Briefing by David Anderson Solicitor and Chartered Tax Adviser, Sykes Anderson LLP solicitors - 9 December 2004

A recent opinion given by the Advocate-General in Inspecteur van de Belastingdienst v. te Heerlen [C-376/03] - is likely to have important tax implications for cross border investors. The opinion was given on 26 October 2004 and is likely to be followed by the European Court of Justice.

The Facts

D lived in Germany and was a German national. On 1 January 1998 10% of his total assets were buildings in the Netherlands. All his other assets were in Germany. The Dutch Inland Revenue assessed him to Dutch wealth tax on his Dutch assets.

Under Dutch internal law Dutch residents could deduct Florins 241.000 before applying the relevant percentage for Dutch wealth tax. This deduction was not available to non-Dutch residents. It was exceptionally available to Belgian residents because of a specific clause in the Netherlands - Belgian double tax treaty. However you would have to be Belgian tax resident to benefit from this treaty.

D refused to pay the full amount of the tax and claimed the same deductions as a Dutch tax resident. The Dutch Inland Revenue refused this and the question for the European Court was whether this decision conformed to European law. The answer is likely to be no and the tax payer is likely to win. This has wide implications across Europe especially for countries like France and Spain, which have annual wealth taxes.

The Law

Article 56 CE prohibits any restrictions on movements of capital between EU member states. This is without prejudice to national tax legislation, which can establish distinctions based on residence or situation of capital. The main legal question was whether Article 56 CE overruled the internal Dutch tax law.

A very interesting subsidiary question was raised as to whether a German tax resident could make use of the Netherlands-Belgian treaty because depriving a German resident of access to this treaty would operate as discrimination against the German resident. This is groundbreaking and could be the start of a European wide tax system by the backdoor.

Decision

The Advocate General came to the view that Article 56 CE overruled the Dutch internal law. He indicated that the German resident should be able to rely on the Belgian treaty. He recommended that the Court should not decide the case on the basis of the Belgian treaty as this would have major implications as tax payers would then analyse tax treaties to see which ones offered most advantages to them and then seek to rely on that treaty. Thus an Irish tax resident who owned a French investment property could say that he wanted to claim tax exemptions under the UK tax treaty with France.

General Comments

The following points were made:

• The opinion is limited to individuals' personal tax not corporate tax.

• The existing case law in this area, which relates to income tax discrimination, can apply to capital taxes such as wealth tax.

• The fact that an EU country gives its tax residents tax advantages it does not give to non residents is not in itself illegal. It must not however hinder free circulation of capital and the right to freely establish in another member state.

• Wealth tax currently only applies in Spain, Finland, France, Luxembourg, Netherlands and Sweden. This means if you are tax resident in a country (like the UK) which does not have wealth tax there is no set off of the tax in the country the tax payer is resident and so the assets in the other state are wholly taxed in that country.

Implications for French Wealth Tax

• France currently allows French tax residents to deduct 20% of the value of their main residence before calculating wealth tax. This is not available to non residents. It is difficult to see how this position can be maintained after this case.

• There are exemptions from wealth tax in French national law for business assets. These exemptions require a French tax resident to be (broadly) working in the business. The exemption should now apply to a UK tax resident person who is managing the business from the UK.

• Comparing Article 32(3) of the new UK-France Double Tax treaty (which is still to be ratified) with say Article 23(2) of the France-Spain Tax Treaty of 12 th June 1997 is instructive. The French treaty with Spain exempts Spanish tax payers from French Wealth tax if the Spanish Tax payer owns less than 25% of the shares in a French resident company. The UK resident tax payer will get no such relief and will have to pay French wealth tax on the shares in the French company. This opinion suggests that a UK shareholder could demand to be treated in the same way as a Spanish tax payer and be exempted from Wealth Tax on his say 24% shareholding in a French company.

There are similar tax exemptions in Article 23(4) of the Spain-France Treaty for Spanish residents involved in international transportation who are exempt from French wealth Tax on assets in France.

Article 23(5) contains a useful clause, which provides that any other assets not within Article 23 of the Treaty are exempted from French Wealth tax. This means that if an asset is not within the definitions in the treaty and is in France it is not assessable to French Wealth Tax. This offers a useful way of creative planning to avoid French Wealth Tax based on ensuring assets are packaged in a way which falls outside the definitions. If Spanish tax residents are able to get away without paying French Wealth Tax on French assets then UK tax residents will, if this opinion is followed in full, be able to claim the same exemptions.

• The UK-France double tax treaty has some important tax breaks, which are not available in other treaties including the France-Ireland double tax treaty. If the Court accepts the secondary argument this will open up the French market to Irish (and other) investors and remove the tax discrimination they currently face.

David Anderson