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International Taxation Case Digest: Bosal Holding BV v. Stratssecretaris van Financier (2003)

Case C-168/01

Lessons Applicable: Treaty as Soft Law


Bosal Holding BV, a limited liability holding company which engages financing and licensing/royalty related activities subjected to corporate tax in the Netherlands.  For the financial year of 1993, it wished to offset its profits with the costs of NLG 3,969,339  in relation to the financing of its holdings in subsidiary companies established in 9 other European Union Member States.   Bosal’s claim was disallowed and dismissed by the inspector of Arnhem Tax Office/Large Undertakings who dismissed Bosal’s claim on the ground that Article 13(1) of the Law on Corporation Tax of 1969 ─ 1993 version provides: In determining profit no account shall be taken of gains acquired from a holding or of the costs relating to a holding, unless it is evident that such costs are indirectly instrumental in making profit that is taxable in the Netherlands xxx
Bosal appealed to the Court  of  Justice-Arnhem by arguing that Article 13(1) restricts the freedom of establishments provided for in Article 52 of the Treaty par 1 (now Article 43 EC) which states that restrictions on the freedom of  establishments of nationals of a Member State in the territory of another Member State shall be prohibited and Article 58 of the Treaty par 1 (now Article 48 EC) which states that companies formed in accordance with the law of a Member State and having their registered office shall be treated in the same way as natural persons who are nationals of Member States.   The Court of Justice-Arnhem Netherlands upheld the Arnhem Tax Office’s decision.  

Thus, Bosal appealed to the Supreme Court of the Netherlands. Since the interpretation of Community law is necessary, the Supreme Court of the Netherlands referred the matter to the European Court of Justice.  The Netherlands together with the UK and  the  Commission  of  the European  Communities countered Bosal based on the following:

First, Netherlands argued that Article 13(1) did not discriminate because the subsidiaries of parent companies established in the Netherlands which do make taxable profits in that Member State and those which do not are not in an objectively comparable situation. For those profits made by subsidiaries themselves, it is not the whole profit that is subjected to Netherlands tax unlike those whose parents and subsidiaries that derive profit only in Netherlands.  Therefore, the distinction between the two groups is appropriate and did not violate the freedom of establishment.  

Second, Netherlands argued that Article 13(1) must be upheld to maintain the coherence of the Netherlands tax system wherein there is a direct link between tax benefit and its related tax liability.  In this case, costs have to be instrumental to profit before there can be deductions.

Third, Netherlands Government and the Commission argue that the limitation of the deductibility of costs incurred in relation to holdings is justified by the objective of avoiding an erosion of the tax base going beyond a mere diminution in tax receipts.

Finally, the Netherlands and United Kingdom Governments and the Commission argue that the 1969 Law is compatible with Article 4 of the directive that it is lawful for Member States to provide that costs in relation to holdings are not in any way deductible from the taxable profits of the parent company

ISSUE: Article 13(1) of the Law on Corporation Tax of 1969 can be upheld as it is not against the freedom of establishments.

HELD: NO. Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, interpreted in the light of Article 52 of the EC Treaty (now, Article 43 EC) precludes a national provision which, when determining the tax on the profits of a parent company established in one Member State, makes the deductibility of costs in connection with that company's holding in the capital of a subsidiary established in another Member State subject to the condition that such costs be indirectly instrumental in making profits which are taxable in the Member State where the parent company is established.

For the first point, by discouraging parent companies from establishing subsidiaries in other Member States, it violated the freedom of establishment.  For the second point on the coherence of tax system, the court cited Baars v. Inspecteur for the proposition that there can be no direct link where the law involves two different taxpayers or two different taxes or tax treatments.  In this case, there is no link between granting of a tax deductions on the costs connected with their subsidiaries from their taxable profit of the parent company and the tax system relating to the subsidiaries of parent companies where they are established in that Member State.  Under the principle of territoriality, the difference in tax treatment in question concerns parent companies according to whether or not they have subsidiaries making profits taxable in the Netherlands.  Moreover, unlike operating branches or establishments, parent companies and their subsidiaries are distinct legal persons.  It could also result to over taxation since the limitation of the deductibility of costs is not compensated for by a corresponding advantage.  Third, such a justification does not differ in substance from that concerning the risk of a diminution in tax revenue.  It does not appear amongst the grounds listed in Article 56(1) of the EC Treaty (now, Article 46(1) EC) and does not constitute a matter of overriding general interest which may be relied upon in order to justify a restriction on the freedom of establishment.  Last, the directive does not provide for any exception concerning the territory where the profits of the subsidiaries might be taxed. In those circumstances, the directive cannot be interpreted as authorising a law such as the 1969 Law.

In this case, the treaty is ruled over the domestic law. 
In the Philippine setting, treaties are only considered as a soft law.  It is not exactly treated as the international law mentioned in Article II, Section 2 of the Constitution provides, among others, that the Philippines adopts the generally accepted principles of international law as part of the law of the land.  Thus, it is not binding nder the doctrine of incorporation. 
In the Philippine setting, a subsidiary is also a juridical entity separate and distinct from that of its parent company.  Thus, the computation of income tax of the principal and subsidiary is also separate and distinct.  There is no allocation of profit and expenses.