On 30th September 2021, Advocate General Athanasios Rantos delivered his opinion in Case C-257/20, Viva Telekom Bulgaria v. Bulgarian Tax Administration, originating from a request for a preliminary ruling brought by the Bulgarian Supreme Administrative Court.
Below is an unofficial English translation of the main points of the Opinion.
OPINION OF THE ADVOCATE GENERAL
delivered on 30 September 2021
Viva Telecom Bulgaria EOOD
Director of the Appeals and Tax Insurance Practice Directorate - Sofia
in the presence of the
Supreme Administrative Prosecutor's Office of the Republic Bulgaria
(Reference for a preliminary ruling from the Supreme administrative Court (Bulgaria)
'Preliminary ruling - Direct taxation - Common system of taxation of interest payments and royalties between related companies of different Member States - Article 63 TFEU - Free movement of capital - Article 49 TFEU - Freedom of establishment - Directive 2003/49 / EC - Exclusion of interest or royalty payments - Interest-free loan payments - Directive 2011/96 / EU - Directive 2008/7 / EC - The 'arm's length' principle - Taxation of withholding tax of unpaid interest - Tax fraud, tax avoidance and tax abuse”
1. The present case concerns the question whether EU law allows the tax legislation of a Member State which, in application of the 'arm's length' principle and in light of the efforts to combat tax evasion, provides for the levying in the form of withholding tax of fictitious interest,which a local subsidiary that has received an interest-free loan granted by its foreign parent company, was obliged under market conditions to repay to the latter. Thus, that case raises an issue known to the Court, namely that of compatibility with the provisions relating to free movement of national anti-abuse legislation adopted in the field of direct taxation.
2.The reference for a preliminary ruling is made in the course of a Bulgarian tax dispute concerning an interest-free loan convertible into a capital contribution, granted to a company established in Bulgaria, namely Viva Telecom Bulgaria ('the applicant'), by its the sole shareholder is InterV Investment Sàrl ('InterV Investment'), established in Luxembourg.
3.The present case will enable the Court to rule on the compatibility of national tax legislation aimed at the prevention of fraud with the primary and secondary law of the European Union in the very sensitive area of taxation of intra-group transactions within the European Union.
28. On 22 November 2013, the applicant entered into a loan agreement, in its capacity as a borrower, with his sole shareholder, InterV Investment, as a lender, whereby the latter provided the applicant with a convertible interest-free loan maturing after 60 years from the date of entry into force of this Agreement (hereinafter referred to as the " disputed loan"). That agreement provides that the borrower's obligation to repay the loan is waived at any time after the date of financing if the borrower decides to convert the loan as a non-monetary contribution in its own capital.
29. On 16 October 2017 the Territorial Directorate of the National Revenue Agency (Bulgaria) ( 'the tax authorities') issued an audit report to the applicant, imposing obligations under Article 195 (2) of CITA to pay withholding tax on certain interest income of InterV Investment for the period from 14 February 2014 to 31 March 2015.
30. Having established that, at the date of the tax audit, the loan in question had not been converted into capital and that the borrower has neither performed payments over the amount of the loan or paid interest, the tax authorities accept that there is a transaction leading to a “tax evasion” within the meaning of Article 16, paragraph 2, item 3 of CITA, the latter qualifying such a transaction as tax evasion where the there is a receipt or provision of loans with an interest rate different from the market interest rate at the time of the transaction, including in the case of interest-free loans. In its act, the tax authorities determine the market interest rate on the loan in order to calculate unpaid interest to the lender before imposing a withholding tax of 10%.
31. According to decision of 29 March 2019 the Sofia City Administrative Court (Bulgaria), seised by the applicant in an appeal challenging the legality of the contested decision, dismissed it, holding that the disputed loan was a financial asset of the company, from which it has received an economic benefit due to non-payment of interest, while the lender has suffered an economic loss due to non-receipt of such interest. According to that court, the borrowings were used to repay certain financial obligations of the borrower set out in the loan agreement and were not an element of equity.
32. The applicant lodged a cassation appeal with the referring court, the Supreme Administrative Court (Bulgaria), for annulment of that judgment.
33. In support of the action, the applicant claims that withholding tax is levied on fictitious interest income without taking into account the proven commercial interest for the purpose of granting an interest-free loan. It also maintains that the latter did not have the funds to pay interest on the loan and that, at the date of the agreement on that loan, InterV Investment was the sole owner of the capital. Furthermore, it claims that Article 16 (2) (3) of CITA is contrary to the case-law of the Court, since it does not allow the parties to an interest-free loan to prove the existence of valid economic considerations for granting of the loan.
34. In the alternative, the applicant submits that, since the Republic of Bulgaria has exercised the option under Article 4 (1) (d) of Directive 2003/49, which allows Member States to exclude from the scope of that directive the interest on loans which they treat for the purposes of taxation as income from equity instruments, Directive 2011/96, which applies to this type of income, is applicable. However, under Article 5 of that Directive, profits distributed by a local subsidiary to its foreign parent company are exempt from withholding tax. It also adds that the disputable loan constitutes contribution to the capital within the meaning of Article 3 (h) to (j) of Directive 2008/7, which, according to Article 5 of that Directive, should not be subject to indirect tax.
35. In those circumstances, the Supreme Administrative Court decided to stay the proceedings and refer the following questions to the Court of Justice for a preliminary ruling:
“1. Does national legislation such as that enacted in Article 16(2), point 3, of the Bulgarian Corporate Income Tax Act (“CITA”) conflict with the principle of proportionality enshrined in Article 5(4) and Article 12(b) of the Treaty on European Union and the right to an effective remedy and to a fair trial enshrined in Article 47 of the Charter of Fundamental Rights of the European Union?
2. Are interest payments in accordance with Article 4(1)(d) of Directive 2003/49/EC 1 profit distributions to which Article 5 of Directive 2011/96/EU 2 applies?
3. Does the rule laid down in Article 1(1)(b) and (3) and Article 5 of Directive 2011/96/EU apply to payments pursuant to an interest-free loan, which becomes due 60 years after the loan contract was entered into, and which is covered by Article 4(1)(d) of Directive 2003/49/EC?
4. Does national legislation such as that enacted in Article 195(1) and Article 200(2) of CITA and Article 200a(1) and (5), point 4, of CITA (repealed), as amended, which applied from 1 January 2011 to 1 January 2015, and Article 195(1), (6), point 3, and (11), point 4, of CITA, as amended on 1 January 2015, and a taxation practice according to which unpaid interest on an interest-free 60-year loan granted on 22 November 2013 to a resident subsidiary by a parent company registered in a different Member State is subject to withholding tax conflict with Article 49 and Article 63(1) and (2) of the Treaty on the Functioning of the European Union, Article 1(1)(b) and (3) and Article 5 of Directive 2011/96/EU and Article 4(1)(d) of Directive 2003/49/EC?
5. Does national legislation such as that enacted in Article 16(1) and (2), point 3, and Article 195(1) of CITA on the taxation at source of fictitious interest income on an interest-free loan granted to a resident company by a company in another Member State which is the borrower’s sole shareholder conflict with Article 3(1)(h) to (j), Article 5(1)(a) and (b), Article 7(1) and Article 8 of Council Directive 2008/7/EC 3 of 12 February 2008 concerning indirect taxes on the raising of capital?
6. Does the transposition of Directive 2003/49/EC in Article 200(2) and Article 200a(1) and (5), point 4, of CITA in 2011, that is prior to expiry of the transposition period laid down in point 3 of the section on taxation in Annex VI to the Act and the Protocol to the Treaty concerning the accession of the Republic of Bulgaria to the European Union, which sets a tax rate of 10% rather than the maximum rate of 5% prescribed in the Act and the Protocol to the Treaty concerning the accession of the Republic of Bulgaria to the European Union, infringe the principles of legal certainty and legitimate expectation?”.
36. Written observations were submitted by the applicant, the tax authorities, the Bulgarian Government and the European Commission. They also expressed opinions at the court hearing held on June 30, 2021.
37. By its six questions, the referring court essentially asks whether the withholding tax is contrary, on the one hand, to primary European Union law under Article 5 (4) and Article 12 (2). (b) TEU, Article 47 of the Charter and Articles 49 TFEU and 63 TFEU (first and fourth questions), and/or on the other hand, secondary EU legislation deriving from Directive 2003/49, respectively, second, third, fourth and sixth questions), Directive 2011/96 (second, third and fourth questions) and Directive 2008/7 (fifth question).
38. Before making a legal analysis of the questions referred by the national court, the following preliminary remarks must be made.
39. It should be recalled that, according to the case-law of the Court, although direct taxation falls within the competence of the Member States and does not require a harmonized approach to this kind of taxation, Member States should exercise that competence in accordance with EUlaw. According to the case-law at hand, the Treaty provisions on the freedoms may limit the right of Member States to determine the conditions and manner of taxation of the income of nationals of other Member States arising from activity exercised within the territory of the taxing Member State.
40. It should also be added that, although the Member States have autonomy in detecting fraud, the Court has held that, in order for national legislation to be regarded as legislation intended to prevent fraud and abuse, its concrete objective must be aimed at preventing practices which result in the creation of purely artificial arrangements which do not reflect economic reality and which are intended to confer an undue tax advantage.
(a) Provisions for the prevention of abusive practices
41. The intention to eliminate double taxation without creating the possibility of non-taxation or taxation at a reduced rate through tax avoidance or through tax fraud - in particular through the use of mechanisms of the most favorable double tax treaty from the tax point of view - is tax policy objective pursued on international level.
42. This is reflected in particular in the context of international tax treaties, which contain provisions on 'prevention of abuse', the purpose of which, in the event of fraud or abuse, is to exclude the application of provisions conferring rights on the taxable person. Such clauses are reproduced both within the European Union law framework as well as within the domestic legal order of a number of Member States, as it is apparent from the present case.
43. In that regard, it must be borne in mind that, according to the settled case-law of the Court, a taxable person may not enjoy a right or advantage derived from EU law where the transaction in question is wholly artificial from economic perspective and it is intended to avoid the application of the legislation of the respective Member State.
44. It should be also noted that Directives 2003/49 and 2011/96, which are the subject to the preliminary ruling questions, have the general objective of preventing tax evasion and allow the Member States not only to take the necessary measures to prevent such fraud, but also to take away the benefits of these directives or refuse to apply them in cases of fraud or abuse.
(b) The arm's length principle
45. The “arm’s length principle” enshrined in, inter alia , Article 9 of the Model Covenant of the Organization for Economic Co-operation and Development (OECD), which reflects the unanimous view of the members of the organization - aims to ensure that taxpayers operating within a group of companies will be treated in the same way as taxpayers operating independently in the market under the general corporate regime taxation.
46. That principle has also been recognized by the Court, which has held, both in the field of taxation and in matters other than taxation, that the arm’s length principle is an appropriate criterion for distinguishing artificial arrangements from actually performed economic transactions and in this context it is an objective fact which makes it possible to assess whether the main aim of the transaction was to obtain a tax advantage.
47. By its first question, the referring court asks, in essence, whether Article 16 (2) (3) of CITA is contrary to Articles 5 (4) and 12 (b) TEU and to the right to an effective remedy and to a fair trial, enshrined in Article 47 of the Charter.
48. It should be noted at the outset that, under Article 5 (4) TEU, the principle of proportionality applies to the “content and form of Union action”, whereas Article 12 (b) TEU concerns the role of national parliaments with respect to compliance with the principle of subsidiarity. These provisions thus, set out the principles that should guide the implementation of the Union's legislative process and not that of the Member States. In this respect, the Court has held that it should not answer a similar question raised by the same referring court in another relatively recent case, since those provisions do not apply to national law and do not apply to a case such as the one in the main proceedings.
49. Furthermore, as with regard to the the right to an effective remedy provided for in Article 47 of the Charter, according to settled case-law, the requirements arising from the protection of fundamental rights are binding only on the Member States whenever applying Union law.
50. Paragraph 16 (2) (3) of CITA provides that the receipt or provision of loans with an interest rate different from the market interest rate at the time of the transaction, including in the case of interest-free loans, constitutes tax evasion. This provision of Bulgarian law does not constitute a transposition of EU directive or the application or enforcement of any other provision of Union law.
51. For the same reasons and in the light of Article 51 of the Charter, it must be held that its provisions are not applicable to such a provision of Bulgarian tax law which does not constitute an application of European Union law.
52. Therefore I propose that the answer to the first question be that Article 5 (4) and Article 12 (b) TEU, as well as Article 47 of the Charter, must be interpreted as meaning that they do not apply to the interpretation of Article 16, paragraph 2, point 3 of CITA, as the latter provision does not constitute an application of Union law.
53. By its second question, the national court essentially asks, whether the payment of interest under Article 4 (1) (d) of Directive 2003/49 may constitute a distribution of profits to which Article 5 of Directive 2011/96 applies.
54. As regards Directive 2003/49, which harmonises direct taxation so as to ensure the benefits of the internal market for economic operators, in accordance with recitals 2 to 4 in the Preamble to that directive, its purpose is to avoid double taxation with regard to interest payments made between related companies of different Member States, as well as one-off taxation of those payments in one Member State, thus, prohibiting the levying of interest in the source Member State to the detriment of the actual beneficiary of the latter.
55. In the first place, the question arises as to whether fictitious interest rates such as those established by the tax authorities in the present case may be covered by Directive 2003/49 and be regarded as 'interest payments' within the meaning of Article 1 (1) and Article 2. point (a) of that directive, in particular in the present case, in which no actual payment was rendered.
56. It should be emphasized that, as confirmed by recital 5 in the Preamble to Directive 2003/49, it applies to 'payments'. It should also be noted that in Article 1, entitled "Scope and procedure", this Directive clearly identifies a "beneficiary of interest" who is from another Member State and receives a "payment made" from a company established in the source state.
57.It also follows from the case-law of the Court that, since Article 2 (a) of Directive 2003/49 defines interest as 'income from claims of any kind' , only the 'actual' beneficiary may receive interest which constitutes income of such claims, therefore the concept of " beneficial owner" within the meaning of this Directive must be interpreted as denoting an entity which is " actually" the recipient in economic terms of interest " paid to it" and thus, entitled to freely determine its purpose.
58. However, when the tax authorities determine and collect tax on fictitious interest on an interest-free loan, the lender does not receive interest at all and I therefore, consider that it cannot be regarded as their 'beneficial owner'.
59. Secondly, it must be emphasized that even if it were assumed that fictitious interest could be regarded as 'interest payments' within the meaning of Directive 2003/49, since those payments relate to an interest-free loan, with maturity of 60 years after its conclusion, they fall within the derogation provided for in Article 4 (1) (d) of that directive, which excludes from its scope 'payments of debt claims for which there is no repayment clause or where the amount is due more than 50 years after the date of issue'. However, the term of the loan at issue is 60 years, which makes Directive 2003/49 inapplicable in the present case.
60. Thirdly, in the interest of completeness, I think it should be borne in mind that Directive 2003/49 pursues a dual purpose, namely, on the one hand, the avoidance of double taxationand the other, the fight against fraud and tax evasion.
61. Thus, in order to avoid double taxation on cross-border interest payments, it is prohibited to tax interest payments in the source Member State to the detriment of the beneficiary of the latter .However, in the present case, there is no possibility of double taxation, which runs the risk of contradicting Directive 2003/49, since the fictitious interest rates set by the tax authorities cannot be taxed in Luxembourg due to the lack of transfer of those amounts in favour of the parent company.
62. As regards the risk of abuse and tax fraud, Article 5 (1) of Directive 2003/49 does not preclude the application of the provisions of national law necessary to prevent fraud or abuse. However, it should be noted that accepting the applicant's interpretation would mean circumventing national tax law. In practice, this would mean allowing related companies to enter into loan agreements (or other types of intra-group transactions) in breach of national law and then invoking Union law in order to avoid the application of national tax law (and possibly taxation). Actually, such an interpretation would be contrary to the objectives of this Directive, among which is combating tax evasion.
63. In light of the foregoing, I consider that the provisions of Directive 2003/49 cannot be applied to a case such as the one in the main proceedings.
64. Therefore, I propose that the answer to the second question referred should be that Article 4 of Directive 2003/49 must be interpreted as meaning that it does not require the payment of interest such as those referred to in Article 4 (1) (d) of that directive qualify as a " profit distribution " under Article 5 of Directive 2011/96.
65. By its third question, the referring court essentially asks whether payments made with respect to an interest-free loan maturing 60 years after its issue date fall within the scope of Article 4 (1) (d) of Directive 2003/49, Article 1 (1) (b) and (3) and Article 5 of Directive 2011/96.
66. As regards Directive 2011/96, it should be borne in mind that it aims to exempt from withholding tax and to eliminate from double taxation of such income at parent company level in order to facilitate the grouping of companies at EU level, the dividends and other forms of profit distributions paid by subsidiaries established in one Member State to their parent companies established in another Member State.
67. In that regard, Article 1 (1) (b) of Directive 2011/96 provides that it applies to the 'distribution of profits' from a subsidiary to its parent company in a cross-border legal relationship.
68. It should be noted that the concept of “ distribution of profits “ is not defined as such in that directive.
69. The Court has held that a Member State in which the company is a tax resident can legally treat as “profit distribution” interest paid by that company to a parent company established in another Member State. However, this conclusion is only applicable within the context in which the subsidiary has actually made interest payment on the loan.
70. Therefore, I consider that fictitious interest, which were merely established by the tax authorities in order to tax a transaction, regarded as covert under national law, cannot be regarded as ‘distribution of profits' within the meaning of Directive 2011/96, in particular in the absence of an actual payment of interest between these two companies in the same group.
71. It should also be noted that, similar to Directive 2003/49, one of the main objectives of Directive 2011/96 is to prevent both double taxation and abuse and tax fraud. In that regard, I refer to the considerations set out in points 61 and 62 of this Opinion, which apply mutatis mutandis to Directive 2011/96.
72. For the reasons set out above, I consider that Directive 2011/96 is not applicable to a situation such as the one in the main proceedings.
73. Therefore, I propose that the third question be answered, that Directive 2011/96 must be interpreted as meaning that it does not apply to withholding tax on fictitious interest income on an interest-free loan granted by the parent company to its subsidiary.
74. The fourth question covers two main aspects, which must be distinguished.
75. The first aspect concerns the question whether the withholding tax on the alleged interest payments on an interest-free loan complies with Directive 2003/49 and with the withholding tax exemption under Directive 2011/96. The second aspect raises the same question, but in the light of the requirements set out in Article 49 TFEU and Article 63 (1) and (2) TFEU.
76. In that regard, according to the recent judgment of the Court (Grand Chamber) in Joined Cases N Luxembourg 1 and Others, it is necessary to distinguish between two hypotheses from the outset.
77. In the first case, the inapplicability of the exemption regime provided for in Directive 2003/49 stems from the finding that there has been fraud or abuse within the meaning of Article 5 of the Directive. In such a case, in the light of the case-law cited in point 43 of this Opinion, a company resident in a Member State is not entitled to invoke the freedoms enshrined in the Treaty on the Functioning of the EU in order to challenge national legislation governing the taxation of interest paid of companies resident in another Member State. In view of the fact that Article 1 (2) of Directive 2011/96 contains a provision similar to Article 5 of Directive 2003/49 as regards its inapplicability in the event of fraud or abuse, I consider that that hypothesis must be applicable mutatis mutandis to Directive 2011/96.
78. In the second case, the inapplicability of the exemption regime provided for in Directive 2003/49 (and the inapplicability of Directive 2011/96 by analogy) stems from the fact that the conditions for the application of that exemption are not met, without, however, fraud or abuse within the meaning of Article 5 of Directive 2003/49 (or Article 1 (2) of Directive 2011/96) being established. In such a case, it must be ascertained whether Article 49 and Article 63, paragraphs 1 and 2 of the Treaty on the Functioning of the EU must be interpreted as precluding national legislation on the taxation of interest as the one in the main proceedings.
79. It should be noted at the outset that the referring court's question concerns only the compatibility with Articles 49 TFEU and Article 63 (1) and (2) TFEU of Articles 195, 200 and 200a of CITA, which lay down the rules and conditions for collection of the tax at the source and the procedure for recalculation and refund of the tax in favour of the foreign persons.
80. Moreover, I consider that an analysis of this matter should not be limited to the above-cited provisions of national law but that it should take into account the overall Bulgarian tax regime applicable to foreign companies. Therefore, I propose to include in the further analysis both Article 16 of CITA (which provides for the terms and conditions for taxation of foreign companies in violation of the arm’s length principle) and Article 199 of CITA (which concerns the tax base for withholding tax on the income of foreign companies) and Article 202a (which provides for the regime of accrual and refund of the tax withheld at source from which foreign companies may benefit).
81. It follows from the case-law of the Court that consideration of the question should not be limited to the formal exemption of a particular type of tax but must also take into account the overall context of the taxation of foreign companies and therefore, carry out a full examination.
82. The answer to that question concerning Directives 2003/49 and 2011/96 was given by the proposed answers to the second and third questions, in which I conclude that those directives are not applicable to the facts of the case.
83. In order to answer the fourth question referred by the national court, it must first be examined whether Articles 49 TFEU and 63 TFEU allow national legislation under which the regime automatically applied to foreign companies, unlike domestic companies, do not allow them to deduct the expenses of the loan in question. If so, it should be examined whether such a difference in treatment can, on the one hand, be eliminated by a mechanism for recalculating and refunding the tax which foreign companies may use and, on the other hand, be justified by overriding reasons of general interest. Moreover, in such a case, the application of that restriction must be able to ensure that the objective pursued is achieved and does not go beyond what is necessary to attain it.
(a) The relevant provisions of the Treaty on the Functioning of the EU
84. In so far as the referring court asks the Court whether the Bulgarian legislation at issue is compatible with the Treaty provisions on freedom of establishment and free movement of capital (Articles 49 TFEU and 63 TFEU), the first question should be asked, in the light of which of those Treaty provisions the national legislation must be assessed.
85. It should be noted that, in principle, questions concerning the tax treatment of interest and capital gains paid between companies of two Member States may fall within the scope of both the free movement of capital and that freedom of establishment, in particular as regards the latter, where a loan has been concluded between related companies, a company from a Member State holding a share in the capital of a company established in another Member State, which allows it to exercise undisputed influence over the decisions of the company and to determine its activity.
86. According to settled case-law, to determine whether national legislation falls within the scope of either freedom, account must be taken into the objective of that legislation.
87.Moreover, it is apparent from the order for reference that Article 16 (2) (3) applies to all cases of interest-free loans and not only to ones rendered by related companies, irrespective of the size of the participation in the capital of the company, which grants the loan. At first sight, that circumstance should lead to a consideration of the fourth question from the point of view of the free movement of capital.
88.However, I consider that the facts of the present case suggest that that Bulgarian legislation must be examined in the light of the freedom of establishment. Apart from the fact that InterV Investment was the applicant's sole shareholder at the time the loan in question was concluded, the characteristics of the latter, and in particular its duration, and the terms of its repayment, show that it could be concluded only between related parties. There is therefore no doubt that there is a relationship of interdependence between those companies, which, given its participation in the applicant's capital, gives InterV Investment undisputed influence over the applicant's decisions, while allowing it to determine its activities.
89.Moreover, such an approach would be consistent with the Court's case-law in several cases in which the national legislation at issue has characteristics which are common to those of the disputed Bulgarian law. In that regard, it should be noted that, in SGI, the Court examined, in the light of the freedom of establishment, Belgian legislation allowing the tax authorities, in the context of income taxation, to add to the profits of a domestic company fictitious interest on an interest-free loan granted to a subsidiary on the ground that although this legislation applies not only to related companies, the issue refers to a situation of related companies.
90.Although I am inclined to consider that it is more appropriate to assess the fourth question in the light of freedom of establishment, it is perfectly acceptable to consider the national legislation at issue in relation to the free movement of capital.
91.However, despite the choice to analyse the compatibility of the national measures at issue regarding to freedom of establishment, the same conclusions as those set out below follow from the analysis of the issue in terms of the free movement of capital. In fact, like freedom of establishment, free movement of capital prohibits measures that may deter foreign entities to invest in a Member State or to discourage residents of that Member State to invest in other countries.
92.Finally, assuming that the national legislation has the effect of restricting the free movement of capital, this consequence of the restriction legally stems from the freedom of establishment and does not justify an examination of that measure in the light of Article 63 TFEU.
b) Do Articles 195 and 199 of CITA establish discrimination between domestic and foreign companies?
93.According to settled case law of the Court Article 49 TFEU seeks to ensure equal treatment for companies in the host Member State and prohibits any discrimination based on the “registered address” of a given company and fundamentally any unjustified restriction of that freedom.
94.However, it is apparent from Article 16 (2) (3) CITA that that provision applies to any interest-free loan, irrespective of whether only domestic companies or also foreign companies are parties to it. Furthermore, it is not disputed that the same tax rate of 10% applies, whether the lender is a domestic or a foreign company.
95.However, it follows from Articles 195 and 199 of CITA that different tax treatment is applied to foreign companies which enter such transactions. Thus, while fictitious interest on a loan granted by a foreign company is taxed with withholding tax, and this constitutes immediate and definitive taxation, without being possible to deduct the costs associated with granting of that loan, the taxation of fictitious interest on a loan granted by a local company depends, within the framework of corporate tax treatment, on the positive or negative financial result of that company, after taking into account the possible costs associated with the granting of this loan.
96. At this stage of the analysis, it should be emphasized that the case-law of the Court is full with judgments relating to this issue, both in terms of free movement of capital and the freedom of establishment. In particular, in a number of judgments in which the facts are similar to those in the main proceedings, the Court has held that national legislation provides that interest which a foreign company receives from a domestic company is taxed with withholding tax by the local company, without the foreign company being able to deduct its costs, such as interest costs directly related to the activity of granting the loan, while such deductibility is granted to local companies that receive interest from another local company, constitutes a restriction on the freedom of establishment. The same conclusion is drawn with regard to the free movement of capital.
97. In the light of the foregoing, I consider that such a difference as regards the terms and conditions for calculating the tax may constitute a restriction under Article 49 TFEU.
98. However, the present case differs from those cases in that, as is apparent, Bulgarian law provides in Article 202a of CITA for procedure allowing foreign companies to be treated in the same way as domestic companies from a tax point of view. Therefore, before considering a possible justification for the discriminatory measure introduced by Articles 195 and 199 of CITA, it should be examined whether Article 202a of CITA allows to eliminate the difference in treatment between domestic and foreign companies established above.
c) Does Article 202a of CITA allow to eliminate the discriminatory characteristics of the tax regime applicable to foreign persons under Articles 195 and 199 of CITA?
1) Scope of Article 202a of CITA
99. It is apparent from the written observations submitted by the tax authorities and the Bulgarian Government that Article 202a of CITA provides for a mechanism allowing foreign companies to choose the tax regime provided for domestic companies. Thus, that procedure allows them, on the one hand, to deduct costs, such as interest costs directly linked to the activity of granting the loan in question, and, on the other hand, to recover the withholding tax in the event of a negative financial result or be exempt from it.
100. The tax authorities and the Bulgarian Government submitted that if the applicant had opted for this scheme in the present case, it would not have been taxed with corporate tax in Bulgaria, as (according to the applicant) its financial result had been negative during the period in question.
101. For his part, the applicant expressed doubts as to the suitability of the procedure under Article 202a of CITA to mitigate any discrimination which would have continued even if a foreign company had chosen to apply that provision, given that the recovery procedure would not have immediate effect.
102. Based on the clarifications made at the hearing by the applicant, the tax authorities and the Bulgarian Government, the recalculation and recovery procedure provided for in Article 202a of the CCT can be summarized as follows.
103. The procedure provided for in Article 202a of CITA is not applicable by default. In order to benefit from it, the foreign company must explicitly choose this procedure, stating this in its tax return. Even if the company concerned decides to make this choice, the withholding tax will be made in accordance with the regime provided for in Articles 195 and 199 of CITA, namely the tax will be withheld directly at the source on the gross income. Only subsequently will the foreign company be able to benefit from a tax refund if, after a reassessment of its position by the tax authorities, it is proved that it has a negative financial result.
104. As regards the length of the recalculation and recovery procedure provided for in Article 202a of CITA, there was disagreement between at the hearing between, on the one hand, the applicant, who maintained that that procedure could be particularly long, and on the other hand, the tax authorities and the Bulgarian government, which disputed the excessively long period for that procedure.
105. The description of the tax refund regime provided for in Article 202a of CITA deserves the following remarks.
106. In the first place, it follows from a joint reading of Article 202a (1) to (4) of CITA that, in fact, that regime allows foreign companies to apply for a recalculation of the tax already withheld at source in accordance with the applicable to domestic company regime. It is obvious that this provision seeks to unify - or at least to approximate - the tax treatment of foreign companies with that of local companies in Bulgaria.
107. It should be noted that the Court has held that the right to deduct may also materialize after deduction of withholding tax in the recovery of withholding tax.
108. However, it must be concluded that, notwithstanding the possibility given to foreign companies, there is still a risk that domestic companies may enjoy a tax advantage. Indeed, as it is evident, it follows that domestic companies may be given the advantage of having liquidity, since, in the event of a negative financial result, they do not have to pay fictitious interest tax, unlike foreign companies.
109. In particular, for a foreign company with a negative financial result, this 'liquidity disadvantage' corresponds to the time discrepancy between the date of withholding at source and that of the tax authorities' refund of the tax overpaid.
110. I consider that the extent of the liquidity advantage that results from this difference in treatment and may constitute an element of discrimination depends to a large extent on national procedural rules, as well as on the practice followed by the tax authorities in enforcement of the procedure under Article 202a of CITA. In those circumstances, if the length of the recalculation and possible recovery procedure exceeds a reasonable time, as the applicant maintains at the hearing, the advantage of a local company having liquid assets, as opposed to a foreign company, may be significant and therefore, discriminatory or an obstacle to the free movement of capital. On the contrary, if this period is reasonable, such a measure may mitigate or prevent discrimination between domestic and foreign companies. It should be noted that the fact that the Bulgarian legislation provides for moratorium interest rates would allow to alleviate this discrimination in relation to liquidity, as far as the stated term is not significant.
111. In this regard, it is necessary to emphasize that the assessment of the existence of any less favourable treatment of interest paid to foreign companies should be an assessment made for each tax year separately.
112. Secondly, it should also be noted that, in addition to the question of the duration of the refund, the analysis of the application of Article 202a of CITA must take into account all the factors which may lead to different treatment between domestic and foreign companies. Although this article aims to establish equal treatment between these two types of companies, which should in principle exclude unequal treatment (other than the liquidity advantage identified above), it should be ensured that its application does not create other forms of discrimination. Therefore, this issue is closely related to the conditions for payment provided for in the Bulgarian corporate tax legislation, including their periodicity and the possibility to defer the payment of the tax or to receive other reliefs that may increase the established advantage related to liquid assets. For example, if Bulgarian law allows a local company that has a negative financial result to adjust or carry-forward its taxation to the next tax year with a positive financial result, this would create a risk of increasing the liquidity over a foreign company.
113. Thirdly and lastly, I consider that, from a practical point of view, the extent to which that provision is capable of mitigating that discrimination will also depend on the ability of the foreign company to provide proof of the costs, which it claims to be deductible, and on the other hand, the tax authority of the country for which the borrower is a resident, in this case Bulgaria, to exercise effective control. In that regard, it should be noted that neither the referring court nor the other parties to the main proceedings have relied on the existence of a bilateral agreement between the Grand Duchy of Luxembourg and the Republic of Bulgaria governing this type of situation.
114. However, a procedure to ensure that there is no discrimination against foreign companies, while ensuring that the tax authorities can verify that the costs incurred justify reimbursement, can only be based on cooperation and exchange of information between the tax authorities of the Member States concerned (or third countries). Moreover, it should be noted that, in addition to bilateral agreements concluded between Member States, such cooperation is also provided for in Directive 2011/16/EU, which aims, inter alia , to avoid both double taxation and non-taxation which may result from cases of fraud or abuse.
115. The referring court must therefore, in principle, examine, in light of the above considerations and having regard to the rules of national procedure and administrative practice in the field of taxation, whether the difference in treatment between domestic and foreign companies which have applied Article 202a of CITA, may provide an advantage related to liquidity.
2) For the objective comparability of the tax situation of local and foreign companies
116. According to settled case-law, discrimination can arise only through the application of different rules to comparable situations or the application of the same rule to differen tsituations.
117. First of all, as regards Article 16 of CITA, there is no doubt that this provision applies in the same way to both domestic and foreign companies.
118. However, as described above, although domestic and foreign companies are subject to withholding tax, the conditions for calculating tax for those two types of companies differ. Thus, the Bulgarian tax legislation establishes a difference in treatment between foreign companies taxed with withholding tax on their gross income under Articles 195 and 199 of CITA (which, moreover, contain the automatically applied regime) and domestic companies taxed with withholding tax on their net income.
119. Although in the Truck Center Judgement, the Court held that the difference in treatment consisting in the application of different taxation techniques depending on the place of establishment of the taxable person relates to situations which are not objectively similar, it should be noted that, unlike the case cited above, in which the advance tax on income from movable property and capital was levied only on interest paid to recipients who are foreign companies, the legislation applicable in the main proceedings provides for one and same means of collecting the tax on dividends, namely withholding tax.
120. Thus, from the moment when a Member State imposes the same tax on not only domestic but also foreign companies on the interestpayment, they receive from a company established in that State, the relevant provisions of these two categories of taxable persons are approximated because they should be subject to the same tax treatment.
121. However, it follows from Articles 195 and 199 of CITA that the liquidity advantage granted to domestic companies does not apply to foreign companies. However, without prejudice to the findings set out in points 109 to 115 of this Opinion, this objective could be achieved through the option provided for in Article 202a of CITA.
3) The existence of a choice under Article 202a of CITA
122. According to settled case-law, a national system which restricts the fundamental freedoms may remain incompatible with European Union law, despite its application not being mandatory, provided that there is a choice, which would possibly allow a situation to become compatible with European Union law, does not in itself remedy the illegality of a system which continues to include a tax mechanism incompatible with that law.
123. The question therefore, arises as to whether the regime provided for in Article 202a of CITA allows for a choice, in which case that scheme cannot eliminate the discriminatory effects of the regime provided for in Articles 195 and 199 of CITA.
124. It should be noted that, at the hearing, the Commission maintained that the regime provided for in Article 202a of CITA must not be regarded as a regime which allows a choice in the light of the case-law of the Court, in particular Gielen and the Autoridade Tributária e Aduaneira (Investment Income Tax), and that this scheme is rather a tax refund mechanism.
125. It should be noted that those two cases differ from the main proceedings in particular in two respects. First, it is true that, contrary to the Bulgarian regime in question, the choice of taxpayers in these two cases has a direct impact on the tax that is deducted from them. However, according to the Bulgarian regime in question, regardless of the decision of a foreign company to choose one of the two available regimes, this company will be taxed at source on its gross income. Only subsequently will its tax situation be reviewed and a refund possibly available, provided that the taxpayer has chosen the regime under Article 202a of CITA. It should also be emphasized that, unlike in the present case, the above cases do not fall within the context of possible abuse or tax fraud.
126. However, I consider that the existence of an option under Article 202a of CITA cannot be questioned.
127. Thus, the fact that a taxable person has the option of choosing between two different regimes, irrespective of the tax treatment which they grant him, shows that it is a regime which allows a choice. This is true in a higher degree when, as in the present case, it is the mechanism which is incompatible with European Union law that applies automatically if the taxable person has not made a choice.
128. I also consider that the fact the mechanism introduced by Article 202a of CITA is more like a tax refund mechanism in the context of withholding tax cannot call into question the fact that it allows a choice for the taxable person.
d) The statement of reasons
129. The last question which arises is whether the difference in treatment of foreign companies can be justified. It must therefore be examined (a) whether the Bulgarian legislation pursues a legitimate aim compatible with the Treaty and is justified by overriding reasons in the public interest, (b) whether it is capable of ensuring the attainment of the objective pursued by it and (c) whether it does not go beyond what is necessary to achieve it.
130. In that regard, the tax authorities and the Bulgarian Government maintain that the legislation in question pursues proportionately legitimate political objectives, stemming in particular from maintaining a balanced distribution of tax powers between Member States and from preventing tax fraud or taxation.
1) The reasoning based on the maintenance of a balanced distribution of tax powers between Member States
131. The Court has held that a balanced distribution of tax powers between Member States can be accepted as a justification for restricting fundamental freedoms, in particular where the system in question intended to prevent certain practices that could hamper the right of Member States to exercise their powers of taxation in relation to activities carried on in its territory.
132. It must be borne in mind that that objective is an expression of the fiscal sovereignty of the Member States. It covers every country's right to protect their tax revenues, especially in terms of realized profits on its territory (principle of territoriality) and regulate its own tax law (principle of autonomy).
133. In the absence of harmonization in the current state of EU law, direct taxation is a competence for the Member States. Member States should also determine the criteria for allocating their tax powers between them by concluding double taxation agreements or by unilateral measures.
134. As Advocate General Kokott points out in Case N Luxembourg 1 and Others, in situations involving a cross-border element, it is not always certain that the recipient declares its income taxable in accordance with the established procedure. As a rule, the country of residence of the recipient of interest rarely receives information about the latter’s foreign income if there are no functioning systems for data exchange between financial authorities. Thus, in such a case, withholding tax in the country where the interest debtor is a resident is a special taxation technique which essentially guarantees (minimum) taxation of the recipient of the interest.
135. However, according to settled case-law, national tax legislation, similar to Articles 195 and 199 of CITA, which, when taxing foreigners, generally takes into account gross income without deducting operating expenses, while residents are taxed on the basis of their net income after deducting these costs, cannot be justified by the objective of maintaining a balanced distribution of tax powers between Member States. This is also the case where, notwithstanding the existence of a choice under Article 202a of CITA, the application of that article confers an advantage on local companies to have liquidity.
136. Thus, in accordance with the case-law of the Court, I consider that the Bulgarian legislation applicable to foreign companies in general should be analyzed, considering Article 16 of CITA, which, in the light of the objectives pursued by that provision, the justification based on the fight against fraud and abuse was examined.
2) The justification derived from the combat of fraud and abuse
137. The Court has already held that the combat of tax fraud or tax evasion is an overriding reason in the public interest which may justify a restriction on the exercise of the freedoms guaranteed by the Treaty movement.
138. A determination of abuse depends on the overall assessment of the circumstances of each case, whose establishment is the responsibility of the competent national authorities and should be able to be subject to judicial review. Although it is undoubtedly for the referring court to make that overall assessment, the Court may provide useful guidance in assessing whether transactions are carried out in the course of ordinary commercial transactions or solely for the purpose of abusing an advantage provided for in EU law.
139. It must be borne in mind that the Court has held that the fact that a domestic company receives a loan from a related company established in another Member State cannot serve as a basis for a general presumption of abusive practices, and to justify a measure which is prejudicial to the exercise of a fundamental freedom guaranteed by the Treaty on the Functioning of the European Union. However, it must be recalled that the taxpayer may not use the resultant Union law right or advantage, where the deal is a wholly artificial arrangement and it is designed to circumvent the legislation of the Member State in question.
140. In that regard, it should be noted that Article 16 of CITA seeks to combat tax evasion by transposing into Bulgarian law the arm’s length principle, recognized by both international tax practice and the case-law of the Court of Justice by an appropriate means to avoid artificial arrangements in terms of cross-border transactions.
141. In those circumstances, I consider that, in the light of the overall tax context of the present case, the tax treatment provided for in the legislation at issue, in particular Article 16 of CITA, is justified by the risk of non-taxation arising, on the one hand, from the fact that interest income is not taxable in the Member State which was to benefit from it (namely the Grand Duchy of Luxembourg), in view of the characteristics of the loan at issue (and in particular the absence of a real interest beneficiary) because the loan was interest-free) and, secondly, the fact that, at the time of the revision act and therefore, during the period covered by the present dispute, the loan in question had not been converted into equity by the applicant (therefore could not be taxed in Bulgaria as a contribution). I therefore, consider that as a provision on 'prevention of abuse', Article 16 of CITA makes it possible to ensure the effective collection of the tax.
142. Thus, if in applying the principles of national law in accordance with EU law, the referring court concludes that there is an abusive practice, it is possible to impose withholding tax such as the one in the present case. But then in this case, the question will no longer be valid because this tax will be the result of abuse, and according to settled case-law EU law cannot be relied for the purposes of abuse.
143. As stated in points 41 to 44 of this Opinion, such an approach is consistent with both international tax practice and Union law and the case-law of the Court of Justice in the field of abuse and fraud.
144. Finally, it should be noted that the above considerations can be accepted not only if the legitimate aim of preventing fraud and abuse is taken into account in isolation, but also if this goal is considered in conjunction with the goal of maintaining a balanced distribution of fraud and abuse. tax powers between Member States.
145. In that regard, it must be emphasized that the Court has held that maintaining a balanced distribution of tax powers and preventing tax avoidance are related objectives. The Court has held that practices leading to the creation of completely artificial arrangements which do not reflect economic reality, in order to avoid taxes which are normally due on profits derived from activities carried out on national territory, may jeopardize the law of the Member States to exercise their powers of taxation in respect of these activities and thus, undermine a balanced allocation of taxation powers between the Member States.