**Case C-311/08**

**Société de Gestion Industrielle (SGI)**

**v**

**État belge**

(Reference for a preliminary ruling from the tribunal de première instance de Mons)

(Freedom of establishment – Free movement of capital – Direct taxation – Income tax legislation − Determination of the taxable income of companies − Companies having a relationship of interdependence
− Unusual or gratuitous advantage granted by a resident company to a company established in another Member State − Addition
of the amount of the advantage in question to the profits of the resident company which granted it − Balanced allocation of
the power to tax between Member States − Combating tax avoidance − Prevention of abuse − Proportionality)

Summary of the Judgment

1.        *Freedom of movement for persons – Freedom of establishment – Provisions of the Treaty – Scope*

*(Arts 43 EC, 48 EC and 56 EC)*

2.        *Community law – Principles – Equal treatment – Discrimination on grounds of nationality – Relationship between Article 12
EC and Articles 43 EC and 56 EC*

*(Arts 12 EC, 43 EC and 56 EC)*

3.        *Freedom of movement for persons – Freedom of establishment – Tax legislation – Income tax*

*(Arts 43 EC and 48 EC)*

1.        Legislation of a Member State under which a resident company is taxed in respect of an unusual or gratuitous advantage where
the advantage has been granted to a company established in another Member State with which it has, directly or indirectly,
a relationship of interdependence, and is not so taxed where the advantage has been granted to another resident company with
which it has such a relationship, must be examined in the light of Articles 43 EC and 48 EC alone, where the dispute concerned
relates solely to the effect of the legislation in question on the tax treatment of a company which has with the other companies
concerned a relationship of interdependence characterised by definite influence. Although such legislation is also capable
of affecting the exercise of other freedoms of movement, and in particular the free movement of capital within the meaning
of Article 56 EC, Articles 43 EC and 48 EC are nevertheless applicable in such a situation.

(see paras 30, 36-37)

2.        Article 12 EC applies independently only to situations governed by Community law for which the EC Treaty lays down no specific
rules of non-discrimination. Articles 43 EC and 56 EC lay down such specific rules on non‐discrimination in relation to freedom
of establishment and the free movement of capital.

(see paras 31-32)

3.        Article 43 EC, read in conjunction with Article 48 EC, must be interpreted as not precluding, in principle, legislation of
a Member State under which a resident company is taxed in respect of an unusual or gratuitous advantage where the advantage
has been granted to a company established in another Member State with which it has, directly or indirectly, a relationship
of interdependence, whereas a resident company cannot be taxed on such an advantage where the advantage has been granted to
another resident company with which it has such a relationship.

Such a difference in the tax treatment of resident companies based on the place where the companies receiving unusual or gratuitous
advantages have their registered office constitutes a restriction on freedom of establishment within the meaning of Article
43 EC, read in conjunction with Article 48 EC. A resident company could be deterred from acquiring, creating or maintaining
a subsidiary in another Member State or from acquiring or maintaining a substantial holding in a company established in that
State because of the tax burden imposed, in a cross‐border situation, on the grant of advantages at which such legislation
is directed. Moreover, such legislation is liable to have a restrictive effect on companies established in other Member States,
since such a company could be deterred from acquiring, creating or maintaining a subsidiary in the Member State concerned
or from acquiring or maintaining a substantial holding in a company established in that State because of the tax burden imposed
there on the grant of the advantages at which that legislation is directed. There is, in any event, still a risk of double
taxation in a cross‐border situation because the unusual or gratuitous advantages granted by a resident company which are
added back to that company’s own profits may give rise to the recipient company being taxed thereon in the Member State in
which it is established.

However, in the light of the need to maintain the balanced allocation of the power to tax between the Member States and to
prevent tax avoidance, taken together, such legislation pursues legitimate objectives which are compatible with the Treaty
and constitute overriding reasons in the public interest and is appropriate for ensuring the attainment of those objectives.
To permit resident companies to transfer their profits in the form of unusual or gratuitous advantages to companies with which
they have a relationship of interdependence that are established in other Member States may well undermine the balanced allocation
of the power to impose taxes between the Member States. It would be liable to undermine the very system of the allocation
of the power to impose taxes between Member States because, according to the choice made by companies having relationships
of interdependence, the Member State of the company granting unusual or gratuitous advantages would be forced to renounce
its right, in its capacity as the State of residence of that company, to tax its income in favour, possibly, of the Member
State in which the recipient company has its establishment. By providing that the resident company is to be taxed in respect
of an unusual or gratuitous advantage which it has granted to a company established in another Member State, the legislation
in question permits the Member State concerned to exercise its tax jurisdiction in relation to activities carried out in its
territory.

Moreover, to permit resident companies to grant unusual or gratuitous advantages to companies with which they have a relationship
of interdependence that are established in other Member States, without making provision for any corrective tax measures,
carries the risk that, by means of artificial arrangements, income transfers may be organised within companies having a relationship
of interdependence towards those established in Member States applying the lowest rates of taxation or in Member States in
which such income is not taxed.

However, it is for the national court to verify whether such legislation goes beyond what is necessary to attain the objectives
pursued by the legislation, taken together. National legislation which provides for a consideration of objective and verifiable
elements in order to determine whether a transaction represents an artificial arrangement, entered into for tax reasons, is
to be regarded as not going beyond what is necessary to attain the objectives relating to the need to maintain the balanced
allocation of the power to tax between the Member States and to prevent tax avoidance, taken together, where, first, on each
occasion on which there is a suspicion that a transaction goes beyond what the companies concerned would have agreed under
fully competitive conditions, the taxpayer is given an opportunity, without being subject to undue administrative constraints,
to provide evidence of any commercial justification that there may have been for that transaction. Second, where the consideration
of such elements leads to the conclusion that the transaction in question goes beyond what the companies concerned would have
agreed under fully competitive conditions, the corrective tax measure must be confined to the part which exceeds what would
have been agreed if the companies did not have a relationship of interdependence. In those circumstances, subject to verification
to be carried out by the national court as regards the last two points, which concern the interpretation and application of
national law, such national legislation is proportionate to the set of objectives pursued by it.

(see paras 44-45, 53, 55, 63-64, 67, 69-72, 75-76, operative part)


JUDGMENT OF THE COURT (Third Chamber)

21 January 2010 ([\*](#Footnote*))

(Freedom of establishment – Free movement of capital – Direct taxation – Income tax legislation − Determination of the taxable income of companies − Companies having a relationship of interdependence
− Unusual or gratuitous advantage granted by a resident company to a company established in another Member State − Addition
of the amount of the advantage in question to the profits of the resident company which granted it − Balanced allocation of
the power to tax between Member States − Combating tax avoidance − Prevention of abuse − Proportionality)

In Case C‐311/08,

REFERENCE for a preliminary ruling under Article 234 EC from the tribunal de première instance de Mons (Belgium), made by
decision of 19 June 2007, received at the Court on 14 July 2008, in the proceedings

**Société de Gestion Industrielle SA (SGI)**

v

**État belge,**

THE COURT (Third Chamber),

composed of J.N. Cunha Rodrigues, President of the Second Chamber, acting for the President of the Third Chamber, P. Lindh,
A. Rosas (Rapporteur), U. Lõhmus and A. Ó Caoimh, Judges,

Advocate General: J. Kokott,

Registrar: C. Strömholm, Administrator,

having regard to the written procedure and further to the hearing on 4 June 2009,

after considering the observations submitted on behalf of:

–        Société de Gestion Industrielle SA (SGI), by R. Forestini and J.F. Libert, avocats,

–        the Belgian Government, by J.-C. Halleux, acting as Agent,

–        the German Government, by M. Lumma and C. Blaschke, acting as Agents,

–        the Swedish Government, by A. Falk and S. Johannesson, acting as Agents,

–        the Commission of the European Communities, by R. Lyal and J.-P. Keppenne, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 10 September 2009,

gives the following

**Judgment**

1        This reference for a preliminary ruling concerns the interpretation of Articles 12 EC, 43 EC, 48 EC and 56 EC.

2        The reference was made in proceedings between Société de Gestion Industrielle SA (SGI) (‘SGI’), a company incorporated under
Belgian law, and État belge (the Belgian State) which were brought on the ground that the national tax authorities had added
back to that company’s own profits the amount of unusual or gratuitous advantages which the company had granted to companies
with which it has a relationship of interdependence that are established in other Member States.

**National legal background**

3        Article 26 of the Code des impôts sur le revenu (Income Tax Code), consolidated by the Royal Decree of 10 April 1992 and confirmed
by the Law of 12 June 1992 (Supplement to the *Moniteur belge*, 30 July 1992, p. 17120), in the version applicable to the dispute in the main proceedings (‘the CIR 1992’), is worded as
follows:

‘Subject to the provisions of Article 54, where an undertaking established in Belgium grants unusual or gratuitous advantages,
those advantages shall be added to its own profits, unless they are used in order to determine the taxable income of the recipients.

Notwithstanding the restriction laid down in the first paragraph, there shall be added to the undertaking’s own profits unusual
or gratuitous advantages which it grants to:

1.      a taxpayer referred to in Article 227 with which the undertaking established in Belgium is, directly or indirectly, in some
form of relationship of interdependence;

2.      a taxpayer referred to in Article 227 or a foreign establishment which, under the legislation of the country in which it is
established, is not subject to income tax in that country or is subject to a tax system there which is markedly more favourable
than the tax system to which the undertaking established in Belgium is subject;

3.      a taxpayer referred to in Article 227 which has common interests with the taxpayer or establishment referred to in subparagraph
1 or subparagraph 2.’

4        It is apparent from the order for reference that, according to national case‐law, in order to be regarded as ‘unusual’ within
the meaning of subparagraph 1 of the second paragraph of Article 26 of the CIR 1992, the advantage granted must be contrary
to the normal course of events and established business rules and practice, in the light of the prevailing economic circumstances
and the financial situation of the parties. A ‘gratuitous’ advantage is one which is granted in the absence of any obligation
or consideration.

5        Article 49 of the CIR 1992 provides as follows:

‘Expenses shall be regarded as deductible business expenses if they have been incurred or borne by the taxpayer during the
tax period for the purposes of generating or retaining taxable income and the authenticity and amount of those expenses is
demonstrated by documentary evidence or, where that is not possible, by any other form of evidence admitted under general
law, other than by oath.

Expenses shall be treated as incurred or borne during the tax period if, during such period, they were actually paid or borne
or they acquired the characteristics of proven and established debts or losses and are accounted for as such.’

6        Article 79 of the CIR 1992 is worded as follows:

‘Business losses may not be deducted from any portion of earnings or profits which derives from unusual or gratuitous advantages
obtained by the taxpayer, directly or indirectly, in whatsoever form and by whatsoever means, from an undertaking with which,
directly or indirectly, it has a relationship of interdependence.’

7        Article 207 of the CIR 1992 provides that it is not possible for certain deductions to be made from the portion of income
deriving from unusual or gratuitous advantages.

8        Article 227(2) of the CIR 1992 defines non‐resident companies as follows:

‘Foreign companies ... which do not have their registered office, principal place of business or centre of management or administration
in Belgium ...’

**The dispute in the main proceedings and the questions referred for a preliminary ruling**

9        SGI is a holding company incorporated under Belgian law. It has a 65% holding in the capital of Recydem SA (‘Recydem’), a
company incorporated under French law. It is also one of the directors of that company.

10      Cobelpin SA (‘Cobelpin’), a company incorporated under Luxembourg law, is one of the shareholders of SGI. In its reply of
7 April 2009 to a written question put by the Court on 23 March 2009, SGI stated that Cobelpin has a 34% shareholding in SGI.
Cobelpin is a director and managing director of SGI.

11      Mr Leone is a managing director of SGI and a director of Cobelpin and Recydem.

12      On 31 December 2000, SGI granted an interest-free loan of BEF 37 836 113 (EUR 937 933) to Recydem. According to the Belgian
tax authorities, for the tax year 2001 it was necessary, in accordance with subparagraph 1 of the second paragraph of Article
26 of the CIR 1992, to add to SGI’s own profits a sum of BEF 1 891 806 (EUR 46 897) in respect of unusual or gratuitous advantages
granted by SGI to that subsidiary. That sum corresponds to notional interest calculated at an annual rate of 5%.

13      From 1 July 2000, SGI paid director’s remuneration of LUF 350 000 (EUR 8 676) per month to Cobelpin. Taking the view that
the requirements in Article 49 of the CIR 1992 were not satisfied, the Belgian tax authorities refused to allow that remuneration
as deductible business expenses for the tax years 2001 and 2002. The sums paid were considered to be clearly disproportionate
and unrelated to the economic benefit of the services in question. Cobelpin’s representative on the SGI board of directors
was also on the board in his own name.

14      Thus, SGI was issued with revised assessments for the tax years 2001 and 2002. Since the objections which SGI lodged against
those assessments on 28 January and 9 February 2004 were rejected by administrative decision of 22 July 2004, the company
brought an action before the tribunal de première instance de Mons (Court of First Instance, Mons) on 4 August 2004.

15      The tribunal de première instance de Mons considers that the Belgian tax authorities correctly applied subparagraph 1 of the
second paragraph of Article 26 of the CIR 1992 by adding back to SGI’s own profits the notional interest on the loan which
it had granted to Recydem. There was in the court’s view, no economic justification for that loan. Whereas, during the period
in question, the subsidiary was in a secure financial position and generated profits, SGI was subject to a severe financial
burden as a result of granting loans.

16      The tribunal de première instance de Mons considers that the director’s remuneration paid by SGI to Cobelpin is not deductible
as business expenses under Article 49 of the CIR 1992 and that such benefits should be added to SGI’s own profits under subparagraph
1 of the second paragraph of Article 26 of the CIR 1992.

17      However, the referring court has doubts as to whether the latter provision is compatible with the principle of freedom of
establishment within the meaning of Article 43 EC et seq. and the principle of the free movement of capital enshrined in Article
56 EC et seq. It explains that the profits of a resident company are increased by the amount of the unusual or gratuitous
advantages granted by it if the recipient company with which it has a relationship of interdependence is established in another
Member State, whereas that is not the case where such advantages have been granted to another resident company in such a position
and are used to determine that company’s taxable income.

18      In those circumstances, the tribunal de première instance de Mons decided to stay the proceedings and to refer the following
questions to the Court for a preliminary ruling:

‘1.      Does Article 43 [EC], in conjunction with Article 48 [EC] and, if appropriate, Article 12 [EC], preclude legislation of a
Member State which, like that at issue, gives rise to the taxation of a company resident in Belgium in respect of an unusual
or gratuitous advantage which it has granted to a company established in another Member State with which the Belgian company
has, directly or indirectly, a relationship of interdependence, whereas, in identical circumstances, the company resident
in Belgium cannot be taxed in respect of an unusual or gratuitous advantage where that advantage is granted to another company
established in Belgium with which the Belgian company has, directly or indirectly, a relationship of interdependence?

2.      Does Article 56 [EC], in conjunction with Article 48 [EC] and, if appropriate, Article 12 [EC], preclude legislation of a
Member State which, like that at issue, gives rise to the taxation of a company resident in Belgium in respect of an unusual
or gratuitous advantage which it has granted to a company established in another Member State with which the Belgian company
has, directly or indirectly, a relationship of interdependence, whereas, in identical circumstances, the company resident
in Belgium cannot be taxed in respect of an unusual or gratuitous advantage where that advantage is granted to another company
established in Belgium with which the Belgian company has, directly or indirectly, a relationship of interdependence?’

**The questions referred**

19      By its two questions, which are framed in virtually identical terms, the tribunal de première instance de Mons asks, essentially,
whether Article 43 EC, read in conjunction with Article 48 EC, and/or Article 56 EC must be interpreted as precluding legislation
of a Member State, such as that at issue in the main proceedings, under which a resident company is taxed in respect of an
‘unusual’ or ‘gratuitous’ advantage which it has granted to a company established in another Member State with which it has,
directly or indirectly, a relationship of interdependence, whereas a resident company cannot be taxed on such an advantage
where the advantage has been granted to another resident company with which it has such a relationship.

20      It is apparent from the order for reference that the first question, which essentially concerns the exercise of freedom of
establishment within the meaning of Articles 43 EC and 48 EC, relates in substance to SGI’s grant of an interest‐free loan
to its French subsidiary, Recydem, and, in particular, to the fact that the Belgian tax authorities, acting pursuant to subparagraph
1 of the second paragraph of Article 26 of the CIR 1992, added the amount of notional interest payable on that loan to SGI’s
own profits for the purpose of determining its taxable income.

21      It is also apparent from the order for reference that the second question, which concerns essentially the interpretation of
Article 56 EC governing the free movement of capital, relates to payment by SGI to its Luxembourg shareholder, Cobelpin, of
director’s remuneration, which is regarded as unreasonably high, and to the tax treatment of that remuneration as regards
SGI. It is clear from the order that the Belgian tax authorities, relying on Article 49 of the CIR 1992, refused to deduct
those payments as business expenses. It is not possible to ascertain on the basis of the information on the case‐file whether,
in that context, those authorities applied subparagraph 1 of the second paragraph of Article 26 of the CIR 1992.

22      However, even if Article 49 of the CIR 1992 were relevant for the purpose of resolving the dispute in the main proceedings,
the fact remains that the tribunal de première instance de Mons has referred questions to the Court concerning only the interpretation
of the freedoms in question in connection with subparagraph 1 of the second paragraph of Article 26 of the CIR 1992. It is
sufficient to point out that that court, which must assume responsibility for the forthcoming judicial decision, is best placed,
in the light of the particular circumstances of the case before it, to define the relevant national legal framework and to
delimit its reference for a preliminary ruling by reference to that framework (see, to that effect, Joined Cases C‐378/07
to C‐380/07 *Angelidaki and Others* [2009] ECR I‐0000, paragraph 48 and the case‐law cited).

*The freedoms in question*

23      It is necessary to determine at the outset whether and to what extent national legislation such as that at issue in the main
proceedings is capable of affecting the exercise of freedom of establishment within the meaning of Articles 43 EC and 48 EC
and/or that of the free movement of capital enshrined in Article 56 EC et seq.

24      All the interested parties which have submitted observations to the Court consider that the first question should be examined
from the point of view of freedom of establishment. As regards the facts underlying the second question, SGI and the Belgian
and German Governments submit that the provisions governing the free movement of capital are applicable. On the other hand,
the other interested parties are of the view that it is appropriate to answer that question in the same terms as the first.
SGI refers to Article 12 EC in connection with both questions.

25      According to established case‐law, in order to determine whether national legislation falls within the scope of one or other
of the freedoms of movement, the purpose of the legislation concerned must be taken into consideration (see, to that effect,
Case C‐196/04 *Cadbury Schweppes and Cadbury Schweppes Overseas* [2006] ECR I‐7995, paragraphs 31 to 33; Case C‐452/04 *Fidium Finanz* [2006] ECR I‐9521, paragraphs 34 and 44 to 49; and Case C‐182/08 *Glaxo Wellcome* [2009] ECR I‐0000, paragraph 36).

26      According to the Belgian Government, the legislation at issue in the main proceedings concerns the manner in which the gross
profit of resident companies is determined for the purpose of the taxation of their income. In order to prevent tax avoidance,
income that has not been generated as a result of unusual or gratuitous advantages being granted to non‐resident companies
with which the resident company has a relationship of interdependence is added back to the latter’s profits. In such circumstances,
that system is said to enable the national tax authorities to tax a resident company on amounts which correspond, as the case
may be, to the sum paid by it over and above the arm’s length price or to the loss of profit sustained by the company.

27      In its reply of 24 April 2009 to a written question put by the Court on 23 March 2009, the Belgian Government stated that
the legislation at issue in the main proceedings is aimed at situations in which different conditions influence the relationships
of the companies in question from those applying to relationships between independent undertakings. According to the Belgian
Government, there is a ‘relationship of interdependence’ within the meaning of that legislation, inter alia where one of the
companies in question has a holding in the capital of the other which enables it to exercise definite influence over that
company’s decisions and to determine its activities within the meaning of the *Baars* line of case‐law (Case C‐251/98 [2000] ECR I‐2787, paragraph 22).

28      The Court has repeatedly held that national legislation which applies in such circumstances comes within the substantive scope
of the provisions of the EC Treaty on freedom of establishment (see, inter alia, *Baars*, paragraphs 21 and 22; *Cadbury Schweppes and Cadbury Schweppes Overseas*, paragraph 31; and *Glaxo Wellcome*, paragraph 47).

29      However, according to the Belgian Government, the legislation at issue in the main proceedings is not applicable only to situations
falling within the scope of the *Baars* case‐law. Whether there is a relationship of interdependence between the companies concerned does not depend on the extent
of the holding of one of those companies in the capital of the other. In its response referred to at paragraph 27 above, the
Belgian Government stated that the legislation in question covers all links which, in the light of the facts and circumstances,
give rise to some form of interdependence, be it direct or indirect, between the companies concerned. That could take the
form of a holding in the capital of the other company in question which is not characterised by the exercise of ‘definite
influence’ within the meaning of that case‐law, but also, for example, the form of dependence in terms of raw materials or
dependence as regards technical cooperation and guarantees.

30      In the light of that guidance, it must be held that the national legislation at issue in the main proceedings is, in principle,
also capable of affecting the exercise of other freedoms of movement, and in particular the free movement of capital within
the meaning of Article 56 EC.

31      As regards the applicability of Article 12 EC, which lays down a general prohibition of all discrimination on grounds of nationality,
it should be noted that that provision applies independently only to situations governed by European Union law for which the
Treaty lays down no specific rules of non-discrimination (see, inter alia, Joined Cases C‐397/98 and C‐410/98 *Metallgesellschaft and Others* [2001] ECR I‐1727, paragraphs 38 and 39; Case C‐443/06 *Hollmann* [2007] ECR I‐8491, paragraphs 28 and 29; and Case C‐105/07 *Lammers & Van Cleeff* [2008] ECR I‐173, paragraph 14).

32      Articles 43 EC and 56 EC lay down such specific rules on non‐discrimination in relation to freedom of establishment and the
free movement of capital.

33      As regards the Treaty provisions which are applicable in circumstances such as those in the main proceedings, it should be
noted that it is not disputed before the referring court that there is a ‘relationship of interdependence’, within the meaning
of the legislation at issue, between SGI and Recydem and between SGI and Cobelpin.

34      With regard to the nature of those relationships, it is apparent from the order for reference that SGI has a 65% holding in
the capital of Recydem. According to the reply referred to at paragraph 10 above, Cobelpin has a 34% holding in the capital
of SGI. The Court does not have available to it information to enable it to establish whether there are other equity links
between those companies.

35      Such holdings are, in principle, capable of giving SGI ‘definite influence’, within the meaning of the *Baars* case‐law referred to at paragraphs 27 and 28 above, over the decisions and activities of Recydem and of giving Cobelpin such
influence over the decisions and activities of SGI. Moreover, according to the order for reference, there are links between
those companies at management level.

36      Consequently, since the dispute in the main proceedings relates solely to the effect of the legislation in question on the
tax treatment of a company which has with the other companies concerned a relationship of interdependence that is characterised
by ‘definite influence’ within the meaning of the *Baars* case‐law, Articles 43 EC and 48 EC on freedom of establishment are applicable.

37      It is therefore necessary to answer the questions referred solely in the light of Articles 43 EC and 48 EC. It is appropriate
to consider those questions together.

*Whether there is a restriction on the freedom of establishment*

38      The freedom of establishment which Article 43 EC grants to Community nationals includes the right for them to take up and
pursue activities as self-employed persons and to set up and manage undertakings, under the same conditions as those laid
down for its own nationals by the law of the Member State of establishment. It entails, for companies or firms formed in accordance
with the law of a Member State and having their registered office, central administration or principal place of business within
the European Community, the right to pursue their activities in the Member State concerned through a subsidiary, branch or
agency (see, inter alia, Case C‐471/04 *Keller Holding* [2006] ECR I-2107, paragraph 29, and *Glaxo Wellcome*, paragraph 45).

39      Even though, according to their wording, the provisions of the Treaty concerning freedom of establishment are directed at
ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State,
they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals
or of a company incorporated under its legislation (see, inter alia, Case C‐264/96 *ICI* [1998] ECR I‐4695, paragraph 21; Case C‐446/03 *Marks & Spencer* [2005] ECR I‐10837, paragraph 31; Case C‐298/05 *Columbus Container Services* [2007] ECR I‐10451, paragraph 33; and Case C‐418/07 *Papillon* [2008] ECR I‐8947, paragraph 16).

40      In the case of companies, their ‘registered office’ for the purposes of Article 48 EC serves, in the same way as nationality
in the case of individuals, as the connecting factor with the legal system of a Member State. Acceptance of the proposition
that the Member State of establishment may freely apply different treatment merely by reason of the fact that the registered
office of a company is situated in another Member State would deprive Article 43 EC of all meaning (see, to that effect, Case
270/83 *Commission* v *France* [1986] ECR 273, paragraph 18; Case C‐330/91 *Commerzbank* [1993] ECR I‐4017, paragraph 13; and Case C‐303/07 *Aberdeen Property Fininvest Alpha* [2009] ECR I‐0000, paragraph 38).

41      SGI, the Swedish Government and the Commission take the view that the legislation at issue in the main proceedings constitutes
a restriction within the meaning of European Union law. The Belgian and German Governments take the opposite view. They argue
that, in the light of the general context, the legislation is not such as to place at a disadvantage resident companies granting
unusual or gratuitous advantages to companies with which they have a relationship of interdependence that are established
in other Member States by comparison with resident companies granting such advantages to other resident companies which are
in such a position. The system in question does not therefore constitute a restriction.

42      In the present case, it is common ground that, under the legislation at issue in the main proceedings, unusual or gratuitous
advantages granted by a resident company to a company with which it has a relationship of interdependence are added to the
former company’s own profits only if the recipient company is established in another Member State. By contrast, a resident
company is not taxed on such an advantage if the advantage is granted to another resident company with which it has such a
relationship, provided that the advantage is used in order to determine the taxable income of the recipient company.

43      It follows that the tax position of a company resident in Belgium which, like SGI, grants unusual or gratuitous advantages
to companies with which it has a relationship of interdependence that are established in other Member States is less favourable
than it would be if it granted such advantages to resident companies with which it has such a relationship.

44      Such a difference in the tax treatment of resident companies based on the place where the companies receiving the advantages
in question have their registered office is liable to constitute a restriction on freedom of establishment within the meaning
of Article 43 EC. A resident company could be deterred from acquiring, creating or maintaining a subsidiary in another Member
State or from acquiring or maintaining a substantial holding in a company established in that State because of the tax burden
imposed, in a cross‐border situation, on the grant of advantages at which the legislation at issue in the main proceedings
is directed.

45      Moreover, that legislation is liable to have a restrictive effect on companies established in other Member States. Such a
company could be deterred from acquiring, creating or maintaining a subsidiary in Belgium or from acquiring or maintaining
a substantial holding in a company established in that State because of the tax burden imposed there on the grant of the advantages
at which that legislation is directed.

46      That conclusion cannot be invalidated by the arguments put forward by the Belgian and German Governments.

47      The Belgian Government contends that the tax disadvantage resulting from the application of that legislation does not arise
from the fact that the Belgian tax authorities add the unusual or gratuitous advantage granted by the resident company back
to that company’s own profits but from the risk of double taxation if the Member State in which the recipient company is established
does not make a corresponding tax adjustment. In its submission, that risk is greatly diminished by the fact that it is possible
to apply Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the adjustment of
profits of associated enterprises (OJ 1990 L 225, p. 10) (‘the Arbitration Convention’).

48      The Belgian Government also draws attention to the fact that, in domestic situations, Articles 79 and 207 of the CIR 1992
provide that certain tax deductions are not available to resident companies which have benefited from unusual or gratuitous
advantages. Accordingly, the difference in tax treatment of resident companies based on the place where recipient companies
have their registered office is less significant than it might appear.

49      According to the German Government, the Belgian tax authorities do not impose any form of additional taxation in cross‐border
situations. Since they have no power to tax the income of a recipient company established in another Member State, they tax
the unusual or gratuitous advantage in the hands of the resident company which granted it. That Government points out that
tax is payable on that kind of advantage in domestic situations, not by the resident company which granted the advantage but
by the recipient resident company. It is therefore doubtful whether the legislation at issue in the main proceedings has a
restrictive effect.

50      First, it should be noted that, for legislation to be regarded as a restriction on freedom of establishment, it is sufficient
that it be capable of restricting the exercise of that freedom in a Member State by companies established in another Member
State, without there being any need to establish that the legislation in question has actually had the effect of leading some
of those companies to refrain from acquiring, creating or maintaining a subsidiary in the first Member State (see Case C‐524/04
*Test Claimants in the Thin Cap Group Litigation* [2007] ECR I‐2107, paragraph 62, and Case C‐231/05 *Oy AA* [2007] ECR I‐6373, paragraph 42).

51      As regards the arguments relating to the tax treatment in a domestic situation of the income of the resident recipient company,
it is apparent, as the Advocate General observed at point 45 of her Opinion, that the Governments in question base their observations
on a global view of the group of companies and presume that it is irrelevant to which company within a group particular income
is attributed.

52      In that connection, it should be noted that the resident company granting an unusual or gratuitous advantage and the recipient
company are separate legal persons, both of which have their own individual tax liability. In any event, the tax burden borne
by the recipient company in a domestic situation cannot be likened to the taxation, in a cross-border situation, of the company
granting the advantage in question.

53      Even if, in a domestic situation in which the companies concerned are, directly or indirectly, 100% related to each other,
the allocation of the tax burden between them may, in some circumstances, have no implications for the purpose of taxation,
there is, in any event, still a risk of double taxation in a cross‐border situation. As the Advocate General has rightly observed
at points 46 and 47 of her Opinion, in such a situation, the unusual or gratuitous advantages granted by a resident company
which are added back to that company’s own profits may give rise to the recipient company being taxed thereon in the Member
State in which it is established.

54      As regards the possibility of applying the Arbitration Convention, it should be pointed out, as observed by the Advocate General
at point 48 of her Opinion, that where the tax authorities in question endeavour to resolve a matter by mutual agreement,
as provided for by Article 6 in Section 3 of the Convention, an additional administrative and financial burden is imposed
on the company which has submitted its case to such a procedure. Moreover, a procedure aimed at resolution by mutual agreement,
followed, if necessary, by an arbitration procedure, may extend over several years. During that period, the company in question
must bear the burden of double taxation. Furthermore, it is apparent, in particular in the light of the matters set out at
paragraph 29 above, that the legislation at issue in the main proceedings is applicable in certain situations falling outside
the scope of the Convention.

55      It follows that legislation of a Member State such as that at issue in the main proceedings constitutes a restriction on freedom
of establishment within the meaning of Article 43 EC, read in conjunction with Article 48 EC.

*Whether the legislation at issue in the main proceedings can be justified*

56      According to established case‐law, a measure which is liable to hinder the freedom of establishment enshrined in Article 43
EC is permissible only if it pursues a legitimate objective compatible with the Treaty and is justified by overriding reasons
in the public interest. It is also necessary, in such a case, that its application be appropriate to ensuring the attainment
of the objective thus pursued and not go beyond what is necessary to attain it (see, inter alia, Case C‐250/95 *Futura Participations and Singer* [1997] ECR I‐2471, paragraph 26; Case C‐9/02 *de Lasteyrie du Saillant* [2004] ECR I‐2409, paragraph 49; *Marks & Spencer*, paragraph 35; and *Lammers & Van Cleeff*, paragraph 25).

57      The Swedish Government and the Commission take the view that the legislation at issue in the main proceedings is justified
by the need to ensure a balanced allocation of the power to tax between Member States, the fear of tax avoidance and the need
to combat abusive practices, taken together. However, the Commission points out that it is necessary to comply with the principle
of proportionality. The Belgian and German Governments rely, in the alternative, on the same grounds of justification.

58      The Belgian Government states that the legislation at issue in the main proceedings seeks to combat tax avoidance by making
it possible to adjust, for taxation purposes, situations in which the companies concerned apply conditions to their relationships
which go beyond what would have been agreed under fully competitive conditions. At the hearing, the Belgian Government stated
that the system in question was based on Article 9 of the model tax convention on income and on capital drawn up by the Organisation
for Economic Cooperation and Development (OECD) and Article 4 of the Arbitration Convention, which provide for similar adjustments
to profits when transactions between associated companies are inconsistent with the arm’s length principle.

59      According to the Belgian Government, the concept of ‘advantage’ within the meaning of the legislation at issue in the main
proceedings is based on the premiss that the recipient is enriched and the person granting the advantage receives no real
consideration equivalent to that advantage. The requirement that the advantage must be ‘unusual’ is designed to cover situations
which are contrary to the normal course of events, rules or established practice or contrary to what is customary, in similar
cases. The requirement that the advantage must be ‘gratuitous’ presupposes that it is granted on the basis that it does not
represent the fulfilment an obligation or that no consideration is provided in that connection.

60      First, as regards the balanced allocation between Member States of the power to tax, it should be recalled that such a justification
may be accepted, in particular, where the system in question is designed to prevent conduct capable of jeopardising the right
of a Member State to exercise its tax jurisdiction in relation to activities carried out in its territory (see, inter alia,
*Marks & Spencer*, paragraph 46; Case C‐347/04 *Rewe Zentralfinanz* [2007] ECR I‐2647, paragraph 42; *Oy AA*, paragraph 54; and *Aberdeen Property Fininvest Alpha*, paragraph 66).

61      The Court has recognised that the preservation of the allocation of the power to impose taxes between Member States may make
it necessary to apply to the economic activities of companies established in one of those States only the tax rules of that
State in respect of both profits and losses (see inter alia, *Oy AA*, paragraph 54, and Case C‐414/06 *Lidl Belgium* [2008] ECR I‐3601, paragraph 31).

62      To give companies the right to elect to have their losses or profits taken into account in the Member State in which they
are established or in another Member State could seriously undermine a balanced allocation of the power to impose taxes between
the Member States, since the tax base would be increased in one of the States in question, and reduced in the other, by the
amount of the losses or profits transferred (see, to that effect, *Marks & Spencer*, paragraph 46; *Oy AA*, paragraph 55; and *Lidl Belgium*, paragraph 32).

63      In the present case, it must be held that to permit resident companies to transfer their profits in the form of unusual or
gratuitous advantages to companies with which they have a relationship of interdependence that are established in other Member
States may well undermine the balanced allocation of the power to impose taxes between the Member States. It would be liable
to undermine the very system of the allocation of the power to impose taxes between Member States because, according to the
choice made by companies having relationships of interdependence, the Member State of the company granting unusual or gratuitous
advantages would be forced to renounce its right, in its capacity as the State of residence of that company, to tax its income
in favour, possibly, of the Member State in which the recipient company has its establishment (see, to that effect, *Oy AA,* paragraph 56).

64      By providing that the resident company is to be taxed in respect of an unusual or gratuitous advantage which it has granted
to a company established in another Member State, the legislation at issue in the main proceedings permits the Belgian State
to exercise its tax jurisdiction in relation to activities carried out in its territory.

65      Second, as regards the prevention of tax avoidance, it should be recalled that a national measure restricting freedom of establishment
may be justified where it specifically targets wholly artificial arrangements designed to circumvent the legislation of the
Member State concerned (see, to that effect, *ICI*, paragraph 26; *Marks & Spencer*, paragraph 57; *Cadbury Schweppes and Cadbury Schweppes Overseas*, paragraph 51; and *Test Claimants in the Thin Cap Group Litigation*, paragraph 72).

66      In that context, national legislation which is not specifically designed to exclude from the tax advantage it confers such
purely artificial arrangements – devoid of economic reality, created with the aim of escaping the tax normally due on the
profits generated by activities carried out on national territory – may nevertheless be regarded as justified by the objective
of preventing tax avoidance, taken together with that of preserving the balanced allocation of the power to impose taxes between
the Member States (see, to that effect, *Oy AA*, paragraph 63).

67      As regards the relevance of that ground of justification in the light of circumstances such as those of the main proceedings,
to permit resident companies to grant unusual or gratuitous advantages to companies with which they have a relationship of
interdependence that are established in other Member States, without making provision for any corrective tax measures, carries
the risk that, by means of artificial arrangements, income transfers may be organised within companies having a relationship
of interdependence towards those established in Member States applying the lowest rates of taxation or in Member States in
which such income is not taxed (see, to that effect, *Oy AA*, paragraph 58).

68      By providing that the resident company is to be taxed in respect of an unusual or gratuitous advantage which it has granted
to a company established in another Member State, the legislation at issue in the main proceedings is able to prevent such
practices, liable to be encouraged by the finding of significant disparities between the bases of assessment or rates of tax
applied in the various Member States and designed only to avoid the tax normally due in the Member State in which the company
granting the advantage has its seat (see, to that effect, *Oy AA*, paragraph 59).

69      In the light of those two considerations, concerning the need to maintain the balanced allocation of the power to tax between
the Member States and to prevent tax avoidance, taken together, it must be held that legislation such as that at issue in
the main proceedings pursues legitimate objectives which are compatible with the Treaty and constitute overriding reasons
in the public interest and that it is appropriate for ensuring the attainment of those objectives.

70      That being so, it remains necessary to examine whether legislation such as that at issue in the main proceedings goes beyond
what is necessary to attain the objectives pursued, taken together.

71      National legislation which provides for a consideration of objective and verifiable elements in order to determine whether
a transaction represents an artificial arrangement, entered into for tax reasons, is to be regarded as not going beyond what
is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between
the Member States and to prevent tax avoidance where, first, on each occasion on which there is a suspicion that a transaction
goes beyond what the companies concerned would have agreed under fully competitive conditions, the taxpayer is given an opportunity,
without being subject to undue administrative constraints, to provide evidence of any commercial justification that there
may have been for that transaction (see, to that effect, *Test Claimants in the Thin Cap Group Litigation*, paragraph 82, and order in Case C‐201/05 *Test Claimants in the CFC and Dividend Group Litigation* [2008] ECR I‐2875, paragraph 84).

72      Second, where the consideration of such elements leads to the conclusion that the transaction in question goes beyond what
the companies concerned would have agreed under fully competitive conditions, the corrective tax measure must be confined
to the part which exceeds what would have been agreed if the companies did not have a relationship of interdependence.

73      According to the Belgian Government, the burden of proof as to the existence of an ‘unusual’ or ‘gratuitous’ advantage within
the meaning of the legislation at issue in the main proceeding rests with the national tax authorities. It states that when
those authorities apply that legislation, the taxpayer is given an opportunity to provide evidence of any commercial justification
that there may have been for the transaction in question. The taxpayer has a month, a period which may be extended, within
which to establish that no unusual or gratuitous advantage is involved, having regard to the circumstances in which the transaction
was effected. If, however, those authorities persist in their intention of issuing a revised assessment and do not accept
the taxpayer’s arguments, the latter can challenge the assessment to tax before the national courts.

74      The Belgian Government adds that, where the legislation at issue in the main proceedings is applied, only the unusual or gratuitous
part of the advantage in question is added back to the profits of the company which granted it.

75      In those circumstances, subject to verification to be carried out by the referring court as regards the last two points, which
concern the interpretation and application of Belgian law, it must be concluded that, in the light of the foregoing, national
legislation such as that at issue in the main proceedings is proportionate to the set of objectives pursued by it.

76      Accordingly, the answer to the questions referred is that Article 43 EC, read in conjunction with Article 48 EC, must be interpreted
as not precluding, in principle, legislation of a Member State, such as that at issue in the main proceedings, under which
a resident company is taxed in respect of an unusual or gratuitous advantage where the advantage has been granted to a company
established in another Member State with which it has, directly or indirectly, a relationship of interdependence, whereas
a resident company cannot be taxed on such an advantage where the advantage has been granted to another resident company with
which it has such a relationship. However, it is for the national court to verify whether the legislation at issue in the
main proceedings goes beyond what is necessary to attain the objectives pursued by the legislation, taken together.

**Costs**

77      Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court,
the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs
of those parties, are not recoverable.

On those grounds, the Court (Third Chamber) hereby rules:

**Article 43 EC, read in conjunction with Article 48 EC, must be interpreted as not precluding, in principle, legislation of
a Member State, such as that at issue in the main proceedings, under which a resident company is taxed in respect of an unusual
or gratuitous advantage where the advantage has been granted to a company established in another Member State with which it
has, directly or indirectly, a relationship of interdependence, whereas a resident company cannot be taxed on such an advantage
where the advantage has been granted to another resident company with which it has such a relationship. However, it is for
the referring court to verify whether the legislation at issue in the main proceedings goes beyond what is necessary to attain
the objectives pursued by the legislation, taken together.**

[Signatures]

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[\*](#Footref*) Language of the case: French.