CJEU: in mergers, the burden of proof lies with tax administrators
In early March, the Court of Justice of the EU (CJEU) dealt with an interesting question in the Société Euro Park Service (C-14/16) case. The case involved a dispute whether a tax administrator’s prior approval was necessary to defer the taxation of capital gains on a cross-border merger, and more importantly, whether the taxpayer had to prove a priori that the transaction had economic grounds. The court held in favour of the taxpayer.
Under French law, to defer tax for cross-border mergers, approval has to be obtained, which is conditional upon meeting certain conditions; for intra-state mergers, tax deferral is provided automatically. In the case in question, the taxpayer did not apply for prior approval but deferred the tax automatically. The French tax administration assessed additional tax plus penalties on the grounds that the company had not sought prior approval and that there were no economic reasons for the intra-group cross-border merger. Without analysing the case or supporting its assertions, the French tax administrator stated that the transaction was effected for the purpose of tax avoidance or tax evasion.
The French government defended this approach, referring to Article 11(1)(a) of the Council Directive 90/434/EEC on common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different member states. Under this article, a member state may disallow the benefits of the directive where tax evasion or tax avoidance appears to be one of the principal objectives or the only objective of a transaction.
The CJEU, however, ruled that the article has to be interpreted to the effect that the tax administration has to analyse each individual case on its own merits and prove that tax evasion or tax avoidance is the sole objective of a transaction. The CJEU concluded that the French legislation’s requirement that companies should apply for approval and in their application a priori present conclusive arguments for valid commercial reasons of the merger went beyond the scope of the directive.
It is positive that the CJEU took the taxpayer’s side against a tax administrator. According to the court, the tax administrator may not argue possible or imminent tax evasion or avoidance without reasonable suspicion, and should be able to support such with sufficient evidence. To quote the CJEU: “To determine whether the operation concerned pursues the objective of tax evasion or avoidance, the competent national authorities may not confine themselves to applying predetermined general criteria but must subject each particular case to a general examination of that operation”.