Ruth Mason (Connecticut) comments on an important case decided yesterday by the European Court of Justice:

An important decision (with implications for U.S.-EU tax treaties) was handed down by the ECJ yesterday: Test Claimants in Class IV of the ACT Group Litigation (C-367/04) (12/12/06):  (1) an EU Member State granting relief for economic double taxation to resident shareholders of domestic companies need not also grant that relief to shareholder resident in other EU Member States, and (2) limitations on benefits provisions in double tax treaties are not contrary to EC law.

The second ruling is more relevant for U.S. readers. Because LOB provisions deny treaty benefits based on the country of residence of the ultimate owners of conduit entities, many scholars questioned whether LOBs were consonant with EC law, which prohibits tax discrimination on the basis of nationality. [See Ruth Mason, U.S. Tax Treaty Policy and the European Court of Justice, 59 Tax L. Rev. 65 (2005).]  Without much reasoning, the Court of Justice held that LOBs do not violate EC law. The crux of the Court’s reasoning seems to be that two taxpayers are not comparable if they are beneficiaries of different tax treaties (or if one is a treaty beneficiary and the other is not). Under EC law, if two taxpayers are not comparable, then taxing them differently is not discrimination.

The good news for Treasury is that it appears that LOB clauses in U.S. double tax treaties with EU countries are off the chopping block. This ruling was not much of a surprise after the Advocate General’s advisory opinion in the case and the Court’s previous ruling in Case C-376/03, D (holding that EC law does not impose a tax treaty most-favored-nation obligation with respect to double tax treaties).

U.S. readers interested in the LOB issue should focus on paragraphs 75-94.