Opinion Statement ECJ-TF 3/2019 on the CJEU Decision of 22 November 2018 in Case C-575/17, Sofina, on Withholding Taxes, Losses and Territoriality

This article deals with the decision taken by the Court of Justice of the European Union in Sofina. In the authors' view, it may have extended the standard of comparability, requiring (foreign) non-dividend income of the recipient to be taken into consideration in comparing the tax treatment of domestic and outbound dividends. This comparator, however, upsets the principle of territoriality, as accepted by the Court in Futura (Case C-250/95) and Centro Equestre (Case C-345/04), by requiring the source state to take into account losses that the non-resident taxpayer has in the residence state.

Taken at face value, Sofina's impact may extend well beyond withholding taxes, specifically, and dividend taxation, more generally, by attaching a "no-loss" condition to all source state taxing rights. It may arguably even bar the permanent establishment (PE) state from taxing profits attributable to that PE if the foreign head office is in a loss position.

Moreover, applying Sofina to everyday international tax law might also not be an easy task and push administrative feasibility to its limits. The Court effectively seems to propose a non-discriminatory deferral of taxation, combined with a domestic regime, that leads to a subsequent recapture if (and only if) the non-resident taxpayer becomes profitable during a subsequent tax year.