicable and under certain circumstances, in case you fulfill the conditions stipulated by the Directive, a dividend distribution can be exempted.
However, in this case the concerning Directive was not applicable since Amurta did not fulfill all the conditions stipulated by the Directive. Amurta held only 14% of the shares instead of the required 25%. In case Amurta was a resident in the Netherlands it would have been entitled to a dividend withholding tax exemption since then the participation exemption would have been applicable. This participation exemption is applicable, among other requirements, in case of 5% Dutch shareholdings. Amurta logded a complaint stating that the difference in treatment between a Dutch resident company and a Portuguese resident company is in conflict with EU law. The ECJ judged that this difference in treatment is indeed in conflict with EU law.
