The Analysis Framework of the Court of Justice of the European Union in the Direct Taxation: Case- 707/20 /NJIKAM KPOUMIE ABDELAZIZ

The Analysis Framework of the Court of Justice of the European Union in the Direct Taxation: Case- 707/20 /NJIKAM KPOUMIE ABDELAZIZ

Abstract:

This dissertation explores the analytical framework employed by the Court of Justice of

the European Union (CJEU) in adjudicating direct taxation cases involving cross-border

activities. By analyzing the methodology utilized by the Court, this work highlights the

interplay between national taxation rights and the fundamental freedoms enshrined in the

Treaty on the Functioning of the European Union (TFEU). The analysis draws extensively

on the Gallaher Limited case (C-707/20) to illustrate the practical application of the

CJEU's framework, ultimately arguing for a balanced approach that respects both fiscal

sovereignty and the principles of free movement within the EU.

I. INTRODUCTION

The interplay between national taxation systems and the fundamental freedoms guaranteed

by the TFEU has become increasingly complex in the context of globalization and cross-

border economic activities. Case C707/20 illustrates the challenges that Member States

face when trying to preserve their fiscal sovereignty while respecting the principles of the

single market. In particular, this cas examine wheter UK tax rules, which impose an

immediate charge on cross-border asset transfers, violate fundamental freedoms guaranteed

by EU law, including freedoms of establishment (Article 49 TFEU) and the free movement

of capital (Article 63 TFEU).

In the context of this case, we will apply the CJEU's typical analytical framework in

matters of direct taxation. This dissertation aims to unpack this framework, focusing on the

steps taken by the Court to assess whether national tax measures infringe upon

fundamental freedoms, particularly in the context of direct taxation.

II. The CJEU's Analytical Framework

1. Identification of the Fundamental Freedom Involved

In the Gallaher Limited case, the CJEU was tasked with determining which freedom was

most relevant, as the case involved cross-border asset transfers within a corporate group.

In this case, the indirect parent company of Gallaher Limited (GL), JTIH, located in the

Netherlands, invokes this freedom by challenging the effects of British legislation on its

intra-group cross-border asset transfers. This freedom is directly affected by tax measures

that make international transfers less attractive.

Based on its consistent case law, the CJEU concluded that, in the context of intra-group

relations, freedom of establishment takes precedence over the free movement of capital,

even if the two freedoms can coexist in certain cases. This approach guarantees a targeted

and coherent analysis of the effects of national legislation on business.

2. Discrimination or Restriction Analysis

Once the relevant freedom is identified, the Court assesses whether the national measure in

question constitutes discrimination or a restriction on that freedom.

a. Comparability Analysis:

The CJEU uses a comparability approach to determine whether national tax rules treat

similar situations differently. In this case, two types of asset transfers are compared:

 Intra-group transfers made between entities resident in the United Kingdom,

which benefit from complete fiscal neutrality.

 Cross-border intra-group transfers, subject to immediate taxation without the

possibility of postponement.

In Gallaher Limited, the Court found that the tax treatment of asset transfers between group

companies in different jurisdictions created a disadvantage for cross-border transactions

compared to domestic ones.

b. Non-Discriminatory Restrictions:

 Even in the absence of explicit discrimination, the CJEU recognizes that

national legislation can constitute a restriction if it makes the exercise of a

fundamental freedom less attractive. In this case, the immediate imposition of

cross-border transfers creates a financial burden that discourages companies

from structuring their activities cross-border. This constitutes an obstacle to

freedom of establishment.

3. Justification Analysis

The CJEU then turned to the justifications provided by the UK government for the

immediate tax liability without the option to defer payment. The Court recognized the

legitimacy of preserving a balanced allocation of taxation powers among member states.

However, it scrutinized whether the specific application of these justifications was

appropriate in the context of the case.

In the Gallaher Limited case, the Court acknowledged the preservation of balanced

taxation powers as a potential justification but scrutinized its application.

4. Proportionality Test

Finally, the CJEU applies a proportionality test to evaluate whether the restriction is

appropriate and necessary to achieve the stated justification. The Court found that while the

UK aimed to prevent tax avoidance and ensure effective fiscal supervision, the rigid

application of immediate taxation without deferral options could impose an excessive

burden on companies engaging in legitimate cross-border transactions.

 Suitability: The Court determined that while the immediate tax liability served a

legitimate aim, it did not effectively address the specific concerns of cross-border

transactions, which could be structured to avoid tax burdens through other means.

 Necessity: The CJEU questioned whether less restrictive alternatives existed. For

instance, allowing for tax deferral until the actual realization of gains could

achieve the same objectives without imposing undue burdens on cross-border

activities.

 Proportionality Stricto Sensu: Ultimately, the Court concluded that the immediate

tax liability imposed a disproportionate burden on cross-border transactions,

especially when considering the economic realities faced by companies like

Gallaher Limited.

In Gallaher Limited, the Court analyzed whether the immediate tax liability imposed on

cross-border transactions without deferral options was proportionate, considering factors

such as cash flow implications and the timing of tax assessments.

IV. Conclusion

Case C-707/20 illustrates the complexity of the interactions between national tax regimes

and the fundamental freedoms guaranteed by European Union law. The CJEU, by applying

its rigorous analytical framework, has demonstrated the importance of protecting the

freedom of establishment facing restrictions arising from national legislation.

Although preserving a balanced distribution of taxing powers constitutes a legitimate

justification, immediate taxation without the possibility of deferral has been deemed

disproportionate. This conclusion reflects the need to find a balance between the fiscal

interests of Member States and the need to ensure a functional and fair single market.

This decision reminds Member States that they must not only justify their restrictions on

fundamental freedoms but also ensure that these measures respect the principle of

proportionality. In this way, Case C-707/20 contributes to strengthening the coherence and

predictability of the European legal framework while encouraging national legislators to

adopt tax mechanisms that respect the principles of Union law.

References

 Court of Justice of the European Union. (2023). Judgment in Case C-707/20,

Gallaher Limited v. The Commissioners for Her Majesty’s Revenue and Customs.

 Treaty on the Functioning of the European Union (TFEU).