Corporate tax law and the fundamental freedoms of the EU must take into account their special relationship. This is particularly important in cross-border cases, especially within the European Union, but also outside it. The ECJ has already partly suggested changes to corporate tax law and on the other hand has also failed to charge corporate tax to taxpayers. Thus, this topic must be considered at least once in cross-border arrangements. In addition, the DAC 6 directive of the EU must also be considered.

In order to understand the link between corporate tax law and the fundamental freedoms of the EU, it is first necessary to know the development of the corporate tax law used in Germany.

Until the year 2000, the so-called full accounting system still applied. As a result, a shareholder of a limited company could offset the corporate tax already paid on the profits distributed against the income tax or even demand a refund of these. However, this crediting came with a great disadvantage. The foreign corporate tax could not be counted against the distributed profits of a foreign company, which flowed to a domestic shareholder. In addition, limited taxpayers were excluded from the crediting. This was not the model of the future.

Now the part-relief system was introduced in Germany in 2001. Accordingly, the tax paid at company level is taken into account in a flat-rate form at shareholder level.

Here it is necessary to distinguish whether the shares of the shareholder are in his private assets or his operating assets. Because if they are in the private assets, the distribution is taxed instead of with the personal income tax rate with the withholding tax of 25% according to §§ 20, 32 d EStG. Otherwise, if the shares are in the operating assets of the taxpayer, the partial income procedure according to § 3 no. 40 EStG is used. Only 60 % of the dividend paid is taxed by the shareholder.

The main advantage here is that this regulation is widely applied in the EU and covers all foreign matters. In addition, the tax volume is fairly divided between the country of residence of the limited liability company and the country of residence of the shareholder. The country of residence of the corporation has to collect a lower corporation tax and the country of residence of the shareholder receives a lower income tax.

Nevertheless, it should be noted that the distribution continues to be subject to higher taxation than other income.

It should be sufficiently known that, logically, corporations can also participate in corporations. For distributions in such a case, the box privilege of § 8b (1), (5) KStG applies. This excludes free float dividends representing shares in voting rights of less than 10 % at the beginning of the calendar year. This issue is given enormous importance in practice and must be kept in mind for the cases considered below.

The accounting system just mentioned now plays an important role in the fundamental freedoms of the European Union, as reflected in subsequent cases already dealt with by the ECJ.

In the Manninen case (C-319/02), an unrestricted taxable person in Finland held shares in a Swedish limited company. However, in Finland, no foreign paid corporate tax can be credited on distributed dividends. This is reserved for domestic dividends. Since this is neither a restriction on the right of residence nor discrimination on the grounds of nationality, it is necessary to examine the restriction or also the impairment of the freedom of movement of capital. The necessary cross-border reference is participation in Swedish society. The existing regulation makes it unattractive for Finnish people to invest in foreign corporations. In addition, foreign companies are also disadvantaged, as they can receive no or at least much more difficult financial resources in Finland.

Nevertheless, according to the ECJ, only a distinction between domestic and foreign dividends is allowed, provided there are no comparable situations or no compelling reasons of general interest. In particular, the coherence of the tax system must be repeatedly mentioned. This means that, as a matter of principle, only one regulation should always be checked for the violation of the EU's fundamental freedoms, but directly related regulations must also be dealt with together.

Now specifically this coherence also applies to the relationship between corporation and shareholder, since these taxpayers are directly connected in the case of distribution. The national standard must also be checked for its appropriateness. Here, however, the European Court of Justice has ruled that coherence can also be ensured if the Finnish tax system is opened up and, moreover, the Finnish market can be opened up. In addition, any threat of tax losses cannot be cited as compelling reasons in the general interest. It was thus found that Finnish law in this case is contrary to Article 63 TFEU.

In the case of Meilicke I (C-292/04) a similar problem was found, which led to the change of corporate tax law in Germany. However, it was still difficult for German taxpayers, although it was theoretically possible to get it. What was it about? Since German financial authorities want to see special proof of the foreign taxes paid and these are hardly available, this turned out to be an extremely high hurdle. Thus, there was usually a double burden of these dividends.

In the EU’s fundamental freedoms, there is not always a sharp limit from which one fundamental freedom begins and another ends. Therefore, it is important here to delimit which basic freedom is to be used in the respective case. Since only the free movement of capital protects in relation to third countries, this distinction must be made especially here. The ECJ case-law makes it clear that there is no cumulative application of fundamental freedoms.

Now in practice, also due to many internationally active companies, it is often necessary to distinguish between the freedom of establishment under Article 49 of the TFEU and the freedom of capital movement under Article 63 of the TFEU.

In order to make this distinction, the European Court of Justice has given an examination. First of all, the allocation to the national rule must be clarified. It is then necessary to carry out an examination of the actual circumstances of the particular case.

3.2.1. Assignment to national rule

Insofar as the national provision is aimed at company holdings in which there is certain influence over decisions of the respective company, the freedom of establishment must in principle be applied. However, it is controversial whether certain influence on the decisions of a company is only 50 % of the shares or already, as the prevailing opinion holds, 25 % of the shares.

If, on the other hand, the national regulation aims at portfolio holdings that are held as investment objects, then the restrictions on the basis of the free movement of capital must be reviewed.

3.2.2. Assignment by actual case

The second examination step is carried out exclusively if the case cannot be assigned to any of these participation categories. This is not a neutral norm. However, where it is a neutral standard, the freedom of movement of capital is directly considered to be the fundamental freedom to be applied. Furthermore, no second examination step will be carried out if it concerns a matter relating to third countries.

The newly regulated corporate tax law since 2001 helps to respect fundamental freedoms in the EU and enables tax already paid to be taken into account even for cross-border participations. The above cases, which were decided by the ECJ, show the complicated examinations and the complexity of the facts. Tax advisors and taxpayers must be cautious when it comes to cross-border issues and dividends alone, because the ECJ has not always been consistent in its judgment. Thus, there is always a residual risk in critical designs.

However, by excluding various fundamental freedoms and applying a priority, it is possible that a protection deficit for taxpayers arises. The ECJ argues that taxable persons from third countries wish to use the protection of the freedom of establishment via the application of the free movement of capital, although this is only provided for taxable persons from Member States. But it is precisely in the case of taxpayers from third countries that such an audit should be carried out.