Case Note: Case C-558/19/Kidka Nteghenjwa

Case Note: Judgment of The Court (Sixth Chamber) of 8 October 2020

Impresa Pizzarotti ; C SpA Italia Sucursala Cluj v. Agenţia Naţională de

Administrare Fiscală - Direcţia Generală de Administrare a Marilor Contribuabili

(Case C-558/19)

Introduction:

The Regional Court of Romania requested a preliminary ruling from the

Court of Justice of the European Union (CJEU) regarding the interpretation of Articles 49

and 63 of the Treaty on the Functioning of the European Union (TFEU). Request arose

from a dispute involving Impresa Pizzarotti & C SPA Italia Sucursala Cluj (“Impresa

Pizzarotti”) and the Agenția Națională de Administrare Fiscală – Direcția Generală de

Administrare a Marilor Contribuabili (National Tax Administration Office – Directorate-

General for the Administration of Large-scale Taxpayers, Romania; “the tax office”)

regarding the annulment of a fiscal administrative act issued by the tax office and the

subsequent tax assessment based on that act.

Facts:

Impresa Pizzarotti is the Romanian branch of SC Impresa Pizzarotti & C SPA

Italia, established in Italy. Between July 29, 2016, and September 11, 2017, the tax office

conducted an audit of the branch, uncovering two loan agreements with its parent

company: one for EUR 11,400,000 dated February 6, 2012, and another for EUR

2,300,000 dated March 9, 2012. These loans were initially set for one year, extendable by

addendum, and notably lacked any interest charge clauses. By January 1, 2013, the

outstanding loan amount was EUR 11,250,000, which was fully repaid by April 9, 2014.

Thus, having regard to Article 11(2) and Article 29(3) of the Tax Code, the tax office

classified Impresa Pizzarotti as a related party to Pizzarotti Italia, asserting that the

interest rates on these loans should have been set at market prices in accordance with

transfer pricing rules (TP Rules) applicable to transactions between Romanian entities

and non-resident related parties. Consequently, on 20 September 2017 a tax assessment

was issued, imposing a significant tax increase. After the tax office rejected Impresa

Pizzarotti’s complaint by its decision of 23 November 2017, the company sought

annulment of the tax assessment in the Tribunalul Cluj, arguing that the national

provisions violated Articles 49 and 63 of the TFEU. The court subsequently referred the

matter to the CJEU for a preliminary ruling.

National Law Involved:

Article 7 of Law No. 571 (Tax Code): This article defines essential terms, including

“person” as any natural or legal entity, and “related person” based on ownership or

control of at least 25% of equity or voting rights. It also defines “transfer” to encompass

sales, assignments, disposals of ownership rights, exchanges for services, and fiduciary

asset transfers per the Civil Code.

Article 11(2) of the Tax Code: This provision authorizes tax authorities to adjust the

income or expenditure of related Romanian and non-resident persons to reflect market

prices in their transactions, outlining methodologies for determining these prices.

Article 29(3) of the Tax Code: This mandates that the taxable profit of a permanent

establishment be calculated as a separate entity, following TP Rules. If invoices for

allocated expenditures are unavailable, alternative documentation must demonstrate that

costs were incurred and reasonably allocated, in line with TP Rules.

Question before the CJEU: Whether Articles 49 and 63 TFEU preclude a Member State

from classifying a money transfer from a resident branch to its parent company

established in another Member State as a "revenue-generating transaction," thereby

requiring the application of TP Rules, whereas, if the same transaction had been effected

between a company branch and a parent company, both of which were established in the

same Member State, would not be subject to the same classification or transfer pricing

obligations.

Analysis:

a) Fundamental Freedom Involved: The request primarily concerns the

interpretation of Articles 49 (freedom of establishment) and 63 (free movement of

capital) TFEU. The CJEU determined that the national legislation should be assessed

exclusively under Article 49 TFEU, reaffirming that the establishment and ownership of

a permanent establishment, such as a branch in another Member State, fall within scope

of Article 49 TFEU.

b) Discrimination or Restriction to Cross-border Activities: The Romanian Tax

Code treats branches as separate entities only when they are permanent establishments

of non-resident persons. Consequently, income adjustments based on TP Rules apply

only if the parent company is established in another Member State. If both the branch

and the parent company are located in Romania, no such income adjustment occurs.

This differential treatment results in branches of non-resident companies facing less

favorable tax conditions compared to branches of resident companies, constituting a

restriction on the freedom of establishment as defined by Article 49 TFEU.

c) Justification: A tax measure that restricts the freedom of establishment under

Article 49 TFEU can be justified if it addresses situations that are not objectively

comparable or is backed by overriding public interest reasons recognized by EU law.

The CJEU has emphasized that TP Rules in the Tax Code are designed to prevent the

artificial reduction of taxable income for non-resident companies through non-market

transactions with their parent companies. Therefore, national legislation aimed at

preventing the untaxed transfer of profits generated within a Member State's

jurisdiction is considered justified, as it ensures a balanced allocation of taxing rights

among Member States.

d) Proportionality Test: A justified tax measure must also pass the proportionality

test, ensuring it does not exceed what is necessary to achieve its objectives. The income

adjustment mandated by Article 29(3) of the Tax Code pertains solely to the difference

between the market price of the transaction and the price actually applied. Taxpayers

retain the opportunity to demonstrate objective reasons for any discrepancies in pricing.

Thus, the Romanian legislation appears to be proportionate and necessary to achieve its

legitimate objectives.

Judgment: The CJEU ruled that Article 49 TFEU must be interpreted as not precluding,

in principle, legislation of Member State from reclassifying money transfer from a

resident branch to its parent company in another Member State as a revenue-generating transaction requiring application of TP Rules unlike similar transactions between

entities within the same Member State, which reclassification and TP rule would not

apply.