The European Court of Justice (ECJ) has this week (5 July 2005) decided against the taxpayer in a case (‘the D case’) involving a German national and resident, who argued for ‘Most-Favoured Nation’ treatment, i.e. that he should receive similar tax treatment to other individuals in a comparable situation.

Bill Dodwell, head of Tax Policy Group for Deloitte in the UK commented: “It is unusual for the ECJ to over-rule the Advocate General’s opinion, as they have done in this case.  This case could have been significant in allowing non-resident taxpayers to scrutinise the taxing country’s various double tax treaties and to argue that they should be treated in line with the most favourable.  As the decision has gone against the taxpayer, such arguments now look less likely to succeed.  Companies are of course different from individuals, so it seems likely such arguments will continue to be made – but perhaps now with less prospect of success.”

For the purposes of Dutch wealth tax, a German individual requested to be taxed in the Netherlands on his Dutch source assets as if he were a Dutch resident, or alternatively on the basis of the Netherlands-Belgium treaty (which was more favourable than the Netherlands–Germany treaty). The Netherlands wealth tax gives resident taxpayers an allowance not available to non-residents unless 90% or more of their estate is in the Netherlands.  However the German individual had only 10% of his wealth in the Netherlands.  The Netherlands double tax treaty with Belgium also gave the allowance to its beneficiaries.  The referring court questioned the legality of the differences in treatment which the Netherlands/Belgium treaty created between Belgian residents and residents of other Member States.

The European Court of Justice held the individual was not comparable to a Dutch resident, as he held only a minor part of this wealth there. The Court decided that the purpose of the allowance given to Dutch residents was because all their worldwide wealth was taxed.  It was not correct to suggest that a non-resident, with only 10% of his assets in The Netherlands, was in a similar position.

Perhaps more interestingly the ‘Most-Favoured Nation’ argument was also dismissed.  The ECJ decided that a German individual is not in a comparable position to a Belgian as the double tax treaty with Belgium has different terms to that with Germany.  Essentially the Court decided that EU member states could enter into Treaties with each other and residents of other EU states could not complain. This contrasts with the earlier Saint Gobain ECJ decision, in which it was held that Member States must grant advantages provided by treaties with non Member States to permanent establishments of companies resident in other Member States.

The case might be particularly relevant for the ACT class IV GLO, as it suggests that the claimants might not win their ‘Most-Favoured Nation’ claim for a tax credit. Whilst companies are not the same as individuals, it might also support Member States in arguing against:

• Any non-resident (individual or company) who claims to suffer a more unfavourable tax treatment in a foreign country than a resident of that country would suffer
• Any non-resident (individual or company) who claims to suffer a worse tax treatment than a resident of a third EU Member State e.g. because of a tax treaty with the country that is levying the tax.  (Case C-376/03; decision given 5 July 2005).

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