On 5 June 2007, the Advocate General (AG Wattel) of the Netherlands Supreme Court delivered his opinion in three cases concerning the extension of the tax sparing credits under the tax treaties with Brazil and Greece to third countries pursuant to the most-favoured nation principle and the Community preference.

(a) Facts. In Case 43.507, the taxpayer was the parent company of a group of companies (fiscal unity). The subsidiaries of the group held participations in, and had debt claims on, companies established in Belgium. In 2001, the subsidiaries received interest income due under those debt claims to an amount of EUR 113,758, which was included in the taxable profit of the group. No withholding tax was withheld in Belgium.

The taxpayer argued that, based on the most-favoured nation principle and the Community preference, the 20% tax sparing credit on interest under the 1990 Brazil-Netherlands tax treaty should be extended to the interest income received from Belgium.

In Case 43.619, the taxpayer was the holding company of a group of companies producing and selling alcoholic and non-alcoholic beverages, with worldwide activities and participations. The taxpayer had established a group (fiscal unity) with its subsidiaries and received substantial amounts of dividends, interest and royalties from EU and EEA Member States, countries with which the EU had an association agreement and third countries. In 1999 dividends were received to an amount of NLG 201,875,418 (EUR 86,609,360), interest income to an amount of NLG 15,843.497 (EUR 6,803,908) and royalty income to an amount of NLG 92,765,929 (EUR 39,837,851).

All dividends received, including those received on a 0.98% holding in a UK company, benefited from the Dutch participation exemption. The taxpayer received a refund of NLG 108 (EUR 47), which upon appeal was adjusted to NLG 5,421,375 (EUR 2,328,181) pursuant to the Bosal decision of the European Court of Justice (ECJ).

The taxpayer claimed that, based on the most-favoured nation principle and the Community preference, the tax sparing credits on dividends, interest and royalties under the treaty with Brazil and/or the 10% tax sparing credit for royalties under the 1981 Greece-Netherlands tax treaty on income and capital should be granted with respect to dividend, interest and royalty income received from other EU and EEA states, association countries and third states.

The tax sparing credit under the treaty with Brazil is 25% on dividends if the parent owns at least 10% of the voting capital of the subsidiary and 20% in all other cases, 20% on interest, 25% on royalties if the parent company owns at least 50% of the voting capital of the subsidiary and 20% in all other cases. The former tax sparing credit on royalties under the treaty with Greece was 10%.

In Case 43.377, the taxpayer was part of the X Group of companies. The group was mainly involved in the production, distribution and transport of electricity and gas. A Spanish company, E S.A., was the top-holding company of the group and owned all the shares in the taxpayer. In 2002 and 2003, the taxpayer received interest from the Spanish company to an amount of EUR 194,390,000 and EUR 203,883,000, respectively.

The taxpayer reasoned that, based on the most-favoured nation principle and the Community preference, the tax sparing credit under the treaty with Brazil, should be granted with respect to the interest received from the Spanish company.

(b) Issues. The issues presented concerned whether or not the denial of those tax sparing credits with respect to dividends, interest and royalties received from other countries is compatible with the freedom of capital and the Community preference.

An additional issue in case 43.619 was whether or not the Dutch credit method for the avoidance of double taxation as included in Dutch treaties is compatible with EC Treaty freedoms and the EU agreements. Under Dutch domestic law, a refund is generally granted for dividend withholding tax to the extent it cannot be credited against the income tax, but not under Dutch tax treaties.

(c) The Court of Appeal in all cases observed that tax credits constitute an integrated whole. The credit provision cannot be separated from the treaty as it contributes to the overall balance of the treaty. Furthermore, the Court held that European law does not require the extension of the application of a tax sparing credit to other EU and EEA Member States and third countries.

(d) Opinion of the AG. The AG rejected the claim on the most-favoured nation treatment with reference to the decisions of the ECJ in the D case and Test Claimants in Class IV of the ACT GLO case, in which the ECJ held that the most-favoured nation principle cannot be derived from EC law. In particular, in the D- case, the ECJ considered that the situation of a non-resident cannot be compared to that of another non-resident who receives special treatment under a bilateral tax treaty. The ECJ based its ruling on the concept of the reciprocity of tax treaties and on the fact that an allowance given under a tax treaty constitutes a benefit not separable from the remainder of the tax treaty.

The AG rejected also the argument of the taxpayer that tax sparing credits must be seen as a unilateral fiscal development aid and are only included in tax treaties for efficiency purposes and, therefore, can be separated from the rest of the treaty. Based on the Explanatory Memorandum concerning the tax treaty with Brazil and a Memorandum of 1987 on Dutch tax treaty policy, the AG observed that tax sparing credits are bilateral negotiations on the competence to levy tax.

With respect to the credit for the avoidance of double taxation, the AG held that, as a result of the Gilly and Test Claiments in the Franked Investment GLO cases, it follows that EC law does not require the country of establishment of a company to avoid international legal or economic double taxation to a higher amount than the tax which would be due on the foreign income under its domestic law.

Finally, the AG held that the argument of the Minister of Finance that in the case of majority participations it is not the freedom of capital but the freedom of establishment that is applicable, is irrelevant in the case at hand. The AG reasoned that the most favoured-nation treatment in his view does not apply. If the Supreme Court would decide the opposite, the AG confirmed the argument of the Minister based on the ECJ decision in Fidium Finanz, Cadburry Schweppers, and Test Claiments in the Franked Investment Income GLO.

Consequently, the AG rejected the taxpayer's claim on the application of the most-favoured nation principle and the Community preference with respect to the tax sparing credit under the tax treaty with Brazil and the former tax sparing credit under the treaty with Greece.