Mutual recognition in investment fund taxation? A reflection based on recent ECJ case law

Recent ECJ case law regarding the taxation of investment funds seems to include elements of mutual recognition, which is a rare phenomenon in the Court's doctrine on direct taxation. Expanding on the rather clear positions of the Court in E, Veronsaajien oikeudenvalvontayksikkö (Case C-480/19) and A SCPI (Case C-342/20), this two-part article strives towards taking a comprehensive and more systematic examination of the issue. Embedded into a broader dogmatic analysis, it will, with certain qualifiers, conclude that mutual recognition elements can be of relevance to the Court when testing national fund taxation systems under the fundamental freedoms.


Introductionmutual recognition in fund taxation; two recent examples
This article forms the final part of a series of papers that the author has written on the taxation of income paid to and received by investment funds under EU law. 1 The commencement of the mode of cooperation between national legal systems. 7Its genesis goes back to the case law up to and including Cassis de Dijon, 8 in which the Court held that goods that have lawfully been produced and marketed in one Member State may also be lawfully marketed in other Member States 9 unless the host Member State can bring forward a mandatory requirement, for which achieving the measure is necessary. 10The element of necessity expressed in Cassis de Dijon then created the essential foundation for later case law declaring the application of national rules to be disproportionate insofar as the rules of the home state effectively address the public interest pursued by the host state. 11In this context, mutual recognition is, in essence, a question of equivalence.If the goal that the national rule seeks to protect is already safeguarded by an equivalent norm in the other Member State, mutual recognition must prevail. 12lthough it took the Court until 2009 to explicitly refer to a principle of mutual recognition, 13 the concept has gained primary status for all of the fundamental freedoms. 14Sensu stricto, mutual recognition is a matter of proportionality. 15The refusal to recognize a good, person, or service because of non-compliance with national requirements that are already equivalently fulfilled in another Member State is disproportionate. 16The inquiry is thus whether the degree of equivalence that exists between the regulatory systems imposed a duty of mutual recognition on one Member State. 17Sensu lato, mutual recognition can also become relevant at earlier stages of the examination and also prevail, in the absence of a proportionality test, in cases that lack a valid imperative requirement to justify the non-application (or non-recognition) of foreign legislation or actions. 18t is worth emphasizing that literature underlines that, under certain circumstances, the duty of mutual recognition can be imposed in the absence of any equivalence test. 19This concerns cases in which the equivalence requirement went beyond what is necessary to protect the interest at stake. 20Similarly, the ECJ has also implemented mutual recognition in the absence of an equivalent level of protection.This happened, for instance, in company law cases which is a field of law with close ties to tax law. 21urthermore, as discussed in literature, there are certain lines of case law in which the Court refrains from imposing mutual recognition despite there being (potential) equivalence. 22The examples brought forward to make this point concern areas that are politically sensitive such as, for instance, gambling, public health care, 23 and also substantive direct taxation as will be shown in section 2.C. 24 B. The essentials of the ECJ's doctrine in direct tax law Bluntly, and yet in sufficiently indicative terms, direct tax law is special, and the ECJ also treats it as such. 25From the perspective of this article, the following instances appear to be especially relevant.First, direct tax law is, thus far, only minimally harmonized among EU Member States. 26Practically, and institutionally, this is a result of the area being carved out from the ordinary legislative procedure of 114 TFEU which results in tax harmonization efforts falling under Article 115 TFEU and, thus, the special legislative procedure. 27The TFEU, as stated by AG Kokott, underlines the sovereignty of Member States in taxation matters. 28The overall sensitivity of the topic, including the fact that the Member States are politically accountable for taxation, has resulted in fierce resistance towards the Commission's attempt to change decision-making mechanisms via the passerelle clause in Article 48 (7) TFEU. 29econdly, most direct tax regimes in the world 30 and all of the EUtax persons who are a resident and economic events taking place in their territory. 31This results in a compartmentalization of tax systems with the exercise of overlapping tax claims resulting in double taxation. 32This wedge between persons and assets inside and outside a Member State's territory exists even if Member States' tax systems are completely identical. 33Yet, the distortions are exacerbated by the fact that they are not. 34As stressed in literature, this is a key difference when compared to the general logic of Internal Market law.From an international tax perspective, it matters whether the taxpayer or sources of income stay or leave a jurisdiction while this should not make a difference from an Internal Market perspective. 35hirdly, and essentially in the context of the above, the ECJ case law on direct taxation under the fundamental freedoms is dominated by a non-discrimination approach.It is not a (non-discriminatory) restriction approach as is typical in other areas of fundamental freedoms recent developments in international tax governance, e.g. S. Kingma, Inclusive Global Tax Governance in the Post-BEPS Era (IBFD, 2020).27.The carve-out is included in Article 114(2) TFEU.See, in more detail and for a broader discussion, e.g.G. Kofler Council meeting Economic and Financial Affairs', 6301/19, p. 4-5.30.In broad terms, there is a wide variety of specialties that tax systems can have in addition to or instead of territorial taxation.For instance, some states, such as especially the US, tax based on nationality, and some states, such as the Cayman Island, do not tax income at all.Furthermore, there are tax systems that essentially only tax economic events taking place in their territoryalso with respect to residents.For the sake of clarity, it may be worth stressing that the notion of territorial taxation is used differently by economists who tend to refer to territorial tax regimes as being such that (usually) exempt foreign active income from taxation.See, e.g., IMF, Corporate Taxation in the Global Economy (IMF, 2019), para.44.This is rather frequent for EU Member States that have a wide tax treaty network and exempt income attributable to foreign permanent establishments of residents (even though, under domestic law, the resident taxpayer is subject to tax on his worldwide income).31.E.g.W. Schön, 'Neutrality and Territoriality -Competing or Converging Concepts in European Tax Law?', 69 Bull.
Int'l Tax'n (2015), p. 280.32.In more conceptual detail on the relevant case law that underlies the ECJ's acceptance of such territorial compartmentalization, see P. Wattel, in P. Wattel law. 36The latter could, given that taxes have, per se, a restrictive effect, result in Member States need to justify every tax with the Court being able to assess its proportionality. 37his would not be workable and, furthermore, would expose Member States to a level of Court control that would not sit well with their sovereignty. 38To borrow a famous metaphor from the recently deceased doyen of European tax law, Frans Vanistendael, 'The European tax landscape is no big snooker table that spans the whole internal market on which all balls are meant to run smoothly.Rather, it is a room containing 27 different snooker tables that should be accessible in a non-discriminatory manner.' 39 Taking account of territoriality and sovereignty equals an imperfect internal market in direct taxation. 40The ECJ iswith some exceptions and frictionsessentially aiming towards ensuring tax neutrality from the perspective of the single Member State. 41The latter must not treat a cross-border situation worse than a comparable domestic situation.In principle, this is in conjunction with a unilateral perspective that, in its purest form, requires disregarding foreign law for the purposes of scrutinizing national law under the fundamental freedoms. 42This is also what underlies the ECJ's statements based on which Member States are not obligated to take account of the possible adverse consequences arising from the particularities of the legislation of another Member State or to draw up its tax rules on the basis of those in another Member State in order to ensure, in all circumstances, taxation that removes all disparities arising from national tax rules. 43Likewise, it underlies the fundamental decision that the TFEU does not address juridical double taxation that results from 'the exercise in parallel by two Member States of their fiscal sovereignty'. 44 Are mutual recognition and direct tax law conceptually unfit?
Mutual recognition is understood to play a rather minor role in direct taxation. 45This is an immediate consequence of the prevailing unilateral perspective in scrutinizing national tax law. 46Mutual recognition, on the other hand, is explicitly concerned with what is called a global view which is a perspective that takes account of foreign law. 47That being said, it is necessary to refine these statements.
The absence of mutual recognition is clear with respect to substantive tax claims.Consider, for illustration, the following example.A person receives foreign dividend income.The taxpayer's residence state taxes its worldwide income based on its residence. 48At the same time, the state of the dividend-paying company taxes the foreign dividend recipient on the basis of the income having its source in this state. 49Given that there is a nexus to both states, both can tax under international lawand very frequently they will, as a starting point, also want to do so. 50The income is thus taxed twice in the hands of the same person (juridical double taxation). 51The fundamental problem from the perspective of mutual recognition lies in the fact that one Member State cannot fulfil the interest of another Member State to tax by taxing.Ultimately, both want to tax. 52hile this is true as it stands, it seems worthwhile to take a closer look on how states typically address the matter.In fact, while double taxation is the natural outcome of the interaction of most states' (and factually all Member States') tax systems (both tax the event due to the territorial connection), there are measures in place that aim to address the resulting double taxation.These are known as double taxation conventions. 53This means that the question of the mutual recognition of tax claims only reaches the ECJ in cases in which Member States have not already themselves agreed on how to allocate the specific tax claim. 54In principle, the ECJ could now act as some sort of final arbitrator and allocate the taxation right itself with a view to taking away juridical double taxation.However, in the Kerckhaert Morres line of case law, the Court refused to take on this role and emphasized that the TFEU does not lay down criteria as to which state is to be obligated to renounce its tax claim and thereby implicitly mutually recognize that of the other state. 55What is interesting in this respect is the fact that the Court made this statement without it, strictly speaking, having been necessary. 56The Court may thus be understood as taking an especially conscious and fierce stance against mutual recognition in substantive tax law towards emphasizing that it is the Member States and not the Court who makes that type of allocation of taxation rights. 57This is particularly so as the Courton a sober reflectioncould well have decided the matter differently.After all, the ECJ treats the OECD Model tax convention as some sort of 'gold-standard' of international tax allocation 58 and, in some cases, it has also assigned the taxation right to one of the involved Member States. 59As a result, it would not appear totally unthinkable that the Court could have developed a doctrine towards providing for a last resort Court-made allocation of taxation rights for the sake of avoiding juridical double taxation. 60The fact that the latter did not happen reinforces the above observation of the Court actively sending a sign of not being willing to interfere in this contextdespite the severe consequences that unresolved juridical double taxation has on the Internal Market. 61urthermore, it points towards the Court not regarding the (mere) act of taxation to be some 56.See in more detail on this, N. Bammens, The Principle of Non-Discrimination in International and European Tax Law, sec.14.2.6.2.5:In essence, the Court had to deal with a situation in which Belgium, as a residence state, taxed a dividend that was subject to WHT in France.Belgium taxed the dividends in the same way that it taxes internal dividends.Hence, at stake was a form of discrimination that is less often discussed at the level of the ECJ, namely whether the application of the same rules concerns different situations.Thus, the question was whether the taxation of the dividend in the other Member State renders the situation to be incomparable.According to the Court, it does not because the position of the shareholder receiving the dividend is 'not necessarily altered' by the fact that the dividends are subject to WHT in the source state.See Case C-513/04 Kerckhart Morres v. Belgium, para.19.Importantly, the discrimination analysis stops here, and the case could have simply been over.However, it was not.The Court went on and made the above-mentioned famous statement on the irrelevance of adverse consequences resulting from the parallel exercise of taxation rights.Bammens correctly regards this a separate analysis of the case under the (nondiscriminatory) restriction approach.The declaration, or confirmation, that this clear (non-discriminatory) restriction is not prevented by the TFEU is the actual ground-breaking element of the case.sort of common and overarching goal that can serve as a basis for mutual recognition. 62This is, in turn, an interesting contrast to the below cases that involve certain values that can form the basis for mutual recognition.Apart from the above rather clear stance of the ECJ on the inaccessibility of tax claims for mutual recognition, the situation is more nuanced.In fact, there are various situations when the principle can be relevant.In this regard, it seems key to emphasize that scholars tend to take a rather diverging view as to what to classify as mutual recognition and what not. 63Given that it is a very broad and versatile concept, this is neither surprising nor does it matter. 64Nonetheless, some clarifications on the understanding of the concept for the purposes of this article may be on point.
To begin with, it should be noted that there are a number of instances in which the Court left a strict unilateral perspective and took account of another state's law for the purposes of assessing the compatibility of national law under the freedoms. 65This raises the preliminary question as to whether such a global view is already to be equated with mutual recognition given that this amounts to a requirement to take account of a decision made by the foreign legislator for the purposes of domestic law. 66When following such a broader understanding, mutual recognition may be detected in the various lines of cases in which some sort of global view prevailed. 67Furthermore, it underlies the (growing) amount of secondary EU law that links the tax treatment of an event in one Member State to the tax treatment in another. 68Under a stricter understanding of the concept, on the other hand, the global view is merely a first step for mutual recognition but not yet mutual recognition itself. 69The latter is rather concerned with the factual replacement of domestic rules by equivalent foreign rules. 70There are a handful of instances in direct tax law where this is relevant. 71One aspect, for instance, is the acceptance of a taxpayer's foreign nationality, or its legal personality as a corporate body. 72Another concerns procedural requirements 73 and, again, another is included in the ECJ's case law on charitable 67.In more detail on the various deviations from the one-country approach, see, e.g.P. organizations. 74Given that this line of case law shows strong conceptual similarities to the subject matter of this research (in each case at stake is the granting of a special tax status to an entity based on certain conditions), a more comprehensive examination may be required. 75hile Member States can decide themselves whether they want to grant special treatment to charitable organizations and, if so, what type, 76 they must uphold it also with respect to charitable organizations from other Member States. 77As held by the Court in Stauffer: [T]he fact remains that where a foundation recognised as having charitable status in one Member State also satisfies the requirements imposed for that purpose by the law of another Member State and where its object is to promote the very same interests of the general public, (…) the authorities of that Member State cannot deny that foundation the right to equal treatment solely on the ground that it is not established in its territory. 78 a result, a foreign charitable organization that promotes an interest different to what is supported by relevant domestic legislation is in a situation that is not comparable to that of a domestic charitable organization. 79On the contrary, a foreign body that is recognized as a charitable organization in another Member State that aims to promote the same objective that is promoted by the domestic charitable body is in a comparable situation.Thus, it must not be discriminated against funds.Still, and this was the point in Futura, a Member State cannot demand also keeping books in another Member State, if the necessary informationthat protects the interest of safeguarding effective fiscal supervision which was the accepted justification at stakecan be delivered based on the books kept in the home state.74.E.g.J. Kokott unless there is a justification available. 80Stated differently, Member States are not obligated to automatically mutually recognize the status of foreign charities as such. 81However, the global approach to comparability, including its contextualization in light of the overall goals of the source Member State's own regime for charitable organizations 82 leads to an outcome that has similar effects as those of mutual recognition: Member States first decide whether they want to introduce a tax privileged status into their tax system of which the fulfilment is bound to certain criteria.If so, this becomes the yardstick for comparability and, as a consequence, Member States must, in effect, recognize foreign rules that underlie a foreign decision to introduce an equivalent framework as equivalent.As a result, a Member State has to accept the regulatory framework of another Member State if it protects the same interest, and unless it can justify not doing so.Even though those who call this 'another piece of the mosaic of the fundamental freedoms in their colour as guarantees of non-discrimination in classical outbound cases' 83 are correct; this does not mean that those who regard this as a piece of the mosaic of mutual recognition are wrong.Rather, it seems that two facet-rich concepts accord closely with each other. 84n the remainder of this article, it will be key to inquire whether such a connection can also exist in the context of investment funds.The question is thus whether the ECJ, in scrutinizing the relevant national rules from a non-discriminatory approach, laid the foundation for an interpretation of the fundamental freedoms towards factually leading to an outcome that requires Member States to mutually recognize foreign investment fund taxation systems as equivalent to their own provided the former protect the same goal as the latter?It is then for the reader to either classify this as a nondiscrimination approach seasoned with mutual recognition elements or outright mutual recognition.

Essentials of investment fund taxation 85
5 In addition, various funds may be subject to different regulatory treatment. 96What matters most for this article is the tax treatment of the fund for which the differentiation between tax opaqueness and tax transparency is made.
To understand the differences, first consider that investment fund structures have three levels at a minimum, that is, the investor, the fund and the investment target.If the fund was subject to tax on the income received by the target 97 and the investor was subject to tax on the income received by the participation rights representing a pro rata interest in the fund, and invests that money in one or multiple assets in accordance with its investment policy.'  fund, 98 it would become less attractive for investors to invest via an investment fund as opposed to directly investing in the target.This would be problematic because investing through funds gives rise to various benefits. 99As such, there are good policy reasons to aim towards ensuring, or at least promoting, tax neutrality between an investment via the fund and the corresponding direct investment of the fund investor into the target. 100For this purpose, it is most relevant to eliminate or alleviate the tax burden with respect to one layer in the structure. 101n the context of private equity fundswhich are rarely covered by a special tax regime 102this mainly works via fiscal self-help.Usually embedded into a more sophisticated structure open to a limited number of professional investors, the pooling vehicle can, for instance, be a company in a tax haven (not subject to tax) or a limited partnership (treated as tax-transparent). 103Mutual funds and UCITSalso referred to as mainstream fundson the other hand, are often subject to some sort of special tax regime that aims to achieve or promote neutrality vis-à-vis direct investment depending on how it is structured. 104There are different techniques that can be used in this context.Either the income is taxed only at the level of the investor, only at the level of the fund or partially at the level of both the former and the latter. 105he first option, the taxation of fund income only at the level of the investor, appears to be rather frequent and can be given effect to by either treating the fund as tax-transparent 106 or as a net income taxation.However, attempts are typically made to try to avoid this.See, e.g., S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, sec.1.3.98.On income paid by the fund to the investor or on capital gains realized through selling the participation in the fund 99.Most importantly, they allow investors to diversify their risks and benefits from professional management at a significantly lower cost than what can be achieved in a direct investment.See, e.g., OECD, The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles, sec.2. 100.On the different notions of neutrality involved in investment fund taxation regimes, see S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, p. 18, differing between 'horizontal neutrality' from the perspective of the investor considering a direct investment in the target or an investment via a fund and theclosely relatedconcept of vertical neutrality.The latter focuses on the economic double taxation of income at the different layers involved in the structure.101.For the sake of completeness, it should be mentioned that other dimensions also matter from a neutrality perspective.
Investments via funds may also give rise to changes in the character of the income and/or the timing of tax payments.Furthermore, it is not always sure for material or simply practical reasons whether the same tax treaty benefits as in the case of a direct investment are available.funds special regimes tend to be more frequent.103.Ibid.The result is that the income is not taxed at the level of the fund, and neither are the distributions from the fund taxed in the establishment jurisdiction of the fund.It may be worth noting that hedge funds also typically rely on the possibilities provided by the ordinary tax system, i.e. tax transparency, or entities that are not taxed.104.It may be worth mentioning that not all fund taxation systems fully strive towards achieving full neutrality.Some do not but at least aim towards it.See, in more detail, the general report of the 2019 IFA congress that is based on a significant number of national reports dealing with the taxation of investment funds from their jurisdiction, S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, p. 43 et seq.105.See, including examples from different country practices, S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, p. 18 et seq.They regard the right for a deduction upon distribution as an additional option.For the corresponding taxation at the investor level, see id., on p. 43 et seq.106.The general reporters of the 2019 IFA Congress define tax transparency in the context of investment funds in the following way: '"Tax transparent", "flow through" "pass through" or "fiscally transparent" means the tax status of an investment fund for the jurisdiction's income tax purposes, whereby (i) the fund itself is not subject to tax on net profits from its investment activities, (ii) its owners are subject to tax on their share of the fund's net profits as allocated tax-opaque 107 and subjecting it to special tax treatment. 108Whatever way the fund taxation regime is structured, states need to specify what qualifies for the special treatment awarded by the fund taxation regime and what does not and hence remains in the national tax system. 109

Fund taxation and the fundamental freedoms
A. The basic dilemmaa necessary but potentially expensive advantage 110 As described above, investment fund tax regimes are concerned with granting special tax treatment to someone in the structure.In real terms, this is not an advantage but the setting off of an otherwise existing disadvantage.Yet, relative to the ordinary tax system, it is an advantage. 111From a budgetary perspective, it is not further problematic to grant this advantage in a purely domestic situation because, here, the fund taxation system can take its intended effect.For instance, a Member State that grants a tax exemption to the fund vehicle will tax the domestic investor.The tax outcome is essentially the same as in the case of a direct investment of the domestic investor in the source companysingle taxation in the same state. 112Additionally, foreign investors of domestic funds can, in principle, be taxed on the distributions from the fund and capital gains received from the disposal of participation in the fund. 113The situation, however, is different when the fund is abroad.The Member State can still tax domestic investors on the income received from the foreign fund, 114 but they cannot tax a foreign investor in the foreign fund.The latter, however, is what they, subject to the applicable tax treaties, could have done in the case of a direct investment by the fund and the allocated income retains the source and character as determined at the fund level and (iii) the investors are treated as realising such net profits regardless of the timing of the distribution of the cash corresponding to such net profits.In this regard, the fund's or its agents' activities may be attributed to the owners in determining the character and source of net profits for income tax purposes.In addition, "tax transparency," "flow through," or "pass through" may be made on a net basis (meaning that the profits and losses are calculated at the fund level, then allocated to the investors) or on a gross basis (meaning that each item of income, gain, loss and deduction is allocated to the investors, who include such items in calculating their overall net profit or loss (whether solely with respect to the investment or at the person-wide basis)), or a combination of both.' See, S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, p. 19.As an example, see, e.g., the Austrian tax regime.See for a discussion: A. Bodis and T. Polivanova-Rosenauer, 'Austria', in IFA (eds.),Investment Funds, (IFA Cahiers, 2019).107.S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, p. 13 define the term 'tax opaque' as any tax treatment of an investment that is not tax-transparent as described the preceding footnote).In essence and subject to various caveats, this refers to situations in which the fund is treated, in one way or another, like a distinct entity that is interposed between the investor and the investment through which the income does not simply flow.112.For sure, the investment through the fund also incurs costs that are not incurred in a direct investment.113.Which, notably, countries do not necessarily do.Especially countries that play a strong role in the investment fund industry, usually, do not tax foreigners on income they receive from domestic funds.Under certain circumstances, it may even be the case that countries treat non-resident investors investing in a fund more favourably than investors that invest directly into the underlying asset.S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, p.48 et seq.114.They cannot, however, influence the fact that the foreign fund taxation system may have a different character.
of the foreign investor. 115While this exemption may, ceteris paribus, increase the inflow of foreign capital, it will go hand in hand with a reduction in tax revenue relative to the situation of the fund investors investing directly. 116The relative merits of these factors will unfold differently for different states, 117 but as a long history of ECJ case law shows, many Member States have been attempting to avoid extending benefits that are granted to domestic funds also to foreign funds.Naturally, this is in tension with thein such cases, normally applicablefree movement of capital 118 and, to the extent that this is motivated by Member States' desires to protect their tax claims that they would have on the investor that invests directly, it could be expected that this steady stream of investment fund cases will not so quickly ebb away. 119hus, what we are confronted with are multi-layered integrated systems that (i) pursue certain neutrality concepts in a certain way but that (ii) Member States tend to be reluctant to extend to cross-border situations due to budgetary reasons.At the same time, it is possible and even likely that the foreign fund is itself subject to a special tax regime that promotes the same or similar underlying values.This is a setting in which the presence of mutual recognition is well conceivable.Below, there will be a search for such elements, first, in the case law on tax-transparent funds (4.B); second, in the case law on tax-exempt funds (section 4.C); and, third, in the case law on fund regimes involving two different taxation techniques (section 4.D).

B. Mutual recognition in cases involving tax-transparent funds
In the context of tax-transparent systems, it is especially the administrative challenges connected to these systems that are to be given attention.As examples of states using tax-transparent fund taxation regimes show, they may attempt to address this issue via connecting tax-transparent treatment to proper reporting and sanction insufficient or inexistent reporting via some sort of estimation of the income. 120An important case in this regard is van Caster & van Caster (C-326/12).The question arose in it whether Germany is allowed to bind theusually punishinglumpsum taxation 121 to the fund's precise fulfilment of documentation and disclosure obligations foreseen in German law. 122While the Court held that, based on the principle of fiscal autonomy, Member States themselves determine what evidence is to be provided to enable tax authorities to correctly establish the tax owed on the income earned from investment funds, 123 Germany cannot disallow taxpayers from providing the evidence that could prove the actual amount of the income (and thus allow abstaining from the disadvantageous estimation). 124In effect, this means that equivalent foreign documentation has to be accepted.This is a matter of mutual recognition.That being stated, it is not investment fund specific but was already developed in the earlier Meilicke case 125 and only extended to the field of investment funds.Furthermore, the recent L Fund case (C-537/20) had to do with a tax-transparent system.Due to the case including certain additional components, it will be discussed in the second part of the article. 126 Mutual recognition in case law on fund taxation regimes offering special tax treatment to funds fulfilling certain criteria 1. Setting the scenea longer history of fund-related case law.As mentioned in section 3, 127 it is rather typical for investment fund tax regimes to provide for an exemption of the fund vehicle.A significant amount of investment fund cases that were at the ECJ involved such a system whereby the tax treatment in the source state of income paid to non-resident funds (in tax jargon what is known as outbound payments) has often been at stake.The first wave of 'outbound' case law, namely, Orange European Smallcap Fund, 128 Aberdeen, 129 Santander, 130 and DFA, 131 involved fund taxation systems that ultimately exempted domestic funds and taxed income paid to non-resident funds.132 In these cases, the differentiation was made based on the seat of the fund, and the Court's solution does not involve mutual recognition.Rather, it transferred the ACT/Denkavit line of case law that it developed in the context of ordinary dividend taxation to the realm of investment funds.133 According to that case law, a Member State, in light of rules mitigating economic double taxation, is creating comparability at the moment it is taxing the outgoing dividend since, via so subjecting the dividend to tax, it exposes the non-resident recipient to the same risk of economic double taxation in the source state.134 Member States have not been able to justify this inferior tax treatment of payments to foreign funds; 135 thus, they lost.The above case law shows no direct signs of mutual recognition and suggests that the ECJ remained in a unilateral view.136,137 Importantly, the taxation of the shareholders did not play a role in this examination in these cases because the respective fund tax systems did not make the exemption of the domestic funds dependent on this.138 However, there is a case, Fidelity (C-480/16), that included a differentiation based on the seat and in which the shareholder's taxation was relevant. As ill be shown in more detail below, this case eventually seems to include a mutual recognition element.139 Case law that is more recent, on the other hand, often involves investment fund systems that provide for differentiations that are not based on the seat of the fund.140 Instead, they bind the special tax treatment to the fulfilment of certain criteria, and all funds, domestic or foreign, that fulfil them qualify for it.In such situations, the question is whether a formally neutral tax system factually places cross-border situations at a disadvantage.141 In an attempt to search for mutual recognition elements in this line of case law, it seems worthwhile to begin from the most recent and, prima facie, most obvious example of a mutual recognition approach which is A SCPI.Based on these insights, there will be a return to earlier case law in order to determine whether this logic is also observable there.

2.
A SCPIthe seemingly rather obvious case 142 .The A SCPI case concerned a French statutory fund 143 that planned to purchase shares in Finnish real estate companies and directly acquire 136.It may be stressed that different nuances of what constitutes a unilateral view and an internal market view exist.Some authors regard the ACT/Denkavit line of case law as an example for a unilateral view.See, e.g., J. di Maria, in K. Dziurdź and C. Marchgraber (eds.),Non-Discrimination in European and Tax Treaty Law; P. Wattel, in P. Wattel, O. Marres and H. Vermeulen (eds.),Direct Tax Matters in European Tax Law; but some, such as E. Kemmeren, in L. Hinnekens and P. Hinnekens (eds.),A Vision of Taxes within and outside European Borders -Festschrift in Honor of Frans Vanistendael, seem to regard it as an example for an internal market approach due to the tax treatment of the shareholder being relevant.It does not really matter for the purposes of this article what classification may be taken.137.However, an important objection must be stressed.In fact, the ECJother than the EFTA Courtis also prepared to take a look into the taxation of the recipient of the income in such cases because it allows Member States to uphold a prima facie discriminatory tax if, based on a tax treaty, the tax gets fully credited against the tax due at the level of the recipient.Due to the non-resident fund being exempt, an offset of the tax is not possible which means that this so-called Amurta-neutralisation is not relevant.Finnish real estate. 144It applied for a ruling to ensure that it was regarded as tax-exempt, however, the request was denied since A SCPI was not a contractual fund. 145The matter came before the ECJ that regarded this to constitute a restriction of the free movement of capital.While Finnish funds may (and normally will) 146 adopt the legal form that enables them to obtain the exemption, foreign funds are subject to the conditions laid down by the legislation of the Member State in which they are established. 147This is liable to place domestic funds at an advantage which can consequently deter non-residents from investing in Finland. 148The Court thus proceeded forward to the comparability analysis.It began by recalling its settled case law according to which comparability is to be analysed in light of the aim of the provision at stake taking into account only the relevant distinguishing criteria laid down by the legislation in question. 149The Finnish Government underlined that the purpose of the Finnish fund taxation system is to avoid the double taxation of income from investments and to endeavour to treat investments made through funds as direct investments for tax purposes. 150In light of these rules, the ECJ does not regard the French statutory fund to be in a situation that is different from a contractual fund because such objectives may also be achieved when a statutory fund benefits in the Member State in which it is established from an exemption from income tax or, such as A SCPI, 151 from a system of tax transparency. 152The situations were thus comparable. 153No justifications were brought forward.Is this a global view?Yes.The Court looks at the tax treatment in the other state and therewith recognizes the economic nature of investment funds as an inseparable unit of investors and the fund vehicle.The alternative unilateral view was not discussed by the ECJ. 154The more thrilling question, however, is whether this global view extends to mutual recognition in the narrow sense supervision of the French Financial Markets Authority.151.According to ibid., para.13, the A SCPI is tax-transparent.152.Ibid., para.74-75, 77.The Court regards this to be, moreover, confirmed by the fact that, under Finnish legislation, a statutory fund is taxed at the level of the fund and investors whereas, for contractual funds, taxation occurs solely at the level of the investors.153.A second argument against comparability was struck down by the Court.See ibid., para.72, 76. 154.Interestingly, it seems to have underlain the EU law assessment of the Finnish legislator.As demonstrated by the government bill accomplishing the codification of the Finnish investment fund tax regime, it was emphasized that the Court, in assessing the different tax treatment of investment funds, only takes into account the differentiation criteria set out under national law which is the legal form in Finland.Based on that, the government brought forward the following logic: with the legal form being the decisive criterion, it is enough to extend the exemption only to foreign funds which, based on the same logic that applies in a domestic situation, are seen as funds.The overall goal of the fund taxation systemwhich takes account of the inseparable layers of funds and is thus global in naturedid not play a role in the argument.See the relevant government bill: Finland, Hallituksen esitys eduskunnalle laeiksi tuloverolain described above.Stated otherwise, is it only taking into account what happens in the other statewhich is known from the Amurta line of case law, 155 or does it go even further towards recognizing the other state's system fulfilling a goal enshrined in the domestic system which is why the foreign system needs to be regarded as equivalent to the domestic systemwhich is known from the case law on charities?Based on A SCPI, at least, the latter seems more likely.Just as with charities, Member States are free to foresee a special tax status for investment funds in their tax systems.Just as with charities, they are free to decide to which criteria they bind access to the system.And just as with respect to charities, 156 the source state was forced to accept as equivalent criteria of another state's system, given that they fulfil the same goal.And just as in case of charities, the mutual recognition duty does not go so far that the mere fact that the foreign state assigns to the foreign vehicle the status of a fund (charity) results in the other state having to follow this decision for the purposes of its own law. 157Rather, it is the goals attached to the tax status in one Member State that form the foundation for determining the equivalence of the tax status in the other Member State.
3. E, Veronsaajien oikeudenvalvontayksikkö.An equally clear case seems to be E, Veronsaajien oikeudenvalvontayksikkö (C-480/19) (hereinafter E), 158 which deals with the taxation of income received by a shareholder in an investment fund in her residence state.At stake is, thus, an inbound case.While facts of the case are simplea Finnish individual receives income from a Luxembourg SICAV 159the underlying Finnish law is complex, 160 but essentially boils down to the result that the distributions by the Luxembourg fund are taxed as employment income (rate up to 50%) at the level of the Finnish individual while the taxation of income distributed by Finnish funds is taxed as capital income (rate 30%, or 34%), and the income distributed by Finnish companies (subject to rules mitigating economic double taxation) is subject to a more favourable tax treatment. 161This amounts to a restriction of the free movement of capital.
The following comparability analysis was again conducted in light of the object and purpose of the rules in question, taking into account only the distinguishing criteria established by the ja rajoitetusti verovelvollisen tulon verottamisesta annetun lain 3 §:n muuttamisesta (HE 304/2018) (30 Dec. 2021), available at https://www.eduskunta.fi/FI/vaski/HallituksenEsitys/Documents/HE_304+2018.pdf.155.Meaning taking into account the fact that the tax is fully credited in the other state.See above.156.See the relevant discussion provided in section 2.C. 157.In parts of literature, the latter is used as a basis for the argument that mutual recognition does not exist in the case law on charities.See S. Hemels, in C.H.J.I.Panayi, W. Haslehner and E. Traversa (eds.),Research Handbook on European Union Taxation Law, sec.4.2.This is certainly true, i.e. there is no automatic mutual recognition of foreign charities.However, that does not mean that foreign equivalent regimes cannot be mutually recognized.158.Case C-480/19 E, Veronsaajien oikeudenvalvontayksikkö. 159.Ibid., para.15. 160.Ibid., para.7-14.161.In more technical terms, the Luxembourg fund was, based on its statutory legal form, treated as a limited liability company in Finland.As such, the Finnish rules on the taxation of dividend income included in sec.33a-33d of the Finnish Income Tax Act (ITA) applied.These rules strive to mitigate economic double taxation of dividend income and foresee different tax consequences at the level of the recipient in dependence on the nature and circumstances of the dividend distributing company.Due to the Luxembourg SICAV not fulfilling the legal form criterion nor the minimum taxation criterion included in sec.33c Finnish ITA, the income was taxed as employment income and thus subject to tax at a progressive rate of up to 50%.See M. Scherleitner, 50 Intertax (2022b), at sec.2.2.For more detail on the Finnish dividend taxation regime, see M. Helminen, Finnish International Taxation (Alma Talent, 2021), ch.10.
legislation. 162Had the Court wanted to remain in the unilateral perspectivewhich it did not doit would probably have established comparability on the basis of a Lenz/Manninen logic which is the standard comparability test for incoming dividends. 163It begins from the perspective of the recipient of the dividend income that is subject to a special tax treatment in a domestic scenario treatment upon which it is tested whether, considering the goal of these rules, the recipient of foreign income is a comparable situation. 164This is interesting because, at least prima facie, it would have appeared defendable to transfer this (unilateral) 165 logic to the E case.From the perspective of either rule applicable in the domestic scenario, that is, capital income taxation for distributions from Finnish funds and the rules aiming to mitigate the economic double taxation of the income, 166 the receiver of domestic income may not be in a different position than the recipient of cross-border income.Yet, the Court did not go this way. 167Instead, it took a global view and considered the fund regime in Luxembourg in the comparability test. 168Thereafter, it established the goal of the Finnish fund taxation system as ensuring single taxation at the investor's level 169 upon which it examined the fund taxation regime to which the Luxembourg fund was subject. 170Given that the Luxembourg fund taxation regime, just as the Finnish one, foresees an exemption for the fund and provides for taxation only at the level of the investor, the Luxembourg fund is considered to be in a comparable situation to a Finnish fund. 171The fact that the legal form of a Luxembourg fund is different than that of a Finnish fund does not change this. 172Neither did it matter that the 162.Case C-480/19 E, Veronsaajien oikeudenvalvontayksikkö, para.49.163.To be clear, this can also be seen differently.In fact, authors have made different sense out of the need expressed in Manninen to provide for an imputation credit for the foreign tax.This has led some authors to conclude that the case involves mutual recognition.J. the tax treatment of dividends received by natural persons as being designed to ensure that the income of a company is also taxed at the shareholder level while providing for the mitigation of the double taxation of that income.170.Ibid., para.51.171.Ibid.172.Ibid., para.52-54.Note that it is ultimately the legal form of the Luxembourg fund that gives rise to the taxation of the income as employment income since this causes it to being equated to a public limited company.This effectuates the relevant rules for foreign dividend income that, in this case, give rise to the income being subject to progressive rates.In former is subject to a subscription tax that is a form of wealth tax. 173The Court also clarified that, due to the UCITS directive not harmonizing the tax treatment of investment funds and the income distributed by them, the fact that the SICAV is a UCITS does not mean that it is in a comparable situation as a Finnish UCITS on the mere grounds that both are UCITSs. 174s this an equivalence test of the type found in A SCPI? What could prima facie speak against this is the observation that what is ultimately at stake isdespite the different formulation of the Courtnot the comparability of the situation of a Luxembourg fund and a Finnish fund.Instead, it is the comparability of the situation of a Finnish investor investing in a Luxembourg fund and a Finnish investor investing in a Finnish fund.This perspective is not different than the above-mentioned Lenz/Manninen comparability that likewise makes a general assumption on the fact that the dividend to be relieved from economic double taxation has been subject to corporate income tax before distribution. 175However, in E, the Court never focused on the investor but rather examined the entire system.This is a remarkable step because it suggests that the Court is, just as in A SCPI, willing to take proper account of the fact that investment funds involve multiple and non-separable layers. 176From this perspectiveand also noting that the free movement of capital protects both sides of the transaction 177it seems understandable that the Court makes comparability dependent on the equivalence of the whole Luxembourg fund regime.

UBS Real Estate (Case C-478/19
).During the time between the decisions of E and A SCPI, the UBS Real Estate (C-478/19) case was decided. 178The latter dealt with a tax advantagethe reduction in mortgage registration tax and land registration feesthat Italy only granted to closed funds. 179Open-ended funds, on the contrary, could not be awarded the benefit. 180Residence was not relevant but, given that Italian law only allowed real estate funds to be created as closed-ended, only foreign funds would not qualify for the tax benefit, which is why the Court regarded Italian rules to result in indirect discrimination. 181wholly domestic scenario, on the other hand, the income distributed by a domestic (contractual) fund and the income distributed by a domestic company is always capital income (that can potentially be taxed somewhat differently).Hence, with respect to Finnish entities' income distributing entities, a differentiation between employment income and capital income based on the legal form is not made.173.The annual subscription tax (taxe d'abonnement) applies to both the contractual and corporate UCITSs at the standard rate of 0.05% of the UCITSs' net assets.In the comparability analysis, the Court focused on the goal of the measure and the relevant distinguishing criteria and emphasized that the aim of the measure is not clear to it.182 As a result and leaving the verification to the national court, it conducted three different comparability tests based on the alleged goals that were brought forward in the proceedings: 183 If the referring court would conclude that the goal of the reduction was to mitigate the double taxation funds that constantly buying and selling real estate are subject to, then open-and closed-ended funds would be in a comparable situation because both are exposed to this risk of double taxation.184 If, on the other hand, the referring court would conclude that the goal was to 'promote and encourage the creation of closed-ended funds, which do not stem from highly speculative and uncertain intentions, and to limit the systemic risks on the real estate market', 185 this does not render an open-and closed-ended fund to be incomparable in light of the tax advantage in question.186 If only the purpose and content of the rule mattersthat is, in colloquial terms, the granting of a tax advantage for the sake of granting a tax advantagethe Court regarded a closed and open fund to appear to be in a comparable situation with respect to the tax advantage insofar as they each pursue the activity of acquiring and subsequently reselling real estate liable to be taxed twice.187 Thus, comparability was assumed in each case.The Court went on to the justification analysis where it accepted, subject to the proportionality of the measure being confirmed by the national Court, a new justification, specifically the above-mentioned limiting of systemic risks in the real estate market.188 In an attempt to fit this into the above A SCPI and E logic, the first question that comes up is why the Court has not decided the case already in the comparability analysis.It would have seemed conceivable, after E, that the Court again looked at the (in this case alleged) goal of the Italian system based on which it could have declared the German open fund to be in a situation that is noncomparable.Even if this was not the actual goal (the ECJ did not ultimately know), 189 it would have been possible to provide the national Court with guidance on how to proceed had it regarded the tax advantage to be provided for this purpose.Italy would have won in the case that the referring court regarded this to be the goal of the rules.The only difference is that there is no further proportionality analysis.190 That being said, the fact that the Court went further to the justification analysis does not disprove the relevance of mutual recognition.As a simple thought experiment shall demonstrate, the opposite may well be true.Assume, merely for the sake of the argument, that the foreign legal order allows open funds but, nevertheless, includes some mechanisms that sufficiently safeguard the Italian 182.Ibid., para.47-49. 183Ibid., para.50-54. The disussion below is conducted in a different order than the comparability analysis of the judgment.184. Ibid., ara.56. 185The underlying risk is the following: A decrease in real estate prices might induce many participants in open-ended investment funds to request the early redemption of their shares.This could lead to the absorbance of the fund's liquidity reserves for which, as a result, the fund would be forced to sell real estatepotentially below its normal valueto be able to meet the redemption requests.policy interest that was accepted as a justification, that is, the limitation of the systemic risk of the real estate market.Stated otherwise, assume that the German system was equivalent.Where would this difference show up? Wou it be the comparability analysis such as in A SCPI and E? Likely not, becauseas demonstrated by the actual judgmentcomparability was given anyway in light of the goal to limit the systemic risk of the real estate market.191 Would it be the proportionality analysis?The answer is likely affirmative because it would appear non-proportionate to uphold the discrimination when the foreign system safeguards the same interest that was accepted as justification.The latter again corresponds to the typical approach to mutual recognition.192 The author does not know whether the German system indeed included such mechanisms.Neither, it seems, did the ECJ that left the proportionality test to the national court.For the purposes of the argument, it also does not matter.What counts is the fact that, if the Italian Court found such an equivalent mechanism to exist in Germany, it would, in this respect, have to regard the national rule as being disproportionate.193 In the event that it does not reach this conclusion, it can uphold the national regulationsif there are no other arguments speaking against the proportionality of the rules.Consequently, the equivalence of the other system would have mattered, and the fact that the other system was not equivalent does not mean that equivalence is not relevant.It is quite the opposite.What explains the dogmatic differences between A SCPI and E on the one hand, and UBS on the other hand, that is, why was the equivalence test included in the comparability analysis in the former cases but (potentially) in the proportionality analysis in the latter?Is it the fact that there was equivalence in A SCPI and E and potentially none in UBS?This would not appear compelling because it would, per se, be difficult to understand why the positive or (potentially) negative result should determine where to include the analysis.
Is it because A SCPI and E were much clearer than UBS?Although the author obviously does not know, this would appear to be conceivable.After all, the equivalence argument is dependent upon the purpose of the rules.The purpose of a rule can, on the one hand, be a yardstick for comparability which is, as mentioned, rather frequent in direct taxation cases. 194When a case is decided in favour of the Member State on the basis of incomparability, it must be clear that the purpose of the rule is, as such, acceptable. 195This is because, through incomparability, what will remain are the impediments on the internal market caused by the national rules discriminating in the name of this purpose. 196On the other hand and upon comparability being established, the purpose of a rule can also serve as a justification.The question is again the same: Is the purpose of the rule such that can justify, that is, heal, the prima facie infringement of the fundamental freedoms?If not, the Member State loses.If yes, the examination continues with the proportionality analysis.Equivalence arguments can become relevant at either the comparability stage (comparable due to being subject to an equivalent set of rules) or in the proportionality analysis (upholding the discrimination not proportional due to being subject to an equivalent set of rules).The difference is ultimately the intensity of the examination.
Had the intention of the Court been to accept the comparability in A SCPI and E on the simple assumption that the neutrality notion of the Finnish fund taxation system is a reasonable basis for the establishment of comparability and sending Finland into the losing battle of finding an additional justification while it regarded the argument limitation of the systemic risk of the real estate market to require further scrutiny, the author would be inclined to understand this logic.This is further reinforced by the discussion below on the Pensioenfonds Metaal en Techniek (PMT), 197 which, in the author's view, demonstrates the downsides of the Court remaining all too easily in the comparability analysis, instead of taking a more holistic view on the matter in the proportionality analysis.
5. Köln-Aktienfonds Deka (Case C-156/17).In Köln-Aktienfonds Deka, a German fund (KA Deka) claiming back the WHT levied on Dutch sourced dividends was at stake. 198The Netherlands denied the refund because the German fund did not qualify for the status of a fiscal investment enterprise (FIE). 199Upon a more complex elaboration, the Court found the Dutch rules, while formally neutral, could factually place cross-border situations at a disadvantage. 200Refraining from delving more comprehensively into that, the author intends to select one aspect of the case that is of relevance for this article.
The Dutch investment fund regime binds the exemption from source tax to the requirement of the fund fully distributing the proceeds to its investors on a yearly basis within eight months at the end of the financial year. 201Köln-Aktienfonds Deka was a German fund that was subject to a taxtransparent tax regime.As a consequence, all of its proceeds have been taxable at the investor level either as direct distributions or as what is referred to as deemed distributions. 202In this regard, the question was whether the German fund is in a comparable situation to a Dutch fund.
The AG suggested to simply accept an ACT/Denkavit comparability. 203Prima facie, it would have appeared understandable for the Court to follow the suggestion. 204After all, the shifting of the tax burden to the unitholder is, at the same time, a mitigation of economic double taxation at the fund level.Whatever reason underlies the redistribution requirement, it remains that the shift of taxation to the unitholders is what allows and demands the mitigation of economic double taxation at the level of the fund. 205The Court, however, was prepared to regard the situation at stake to be incomparable should it turn out at the level of the national Court that the goal of the Dutch redistribution requirement was to get the profits as soon as possible to the investors. 206Under these circumstances, a German fund is not in a comparable situation if it does not actually distribute the profits.However, if the goal is (just) to shift the taxation to the unitholders, the German fund is comparable because, via the actual and deemed distributions foreseen in the German fund taxation system at stake in Köln-Aktienfonds Deka, the profits of the fund are allocated to the investors for tax purposes. 207as this an equivalence test as well?It could be stated as such because what is of relevance is the question of whether the German system fulfils the policy interest of the Dutch system.What immediately raises attention, however, is the harshness of the Court.At least to the author, it seems difficult to understand why, for the purposes of the access to the Dutch fund taxation regime, the mechanics of shifting the tax burden to the investor matter so much that the Court is prepared to potentially regard the situations to be incomparable. 208After all, both systems yield the same tax outcome.For sure, it makes a difference for the investor whether the income of the fund is capitalized in its participation in the fund or whether it receives it in cash as a result of mandatory distribution requirements. 209However, this appears to be a relatively minor difference when considering the fact that the denial of comparability effectuates a tax that will subsequently fundamentally create a difference from the investor's perspective. 210 Fidelity (Case C-156/17).Another interesting investment fund case in the search for mutual recognition elements is Fidelity (C-156/17).211 In brief, the system at stake taxes outgoing dividends to foreign funds, but exempts dividends paid to Danish funds; but only if the fund makes a minimum distribution or calculates a minimum distribution, from which tax it withholds a tax.212 With the distinction being made based on residency, comparability was established based on the ACT/Denkavit formula.213 The goal of the Danish tax system to shift the tax burden to the investor goes hand in hand with the need to accept that, under this logic, the foreign investor cannot be taxed.214 The Danish rule was nonetheless justified due to it safeguarding the coherence of the tax system.215 The tax advantage of the exemption from tax is directly connected to the disadvantage, specifically levying a withholding tax. 216However, it is not proportional to uphold this rule if the foreign fund itself withholds a tax equivalent to the Danish tax.217 Various aspects of the case are of special interest for this article.First, coherence is an often invoked but rarely accepted justification grounds.218 The Court is normally very strict in demanding that the advantage and disadvantage concern the same tax and the same taxpayer.219 However, in Fidelity, this was different, and the Court accepted the connection of an advantage and a disadvantage for two different persons, namely, the fund (that is exempt) and the investor (on behalf of which the tax is levied).220 The fact that the Court was prepared to do so again suggests that the ECJ accepts the inseparable connection between the different layers of an investment fund structure.
Secondly, the Court again provided for an equivalence test this time in the proportionality analysis. 221Once the foreign fund qualifiedly withholds a tax, that is, once the foreign fund is subject to an equivalent regime, the Danish WHT cannot be levied; otherwise, it can. 222Again, there seems to be an extraordinarily narrow understanding of equivalence because, when the ECJ demands that the 'latter pay a tax that is equivalent to the tax which Danish Article 16 C funds are required to retain, as a withholding tax, on the minimum distribution calculated in accordance with that provision', 223 it may be possible that foreign funds subject to (slightly) different rules than the Danish regulations would no longer be considered equivalent.
Furthermore, it is interesting to see the differentiation made by the ECJ between Fidelity and A SCPI.On the one hand, both systems are such that foresee taxation solely at the shareholder's level.In A SCPI, this matters in the comparability analysis: a foreign system that does not foresee these consequences is not equivalent and thus not comparable. 224Based on that, the Member State can uphold the discriminatory source tax.On the other hand, in Fidelityas later confirmed in this respect by AllianzGIcomparability was given. 225Denmark thus needed to proceed forward to the justification analysis where it could, via the proportionality test, reach the same result as in A SPCI. Unless the foreign system is equivalent, discriminatory source tax can be upheld.The author would assume that the difference between these cases is remarked by the fact that the system in A SCPI does not include a differentiation based on the seat while the system in Fidelity does.The (simpler) acceptance of comparability in Fidelity based (merely) on the ACT/ Denkavit formula could be associated with the Danish system's more problematic differentiation based on the seat.However, the fact that the Court took the additional requirement for Danish funds into account in the later parts of the examination suggests that it does not strive towards an outcome that treats foreign funds more favourably than domestic funds which would be the case if only domestic funds have to fulfil this additional withholding requirement.This would at least be a sensible explanation, especially when remembering that at stake is an interpretation of the fundamental freedoms that are ultimately rules that should improve allocation efficiency via decreasing (certain) distortions.Their interpretation should not itselfas convincingly held elsewheregive rise to distortions. 226This would be the case, however, if striking down rules that disadvantage cross-border situations causes an outcome that advantages cross-border situations.
7. L Fund (Case C-537/20).The most recent case investment fund tax case, L Fund (C-537/20), concerns a Luxembourg property fund set up as a specialized investment fund under Luxembourg law. 227It had two non-German institutional investors and received income from the letting and sale of German real estate. 228While the Luxembourg fund was subject to tax transparency in Luxembourg, 229 the German Bundesfinanzhof regarded the Luxembourg fund to be opaque based on a resemblance test. 230Due to being foreign, it was not entitled to the tax exemption to which German funds are subject. 231Thus, it was taxed on the German income. 232With respect to German funds, on the other hand, a tax-transparent system applies.For this purpose, the fund, which is a corporate tax subject, is granted an exemption, but this goes directly hand in hand with the taxation of the actual and deemed distributions of the fund at the level of the domestic investor. 233Foreign investors in a German specialized property fund are directly attributed income from property, which means that tax transparency is also upheld here. 234he ECJ regarded the German rule to create a restriction on the free movement of capital. 235In the following comparability analysis, the ECJ regarded the goal of the German rules to be the taxation of the income from property of resident specialized property funds with non-resident institutional investors at the level of the latter (investors) and not the former (fund). 236This is to 'implement the transparency principle, under which income is taxed only once, and to ensure equality of treatment between direct investments and investments made through an investment fund'. 237hereupon, the Court underlines that Germany taxes the foreign fund because it cannot tax foreign investors of the foreign fund. 238Differently from what was suggested by the Bundesfinanzhof, the ECJ regarded the differentiation criteria not to be the taxation of the investor 239 but the seat of the fund.Ultimately, it was only domestic funds and not foreign funds that are exempt from corporate tax. 240As in Fidelity, 241 the Court held that Germany, which shifts the level of taxation to the investor, must accept that it cannot tax the foreign investor, and cannot make up for this by taxing the foreign fund. 242In this regard, the Court also stresses that, if Germany is serious about shifting the taxation to the level of the investors, it should extend the exemption to the foreign fund when its investors are taxed. 243Furthermore, the Court states that it is possible that the foreign fund has German investors that Germany could tax. 244From that perspective, a nonresident fund is in an objectively comparable situation to that of a resident fund. 245It is unnecessary and incoherent to tax foreign funds for the sake of ensuring the taxation of investors to the extent that the foreign fund has domestic investors. 246In addition, the Court holds that: resident and non-resident funds are in a comparable situation with regard to the objective pursued by the transparency principle, namely to ensure equal treatment between direct investments and investments made through an investment fund.The income from property of resident funds is only taxed at the level of their investors for the purpose of achieving that objective. 247is statement is interesting because it again seems to suggest that the Court makes comparability dependent on the fact that the foreign fund is subject to the same system as the domestic fund.Problematically, the Court does not clearly express this.Rather, it seems to make a very general statement with respect to 'resident and non-resident funds' being comparable with respect to the objective of the transparency principle after which it refers to the taxation of the German fund achieving this goal.The question as to whether the Luxembourg system fulfils this objective isdifferently from other judgmentsnot explicitly addressed. 248Nonetheless, the Luxembourg fund was subject to tax transparency and thus subject to an equivalent regime as the German fund.This was clear to the Court. 249Given that the Court adopts this perspective in the comparability analysis and, based on it, declares the situations to be comparable, suggests that equivalence mattered here as well.
In the justification analysis, the Court again seems to be principally open to accepting the coherence argument, ifwhich is for the national Court to determine -'the attribution of income from property to non-resident investors and the taxation of resident investors in resident funds compensates for the exemption granted to those funds.In particular, it must determine whether such investors are systematically taxed and cannot benefit from an exemption from that tax.' 250 However, with reference to Fidelity, the Court regards the German rule to go beyond what is necessary for ensuring the coherence of that tax system.First, the Court holds that the economic double taxation that German investors in foreign funds may be exposed to due to Germany taxing the fund may not always be eliminated.This frustrates the objective pursued by the German system. 251Secondly, the ECJ emphasizes that internal consistency of the German tax system could be maintained if nonresident funds could benefit from the exemption, provided that the German tax authorities ensure, with the full cooperation of those funds, that the investors in those funds pay a tax equivalent to that to which investors in a domestic fund are liable. 252Allowing such foreign funds to benefit from that exemption under those conditions would constitute a less restrictive measure than the respective German regime at issue. 253Although this is not a necessity, it seems that this criterion would be fulfilled especially in situations in which the foreign fund, like the domestic fund, withholds a tax on the distributions that it makes. 254he L Fund case thus widely confirms the Court's approach in Fidelity but, contrary to it, seems to include an equivalence test already in the comparability analysis.The difference between the cases in this respect may be explained by the fact that the income at stake in Fidelity is a dividend while it was income from property in L Fund.Economic double taxation at the fund level can only happen with respect to the dividend which is why the ACT/Denkavit formula could be used in Fidelity 255 but not in L Fund.What is interesting, though, is the difference in the coherence test.In Fidelity, it wasdue to Danish law demanding thisprecisely the withholding requirement that the foreign fund must fulfil. 256In L Fund, the taxation requirement is more general.This may have to do with the looser approach provided in German law in which the exemption of the fund is not explicitly made subject to the taxation of the investor while a direct link maysubject to confirmation by the national courtstill be inferred from it. 257Secondly, and somewhat puzzlingly, in L Funddifferently from Fidelitythe Court did not focus on the direct link that it was apparently prepared to accept under the coherence argument when it questioned whether Germany went beyond safeguarding coherence.While, for German funds, it questioned whether the taxation of the investors compensates for the exemption of the fund, 258 it did not question whether the taxation of the investors in the foreign fund compensates for the exemption of the foreign fund.Instead, the Court focused on the taxation of foreign investors that needs to be equivalent to investors in the domestic fund. 259This can, of course, be different.If the foreign fund is exempt from a 10% corporate tax, it will be a 10% tax that the investors are to be subjected to for compensating for the exemption.When the tax of the investor in the German fund matters, then the tax burden that the investors in the foreign fund must fulfil a higher taxation requirement.
With that being said, the author doubts whether the Court's approach to refer to actual tax burdens proves workable.After all, the tax situation and the tax treatment of investors can be very different.Apart from that, it is, as worked out in section 3, not the typical idea of investment fund regimes to have investor taxation compensating for the special tax treatment of the fund.Rather, the goal is to eliminate or diminish the disadvantage vis a vis direct investments that would result from the taxation of the fund as a second layer between the investment and the investors. 260Following the Court's understanding would mean that an exempt fund would become taxable on the income ifas is not infrequent in practicethe investor is tax-exempt.This outcome appears rather absurd as the policy decision to exempt the respective investor from taxation would be frustrated due to the taxation of an investment through the fund.This is not what the author has understood to be the idea of the German system; but what is ultimately relevant, and is quite typical, is taking out one layer of taxation (fund) and keeping the other.

D. Mutual recognition in cases involving different taxation techniques for resident and non-resident funds
1. Setting the scene.There are two cases that involve investment fund regimes that apply two different tax regimes for domestic and foreign funds.As a result, at stake is not the question as to whether a certain tax benefit is to be extended to non-resident funds, but whether the application of a certain system to resident funds and a certain different system to non-resident funds is in line with the fundamental freedoms.Below, the first case to be analysed is the pension fund case Pensioenfonds Metaal en Techniek ("PMT") 261 which is particularly interesting to contrast with UBS Real Estate. 262The second is the recent AllianzGI case, which is less spectacular but gives rise to some interesting nuances. 263The cases will again be analysed with a very clear focus on the search for elements of mutual recognition.
2. Pensioenfonds Metaal en Techniek ("PMT").The PMT case concerned a Dutch pension fund that received dividends from Sweden that were subject to a 15% withholding tax.Swedish pension funds, on the other hand, were liable for a capital yield tax. 264 The base of this tax consists of the net value of assets at the beginning of the year multiplied by the average government bond yield of the preceding year.The result is taxed at 15%. 265It was not under dispute that the tax burden was heavier for non-resident funds in at least some years. 266Thus, the ECJ held that there was a restriction of the free movement of capital. 267ence, the Court proceeded to perform a comparability analysis.Thereby, it regarded the goal of the measure, that is, the introduction of 'neutral taxation independent of the economic climate surrounding various kinds of assets and all of the kinds of pension products concerned' 268 after which it continued to state that 'in order to achieve such an objective, all the assets of a resident pension fund are subject to yearly lump sum taxation, reflecting the yield of those assets, irrespective of the receipt of income generated by those assets, in particular the receipt of dividends.' 269The Court recognized that Sweden cannot tax all of the assets of non-resident pension funds on a yearly basis. 270Thus, it holds that the objective of the Swedish measure cannot be achieved with respect to foreign funds.The Court also does not consider it to be possible to mirror the taxation of resident funds in the context of taxing the dividend as the Swedish system demands annual taxation of the entire invested capital. 271Consequently, the ECJ concluded by stating that, with respect to the rule at issue, non-resident pension funds are not comparable to Swedish pension funds. 272hus, Sweden won.
The PMT case was heavily criticized in literature particularly because it is very difficult to reconcile with the earlier Miljoen case that likewise imposed two different systems for dividends. 273,274he author himself joined the chorus of voices that flagged the risk of the Court freely affording opportunities for Member States to engineer their way out of the limitations under the fundamental freedoms by designing tax systems applying in a domestic context in the light of which the crossborder situation is not anymore comparable. 275his concern does not disappear.However, after A SCPI and UBS, it may be on point to see PMT with fresh eyes.Actually, PMT almost seems like a prototype for the equivalence test logic of A SCPIand it shows the inherent limitations of making this test already in the context of the comparability analysis.The Court not only took for granted that the goal of the Swedish system is worth protecting and that the foreign system does not fulfil these goals.Rather, via deciding the case in the comparability analysis, it did not have the national Court to take a look at the other system.This would, however, seem to have been necessary, because when the underlying value of the Swedish system is acceptable in the first place, why should it then be allowed for Sweden to frustrate, via the levying of a withholding tax, the functioning of another state's system that is built on the same value?For sure, it could have been simply clear to the ECJ that the Dutch system does not fulfil these goals, which is why it did not bother relaying this to the referring Court to find out.This would, however, be problematic because it gives improper guidance to national Courts that apply EU law and that may be confronted with a situation of equivalence.This argument could be countered and the fact could be invoked that Sweden has a taxation right on the outgoing dividends that it also exercises in a domestic case.The possibility for Sweden to mirror the tax liability of the domestic funds when taxing the distribution of the dividend to the foreign pension fund was also discussed at the level of the Court where it was dismissed because Sweden, in accordance with the tax treaty with the Netherlands, can only tax the dividends. 276On the other hand, to achieve the objective of the Swedish system, specifically the neutral taxation independent of the economic climate surrounding various kinds of assets and all of the kinds of pension products concerned, it is necessary to tax all of the fund's assets. 277While this is certainly true, it could now be argued that this should not be the end of the problem but the beginning of it.Should a Member State be able to afford better treatment for domestic funds and then hide behind the tax treaty as preventing it from imposing the same system on foreign funds?The answer should be no.However, it would be equally odd to forbid Sweden to impose its system on domestic pension funds just because it is not possible to equally impose the system on foreign pension funds.
The way out of this dilemma may, precisely, have been an approach similar to what the Court applied in UBS Real Estate. 278Pursuant to it, it could have accepted the Swedish and Dutch funds to be in a comparable situation after which it could have been possible to accept the aim of the neutral taxation independent of the economic climate surrounding various kinds of assets and all of the kinds of pension products concerned as a justification.Thereafter, in the proportionality analysis, the national Court would have been able to take account of whether the foreign system fulfilled this goal as well and, if it did, then it would appear difficult for Sweden to defend levying a tax on the outgoing dividend.Similarly, if it did not fulfil the goal, the tax could have been upheld.The author admits that this argument stands on a shaky ground, since the Court is typically reluctant to accept economic policy arguments as justification. 279However, there is no actual difference between, on the one hand, accepting this as justification due to being the core policy rationale of the relevant domestic tax system and, on the other hand, using this goal as benchmark for comparability.The end result, so it appears, is the acceptance of the system's goal.For sure, in PMT, the Court did not pay any attention to the regime to which the foreign fund was subject.Neither did the Court in UBS Real Estatebut the fact that the latter includes a proportionality analysis that may allow for this perspective is a key difference and, in the author's view, a key progress.

AllianzGI.
The second and more recent case involving two different taxation techniques is AllianzGI, which deals with a German UCITS fund that received Portuguese dividends that are subject to a 25% withholding tax. 280Dividends paid to a Portuguese UCITS, on the other hand, are not taxed.However, the Portuguese UCITS is subject to a stamp taxto which foreign funds are again not subject. 281Based on this rule, a Portuguese fund has to quarterly pay a tax on the fund's net book value that is between 0.0025% and 0.0125% depending on the nature of the fund. 282,283The referring court wanted to know, inter alia, whether this different taxation technique used for resident funds can justify the less favourable tax treatment of distributions made to non-resident funds. 284he ECJ found this to result in a restriction of the free movement of capital. 285What followed was an extensive comparability analysis that did not add much insight in terms of what is relevant for this article. 286Other than what may have been expected after the AG opinion, 287 the judgment does not refine the above PMT doctrine because the Court declared the stamp tax as not being relevant for the question of comparability.This was because it regarded the stamp tax as an asset tax, and thus something different than the income tax to which the dividends were subject. 288urthermore, the Court paid attention to the fact that the stamp tax not only applies to retained income that it explicitly emphasized to be a difference to PMT. 289 It mattered to the Court that the resident fund can, at will, escape the stamp tax by immediately distributing the income. 290ith the irrelevance of the stamp tax, all that remained was a rather straightforward case: dividends paid to domestic funds are exempt, and dividends to foreign funds are taxed.Based on the ACT/ Denkavit formula, the situations are comparable. 291hat being stated, AllianzGI still provides an important nuance that has already been implicit in, for instance, E. In the testing of equivalence, it is only the same types of tax that appears to matter.Stated in a different manner, when dividend taxes are at stake, the lump sum yield tax of PMT was taken into account in the comparability analysis, but the subscription tax in E and the stamp tax in AllianzGIboth asset taxeswere not. 292

What does this tell us?
The above analysis of fund-specific case law provides the following insights.First, mutual recognition elements are included in the case law on tax-transparent funds with regard to the acceptance of foreign documentation.This is nothing special, however, and just a simple extension of the Meilicke II (C-262/09) 293 case law to funds. 294The situation is more complex for fund cases that involve tax regimes that provide for an exemption to the fund.In these cases, of which almost all concern the taxation of income paid to foreign investment funds, the ECJ takes a relatively strict stance on comparability vis-à-vis fund taxation systems that provide for a differentiation based on the seat of the fund. 295In these cases, the Court does not seem to be prepared to further scrutinize alleged policy goals but to simply declare comparability based on the ACT/Denkavit formula that was developed outside the investment fund context. 296While the shifting of the tax burden to the investor level, as shown by Fidelity and AllianzGI, is not relevant to the Court as a matter that affects comparability, the Court was, in Fidelity, nevertheless prepared to allow the source state to uphold a discriminatory tax if, under a strict reading, the foreign fund regime did not include the same withholding mechanism at the level of the fund as the source state's fund regime. 297n the other hand, in cases that involve tax regimes that provide for an exemption of the fund vehicle without there being a differentiation made based on the seat of the fund, equivalence elements are, such as in Deka, A SCPI and E, to be observed already in the comparability analysis. 298his also seems to be true for the PMT case that includes the application of two different taxing techniques for domestic and foreign funds, 299 as well as L Fund, which deals with income from property. 300Yet, it does not seem to apply to UBS Real Estate which concerned granting a tax benefit to certain types of funds and thatshould the assumptions made above holdinclude equivalence elements in the proportionality analysis. 301hese observations suggest that the ECJ is, in principle, prepared to regard the values underlying a state's fund taxation regime to be accessible to an equivalence testsimilar to what appears to be the situation for case law on charities. 302This is not inconsequential.After all, in both cases at stake is a special tax status that a state awards to some entity based on certain reasons.These reasons include a value that can be either enshrined in the functioning of the fund taxation system, such as, for instance, the exemption of the fund in the Finnish system, the withholding tax requirement in Fidelity, or the redistribution requirement in Deka. 303Alternatively, it can be an external value that the special tax regime is bound to promote, such as the economic climate neutrality of PMT 304 or the decrease in systematic risk in the real estate market achieved through the granting of tax benefits to certain kinds of funds, as in UBS. 305s it mutual recognition in the narrower sense?What, prima facie, may cast doubts is the fact that equivalence elements are sometimes in the comparability analysis and sometimes in the proportionality analysis.In non-tax cases, on the other hand, it is traditionally the proportionality analysis in which mutual recognition arises, that is, it is not proportionate to impose a second set of rules on top of a first set of rules that already fulfil the relevant objectives. 306Yet, and as worked out above, given that the Court frequently, including in fund cases, assesses comparability in light of the object and purpose of the rules, this does not conceptually matter.
The ECJ's decision to look across the border towards giving the other foreign fund the general possibility to access the fund regime of the source state through the establishment of comparability is a step towards the internal market goal.At the same time, especially Deka andalthough here in the proportionality analysis -Fidelity as well as L Fund, suggest that the understanding of equivalence is very narrow. 307What seems to be demanded is not just sufficient similarity but true equivalence.This is again not unseen in other fields of internal market law where the mutual recognition principle is applied. 308On the other hand, the Court does not appear to take other taxes, such as the subscription tax in Luxembourg or stamp tax in Portugal, into account in testing for equivalency.This is, again, a rather broad approach.
What the author sees as criticalas discussed aboveis the undifferentiated inclusion of values into the comparability analysis.This risks, as shown in PMT, the examination becoming selfdefeating with the Court simply accepting an impediment of the freedoms for a goal that has not yet itself been tested on its worthiness of being accepted.In this context, the author regards the Court's approach provided for in UBS as a clear advancement. 309The external policy goal that is connected to the fund regime (here, the prevention of systematic risks in the real estate market) is first addressed in the justification analysis and, upon acceptance, provides a framework for equivalence arguments in the proportionality test.This way, the Court's thinking becomes much more transparent.
Increased transparency in the Court's argumentation is, not in the least, key for addressing the major disadvantage of judicial mutual recognition, that is, the missing foolproofness of the system. 310In fact, mutual recognition has once been defined as an intellectual breakthrough but a colossal market failure. 311The legal uncertainty attached to the question as to whether a Member State mayafter long litigationuphold its denial of mutual recognition by means of a valid public policy argument can induce market participants to avoid the risk from the outset and refrain from exercising their free movement rights. 312To general Internal Market lawyers, the issue is well known, and there are numerous initiatives to address the problem. 313Whether such concerns equally matter forusually well-advisedinvestment fund activities is difficult to state.What nevertheless remains is the fact that the contours of the above equivalence test would have to be determined via case law, which is a slow process.
With full harmonization from a current perspective not appearing to be in reach, an option for improvement that could be considered is legislative mutual recognition. 314In legislative approaches to mutual recognition, the level of automatization of mutual recognition can be set at different levels, and it may be accompanied by reservations for national provisions protecting a certain public interest and may go hand in hand with minimum harmonization. 315Weaker forms of legislative mutual recognition can be made conditional on the fulfilment of certain prerequisites while stronger forms may be (more) automatic. 316This way, progress could be achieved while the loss of regulatory autonomy for Member States may be limited.In an area as sensitive as direct tax law, this could be a decisive advantage.Given that the regulatory framework is already harmonized, a significant amount of approximation would also already exist. 317Future research should further inquire into the feasibility of such a policy.

Conclusion
If the above is correct, there could be two implications.First, how to make sense of foreign funds for the purposes of the domestic legal system would be better understood.It would have to be accepted that a unilateral view is not adequate for investment funds since they include, per definition, at least three layers that cannot be examined in isolation.As such, the Court's approach to looking for equivalence in the other state's fund taxation system is not without merit.It merely continues a national decision across the border.Just as Member States that want to promote a certain benevolent activity need to accept that another Member State's law promotes the same interest, Member States that promote collective investment activity through a certain regime and/or bind to it certain values will have to principally accept an equivalent foreign regime unless there is an acceptable reason not to do so.The above analysis suggests that there are different dogmatic ways the ECJ uses to give effect to this outcomeeither taking equivalence into account in the comparability analysis that is contextualized in light of the object and purpose of the rules or in the proportionality analysis after accepting the underlying value to be protected as justification.Future research should study whether legislative mutual recognition could be a progression in the field of the taxation of investment funds.
Wattel, in P. Wattel, O. Marres and H. Vermeulen (eds.),Direct Tax Matters in European Tax Law, sec.14.5., who summarizes the relevant case law as the 'Always-Somewhere' or 'One-Market' approach (which essentially amounts to cases concerned allowing a deduction Futura and Singer, EU:C:1997:239, the ECJ required the state of a branch to acknowledge the bookkeeping and files that the taxpayer maintains in the home state.In this regard, it is worth clarifying that the reference to another Member State's bookkeeping is not in conjunction with a duty to accept the profit or loss calculated under foreign rules for tax purposes.Thus far and subject to restrictions imposed by primary EU law, Member States decide themselves on what constitutes their tax baseincluding rules on the calculation of the income of investment Centro di Musicologia Walter Stauffer v. Finanzamt München für Körperschaften, para.40.79.See in this regard Case C-133/13 Staatssecretaris van Economische Zaken en Staatssecretaris van Financiën tegen Q, para.20 et seq.and Case C-87/13 Staatssecretaris van Financiën tegen X, para.27 et seq. Allocating Taxing Powers within the European Union, sec.3.1.5.82.It may be worth underlining that, in tax cases, the comparability analysis is frequently conducted in light of the object and purpose of the rules at stake.This approach has been criticized in literature.Intertax (2022b).83.E. Reimer, in I. Richelle, W. Schön and E. Traversa (eds), Allocating Taxing Powers within the European Union, p. 209.84.See for a more critical account, J. Ghosh, 16 Cambridge Yearbook of European Legal Studies (2014).85.This chapter was inevitably included as a framework in the other papers of the series.86.Which has been used as a definition in S. Hwang and O. Weidmann, 'General Report', in IFA (eds.),Investment Funds this principal idea, they can differ among various dimensions.For instance, funds may be widely held 87 or privately held; 88 open-ended 89 or closed-ended; 90 and have different legal forms, 91 organizational structures, 92 investment policies, 93 distribution policies 94 and lifetimes.
While all 80. Compare id.See further also J. Ghosh, 16 Cambridge Yearbook of European Legal Studies (2014), who provides for interesting conceptual critique on the principle of mutual recognition as being rather redundant as a principle separate from non-discrimination and market access.81.Which is why literature correctly states that there is no mutual recognition of charities as such, i.e.. different approaches of Member States are allowed.See, e.g., S. Hemels, in C.H.J.I.Panayi, W. Haslehner and E. Traversa (eds.),Research Handbook on European Union Taxation Law (Elgar, 2020), at sec.4.2.E. Reimer, in I. Richelle, W. Schön and E. Traversa (eds), See, instead, J. Englisch, in M. Lang (ed.), Europäisches Steuerrecht, p. 281 et seq.; E. Reimer, in H. Schaumburg and J. Englisch (eds.),Europäisches Steuerrecht; B. Strassburger, Die Dogmatik der EU-Grundfreiheiten: Konkretisiert anhand des nationalen Rechts der Dividendenbesteuerung, p. 171 et seq.; M. Scherleitner, 50 (IFA Cahiers, 2019), under reference to the Financial Times Glossary (the link they provided does not work).Further on definitional issues regarding investment funds, see e.g.T. Viitala, Taxation of Investment Funds in the European Union, (IBFD, 2005), ch.2; H. Wegman, Investor Protection: Towards Additional EU Regulation of Investment Funds? (Wolters Kluwer, 2016), sec.2.2., whoto provide for a second definitionstates: 'An investment fund is a professionally managed entity that pools money from investors who, in return, receive fund shares or other funds build on OECD, The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles (OECD 2010), para. 1 et seq.87.Which typically means that they are open to the general public.88.Privately held funds are held by a small number of typically sophisticated investors.89.With respect to open-ended funds, the management company redeems the units in the funds at the request of the unit Investment Funds, p. 36.96.See Directive 2009/65/EC of the European Parliament and of the Council of 13 Jul.2009 on the coordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast) as amended by Directive 2014/91/EU, OJ L 302, ('the UCITS Directive').The UCITS Directive has two implementation directives.Directive 2010/42/EU implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures, and notification procedure, OJ L 178, and Directive 2010/43/EU implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organizational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company, OJ L 176; and Directive 2011/61/EU of the European Parliament and of the Council of 8 Jun.2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No. 1060/2009 and holder.See, with further references, e.g.T. Viitala, Taxation of Investment Funds in the European Union, sec.2.1.4.; H. Wegman, Investor Protection: Towards Additional EU Regulation of Investment Funds?, sec.2.6.90.Closed-ended funds have a fixed share capital, and there is no obligation to redeem shares or units at the request of the investor.Their shares usually trade on a stock exchange.91.Investment funds, for instance, can be corporations, contractual arrangements, trusts, or partnerships.See, for an overview, e.g.H. Wegman, Investor Protection: Towards Additional EU Regulation of Investment Funds?, sec.2.7.92.Next to stand-alone investment funds, there are, e.g., umbrella funds that consist of several sub-funds; a fund of funds which is a fund that invests in other funds (outsourcing the choice of the right funds to a fund manager); as well as master-feeder structures which are funds that consist of separate feeder funds that invest all of their assets into a master fund.See, for an overview, e.g.T. Viitala, Taxation of Investment Funds in the European Union, sec.2.1.4.and in fair detail, H. Wegman, Investor Protection: Towards Additional EU Regulation of Investment Funds?, sec.2.6.93.In the EFAMA classification report, funds are classified into six main categories including: 'equity, bond, multi-asset, money market, "Absolute Return Innovative Strategies" (ARIS), and other funds'.See EFAMA, The European Fund Classification EFC Categories 2nd edition 2020 (15 June 2021), https://www.fundconnect.com/Solutions/Assets/EFC%20Categories%20Report.pdf.94.Funds may be distributing the profits to investors or they may accumulate them.95.Hedge funds as well as open-ended and closed-ended funds typically have an indefinite lifetime while private equity funds have a life cycle that is divided into phases.See S. Hwang and O. Weidmann, in IFA (eds.), (EU) No. 1095/2010, OJ L174, ('the AIFM Directive'); see further on investment funds law, e.g.I. Riassetto, 'Introduction to Investment Funds Law', in W. Haslehner (ed.), Investment Fund Taxation -Domestic Law, EU Law, and Double Taxation Treaties (Kluwer, 2018).97.Depending on the investment strategy, this can be, for instance, interest, dividends, rental income or capital gains on the sale of the shares or interest in the investment target.Certain private equity investment structures such as e.g. a distressed buyout structure, can also be regarded as a commercial activity under certain circumstances and thus effectuate Investment Funds, sec.1.2.102.S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, sec.1.3.Exceptions, of course, exist.For venture capital OECD, The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles; R. Prokisch, 'Art. 1. Unter das Abkommen fallende Personen', in K. Vogel and M. Lehner (eds.),Doppelbesteuerungsabkommen (Beck, 2015), para.54a-54g.For hedge funds that hold a portfolio of synthetic investment, the relevance of tax treaties is a different question.See further S. Hwang and O. Weidmann, in IFA (eds.), Compare further OECD, The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles.108.See, S. Hwang and O. Weidmann, in IFA (eds.),Investment Funds, sec.1.2.and the relevant country reports.This is also what underlies many of the below cases.109.Compare, e.g., also G. Genta, 53 European Taxation (2013), p. 143.110.This section is based on M. Scherleitner, 62 European Taxation (2022), sec.5.1.111.E.g. ibid.
but not in 2020.At the core of this stands a change in Finnish law that induced the tax authority to provide for a different outcome.See, in more detail, for example, A. Tallgren and J. Juusela, 'Taxation of Corporate-Based Investment Funds in Finland -A SCPI (Case C-342/20) as an Example of Discriminatory Treatment Based on Legal Form', 23 Fin.& Cap.Mkts (2022), secs.2.3.and 3.The decision only deals with the 2020 tax year.See Case C-342/20 A SCPI v. Veronsaajien oikeudenvalvontayksikkö, para.15-27.146.
The Principle of Non-Discrimination in International and European Tax Law, sec.14.2.6.2.4.164.Case C-315/02 Anneliese Lenz v. Finanzlandesdirektion für Tirol; and Case C-319/02 Petri Manninen.165.Case C-315/02 Anneliese Lenz v. Finanzlandesdirektion für Tirol.166.See also footnote 38.167.For further considerations on why the Court could have abstained from this view and what this could mean, see M. Scherleitner, 50 Intertax (2022a), sec.3.3.168.Case C-480/19 E, Veronsaajien oikeudenvalvontayksikkö, para.51.169.Case C-480/19 E, Veronsaajien oikeudenvalvontayksikkö, para.50.It also referred to the goal of provisions concerning Ghosh, 16 Cambridge Yearbook of European Legal Studies (2014), p. 213, for instance, regards Manninen and even Lenz as being examples of mutual recognition.While this position is not shared here, it is defendable when one is prepared to follow Ghosh's very broad view of what contains mutual recognition.Additionally, E. Kemmeren, in L. Hinnekens and P. Hinnekens (eds.),AVision of Taxes within and outside European Borders -Festschrift in Honor of Frans Vanistendael regards Manninen as an example for an internal market approach since, ultimately, the tax levied by the source state is credited.Also this view is defendable in light of the working definition used by the author.However, others, including the author of this article, regard both Lenz and Manninen as unilateral cases because it is, after all, the decision of the Member State to provide relief in a domestic setting, and the mechanism foreseen for such dividends is, upon taxing the inbound dividend, to be extended to a cross-border situation.See further, e.g., P. Wattel, in P.Wattel, O. Marres and H. Vermeulen (eds.),Direct Tax Matters in European Tax Law, at sec.14.4.2., or G. Kofler, Doppelbesteuerungsabkommen und Europäisches Gemeinschaftsrecht (Linde, 2007), p. 1024 et seq.; C.H.J.I.Panayi, European Union Corporate Tax Law, p. 199-200; and, for a detailed account, N. Bammens, Case C-480/19 E, Veronsaajien oikeudenvalvontayksikkö, para.45 et seq.175.Whereby the amount of corporate tax is of no relevance as long as it is positive, i.e. as long as there is economic double taxation.Relevantly, in Case C-319/02 Petri Manninen, para.34, the Court held that with the source state eliminating the economic double taxation (e.g. by exempting the income) the situation of a shareholder of a domestic company would not be comparable to the shareholder of a foreign company.See, for further elaborations on this in the context of the Case C-480/19 E, Veronsaajien oikeudenvalvontayksikkö, M. Scherleitner, 50 Intertax (2022a), sec.3.3.According to Case C-478/19 UBS Real Estate, para.5, in Italian law a 'closed-ended fund' means a mutual investment fund in which the right to redemption of shares is granted to participants only at predetermined deadlines.180.Ibid., para. 2 et seq.181.Ibid., para.40-43.
See ibid., para.50.as well as Opinion of Advocate General Gerard Hogan in Case C-478/19 UBS Real Estate, EU:C:2021:148, para.90, referring to this as a snowball effect and implying, on plausible grounds, that the under-value selling of real estate by the fund reinforces the market crisis.186.Case C-478/19 UBS Real Estate, para.57.187.Ibid., para.58.188.Ibid., para.73.189.Ibid., para.49 and 55. 190.M. Scherleitner, 50 Intertax (2022a), sec.3.2., ignorantly expands this deviation from the E approach too far as meaning a decision against mutual recognition.The below shows that this view needs to be refined.