The Case Note of Case C-258/22 Bubble (Li, Xiaoyi)

The Case Note of Case C-258/22

Bubble (Li, Xiaoyi)

1. Basic facts about the Case C-258/22

1.1. The facts about the court

This case stems from the request for a preliminary ruling under Article 267 TFEU from the Federal Finance Court, Germany, made by a decision of 23 November 2021, received at the Court on 14 April 2022.

This case was held by the Sixth Chamber,composed of P.G. Xuereb, President of the Chamber, T. von Danwitz and I. Ziemele (Rapporteur), Judges, with the Advocate General: G. Pitruzzella, andRegistrar: A. Calot Escobar.

The participants are H Lebensversicherung(hereafter H company), the German Government, and the European Commission. The Advocate General did not provide an opinion for this case.

1.2. The facts about the case

The request of the case concerns the interpretation of Article 63 TFEU, in respect of the disputes with the German Hanover-Nord Tax Office (hereafter the German tax authority) on the calculation of the basis of assessment for business tax due for 2001.

H company is a life insurance company that holdsshareholdings of less than 10% of the capital of several non-resident capital companies. In April 2004, the H company, as an insurance company entitled to the provision of point 2 of the eighth sentence of Paragraph 34(7) of the new version of the KStG, exercised its right of this provision and expected a 20% exemption from the dividend incomes from those non-resident investees, referring to the Paragraph 8b(1) of the KStG. This beautiful dream did not come true as the tax authority added the 20% dividend income back to H company’s tax base of business tax according to point 5 of Paragraph 8 of the Law on business tax.

H company contested the tax authority’s action and brought it to the German Finance Court. H company believed that the temporal applicability of Paragraph 8b(1) of the KStG precluded the add-back of 20% dividend income under point 5 of Paragraph 8 of the Law on business tax, which constituted discrimination and an infringement of the free movement of capital.

On 25 January 2018, the German Finance Court upheld the H company. The tax authority appealed the case to the German Federal Finance Court (the referring court).

After scrutiny of the case facts, the referring court provided that the add-back carried out under point 5 of Paragraph 8 of the Law on business tax for the purposes of business tax does not, ultimately, result in less favorable tax treatment for situations involving a foreign component and decided to abate its position in the case STEKO Industriemontage (C‐377/07, EU:C:2009:29). The referring court stayed and referred this case to the CJEU for preliminary ruling.

2. Case analysis

2.1. First step: identify the fundamental freedom involved

In this case, H company believed that the German tax laws infringed the free movement of capital with respect to the tax base of German business tax as those laws made dividend income from foreign investees less favorable.

2.2. Second step: identify discriminable or non-discriminable restrictions

The CJEU recognized that there were different tax rules when calculating the basis of the business tax. However, according to Paragraph 8b(8) of the law on corporate tax, only dividends from non-resident companies can choose to exempt 20% of income which led to the profit add-back referred to inParagraph 8 of the law on business tax.

Paragraph 8b(1) of the KStG was applicable for the first time during the 2002 tax period. That meant that dividends paid during the 2001 tax period had to be fully taken into account from the first stage of that calculation.

The temporary application difference concerning Paragraph 8b(1) of the KStG will not cause a bias between resident and non-resident investee companies. Furthermore, it even protected the balance and fairness of the tax treatment under these two distinct circumstances since this provision ascertained the full amount of dividend income had always been taken into account.

The CJEU held that, unlike the STEKO Industriemontage (C‐377/07), the different treatmentsin the H company case do not cause a less favorable outcome for dividend income from non-resident investee companies. Thus, there is no discrimination based on nationality or residence in this case.

Furthermore, the CJEU did not uphold the H company’s complaint that German tax laws constituted restrictions on the free movement of capital due to the complexity of tax policies on non-resident investee companies as this complaint was impertinent with the initial contest of the H company and failed on proving the excessive difficulty and extra burden to comply these laws. The difference in treatment is not liable to discourage that Member State’s residents from investing their capital in another State and, accordingly, does not constitute a restriction on the free movement of capital. The following steps are dismissed as no restriction is recognized.

Eventually, the CJEU ruled that Article 63 TFEU must be interpreted as not precluding legislation of a Member State under which, when calculating the basis of assessment for a company’s business tax, dividends from holdings of less than 10% in non-resident capital companies are to be added back to that basis of assessment, if and to the extent that those dividends were deducted from that basis of assessment at a previous stage of that calculation, whereas dividends from comparable holdings in resident capital companies are included from the outset in the abovementioned basis of assessment, without being deducted from or, consequently, added back to that basis of assessment.