© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
G3. Restrictions
Prohibition on restrictions
- Direct tax competence must be exercised consistently with EU law
"[40] According to settled case-law, although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with Community law (Case C-311/97 Royal Bank of Scotland [1999] ECR I-2651, paragraph 19; Case C-319/02 Manninen [2004] ECR I-7477, paragraph 19; and Case C-446/03 Marks & Spencer [2005] ECR I-10837, paragraph 29)." (Cadbury Schweppes C‑196/04)
"[14] Although direct taxation falls within the competence of the Member States, the latter must none the less exercise that competence consistently with Community law (see, inter alia, Case C-80/94 Wielockx [1995] ECR I‑2493, paragraph 16, and Case C-242/03 Weidert and Paulus [2004] ECR I-0000, paragraph 12)." (Laboratoires Fournier C-39/04)
- Restriction prohibited even if of limited scope or minor importance
"[49] In this context, it is clear that it is not necessary for the tax charge to be excessive or definitive for tax legislation to be regarded as forming a prohibited restriction of a fundamental freedom.
[50] According to the settled case-law of the Court, a restriction on a fundamental freedom is prohibited by the Treaty, even if it is of limited scope or minor importance (see, to that effect, regarding the free movement of capital, judgment in Dijkman and Dijkman-Lavaleije, C‑233/09, EU:C:2010:397, paragraph 42; and, regarding the freedom of establishment, judgments in Commission v France, C‑34/98, EU:C:2000:84, paragraph 49, and de Lasteyrie du Saillant, C‑9/02, EU:C:2004:138, paragraph 43)." (F.E. Familienprivatstiftung Eisenstadt C-589/13)
- Prohibition on national rules making provision of services between Member States more difficult than internal services
"[62] Article 56 TFEU precludes the application of any national rules which have the effect of making the provision of services between Member States more difficult than the provision of services purely within a Member State..." (Cartrans Preda C-461/21)
- No restriction on grounds that person providing service is established in another Member State
"[62] Article 56 TFEU precludes the application of any national rules which have the effect of making the provision of services between Member States more difficult than the provision of services purely within a Member State..." (Cartrans Preda C-461/21)
MEANING OF RESTRICTIONS
- Principle of fiscal territoriality permits distinctions based on residence, but not where a service is provided
"[17] The French Government submits, however, that that difference of treatment flows directly from the principle of fiscal territoriality, which the Court expressly recognised in Case C-250/95 Futura Participations and Singer [1997] ECR I‑2471, paragraph 22, and hence cannot be regarded as giving rise to overt or covert discrimination prohibited by the EC Treaty.
[18] In that case, however, the Court was considering the compatibility with the Treaty provisions on the freedom of establishment of national tax rules applying to resident and non-resident undertakings, whereas the main proceedings in the present case involve an assessment of the compatibility with the Treaty of national tax provisions which confer a benefit on companies established in a Member State in return for the provision of services provided on their behalf in that Member State alone. Such provisions are contrary to Article 49 EC because they are, albeit indirectly, based upon the place of establishment of the provider of services and are consequently liable to restrict its cross-border activities." (Laboratoires Fournier C-39/04)
- Restriction includes any measure which prohibits, impedes or renders less attractive the exercise of the freedom
"[62] Restrictions on the freedom to provide services are national measures which prohibit, impede or render less attractive the exercise of that freedom (judgment of 25 July 2018, TTL, C‑553/16, EU:C:2018:604, paragraph 46 and the case-law cited)." (Cartrans Preda C-461/21)
- Sufficient that legislation is capable of restricting the exercise of freedom
"[62] Contrary to what the United Kingdom Government submits, in order for such legislation to be considered to be a restriction on freedom of establishment, it is sufficient that it be capable of restricting the exercise of that freedom in a Member State by companies established in another Member State, and it is not necessary to establish that the legislation in question has actually had the effect of leading some of those companies to refrain from acquiring, creating or maintaining a subsidiary in the first Member State." (Test Claimants in Thin Cap C-524/04)
- Making exercise by national of freedom of establishment in another Member State
"[42] Even though, according to their wording, the provisions of the Treaty concerning freedom of establishment are directed to ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State, they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation (see, in particular, Case C-264/96 ICI [1998] ECR I-4695, paragraph 21, and Marks & Spencer, paragraph 31)." (Cadbury Schweppes C‑196/04)
- Other potential advantages for non-resident does not mean there is no restriction
"[86] That conclusion is not called into question by the fact that a Danish service provider may, because the withholding at source of tax on gross income is only at a rate of 4% and despite it being impossible to deduct business expenses, pay lower income tax than the income tax paid by a resident service provider who, while able to deduct business expenses, has 16% of his, her or its net income taxed. The Court has repeatedly held that unfavourable tax treatment contrary to a fundamental freedom cannot be regarded as compatible with EU law because of the potential existence of other advantages (judgment of 13 July 2016, Brisal and KBC Finance Ireland, C‑18/15, EU:C:2016:549, paragraph 32 and the case-law cited)." (Cartrans Preda C-461/21)
- Taxation of recipient of gratuitous advantage in domestic situation cannot be likened to taxation, in cross-border situation, of company granting the advantage
"[52] In that connection, it should be noted that the resident company granting an unusual or gratuitous advantage and the recipient company are separate legal persons, both of which have their own individual tax liability. In any event, the tax burden borne by the recipient company in a domestic situation cannot be likened to the taxation, in a cross-border situation, of the company granting the advantage in question.
[53] Even if, in a domestic situation in which the companies concerned are, directly or indirectly, 100% related to each other, the allocation of the tax burden between them may, in some circumstances, have no implications for the purpose of taxation, there is, in any event, still a risk of double taxation in a cross‑border situation. As the Advocate General has rightly observed at points 46 and 47 of her Opinion, in such a situation, the unusual or gratuitous advantages granted by a resident company which are added back to that company’s own profits may give rise to the recipient company being taxed thereon in the Member State in which it is established." (SGI C-311/08)
EXAMPLES
Scope of exemptions/reliefs
- Measures reducing the value of a gift to a non-resident
"[26] In the case of gifts, it follows from that case-law that the measures prohibited by Article 56(1) EC as being restrictions on the movement of capital include those whose effect is to reduce the value of a gift by a resident of a Member State other than that in which the property concerned is located and which taxes the gift of that property (see, by analogy, van Hilten-van der Heijden, paragraph 44; Jäger, paragraph 31; Eckelkamp and Others, paragraph 44; Arens-Sikken, paragraph 37; and Block, paragraph 24)." (Mattner C-510/08)
- Limiting exemption from tax on rental income to resident foundations
"[27] The fact that tax exemption for rental income applies only to charitable foundations which, in principle, have unlimited tax liability in Germany places foundations whose seats are in another Member State at a disadvantage and may constitute an obstacle to the free movement of capital and payments
[28] It follows from the above that legislation such as that at issue in the main proceedings constitutes a restriction on the free movement of capital which is, in principle, prohibited by Article 73b of the EC Treaty." (Centro di Musicologia Walter Stauffer C-386/04)
- Inheritance tax allowance that only applies if deceased or heir resident in Member State is a restriction
"[24] In the present case, the national legislation at issue in the main proceedings provides that, in the case of an estate including an immovable property situated in Germany, where the deceased and the heir were not resident in that Member State at the time of the death, the tax-free allowance is less than that which would be applied if the deceased or the heir had been resident in Germany at that time.
[25] It should be noted that such legislation, which makes the application of a tax-free allowance in respect of the immovable property concerned dependent on the place of residence of the deceased and the heir at the time of the death, leads to succession between non-residents including such property being subject to a higher tax liability than that involving at least one resident and therefore has the effect of reducing the value of that succession (see, by analogy, Eckelkamp and Others, paragraphs 45 and 46; Mattner, paragraphs 27 and 28; and Missionswerk Werner Heukelbach, paragraph 24)." (Welte C-181/12)
- Higher tax allowance for gift to resident
"[27] In the present case, national provisions such as those at issue in the main proceedings, in so far as they provide that a gift of immovable property located in the Federal Republic of Germany qualifies for a smaller allowance against the taxable value where the donor and the donee reside in another Member State than would apply if one of them were resident in German territory, with the result that gifts in the first category are subject to gift tax that is higher than the tax payable on the second category of gifts, have the effect of restricting the movement of capital by reducing the value of a gift which includes such property (see, by analogy, Eckelkamp and Others, paragraph 45).
[28] Where those provisions make the application of an allowance against the taxable value of the immovable property concerned dependent on the place of residence of the donor and the donee on the date of the gift, the greater tax burden on the gift between non-residents constitutes a restriction on the free movement of capital (see, by analogy, Eckelkamp and Others, paragraph 46)." (Mattner C-510/08)
- More favourable tax treatment of gifts to resident foundations compared to non-resident foundations is a restriction
"[48] It must be held, having regard to the case-law cited in paragraphs 46 and 47 of the present judgment, that – as regards the transfer of assets to a family foundation, equated to a gift inter vivos – rules providing for a more favourable tax treatment of gifts made to family foundations established on national territory than that of gifts made to similar entities established in Member States of the EEA, with the effect of reducing the value of the property gifted to that similar entity, constitute a restriction on the movement of capital within the meaning of Article 40 of the EEA Agreement." (Familienstiftung C-142/24)
- Reduced interim tax based on whether gift recipient is subject to domestic capital gains tax is a restriction (both for the foundation and the founder)
"[47] A foundation which has beneficiaries residing in the national territory and others residing in another Member State would therefore be discouraged from making gifts to the latter because, without being able to benefit from a tax reduction or reimbursement in connection with those gifts, the interim tax charged on its income reduces the aggregate financial means at its disposal both for generating income and for making gifts to resident beneficiaries. At the level of the foundation, this would lead to a distortion in the resulting selection, from a tax point of view, between international gifts which are less advantageous and national gifts which are more advantageous.
[48] Furthermore, in so far as gifts to beneficiaries residing in another Member State will lead to interim taxation being levied at a rate of 12.5% on his foundation, it is from the founder’s point of view less advantageous from the outset to set up a private foundation with beneficiaries residing in another Member State than setting up an equivalent foundation with beneficiaries residing only in Austria." (F.E. Familienprivatstiftung Eisenstadt C-589/13)
- Different potential liabilities is a restriction
"[68] It follows that, as the Advocate General observed in point 37 of his Opinion, an obligation to withhold tax at source, such as the one described in paragraph 64 of the present judgment, inasmuch as it entails not only an additional administrative burden but also the risks concerning liability, may render cross-border services less attractive for resident recipients of services than services performed by providers that are also residents. Consequently, such an obligation is liable to deter those recipients from having recourse to non-resident service providers (see, to that effect, judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraphs 28 and 32), and it must be classified as a restriction on the freedom to provide services within the meaning of the case-law referred to in paragraph 63 of the present judgment." (Cartrans Preda C-461/21)
- Different levels of withholding tax is a restriction
"[64] In the present case, it is apparent, in essence, from the explanations provided by the referring court that, where a service is supplied to a Romanian resident by a non-resident provider, Romanian legislation requires the recipient of that service to withhold at source, by way of tax on the income of non-residents, 16% of the gross income paid to that operator. Where that operator is a resident of Denmark, the rate of that withholding tax is, however, reduced to 4% pursuant to the provisions of the double taxation convention. On the other hand, where the same services are supplied by a resident provider, no withholding is to apply.
...
[68] Consequently, such an obligation is liable to deter those recipients from having recourse to non-resident service providers (see, to that effect, judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraphs 28 and 32), and it must be classified as a restriction on the freedom to provide services within the meaning of the case-law referred to in paragraph 63 of the present judgment." (Cartrans Preda C-461/21)
- Expense deduction rules different for non-residents is a restriction
"[85] In accordance with the case-law cited in paragraphs 63 of the present judgment, national legislation under which service providers that are resident in a Member State may deduct from the taxable amount of gross income received in return for a supply of services the business expenses connected with that provision, while non-resident service providers do not have the possibility to do so, constitutes a restriction on the freedom to provide services, within the meaning of Article 56 TFEU." (Cartrans Preda C-461/21)
- Exemption for employee income based on residence of employer restricts free movement of workers
"[46] By establishing a difference in treatment for employees’ income in this way, depending on the Member State in which their employer is established, the national legislation at issue in the main proceedings is liable to dissuade those employees from accepting work from an employer established in a Member State which is not the Federal Republic of Germany and thus constitutes a restriction on the free movement of workers, which is in principle forbidden by Article 45 TFEU." (Petersen C-544/11)
- Less favourable treatment of loans
"[45] It follows that, even prior to 1995 and, in any case, between 1995 and 2004, when interest was paid by a resident company in respect of a loan granted by a related non-resident company, the tax position of the former company was less advantageous than that of a resident borrowing company which had been granted a loan by a related resident company." (Test Claimants in Thin Cap C-524/04)
Taxing resident on profits of non-resident
- Taxing a resident company on the profits of a subsidiary if the subsidiary is established in a Member State with lower taxation
"[46] As submitted by the applicants in the main proceedings and by Ireland and the Commission of the European Communities, the separate tax treatment under the legislation on CFCs and the resulting disadvantage for resident companies which have a subsidiary subject, in another Member State, to a lower level of taxation are such as to hinder the exercise of freedom of establishment by such companies, dissuading them from establishing, acquiring or maintaining a subsidiary in a Member State in which the latter is subject to such a level of taxation. They therefore constitute a restriction on freedom of establishment within the meaning of Articles 43 EC and 48 EC." (Cadbury Schweppes C‑196/04)
Cash flow disadvantage for non-residents
- Cashflow disadvantage arising from cross-border situation can form restriction
"[49 Furthermore, it follows from settled case-law that a cash-flow disadvantage which arises from a cross-border situation can form a restriction on a fundamental freedom where such a disadvantage does not arise in a purely national situation (judgment of 17 September 2015, F.E. Familienprivatstiftung Eisenstadt, C‑589/13, EU:C:2015:612, paragraph 51 and the case-law cited)." (Familienstiftung C-142/24)
Collection mechanisms
- Different collection mechanisms for residents v. non-residents not a restriction
""[66] While it is true that, as the Romanian Government submitted, in essence, in its written observations with reference to the judgment of 22 December 2008, Truck Center (C‑282/07, EU:C:2008:762), the Court has already accepted the application of different tax collection techniques to those deriving income from capital depending on whether they are resident or non-resident, that difference in treatment relates to situations which are not objectively comparable. As that difference in treatment does not, moreover, necessarily procure an advantage for resident recipients, the Court has ruled that it does not constitute a restriction of the freedom of establishment (judgment of 18 October 2012, X, C‑498/10, EU:C:2012:635, paragraph 26 and the case-law cited)." (Cartrans Preda C-461/21)