Old German branch tax held discriminatory
In case C-253/03 CLT-UFA delivered on 23 February 2006 the ECJ stated that German provisions stipulating for different tax rates for branches and subsidiaries were contrary to the EC Treaty.
Up until 2000 German tax provisions stipulated that domestic subsidiaries could benefit from a reduced tax rate of 30% provided that the profits were distributed. If the profits were retained, a general tax rate of 45% would apply. The reduced tax rate of 30% was however not applicable to branches of non-resident companies, instead the profits were subject t corporate tax of 42%. Hence, there was an obvious difference in tax treatment depending on whether the foreign company chose to operate in Germany through a subsidiary or a branch.
CLT-UFA SA, a Luxemburg company with a permanent establishment in Germany, brought an action against German tax authorities claiming that the application of different tax rates was in breach with the freedom of establishment in Article 43 of the EC Treaty.
When examining the case the ECJ referred to cases Commission v France and Saint Gobain. The court stressed that the freedom of establishment includes the freedom to choose the appropriate legal form in which to pursue activities in another Member State and cannot be limited by discriminatory tax provisions. The court found that branches and subsidiaries were in comparable situation for corporate tax purposes. The application of different conditions was therefore discriminatory. The court ruled finally that the difference in treatment could not be justified, and consequently a breach of EC Law was at hand. Read the case.
