EU: CJEU referral on interpretation of tax dispute resolution mechanisms directive (Latvia)
Core question being whether double taxation under directive includes inclusion in tax base in two member states, even if income now actually taxed twice
The Latvian District Administrative Court on August 7, 2025, referred several questions to the Court of Justice of the European Union (CJEU) concerning the interpretation of the Directive 2017/1852 on tax dispute resolution mechanisms (DRM).
Summary
The taxpayer, a Dutch company, sold its shares in several property-rich Latvian companies to another Latvian company. More than 50% of the value of the assets of the sold companies consisted of immovable property situated in Latvia. In accordance with Latvian domestic tax law, and following discussions with the Latvian tax authorities, the buyer withheld from the purchase price a sum equal to 3% of the transaction price, representing Latvian corporate income tax due by the seller. From a Dutch perspective, the proceeds of the sale transaction were within the scope of Dutch corporate income tax, but benefited from a participation exemption.
The taxpayer consulted with the Dutch tax authorities and challenged the tax treatment applied by the buyer. In its view, the provisions of the capital gains article of the Latvia-Netherlands income tax treaty were applicable, and no tax was due in Latvia. Since the positions of the competent authorities differed, the Latvian tax authorities decided in 2021 to start the mutual agreement procedure under the DRM. However, the competent authorities were unable to reach an agreement on the interpretation of the treaty provisions within the three-year period provided by the DRM. As a result, the taxpayer requested the Latvian tax authorities to set up a dispute resolution advisory commission per Article 6(1)(b) of the DRM. The Latvian tax authorities, however, refused to initiate the procedure on the ground that the facts of the case did not involve “double taxation” within the meaning of the DRM, since the Netherlands had in fact exempted the sale proceeds. Therefore, according to the Latvian tax authorities, there was no actual taxation of the same income in two different member states and, consequently, no obligation to establish an advisory commission.
The taxpayer challenged the refusal before the Latvian courts, arguing that the DRM defines double taxation broadly, referring to situations in which the same income is included in the tax bases of two or more member states, and does not require that income actually be taxed twice. The referring court expressed doubts about the correct interpretation of the DRM and referred the following questions to the CJEU:
- Whether Article 6(1)(b) of the DRM establishes a clear obligation that, if the authorities of two member states fail to reach an agreement within the required period, an advisory commission must be established at the request of the affected taxpayer
- Whether the term double taxation within the meaning of the DRM also covers situations in which the same income falls under the tax systems of two member states, even if that income is exempt from taxation in one of them
- Whether the taxpayer retains the right to a dispute resolution advisory commission even if the CJEU concludes that the present case does not involve double taxation within the meaning of the DRM
Read a September 2025 report prepared by KPMG’s EU Tax Centre