CFE ECJ Task Force: Opinion Statement ECJ-TF 4/2019 on the ECJ Decision of 26 February 2019 in X-GmbH (Case C-135/17), Concerning the Application of the German CFC Legislation in Relation to Third Countries

Eric Kemmeren, Alfredo Prats, Werner Haslehner, Volker Heydt, Georg Kofler, Michael Lang, João Nogueira, Pasquale Pistone, Stella Raventos-Calvo, Emmanuel de la Blétière, Isabelle Richelle, Alexander Rust, Rupert Shiers

Research output: Contribution to journalArticleProfessional


X-GmbH (Case C-135/17) [1.] concerned the compatibility of German CFC legislation with regard to third countries. In Germany, CFC legislation only applies in cross-border situations and not in purely domestic situations. In general, the application of CFC legislation requires that the shareholders have control over the foreign subsidiary, that the foreign subsidiary be taxed at a lower rate and that it earn passive income. Concerning a special type of passive income, there is even no control requirement. In relation to other EU and EEA countries, Germany does not apply its CFC legislation if the taxpayer proves that the company carries on a genuine economic activity. However, this “Cadbury Schweppes exception” [2.] does not apply in relation to third countries. The referring German Court asked whether the relevant German tax rules were compatible with the TFEU provisions on the free movement of capital. The first and second question concerned the interpretation of the standstill clause in article 64(1) of the Treaty on the Functioning of the European Union (TFEU) (2007). [3.] With its third question, the German Court inquired whether the Cadbury Schweppes jurisprudence can be transferred to the free movement of capital. [4.]

The ECJ held that the standstill clause also applies if the scope of the domestic CFC legislation is extended after 31 December 1993 to shareholdings that do not involve direct investment. In addition, the Court stated that Member States cannot rely on the standstill clause if they change their legislation after 31 December 1993 and then later replace these changes by legislation essentially identical to that applicable on 31 December 1993 unless these changes were never applied due to their repeal with retroactive effect. Concerning the interpretation of article 63 of the TFEU, the ECJ adopted, in substance, its approach in Cadbury Schweppes (Case C-194/04) and held that the German CFC legislation does not infringe the free movement of capital unless the Member State of the shareholder is able to verify the accuracy of the information that the shareholding in the company is not the result of an artificial scheme.

The CFE Tax Advisers Europe note that the Court’s decision in X GmbH constitutes a continuation of the Court's prior case law regarding the meaning of the standstill clause. The CFE welcomes the clarification with regard to the question of whether a restriction already existed on 31 December 1993.

The Court further developed its Cadbury Schweppes (Case C-196/04) jurisprudence, illustrating how to interpret the phrase “wholly artificial arrangements” in relation to the free movement of capital. The Court held that this concept has to be interpreted in a broader way in relation to third countries. It would be helpful if the Court were to give further guidance in a future decision on the meaning of “artificial transfer of profits”.

X GmbH is also likely to be relevant in respect of domestic legislation implementing articles 7 and 8 of the EU Anti-Tax Avoidance Directive (2016/1164) (ATAD) [5.] in that Member States will also have to apply the “substance escape” to third countries with an exchange of information clause.
Original languageEnglish
Pages (from-to)152-157
JournalEuropean Taxation
Issue number4
Publication statusPublished - 2020


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