Reviewer: Mattias Dahlberg

Review of: Tomi Viitala, Tax Treatment of Investment Funds and Their Investors within the European Union, Publications of the Turku School of Economics and Business Administration, Turku, 2004, 382 pages (also published in the Doctoral Series of the IBFD).

Tomi Viitala defended his thesis in Turku, School of Economics, on 1 October 2004, where Dahlberg acted as opponent.

1 The subject

The title gives a good picture of the general subject dealt with in the thesis. The author reports evidence of the growing importance of investment funds in both Finland and other European countries. The taxation of investment funds is increasingly important for investment funds, their investors and states harbouring such persons. To my knowledge there have to this date been no scholarly attempts of dealing with this subject, at least not on such a broad basis as the one taken by the author. In conclusion, I have no problem with accepting that the taxation of investment funds and their investors is a subject well worth scholarly analysis from a legal point of view.

2 The outline and remarks on the approach taken

The thesis contains eight chapters, and including all parts it covers almost 400 pages in the format in which I have studied it. Chapter 1 contains an introduction dealing with the subject, objective and scope of the study, approach and research methods, materials, terminology and outline. Chapter 2 is a presentation of the economic importance and general situation of investment funds in the United Kingdom, Germany, France, Finland and Luxembourg. It covers about 30 pages. The chapter is mostly descriptive but gives an interesting outlook on the economic importance of investment funds. Chapter 3 deals with the taxation of investment funds in the residence state. Once again the author deals with national law in the United Kingdom, Germany, France, Finland and Luxembourg. It covers a bit more than 10 pages. The chapter is mainly descriptive on the treatment in national law. Chapter 4 deals with the taxation in the source state of investments made by investment funds. The chapter contains an interesting part on the treatment of investment funds in relation to tax treaties. The chapter has analytical parts and I will return to this issue. Chapter 5 deals with the taxation of fund investors. Once again the respondent deals with the taxation according to the national law in the United Kingdom, Germany, France and Finland (albeit with the exception of Luxembourg). For each country the respondent deals with the tax treatment of (i) a resident in a domestic fund, (ii) a resident in a foreign fund, (iii) a non-resident investor in a domestic fund, and finally (iv) he gives an evaluation. The chapter is mostly descriptive, but the evaluation for each question has an analytical core. The chapter covers about 50 pages. Chapter 6 is an introduction to investment funds and tax enforcement. Chapter 7 is in my view the analytical core of the thesis. It deals with the taxation of investment fund investments and ”negative integration”. The chapter is long: it covers almost 110 pages, and this single chapter constitutes more than one fourth of the book. Chapter 8 deals with taxation of investment fund investments and ”positive integration”, and it also includes conclusions as well as final remarks and a discussion on future prospects.

In my view the book should have been modelled around Chapter 7 on negative integration. Parts of Chapters 2 to 6 could in my view have been shortened considerably.

3 The objective of the thesis

The respondent declares the objective of the thesis in the following way: ”The objective of the study is to provide a comprehensive understanding of the issues related to the tax treatment of investment funds and their investors within the European Union.”1 The author continues ”... it is of the utmost importance to understand the interconnection of different taxing events when dealing with the taxation of investment funds and their investors”.2 Apparently, the author is well aware that the comprehensive approach that he has taken will inflict upon the thoroughness of the study.

The objective is too wide. The author deals with the taxation of both investment funds and their investors. He considers national law of four, sometimes five, countries. He deals with tax treaty implications. He covers negative integration through the case law of the European Court of Justice and its interpretation of fundamental freedoms contained in the EC Treaty. He deals with tax enforcement. Finally, he also considers ”positive integration” within the European Union through acts of Community law. To deal with all of these issues in a thorough way in one book of 350–400 pages is not possible. Chapter 7 on negative integration is of good quality. In this chapter the author contributes with new knowledge regarding the relation between, on the one hand, the taxation of investment funds and their investors, and, on the other hand, EC tax law. In general, the author presents a good command of EC tax law.

Viitala, Tax treatment of investment funds and their investors within the European Union, p. 16.

Op.cit. p. 16.

4 Method and material

The author applies different methods in his research. In the most analytical chapter of the thesis – Chapter 7 on implications from the case law of the European Court of Justice – the author exerts a good command of a classic legal method. Here the author makes use of the relevant sources of law, including primary sources such as the EC Treaty and the case law of the Court, but also secondary sources such as scholarly doctrine.

The author deals with the national law of several countries, and accordingly comparative research is important. Still, I think the author has decided to deal with too many jurisdictions, at least when put in relation to all the perspectives chosen (for example investment funds, investors and tax treaties). Moreover, I think he is too bound to secondary sources that are not necessarily accurate. Some of the referred material is old, at least from a tax law perspective. Still, regarding Finland and Germany the author makes use of primary sources, but obviously he has had ”linguistic access” to United Kingdom law, and has nevertheless relied on secondary material, for example from the International Bureau of Fiscal Documentation (IBFD) in Amsterdam.

5 Language

The author has chosen to write his thesis in English, which is a good choice. The subject is truly international, and his findings should be of interest in other countries. The author writes clearly and efficiently. There are not many repetitions. There are language errors, but they are not disturbing.

6 Specific issues

In my opposition I raised a large number of specific issues presented in Mr Viitala’s thesis. Here I will discuss a few of them.

In section 4.4.1 (p. 80) the author refers to the objective of tax neutrality, but he also refers to the principle of neutrality. Whether one should refer to tax neutrality as an objective or as a principle is a debated question. One can hardly say that any way of referring is wrong, but I think that consistency should be maintained: either it is a principle or an objective.

In section the author discusses French fonds commun de placement (FCP) and whether they fall within the tax treaty term ”other bodies of persons”. He states (p. 89) that ” least France seems to consider that the FCP would fall within this definition and should therefore be treated as a person for tax treaty purpose”. In support of this view he refers to the French 1997 report to the International Fiscal Association written by Blanluet. That source is almost eight years old, and there is no indication that the author has checked whether this view still holds true.

In section the author deals with limitation on benefits articles – by some referred to as exclusion provisions – contained in tax treaties. Such provisions are especially common in US tax treaties, but are frequent also in tax treaties concluded by other states. For example, in Luxembourg tax treaties so called 1929 Holding companies are as a rule excluded from the treaties. In footnote 467 the author claims that the exclusion provision contained in the Swedish-Luxembourg tax treaty is of the type where 1929 Holding companies are excluded. That was true for the old Swedish tax treaty with Luxembourg from 1983, but is only partly true for the 1996 treaty.3 The author refers to similar exclusion provisions in a number of other tax treaties concluded by Luxembourg. However, he invokes no source for his statement. He refers to no tax treaties in the bibliography. The author has probably made use of a secondary source, but has omitted to refer to it. Even so, I think that the author should have checked that information against the actual tax treaties.

That is highly manageable because they are available in electronic versions provided by the IBFD, an institution which the author according to the acknowledgements apparently has visited.

In Chapter 7 the author deals with the taxation of investment fund investments and negative integration. As previously noted, this is without question the most interesting chapter from a scholarly point of view. Here the author tests whether national law on investment funds is compatible with fundamental freedoms of the EC Treaty, most notably the freedom to provide services and the free movement of capital. Previous chapters on national law are from a scholarly point of view less interesting, because they are more or less descriptions of descriptions contained in secondary sources of varying age and reliability.

During the disputation we had in my view an interesting discussion on several of the issues the author deals with in this chapter. In section 7.2 the author discusses whether the free movement of capital also applies in relation to third countries (i.e. outside of the EU). This is a debated issue and the case law from the European Court of Justice is scarce, but the author states that there is no case law (p. 205). However, the decision in the joined cases C-163/94, C-165/94 and C-250/94 Sanz de Lera and Others is one exception, although not dealing with matters of taxation. Still, I think it deserved to be mentioned.

The author applies the terms ”restriction” and ”discrimination” in a way that is not uncommon, but in my view less clear. According to the wording of the EC Treaty ”restrictions” on the fundamental freedoms are prohibited – with the exception of the free movement of workers (Art. 39) which prohibits ”discrimination” but where the European Court of Justice has declared that it also includes a prohibition against restrictions. From my viewpoint, the term restriction is a broader term including discrimination as well as ”non-discriminatory restrictions”. Regarding accepted justifications according to the rule-of-reason doctrine, the author does not (p. 226) mention the fiscal principle of territoriality. On the basis of the decision in the case C-250/95 Futura Participations one could at least argue that such a justification has been principally accepted by the Court. Moreover, the author mentions the case C-204/90 Bachmann as the only case where the Court has accepted the principle of flscal cohesion as a ground of justification (p. 231). There is, however, a ”twin decision” – C-300/90 Commission v. Belgium – where the Court also accepted this justification, but disregarding that exception, he is of course right.

As regards the author’s analysis on the compatibility of national law with fundamental freedoms his conclusions are in general well founded. Concerning national anti-avoidance legislation, the author concludes (p. 285) that such legislation is ”basically compatible with Community law, provided that there is an escape clause for investors having no abusive intentions”. This might be true, but it is nevertheless debateable. In my view the author’s use of ”tax avoidance” is questionable. That term is commonly understood to refer to otherwise lawful international tax planning undertaken by tax subjects that is countered with national anti-avoidance legislation such as CFC legislation. The author seems to regard abuse as a different, more advanced degree of tax avoidance. From my point of view one should make a clear distinction between tax avoidance and tax abuse.

In the concluding Chapter 8 the author gives his general view on integration within the European Union. He identifies problems with negative integration through the decisions of the European Court of Justice. One valuable remark (p. 326) is that negative integration cannot resolve the problem with inefficient tax enforcement. Regarding ”positive integration” the author thinks (p. 334) that the Member states should seek a multilateral agreement at the Community level to abolish withholding taxes on dividends in the source state, when paid to investment funds (UCITS) established in other Member states. Abolished taxes no doubt would minimise the risk of tax legislation in conflict with fundamental freedoms of the EC Treaty.

It should be noticed that the author later on refers to the protocol of the new Sweden-Luxembourg treaty (p. 107).

7 Final evaluation

Tomi Viitala has written a doctoral thesis on an important subject. The subject is, however, too wide to be dealt with in one book. Large parts of the book are descriptive, and as a basis for that description the author has mainly used secondary sources on the contents of foreign law. Also concerning the contents of tax treaties the author relies on secondary sources. It should be said to the author’s benefit that he writes in a clear and efficient manner and that he usually is easy to understand. Chapter 7 is the most interesting part of the book. It is largely well written, even if one can have another opinion than the author on specific matters. In my view, the book should have been modelled around Chapter 7. That chapter consists of almost 110 pages, which is too long in a book of about 350 pages (excluding the Bibliography). It could very well have been split into several chapters. The description in previous chapters of national law of different jurisdictions could have been shortened considerably. Instead, a brief description of the contents of national law could have formed the basis for hypothetical examples of national law, which in turn could have been tested against tax treaty law and Community law. In conclusion, I think that the quality of the book is above average if one takes into account the value it will have for policy makers in the European Union and its Member States.

Mattias Dahlberg, professor i finansrätt, Juridiska fakulteten, Uppsala universitet.