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Case Report: X NV v Staatssecretaris van Financiën (Case C-498/10)

European Court of Justice (First Chamber).

Judgment delivered 18 October 2012.

Income tax – wages tax – withholding tax - freedom to provide services – payment to UK semi-professional football clubs for matches – Dutch withholding tax at 20 per cent of fee - obligation to withhold at source wages tax on remuneration paid to non-resident service providers, but not on remuneration paid to residents, constituted restriction on freedom to provide services – restriction justified by need to ensure effective collection of tax and did not go beyond what was necessary to achieve that aim - TFEU, art. 56.

Summary

Income tax – wages tax – withholding tax - freedom to provide services – payment to UK semi-professional football clubs for matches – Dutch withholding tax at 20 per cent of fee - obligation to withhold at source wages tax on remuneration paid to non-resident service providers, but not on remuneration paid to residents, constituted restriction on freedom to provide services – restriction justified by need to ensure effective collection of tax and did not go beyond what was necessary to achieve that aim – TFEU, art. 56.

Dutch legislation which required the withholding at source of wages tax on the remuneration paid to non-resident service providers, but not on remuneration paid to resident service providers, constituted a restriction on the freedom to provide services but was justified by the need to ensure the effective collection of tax.

Facts

The taxpayer, a semi-professional football club established in the Netherlands, agreed to play friendly matches against two semi-professional football clubs established in the UK. Those matches took place in the Netherlands in August 2002 and August 2004 respectively. The taxpayer made payments to those clubs for the matches at issue. Those sums were not paid to the players. As it neither withheld nor paid wages tax in respect of those sums, the tax authorities raised assessments on the taxpayer, corresponding to 20 per cent of those sums after deduction of certain costs.

The district court annulled those decisions and assessments but the regional Court of Appeal set aside that decision. Taking the view that the relevant Netherlands legislation constituted a restriction on the freedom to provide services within the meaning of TFEU, art. 56 which could not be justified, X appealed in cassation to the Supreme Court which stayed the proceedings and referred to the ECJ for a preliminary ruling.

Issues

Whether the Dutch legislation constituted a restriction on the freedom to provide services within the meaning of TFEU, art. 56; whether that restriction could be justified by the need to ensure the effective collection of tax; whether account had to be taken of the fact that that legislation had been amended; and whether it was relevant that the non-resident service provider could deduct the tax withheld in the Netherlands from its tax liability in the member state in which it was established.

Decision

The ECJ (First Chamber) (ruling accordingly) said that an obligation to withhold tax, inasmuch as it entailed an additional administrative burden as well as the related risks concerning liability, was liable to render cross-border services less attractive for resident recipients of services than services provided by resident service providers and to deter those recipients from having recourse to non resident service providers. A restriction on a fundamental freedom was prohibited by the TFEU even if it was of limited scope or minor importance. Furthermore, unfavourable tax treatment contrary to a fundamental freedom was not compatible with EU law as a result of the existence of other advantages, even supposing that such advantages existed. Consequently, the obligation on the recipient of services to withhold at source tax on the remuneration paid to non resident service providers, whereas such a withholding tax at source was not levied on remuneration paid to resident service providers, constituted a restriction on the freedom to provide services in that it entailed an additional administrative burden and related liability risks.

A restriction on the freedom to provide services might be accepted only if it was justified by overriding reasons in the public interest. In the case of service providers which provided occasional services in a member state other than that in which they were established, and where they remained only a short period of time, a withholding tax at source constituted an appropriate means of ensuring the effective collection of the tax due. It did not go beyond what was necessary to achieve that purpose, even in the light of the opportunities for mutual assistance in the recovery of taxes presented by Directive 76/308. The subsequent renunciation of the withholding tax at issue in the main proceedings did not prejudice either its appropriateness to achieve the aim pursued or its proportionality, both of which had to be assessed solely in the light of the objectives pursued.

The obligation to withhold tax at source was liable both to render cross border services less attractive for resident service recipients than services provided by resident service providers and to deter those recipients from having recourse to non-resident service providers, irrespective of the effects that the withholding tax might have on the tax situation of non-resident service providers. Therefore, the tax treatment of the service provider in the member state in which he was established was not relevant for the purpose of determining whether the obligation on the recipient of services to withhold that tax at source constituted a restriction on the freedom to provide services prohibited by art. 56.


SOURCE: CCH Online

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