It’s not often that I come across a term in a tax case that I don’t understand, but also have never even heard of. But recently I did, and it was the word aliud. It came up in an opinion issued by an Advocate-General of the European Court of Justice and, while it was the Dutch rather than the English version of the opinion (no English version has been issued as yet), it turns out that its use is not limited to Dutch cases. Desperately digging into my schoolboy Latin, I wondered if this was a long-forgotten inflection of alias or, even less likely, a reference to a genus of the onion plant. More reliable sources gave the meaning, loosely translated from the Latin alius, as ‘something different’. Rereading the opinion I wondered if using the Latin tag was making the argument in question sound stronger than it really was.
The transaction in brief
Let me explain the context. The opinion involves the implementation of the EU Merger Directive into Finnish domestic law. This type of case is usually about whether the domestic implementing rules are in line with what the Directive requires. In this particular case (A Oy, C-292/16) the argument was that the domestic implementing rules are infringing a basic rule of EU law, as explained further below. The transaction in question was (in effect) the incorporation of the Austrian branch of a Finnish company, whereby the Finnish company transferred the branch to an Austrian group company in exchange for new shares issued by the latter. The way the Merger Directive works in that situation is that Austria has to allow the transfer of the branch assets at their tax value – thus effectively deferring any taxable gain that might otherwise arise. However, that’s not the end of the story as there is another taxing jurisdiction involved, in this case Finland, where the transferring company is resident. The Directive deals with this by requiring Finland either to exempt the transfer or, if it taxes foreign branch gains (which Finland would normally do), to give a credit for any Austrian tax that would have been paid on the transfer if the Directive was not applied.
What the Merger Directive does not do
What the Directive does not do is say when that tax (less the credit) should be paid. The Finnish tax administration wanted it immediately, whereas the Finnish taxpayer company wanted to defer it. The deferral argument was based on a comparison with a similar purely domestic transaction involving the incorporation of a Finnish branch, which would not have resulted in an immediate tax charge because the assets would have been transferred at their respective tax values: to deny similar treatment for a cross-border transaction would infringe the Finnish company’s right of free movement (i.e. its freedom of establishment) in the EU. In fact the Attorney-General (AG) agreed with that argument but took the view that the infringement of this basic rule of EU law was justified.
Branch incorporation = emigration?
The details of the justification argument (based on the balanced allocation of taxing rights between EU Member States) are not so important here but the condition for allowing the justification is. As the AG explained, this justification can only be invoked where Finland’s right to tax would be threatened as a result of the merger transaction. The AG concluded that it was because, like emigration, after the transfer the branch assets would no longer be within Finland’s taxing jurisdiction. That of course is a correct observation, but the question is whether Finland had retained an – indirect – taxing right by way of the shares issued by the Austrian company. That is where the analogy with exit cases breaks down.
Something else the Merger Directive does not do
The AG noted (incorrectly as it happens) that the Directive provides that the transferring (i.e. Finnish) company does retain an indirect taxing right through the shares it receives at least as regards the gain arising after the transaction in question. Instead of concluding from this that no indirect right to tax exists as regards the pre-existing gain in the branch assets, the AG goes on to say that shares in a foreign company are not the same as foreign branch assets (that’s the aliud) and that therefore the branch assets should be regarded as having been permanently removed from Finland’s taxing jurisdiction. In fact the Directive (in both the version applicable at the time as well as the current version) does not deal at all with the shares received in exchange for a branch transfer (it only deals with that aspect in the context of other transactions such as legal mergers and share exchanges). So there is no reason why Finland could not have allowed the implicit (net) gain in the transferred assets to be be rolled into the tax value of the shares acquired in exchange (and any participation exemption limited to that extent), thus protecting its taxing rights. That is exactly what the Directive does prescribe in the case of a share exchange transaction. So if it’s good enough for an exchange of shares why should the same mechanism not be good enough for the transfer of a foreign branch in exchange for shares? What we are left with is the aliud, i.e. the (uncontrovertible) fact that shares in a foreign company are different from assets of a foreign branch.
Sometimes the way we get there is as important as getting there
Admittedly, a distinction between business assets and shares has been recognized by the European Court in a related (exit tax) context (see in particular the National Grid case). However this was not in the context of whether the state of origin had lost its right to tax but rather in the context of the different (and subsequent) question whether limited deferral was a more proportionate measure than immediate taxation. The question is whether in the case of a branch incorporation, the difference between the original branch assets and the consideration shares is such that the transferor state can really be said to have lost its right to tax the branch after the transaction. This is a fair question as there are potential tax avoidance as well as compliance issues that could be relevant. Maybe at the end of the day my approach would lead to the same result as that of the AG – who, in line with National Grid, finally concluded that some sort of deferral was a more proportionate measure than immediate taxation. But simply to label it as an aliud does not seem to do the question justice.