Following the 2014 amendment, the parent company's Member State must only refrain from taxing distributed profits to the extent that such profits are not deductible by the subsidiary. The actual application of the national anti-hybrid rules may conflict with the Parent-Subsidiary Directive, depending on the implementation procedure adopted by the Member State.
Rule of Reason
It is worth mentioning that the grounds of justification that will be analyzed from now on can be invoked jointly by the Member State concerned.46 The ECJ took this approach for the first time in the Marks & Spencer case,47 where it states has that the three justifications must be examined. together in order to constitute compelling reasons in the public interest that are compatible with EU law.48 Since then, the ECJ has established a new method for determining whether a discriminatory national tax law is justifiable under EU law, based on ' a careful analysis of the situation and a collective evaluation of different justifications. 49.
The Balanced Allocation of Taxing Powers
This indicates that anti-hybrid rules do not exactly preserve tax jurisdiction or the attribution of taxing rights from a state of residence perspective, but rather change the way taxing rights are exercised in a cross-border context, merely to mitigate the loss of tax revenue from one Member State to another. Others. Insofar as EU law does not set general criteria for the division of powers and the elimination of double non-taxation between Member States, which is the main aim of the anti-hybrid rules, the balanced distribution of taxing rights has not been jeopardized by the use of hybrid arrangements.
The Cohesion of the National Tax System
Thus, it is not surprising that, from the point of view of a Member State, the tax treatment applicable to the financial instrument or legal entity is completely symmetrical, without affecting the fairness or cohesion of the tax system.79 This means that unilateral countermeasures of adopted by a Member State against hybrid mismatch arrangements may lead to an unsustainable contradiction with the structure and principles of its tax system. It is true that, from the perspective of fiscal cohesion, it is possible to establish a direct link between the deduction of interest expenses by the subsidiary and the subsequent taxation of dividends by the parent company, as long as the possible differences in tax rates are. neglected. 1000; Dennis Weber, An analysis of the past, present and future of tax system coherence as justification, EC Tax Review 2015, p.
Therefore, member states cannot refer to the cohesion of the national tax system as a justification to fight against hybrid mismatch arrangements, because it unjustifiably neglects the basic parameters of EU legislation, such as fiscal sovereignty, the right to use tax planning and differences in the field of direct taxation. Nevertheless, it seems reasonable to analyze the cohesion of the tax system from a broader perspective that would cover the European Union as a whole. In the Danner case (C), the European Court did not examine fiscal compliance at the micro level of the national legislation of a member state, but at the broader macro level of two member states that have signed a tax treaty.82 On this basis, it might be possible to establish a direct link between the possibility of deducting compensation , arising from a hybrid instrument, on the one hand at the level of the subsidiary company and taxation of the corresponding amount at the level of the parent company on the other hand.
The preservation of a direct link between deductions and taxation in a wider cross-border context can be accepted by the European Court of Justice as a valid justification for ensuring the coherence of the different tax systems, since the EU Treaties provide the legal basis for analyzing the subject from an international perspective, whereby equal sovereign nations endeavor to receive their fair shares of a shared tax base.83 In this perspective, it should be remembered that in the Manninen case (C-319/02) ), AG Kokott has already tried to establish a direct link between the coherence of the tax system and the principle of single taxation by ascertaining that it.
The Prevention of Tax Abuse
This is because anti-hybrid rules only tax dividends received by the parent company to the extent that the consideration arising from the hybrid financial instrument is deductible at the subsidiary level. This argument is not persuasive, because the discrepancy in tax outcome does not constitute an abuse if the hybrid financial instrument provides arm's length remuneration and meets a real financial need of the borrower.100 Clear evidence in support of the above statement arises from the fact that , even after the amendment of the Parent-Subsidiary Directive in 2014, the hybrid financial instrument is not re-characterized for tax purposes. Instead, only the tax treatment of the amount received by the parent is adjusted with respect to the portion of the mismatch in the tax outcome.101 Another important point to note is when the parent decides to do so.
Given the existence of non-tax reasons for using hybrid financial instruments, domestic laws should at least allow taxpayers the opportunity to prove that tax avoidance was not the main or dominant reason for the structured adoption. Indeed, since the CJEU already considered that the protection of tax revenues cannot serve as a possible basis of justification for the restriction of fundamental rights under EU law,108 it seems necessary to assess, based on the facts and the circumstances of each case, whether the use of hybrid financial instruments can be considered an artificial tax-driven transaction. This means that the taxpayer must have the right to demonstrate that, in the specific case, the use of the hybrid instrument is not completely artificial, reflecting the economic reality. 111.
However, in exceptional circumstances, the CJEU may consider the prevention of tax abuse as a valid basis of justification in a specific case, provided that the facts and circumstances prove the existence of artificiality in the transaction carried out by the taxpayer.
THE NEED TO COUNTERACT HYBRID ARRANGEMENTS: A NEW GROUND OF JUSTIFICATION?
Avi-Yonah, International Tax as International Law – An Analysis of the International Tax Regime (Cambridge Tax Law Series, 2007), p. In light of the above, the anti-hybrid rules introduced in the Parent-Subsidiary Directive can be considered as a mechanism to achieve the principle of matching on the international tax area outside the scope of the tax treaties. The preservation of a direct link between deductions and taxation in a wider cross-border context can thus be accepted as a consequence of the single tax principle.
The wording of the provision does not clarify whether the deduction of the consideration from the hybrid instrument reduces the amount of the tax deduction. In the author's opinion, since the Parent and Subsidiary Directive allows both the exemption method and the indirect credit method, the Member States' national laws may allow a transition to the indirect credit method when the tax level in the subsidiary is too low. In this case, the country of the parent company will comply with the provision of Article 4 of the Parent-Subsidiary Directive and thus achieve the objective of preventing double taxation.
As already mentioned, Article 4.1, letter a) of the Parent and Subsidiary Directive states that the parent company's Member State must. On the one hand, if the country of the parent company characterizes the payment as interest, the amount may be taxed based on its national law under the Interest and Royalties Directive. If, on the other hand, the parent company's country characterizes the payment as a profit distribution within the framework of the parent-subsidiary directive, the corresponding amount must not be taxed to the extent that the corresponding payment has not been deducted at the level of the subsidiary.
PROPORTIONALITY TEST
For example, the overkill effect can occur when the payment is deducted at the subsidiary level at a rate of 15%, while the corresponding amount is taxed at the parent level at a rate of 35%. On the other hand, the underkill effect can occur when the payment is withheld from the subsidiary at a rate of 35%, while the corresponding amount is taxed at the parent company at a rate of 15%.167 In the Schempp judgment, the ECJ does not give weight to the tax rate applicable to the income from which the expense was deducted, as compared to the tax rate applied to the income by the Member State of the beneficiary of such payment. This implies that these differences in statutory tax rates are considered by the ECJ to be an inescapable consequence of Member States' direct tax sovereignty.
Application of this provision simultaneously with the new rule introduced in the Parent-Subsidiary Directive may lead to legal double taxation due to the withholding. Moreover, the anti-hybrid rule introduced in the Parent-Subsidiary Directive linked the tax treatment applicable to the profit distribution to whether or not the corresponding amount was deducted at the level of the first-class subsidiary. In a vertical investment line, the profits generated by the second-tier subsidiary and distributed as dividends to the first-tier subsidiary may be taxed again at the level of the parent if the payment by the first-tier subsidiary has been classified as deductible interest expense under national law. legislation of that state.
This result seems incompatible not only with the proportionality test, but also contrary to the objective and purpose of the Parent-Subsidiary Directive.
CONCLUSIONS
In this scenario, the tax credit for the parent company may be limited because Member States that rely on the credit method do not apply their capital export neutrality principle to the repayment of the foreign tax credit.175 It follows that the simultaneous application of both rules may have an overkill effect and thereby violate the principle of proportionality . It thus ignores the fact that considering only the first-tier subsidiary can often lead to an unintended consequence: economic double taxation.
