62009CC0397_EN
Opinion of the Advocate-General
Opinion of the Advocate-General
1. In this reference from the Bundesfinanzhof (Federal Finance Court) (Germany) the Court is asked for the first time to construe Article 1(1) of Council Directive 2003/49/EC, (2) which requires Member States to refrain from imposing a charge to tax on interest or royalty payments made by associated companies situated in different Member States. Under article 1(10) of that Directive, Member States have the option, however, of not applying the tax exemption where companies have not been associated for a period of at least two years.
2. The main issue in the present proceedings is whether Directive 2003/49 precludes a national rule which provides that interest payments are not fully deductible when determining the basis of assessment to tax in respect of the company making the interest payment.
Legislation
Directive 2003/49
3. The preamble to Directive 2003/49 contains, inter alia, the following recitals:
‘(1) In a Single Market having the characteristics of a domestic market, transactions between companies of different Member States should not be subject to less favourable tax conditions than those applicable to the same transactions carried out between companies of the same Member State.
(2) This requirement is not currently met as regards interest and royalty payments; national tax laws coupled, where applicable, with bilateral or multilateral agreements may not always ensure that double taxation is eliminated, and their application often entails burdensome administrative formalities and cash-flow problems for the companies concerned.
(3) It is necessary to ensure that interest and royalty payments are subject to tax once in a Member State.
(4) The abolition of taxation on interest and royalty payments in the Member State where they arise, whether collected by deduction at source or by assessment, is the most appropriate means of eliminating the aforementioned formalities and problems and of ensuring the equality of tax treatment as between national and cross-border transactions; it is particularly necessary to abolish such taxes in respect of such payments made between associated companies of different Member States as well as between permanent establishments of such companies.
…’
4. Article 1 is entitled ‘Scope and procedure’. The relevant provisions are the following:
‘1. Interest or royalty payments arising in a Member State shall be exempt from any taxes imposed on those payments in that State, whether by deduction at source or by assessment, provided that the beneficial owner of the interest or royalties is a company of another Member State or a permanent establishment situated in another Member State of a company of a Member State.
2. A payment made by a company of a Member State or by a permanent establishment situated in another Member State shall be deemed to arise in that Member State, hereafter referred to as the “source State”.
3. A permanent establishment shall be treated as the payer of interest or royalties only insofar as those payments represent a tax-deductible expense for the permanent establishment in the Member State in which it is situated.
…
7. This Article shall apply only if the company which is the payer, or the company whose permanent establishment is treated as the payer, of interest or royalties is an associated company of the company which is the beneficial owner, or whose permanent establishment is treated as the beneficial owner, of that interest or those royalties.
…
9. Nothing in this Article shall prevent a Member State from taking interest or royalties received by its companies, by permanent establishments of its companies or by permanent establishments situated in that State into account when applying its tax law.
10. A Member State shall have the option of not applying this Directive to a company of another Member State or to a permanent establishment of a company of another Member State in circumstances where the conditions set out in Article 3(b) have not been maintained for an uninterrupted period of at least two years.
…’
5. Article 2(a) provides that, for the purposes of Directive 2003/49, ‘the term “interest” means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures; penalty charges for late payment shall not be regarded as interest.’
6. The terms ‘company’, ‘associated company’ and ‘permanent establishment’ are defined in Article 3:
‘(a) the term “company of a Member State” means any company:
(i) taking one of the forms listed in the Annex hereto [ (3) ] ; and
(ii) which in accordance with the tax laws of a Member State is considered to be resident in that Member State and is not, within the meaning of a Double Taxation Convention on Income concluded with a third State, considered to be resident for tax purposes outside the Community; and
(iii) which is subject to one of the following taxes without being exempt, or to a tax which is identical or substantially similar and which is imposed after the date of entry into force of this Directive in addition to, or in place of, those existing taxes:
…
– Körperschaftsteuer in Germany, [ (4) ]
…
(b) a company is an “associated company” of a second company if, at least:
(i) the first company has a direct minimum holding of 25% in the capital of the second company, or
(ii) the second company has a direct minimum holding of 25% in the capital of the first company, or
(iii) a third company has a direct minimum holding of 25% both in the capital of the first company and in the capital of the second company.
Holdings must involve only companies resident in Community territory.
However, Member States shall have the option of replacing the criterion of a minimum holding in the capital with that of a minimum holding of voting rights.
…’
7. Article 9 states: ‘This Directive shall not affect the application of domestic or agreement-based provisions which go beyond the provisions of this Directive and are designed to eliminate or mitigate the double taxation of interest and royalties.’
The parent subsidiary directive (5)
8. The parent subsidiary directive is not directly at issue in the present proceedings. However, it is necessary to take it into account in considering the questions raised by the national court.
9. The purpose of the parent subsidiary directive is to facilitate, through the introduction of a common system of taxation, cross-border cooperation between companies of different Member States. (6) Thus, with a view to preventing double taxation, Article 5(1) of that directive provides for exemption, in the State of the subsidiary, from withholding tax upon the distribution of profits to its parent. (7)
10. Article 3(1)(a) of the parent subsidiary directive provides that the status of parent company is to be attributed to any company of a Member State which fulfils certain conditions set out in Article 2 and has a minimum holding of 20% in the capital of a company of another Member State. The second indent of Article 3(2) of the directive provides each Member State with the option, by way of derogation from paragraph 1, of ‘not applying this Directive to companies of that Member State which do not maintain for an uninterrupted period of at least two years holdings qualifying them as parent companies or to those of their companies in which a company of another Member State does not maintain such a holding for an uninterrupted period of at least two years’.
National legislation
11. Directive 2003/49 is transposed in Germany by Paragraph 50g of the Einkommensteuergesetz (‘law on income tax’).
12. Corporation tax in Germany is levied by the federal authorities under the Körperschaftsteuergesetz (‘law on corporation tax’). The Gewerbesteuer (a business or trade tax) is imposed by the local and municipal authorities. (8) A particular feature of the Gewerbesteuer is that the business profits are first determined in accordance with the provisions of the Law on Income Tax or the Law on Corporation Tax. (9) Certain amounts are then added back to the profits and certain deductions are subtracted. The purpose of the add-backs and deductions is to enable the objective earnings of the business to be determined regardless of whether they arise on the investment of the business’s own capital or outside capital. (10) Corporation tax and the Gewerbesteuer coexist and both are charged on business profits. The present case concerns the tax levied by the municipality of Gelsenkirchen-Süd pursuant to the Gewerbesteuergesetz 2002 (‘GewStG 2002’). (11)
13. Paragraph 1 of the GewStG 2002 provides that local and municipal authorities may charge a local tax on businesses.
14. Paragraph 2 of the GewStG 2002 states:
‘(1) All business establishments that operate within Germany shall be subject to the Gewerbesteuer. Business establishments shall be taken to be commercial undertakings within the meaning of the Law on Income Tax. A business establishment is considered to operate within Germany whenever business premises are maintained upon German territory or on a merchant vessel registered in Germany.
(2) Any company formed by shares (notably European companies, such as public limited liability companies, limited liability companies, limited partnerships) shall in all cases be regarded fully as a business establishment …’
15. Paragraph 6 of the GewStG 2002 provides that the basis of assessment of the charge to the Gewerbesteuer is trading income and the business profits of the company.
16. Paragraph 7 of the GewStG 2002 defines the trading income and business profits as:
‘the profit, determined in accordance with the provisions of the Law on Income Tax or the Law on Corporation Tax … increased and reduced by the amounts referred to in Paragraphs 8 and 9’.
17. Paragraph 8 of the GewStG 2002 states:
‘The following amounts in so far as they are deducted at the time of determining the profits shall be added back to the profits resulting from the carrying on of a business enterprise or commercial undertaking. (12)
1. Half of the income relating to debts which have an economic link either to the creation or the acquisition of the business activity or part of the activity, or with an expansion or the improvement of the business activity or which serves to increase working capital on anything other than a temporary basis ...’
18. Paragraph 10a of the GewStG 2002 makes provision for losses to be deducted from profits determined in accordance with Paragraph 8 of the GewStG 2002 in order to establish the basis of assessment to the Gewerbesteuer.
Facts, procedure and the questions referred
19. The applicant in the main proceedings, Scheuten Solar Technology GmbH (‘Scheuten’) is a company established in Germany which manufactures solar panels. Solar Systems BV (‘Solar Systems’), which is established in the Netherlands, became the sole shareholder of Scheuten in 2003.
20. By 11 largely identical agreements concluded between 27 August 2003 and 1 December 2004, Solar Systems granted Scheuten loans amounting in total to EUR 5 180 000 at an interest rate of 5%. Repayment of the loans was to be on demand by Solar Systems. In 2004, the year at issue, Scheuten paid interest to Solar Systems in the sum of EUR 154 584 in respect of the loans.
21. In accordance with Paragraph 8(1) of the GewStG 2002, the tax authorities issued a decision confirming that Scheuten was not entitled to deduct 50% of that sum (EUR 77 292) from its business profits and proceeded to assess the company to the Gewerbesteuer for 2004 upon that basis. Scheuten considered that the full amount of the interest which it paid to Solar Systems during 2004 should be deductible from its business profits, thereby reducing its basis of taxation. Scheuten therefore challenged the tax authorities’ decision.
22. By judgment of 22 February 2008 the Finanzgericht Münster (Munster Finance Court) dismissed Scheuten’s application.
23. Scheuten appealed to the Bundesfinanzhof, claiming that the Finanzgericht’s judgment should be set aside and the notice of assessment to the Gewerbesteuer should be amended. It contended that, since its trading income (after full deduction of its 2004 interest payments) was EUR 3 187 and it was entitled to carry forward a loss of EUR 5 313, the basis of taxation should therefore be nil. The Bundesfinanzhof seeks a preliminary ruling on the following questions:
‘(a) Does Article 1(1) of Directive 2003/49 preclude a provision under which loan interest paid by a company of one Member State to an associated company of another Member State is added to the basis of assessment to the Gewerbesteuer for the first company?
(b) If so, is Article 1(10) of Directive 2003/49 to be interpreted as meaning that a Member State has the option of not applying the directive where the conditions set out in Article 3(b) in relation to the existence of an associated company have not yet been maintained for an uninterrupted period of at least two years at the time of payment of the interest?
Can the Member States rely, in respect of the paying company, directly on Article 1(10) of Directive 2003/49 in those circumstances?’
24. Written observations were submitted on behalf of Scheuten, the Belgian, Danish, German, Italian, Netherlands, Portuguese, Swedish and United Kingdom Governments and the European Commission. Scheuten, the Finanzamt Gelsenkirchen-Süd, the German, Estonian and Swedish Governments and the Commission made oral submissions at the hearing on 16 September 2010.
Assessment
Preliminary remark
25. Scheuten contends that the decision to include 50% of the interest payments it had made to Solar Systems in its basis of assessment to the Gewerbesteuer is contrary to the right to freedom of establishment enshrined in Article 43 EC (now Article 49 TFEU) and Article 48 EC (now Article 54 TFEU). (13)
26. However, it seems to me that Scheuten can no longer sustain this submission, since it accepted at the hearing (in response to questions from the Court) that the national legislation is not discriminatory, inasmuch as the provisions governing the adding-back of 50% of interest payments to business profits do not distinguish between national and cross-border transactions.
27. Since the national court has not, in any event, raised any questions concerning the application of Articles 43 EC and 48 EC, I do not propose to consider this point further.
Question 1
28. By its first question the referring court asks whether Directive 2003/49 precludes national rules that do not allow interest payments made by a company to an associated company in another Member State to be treated as deductible expenditure for the purposes of determining the basis of assessment to the Gewerbesteuer of the company making those interest payments.
29. In my view the national rules at issue are not precluded by Directive 2003/49.
Scope of Directive 2003/49
30. The conditions for the application of Directive 2003/49 appear at first sight to be fulfilled. Scheuten is a company of a Member State which made interest payments to an associated company (Solar Systems) within the meaning of the definitions in, respectively, Article 3(a) and Article 3(b) of Directive 2003/49. It is, however, necessary to look rather more closely at the effect that the contested national rules actually have on those interest payments.
– The effect of the national rules
31. Under Paragraph 6 of the GewStG 2002 Scheuten is charged to tax on its trading income and business profits. (14) Paragraph 7 of the GewStG 2002 defines trading income and business profits and provides that, for the purposes of the Gewerbesteuer, those profits are to be increased as prescribed in Paragraph 8 and/or reduced as set out in Paragraph 9. (15) The amount payable by way of Gewerbesteuer is then determined by reference to that figure. The basis to tax for the Gewerbesteuer is thus different from the tax basis for either income tax or corporation tax. (16) In a sense, it is a misnomer to describe the interest payments at issue as ‘added back’ to profits. In reality, the rules provide that those payments are not deducted from profits for the purposes of assessment to the Gewerbesteuer.
32. There are, in effect, two fiscal consequences to Paragraph 8(1) of the GewStG 2002. First, 50% of the interest paid by Scheuten to Solar Systems is not deducted from its profits as an allowable expense. Second, Scheuten’s basis of assessment to tax for the Gewerbesteuer is therefore increased as a result of including the non-deductible interest payments. (17)
33. The interest payments made by Scheuten are clearly an expense of that company. The national legislation at issue prescribes that 50% of that expenditure is not deductible in determining the basis of assessment to a particular tax: the Gewerbesteuer. Does what constitutes allowable expenditure fall within the scope of Directive 2003/49?
34. By contrast with the situation as regards indirect taxes, the Treaty does not make specific provision for the direct taxes (such as income tax and corporation tax) to be harmonised. (18) Thus, to date no rules have been adopted concerning the harmonisation of national tax regimes and the complex systems of the Member States’ diverging tax bases. (19)
35. Scheuten contends that the effect of Article 1(1) of Directive 2003/49 is to remove any charge to tax whatsoever upon interest payments made by the payer of interest. The effect of Paragraph 8(1) of the GewStG 2002 is equivalent to the imposition of a charge to tax, because 50% of the interest Scheuten has paid to Solar Systems is included in Scheuten’s basis of assessment to tax.
36. The German Government and the Finanzamt Gelsenkirchen-Süd, supported by the Commission, contend that Paragraph 8(1) of the GewStG 2002 is a rule concerning the basis of assessment to tax. That rule determines the factors to be taken into account in establishing the profits on which a charge to the Gewerbesteuer can be levied, in particular, whether interest payments are a deductible expense. Such rules fall outside the scope of Directive 2003/49. Therefore the reply to the first question posed by the referring court should be in the negative.
37. Five of the Member States that have lodged written observations (Denmark, Italy, the Netherlands, Portugal and Sweden) make similar observations to those of the German Government and the Commission. That position was likewise supported by Estonia at the hearing. The United Kingdom also contends, for different reasons, that the reply to the first question should be negative. It submits that Directive 2003/49 is concerned with the tax treatment of the beneficiary
of interest payments, not the company that makes such payments.
38. The Belgian Government takes a different approach. It submits that the effect of Paragraph 8(1) of the GewStG 2002 is equivalent to the imposition of a tax. However, where the purpose of including interest payments in the basis of assessment to tax is to counter under- capitalisation of corporate financing, such treatment is not precluded by Directive 2003/49.
39. I agree with the Commission and the Member States that contend that the present matter falls outside the scope of Directive 2003/49.
40. For Article 1(1) of Directive 2003/49 to apply, there must first be a charge to tax. Interest payments are then exempt from that charge to tax where the beneficial owner is a company or permanent establishment situated in another Member State. The exemption is thus triggered by the charge to tax, not by the determination of the basis of assessment to tax (which represents a prior stage in the process of levying taxes).
41. First, it must be acknowledged that both rules introducing a charge to tax and rules concerning the basis of assessment naturally result in fiscal consequences. However, such rules concern different types of measure. Rules that impose a charge to tax create a liability following an event (such as the payment of dividends by a subsidiary to its parent). Rules concerning the basis of assessment identify what is to be treated as taxable income or profit (for example, how much of a person’s income is to be assessed to tax or what expenditure or losses are deductible in establishing a company’s or an individual’s tax liability).
42. Since direct taxes have not been harmonised within the European Union, there are no EU measures harmonising the basis of assessment in national tax systems. (20) The Court has, however, consistently held that ‘… although direct taxation falls within their competence, the Member States must none the less exercise that competence consistently with Community law’. (21) That constraint might be highly relevant if, for example, the national measure were one that discriminated between national and trans-border transactions and thus represented an obstacle to freedom of establishment. For the reasons that I have indicated in the preliminary remark to this assessment, that issue does not fall to be examined in the present proceedings.
43. Second, as the Commission rightly observes, there is nothing in the wording of Directive 2003/49 to suggest that the legislature wished to introduce rules concerning the basis of assessment to tax. Article 1(3) of the directive does, it is true, refer to a ‘tax-deductible expense’. However, the term ‘deductible’ is there linked to the definition and treatment of a ‘permanent establishment’. Article 1(3) does not contain any rules governing the basis of assessment to tax.
44. It therefore seems to me that, in the absence of an express legislative provision governing the manner in which profits are determined as the basis of assessment to tax, there is no justification for drawing the inference that the scope of Directive 2003/49 extends beyond the exemption from the charge to tax provided in Article 1(1).
– Does the Court’s case-law on the parent subsidiary directive apply?
45. Scheuten contends that it follows from the Court’s case-law under the parent subsidiary directive that a provision such as Paragraph 8(1) of the GewStG 2002, which requires deductible expenditure to be included in a company’s basis of assessment to tax, should be considered as imposing a charge to tax for the purposes of Article 1(1) of Directive 2003/49. First, Scheuten relies upon Athinaïki Zythopoiïa (‘ Greek breweries ’). (22) In that case, a Greek subsidiary had made a distribution of profits to its Netherlands parent company. In determining the subsidiary’s taxable profits the Greek tax authorities withdrew certain tax exemptions that would otherwise have applied if there had been no distribution to an overseas parent company and the profits had remained with the subsidiary. Accordingly, in calculating the subsidiary’s basis of taxation account was taken of income that had been subject to special taxation entailing the extinction of a tax liability and non-taxable income. (23) The Court had to decide whether the national measures there at issue constituted a withholding tax prohibited under Article 5(1) of the parent subsidiary directive.
46. In my view, the present matter is distinguishable from Greek breweries . There the Court held that the national authorities’ decision to withdraw certain tax exemptions from the subsidiary – which resulted in an increase to its basis of assessment to tax and therefore its tax burden – constituted a withholding tax. The Court found that there were a number of elements that demonstrated that withholding tax had been imposed upon the parent company: (i) the subsidiary’s tax burden was increased only because it made a distribution to its parent company – this was the chargeable event for tax purposes; (ii) the distributed profit constituted the taxable amount; (iii) the economic effect of taxing the subsidiary was tantamount to taxing the parent company because the tax was retained and paid directly to the tax authorities by the subsidiary, thus reducing the amount of the distributed profits paid to the parent; and (iv) unlike the usual position with regard to corporation tax, the domestic provisions at issue did not take account of losses carried forward from previous years in the calculation of tax liability. (24)
47. None of the elements identified by the Court in Greek breweries are present here. First, the national provisions at issue concern the deductibility of expenditure, rather than the imposition of a charge to tax. Second, the taxable amount is not equivalent to the interest paid by Scheuten. The taxable amount is determined by the relevant provisions of the GewStG 2002 (25) – the non-deductible interest payments are merely one element of that taxable amount. Third, the national rules have no economic effect on the parent company to whom interest is paid. Solar Systems receives the full amount of interest due; and that sum is not subject to a charge to tax in Germany. Finally, it does not follow that Scheuten itself would necessarily be subject to tax on the interest payments that are included in its basis of assessment to tax. That element may be offset by other deductible expenditure. If deductions exceed income from profits, there will be no charge to tax. (26)
48. Scheuten also relies on Burda, (27) where the Court held in the context of the parent subsidiary directive that the following three cumulative conditions must be satisfied in order for a charge to tax to be characterised as the imposition of a withholding tax. First, the chargeable event for tax purposes must be the payment of dividends or of any other income from shares; second, the taxable amount must be the income from those shares; and, third, the taxable person must be the ‘holder of the shares’. (28)
49. However, none of those three cumulative conditions appears to be fulfilled in the present case. As I have already observed in relation to Greek breweries, the interest payments made by Scheuten do not, as such, trigger a chargeable event. Nor does the interest paid constitute the taxable amount – rather, the rule is that 50% of the interest payment is not allowed as a deductible expense. Finally, when withholding tax is imposed the taxable person is the parent company that holds shares in the subsidiary. Here, Solar Systems (the parent company which is the ‘holder of the shares’), is not the taxable person under the GewStG 2002.
50. More generally, the Court’s rulings in Greek breweries and Burda
were concerned with identifying whether the national legislation at issue in effect amounted to a withholding tax. The present case concerns a rule governing the deductibility of expenditure and the basis of assessment to tax. I do not read the Court’s case-law under the parent subsidiary directive, in particular the judgments in those two cases, as indicating that such a rule in effect amounts to a withholding tax.
51. It follows that, in my view, the case-law concerning the parent subsidiary directive does not assist the Court in determining the nature of the national rule on deductibility for the purposes of Directive 2003/49.
– Conclusion – Article 1(1) and the scope of Directive 2003/49
52. In my view Article 1(1) of Directive 2003/49 is limited to providing an exemption from a charge to tax upon interest payments made by associated companies situated in different Member States. National provisions that determine the basis of assessment to tax, such as rules governing the deductibility of expenditure, fall outside the scope of Directive 2003/49. However, Scheuten has advanced a number of additional arguments which are reflected in the order for reference, based on the wording, the scheme and the purpose of the legislation. I now turn to examine those issues.
The wording and scheme of Directive 2003/49
– The meaning of ‘payment’
53. The referring court wonders whether Article 1(1) of Directive 2003/49 is not ambiguous. It considers that the language used supports two meanings. It may mean (as I have concluded above) that the tax exemption applies to a charge to tax on interest payments which constitute income in the hands of the beneficial owner. However, it might also be read as meaning that the interest payment made by the payer of interest is to be treated as a deductible expense for that company.
54. The words ‘interest … payments ’ were used in all language versions of Directive 2003/49 extant at the time of its adoption with the exception of the German language text, which has ‘Einkünfte in Form von Zinsen’ (income in the form of interest).
55. The referring court considers that the German language version supports the contention that the exemption provided in Article 1(1) is only available to the beneficial owner of interest – an approach that is echoed by the United Kingdom.
56. However, Scheuten submits that the word ‘payments’ is a more neutral term and that it refers both to payments made by the payer of interest (the debtor) and to payments to the beneficial owner (the creditor).
57. It is settled case-law that the different language versions in which EU legislation is drafted are all equally authentic. (29) The German text is drafted in a manner which tends to suggest (more clearly than the other language versions) that Article 1(1) refers exclusively to the position of the beneficial owner (the company receiving the interest – here, Solar Systems). However, this is not sufficient by itself to establish that Article 1(1) should be so construed. Rather, it is necessary, to consider the wording of the legislation in the light of the general scheme and purpose of the directive. (30)
58. It is true that, read in isolation, the word ‘ payments ’ could refer either to a payment of interest received by the beneficial owner, or to a payment made by the company paying interest. However, when read in the context of Directive 2003/49 as a whole, the word ‘payments’ is not ambiguous. It can only refer to interest payments received by the beneficial owner.
59. That is because, first, Article 2(a) defines ‘interest’ as ‘income from debt-claims of every kind …’. Only the beneficial owner receives interest as income from a debt-claim. By definition, the payer of interest cannot receive income from a debt claim. For him, an interest payment is not income, but an expense.
60. As the Commission has noted, the wording of Article 1(10) also suggests that Directive 2003/49 is concerned with exempting interest payments to the beneficial owner from a charge to tax, rather than with the basis of assessment to tax of the company paying interest. Article 1(10) permits the Member States to derogate from providing the exemption in Article 1(1) where certain conditions are not fulfilled. (31) Article 1(10) expressly identifies ‘a company of another Member State or … a permanent establishment of a company of another Member State …’ as the beneficiary to whom the exemption in Article 1(1) will not apply where the derogation is invoked. Conversely, Article 1(10) makes no reference to the payer of interest.
61. It follows that the exemption provided for in Article 1(1) can enure only to the benefit of a beneficial owner situated in another Member State.
– Double taxation
62. Article 9 of Directive 2003/49, which states that the directive shall not affect the application of national measures or international agreements which go beyond the directive and are designed to eliminate or mitigate ‘double taxation’ of interest, provides further confirmation that the exemption from tax applies only to the beneficial owner.
63. The term ‘double taxation’ is not defined in Directive 2003/49. However, it is commonly understood to refer to the presence of two possible levels of taxation. The consequences were lucidly explained by Advocate General Geelhoed in his Opinion in ACT : (32) ‘The existence of these two possible levels of taxation may lead, on the one hand, to economic double taxation (taxation of the same income twice, in the hands of two different taxpayers) and, on the other hand, juridical double taxation (taxation of the same income twice in the hands of the same taxpayer). Economic double taxation, when, for example, the same profits are taxed first in the hands of the company as corporation tax, and second in the hands of the shareholder as income tax. Juridical double taxation, when, for example, a shareholder suffers first withholding tax and then income tax, levied by different States, on the same profits.’
64. The referring court considers that the term ‘double taxation’ in Directive 2003/49 includes both economic and juridical double taxation. In my view it covers only the latter.
65. The parent subsidiary directive is clearly concerned with economic double taxation – taxation of the same income (distributions of profits) in the hands of the subsidiary and again in the hands of the parent company. In contrast, Directive 2003/49 recognises that the same person – the beneficial owner – is potentially subject to a charge to tax twice in respect of the same income, in the source State (the State of the company paying interest) by withholding tax or by assessment and again in the beneficial owner’s home State. Directive 2003/49 is thus concerned with the imposition of a charge to tax not upon two different persons, but on one. The beneficial owner is the only person that might suffer double taxation; (33) and Directive 2003/49 is thus concerned solely with juridical double taxation.
66. For the sake of completeness, I recall that the Commission’s proposal for Directive 2003/49 was influenced by the OECD Model Tax Convention, (34) the main purpose of which is to set out a means of dealing, on a uniform basis, with the most common problems that arise in the context of international juridical double taxation. Its objective is to introduce a system which ensures that the beneficial owner pays tax in his home State and to minimise the taxation and associated administrative burdens borne by the beneficial owner who receives cross-border interest payments.
67. It therefore seems to me that the words ‘double taxation’ in Directive 2003/49 can only refer to taxation of income received by the beneficial owner of interest. Accordingly the payer of interest is not included within the exemption from tax provided for in Article 1(1).
68. In the present case there are two tax consequences regarding the interest payment made by Scheuten to its Netherlands parent company, Solar Systems. First, Scheuten’s basis of assessment for the purposes of the Gewerbesteuer is increased because 50% of the interest payments it has made are not permitted as deductible expenditure. As I have already indicated, (35) that will not necessarily result in a charge to tax: if, on calculation, deductions exceed income from profits, there will be no tax liability under the Gewerbesteuer. Second, Solar Systems (the beneficial owner) may be subject to tax in the Netherlands on receipt of the interest payment.
69. However, this combination of tax consequences is not, as such, either economic or juridical double taxation: a further indication that the situation giving rise to the current proceedings falls outside the scope of Directive 2003/49.
– ‘Withholding tax or tax by assessment’
70. Finally, the referring court wonders whether the fact that Directive 2003/49 provides exemption from tax on interest payments levied by withholding tax or by assessment means that both the beneficial owner and the payer of interest are within its scope. The referring court observes that the scope of Directive 2003/49 is wider than the parent subsidiary directive in this respect, as the latter only refers to withholding taxes on profits distributed by a subsidiary to its parent.
71. The Commission and all the Member States apart from Belgium that have submitted observations contend that it does not follow from the presence of words that include the process of charging tax by assessment that the scope of Directive 2003/49 extends to cover either the payer of interest as well as the beneficial owner, or the basis of assessment to tax.
72. I agree.
73. First, the words ‘or by assessment’ refer simply to a particular mechanism for establishing a tax liability. I cannot think that is sufficient to establish that Directive 2003/49 is concerned with the basis of assessment of the company paying interest.
74. Second, the inclusion of two methods of establishing a tax liability – withholding tax and tax by assessment – is consistent with the objective of Directive 2003/49 of ensuring the elimination of double taxation as regards interest payments made between associated companies situated in different Member States. (36) Since both means of establishing tax liability fall within its scope, Directive 2003/49 is more likely to be effective in achieving this objective.
75. Thus, I do not consider that this difference in terminology between Directive 2003/49 and the parent subsidiary directive leads to the conclusion that both the beneficial owner and the payer of interest fall within the scope of the exemption in Article 1(1) of Directive 2003/49.
– Conclusion – the wording and scheme of Directive 2003/49
76. I am therefore of the view that, when construed in the context of the wording and the general scheme of the legislation, the words ‘interest … payments’ refer to the exemption from tax on interest payments to the beneficial owner. I do not consider that Directive 2003/49 refers either to the payer of interest or to whether such payments are deductible from the debtor’s basis of assessment to tax.
The objective of Directive 2003/49
77. Finally, the conclusion that Directive 2003/49 is concerned solely with the tax consequences of interest payments to the beneficial owner of interest is supported by reference to its objectives.
78. Recitals 1 to 4 of Directive 2003/49 explain that national measures and international agreements do not necessarily eliminate double taxation on cross-border interest payments; that such payments should be subject to tax once; and that the abolition of taxation on interest payments is the most appropriate means of achieving that objective. The Commission likewise explains in its report on the operation of Directive 2003/49 that the purpose of taxing the beneficial owner in the Member State of residence or location is to ensure that income from interest payments is taxed in the same jurisdiction as that in which the related expenditure is deductible (i.e. the cost of raising the capital to which the subsequent interest payments relate). (37)
79. Thus, the objective of Directive 2003/49 is to eliminate possible disadvantages of double taxation to the beneficial owner who receives cross-border interest payments and to ensure that such transactions are not subject to less favourable conditions than the same transactions conducted within a Member State. The directive is not concerned with the basis of assessment to tax of the person paying the interest.
80. Accordingly, in my view the reply to the first question is that Article 1(1) of Directive 2003/49 does not preclude a provision under which loan interest paid by a company located in one Member State to an associated company of another Member State is added to the basis of assessment to the Gewerbesteuer 2002 for the first company.
Question 2
81. In the light of my answer to the first question, there is no need to answer the second question. However, to cover all possibilities I shall address it briefly.
82. In its second question, the referring court seeks guidance on the interpretation of Article 1(10) of Direc tive 2003/49. If Article 1(1) of Directive 2003/49 precludes the reincorporation (or ‘adding-back’) of interest payments in Scheuten’s basis of assessment to tax (i.e. the full amount of the interest payment is therefore a deductible expense for tax purposes), could the tax authorities then apply the derogation in Article 1(10), the effect of which would be not to apply Article 1(1), rendering the interest payment non-deductible?
83. Scheuten contends that Article 1(10) should be interpreted in the sense that a payment of interest is exempt from tax even where the companies concerned have not been associated for an uninterrupted period of at least two years.
84. Only the Commission and three of the Member States that have submitted observations in the present proceedings propose a response to the second question.
85. Belgium and Estonia contend that the second question should be answered in the affirmative, whilst the Italian Government and the Commission take the opposite view.
86. Article 1(10) provides Member States with a discretion to derogate from the exemption to tax on interest payments where the payer of interest and the beneficial owner have not been associated for an uninterrupted period of at least two years. (38) In the present proceedings, Scheuten and Solar Systems had been associated for less than two years at the time the interest payment was made.
87. The second indent of Article 3(2) of the parent subsidiary directive and Article 1(10) of Directive 2003/49 are expressed in similar terms. The former likewise contains a derogation: there, from the exemption from withholding tax under Article 5(1) of that directive where a subsidiary makes a distribution to its parent. (39)
88. In my view, Article 1(10) of Directive 2003/49, like the second indent of Article 3(2) of the parent subsidiary directive, is capable of bearing two interpretations. (40) Article 1(10) could be construed, first, as providing that the derogation from the exemption in Article 1(1) applies subject to the condition that the payer of interest and the beneficial owner have been associated for an uninterrupted period of at least two years when the interest payment is made. Alternatively, Article 1(10) could be interpreted, in line with the Court’s decision in Denkavit, in relation to the parent subsidiary directive, as providing that the payer of interest and the beneficial owner must have been associated for that minimum period of time, without its being necessary that this period should have expired at the time when the interest payment is made, as long as the minimum holding period is subsequently observed. (41)
89. When interpreting the second indent of Article 3(2) of the parent subsidiary directive, the Court in Denkavit
placed weight on the use of the present tense in all language versions apart from Danish, where the past tense was used. (42) In the other languages available at the time, it states: ‘… does not maintain such a holding for an uninterrupted period of at least two years’. Article 1(10) of Directive 2003/49 is drafted differently. The English version states: ‘… have not been maintained for an uninterrupted period of at least two years’, and the various language versions of the directive do not use the same tense. (43)
90. Given the textual divergences, it seems preferable to concentrate on construing Article 1(10) by reference to its legislative purpose, which is to facilitate tax arrangements in relation to cross-border interest payments, rather than to allow Member States to introduce unilateral impediments to such transactions. (44) A reading that allowed Member States to require that a minimum uninterrupted holding period of at least two years must have been completed when the interest payment is made would in my view run counter to the purpose of Directive 2003/49. (45)
91. I therefore consider that the Court’s approach in Denkavit should be applied here.
92. The referring court’s second question appears to be based upon the idea that (in theory) the German tax authorities might wish to apply Article 1(10), as the payer of interest and the beneficial owner had been associated for less than two years at the time the interest payment was made. However, Germany has not adopted any provisions implementing the derogation provided by Article 1(10) of Directive 2003/49.
93. By the second part of the second question, the referring court seems to ask whether Member States can rely directly on Article 1(10) even if they have not adopted any provisions implementing the facility for derogation which it contains. The referring court explains its question, however, in the following way. In the event that Article 1(1) and 1(10) apply to the present matter, can Scheuten rely directly on Article 1(1), in other words, is Article 1(1) directly effective?
94. It seems to me that Article 1(1) is both unconditional and sufficiently precise to have direct effects. Moreover, it is settled case-law that, where a degree of latitude is left to Member States, that does not prevent the direct effect of a provision of a directive if it is possible to determine minimum rights. (46)
95. Therefore, notwithstanding Article 1(10), Article 1(1) is directly effective.
96. That said, the second question appears to be hypothetical. First, the present matter differs from Denkavit
in so far as there is no national legislation implementing the facility for derogation contained in Article 1(10). Second, the German tax authorities do not seek to rely on Article 1(10). There is therefore no need for the Court to answer the second question.
Conclusion
97. Accordingly, I suggest that the Court should answer the questions referred by the Bundesfinanzhof as follows:
Article 1(1) of Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States does not preclude a provision under which loan interest paid by a company located in one Member State to an associated company of another Member State is added to the basis of assessment to the Gewerbesteuer for the first company.
(1) .
(2)  –	Directive of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (OJ 2003 L 157, p. 49) (‘Directive 2003/49’). Directive 2003/49 is one of three measures adopted to curb harmful tax competition. The other measures are Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments (OJ 2003 L 157, p. 38), which applies to natural persons, and the Code of Conduct to eliminate harmful tax competition in the business taxation area (OJ 1998 C 2, p. 1), which is not legally binding.
(3)  – The Annex to Directive 2003/49 lists the types of companies covered by Article 3(a). Under German law the following fall within its scope: ‘Aktiengesellschaft’, ‘Kommanditgesellschaft auf Aktien, Gesellschaft mit beschränkter Haftung’ and ‘bergrechtliche Gewerkschaft’.
(4)  – Corporation tax.
(5)  –	Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ 1990 L 225, p. 6) (‘the parent subsidiary directive’).
(6)  –	Case C‑284/06 Burda
[2008] ECR I‑4571, paragraph 51; see also the case-law cited there.
(7)  –	Member States commonly impose taxes on the distribution of profits by companies, that is, on dividends paid to shareholders. Such taxes normally take the form of withholding tax collected at source by the paying company on behalf of the tax authorities. Withholding taxes are often used in a domestic context to ensure compliance and to simplify collection; and the tax withheld generally meets, or is set against, the liability of recipients who are resident taxpayers. Withholding taxes on cross-border dividends represent the imposition of an extra tax by the taxing State on non-residents for which the latter may not obtain relief in their State of residence. See, for example, the Opinion of Advocate General Jacobs in Joined Cases C‑283/94, C‑291/94 and C‑292/94 Denkavit and Others
[1996] ECR I‑5063, point 7.
(8)  –	The Gewerbesteuer is considered to be unique to Germany. However, the Italian Government states in its written observations that a tax that has similar characteristics to the Gewerbesteuer is charged in Italy.
(9)  –	See point 16 below.
(10)  –	See, for example, Case C‑294/97 Eurowings Luftverkehrs
[1999] ECR I‑7447, paragraph 6.
(11)  –	The provisions of the GewStG 2002 described in points 13 to 18 are those that were in force at the material time.
(12)  – See points 31 to 33 below.
(13)  –	Article 48 EC provides that Article 43 EC applies to companies or firms formed in accordance with the law of Member States having their registered office, central administration or place of business within the Community, which are to be treated in the same way as natural persons who are nationals of the Member States.
(14)  –	See point 15 above.
(15)  –	See point 16 above.
(16)  –	See point 16 above.
(17)  –	See point 17 above.
(18)  –	See Article 93 EC (now Article 113 TFEU), which provides for the adoption of harmonising legislation in respect of certain forms of indirect taxation. Company taxation has received particular attention as an important element for the establishment and completion of the internal market. Thus, certain measures have been adopted under Article 94 EC (now Article 115 TFEU) ‑ see for example, the parent subsidiary directive (cited in footnote 5, above), Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (OJ 1990 L 225, p. 1) and the Convention on the elimination of double taxation in connection with the adjustments of profits of associated enterprises (90/436/EEC) (OJ 1990 L 225, p. 10) (‘the Arbitration Convention’). The Arbitration Convention entered into force on 1 January 1995 for a period of five years. A Protocol to the Arbitration Convention (OJ 1999 C 202, p. 1) extended the period of application from 1 January 2000 to 31 December 2004 when it ceased to have effect.
(19)  –	The issue of the harmonisation of Member States’ systems of corporation tax has been the subject of a number of studies and reports from as long ago as 1962: see, for example, the Neumark Report (1962), the Tempel Report (1970) and the Ruding Report (1992). However, to date only measures to combat specific issues have been adopted (see footnotes 2 and 18 above).
(20)  –	See point 34 above.
(21)  –	Case C‑374/04 Test Claimants in Class IV of the ACT Group Litigation (‘ACT’)
[2006] ECR I‑11673, paragraph 36; see also the case-law cited there.
(22)  –	Case C‑294/99 [2001] ECR I‑6797.
(23)  –	Greek breweries, paragraphs 26 to 29; see also the Opinion of Advocate General Alber, point 1.
(24)  –	Greek breweries, cited in footnote 22, above, paragraphs 28 and 29; see also the Opinion of Advocate General Alber at points 24 to 33.
(25)  –	See points 15 to 18 above.
(26)  –	See, for example, Paragraph 10a of the GewStG 2002, point 18 above.
(27)  –	Cited in f ootnote 6 above
(28)  –	Burda, paragraph 52.
(29)  –	Case 283/81 Cilfit and Others
[1982] ECR 3415, paragraphs 18 to 20, and Case C‑289/05 Länsstyrelsen i Norrbottens län [2007] ECR I‑1965, paragraphs 18 to 20.
(30)  –	See Case C‑1/02 Borgmann
[2004] ECR I‑3219, paragraph 25.
(31)  –	See point 82 et seq. below, where I consider question 2.
(32)  –	Cited in footnote 21 above, point 5 of the Opinion.
(33)  –	Regarding the tax consequences of cross-border interest payments for the beneficial owner, see for example, Case C‑282/07 Truck Center [2008] ECR I‑10767. That case, which arose before Directive 2003/49 came into effect, concerned the imposition of withholding tax upon interest payments made by a Belgian subsidiary to its parent company in Luxembourg. The case was considered under the Treaty rules on the right to freedom of establishment (see now respectively Article 49 TFEU and Article 54 TFEU). Advocate General Kokott explains at point 32 of her Opinion that it is the tax position of the company receiving the interest payment that is relevant regarding the obligation to deduct withholding tax (an obligation which applied only where the recipient of interest was situated outside Belgium).
(34)  –	OECD Model Tax Convention on Income and Capital of 1996. The eighth version of the Convention was published by the OECD in 2010 and is available from www.oecdbookshop.org. See also the Proposal for a Council Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States of 4 March 1998 (COM(1998) 67 final), page 6.
(35)  –	See point 47 above.
(36)  –	See recital 2, cited in point 3 above.
(37)  –	See the Commission’s report on the operation of Directive 2003/49 (COM(2009) 179 final), page 3, point 3.1.
(38)  –	See Article 3(b) of Directive 2003/49, set out in point 6 above.
(39)  –	See point 10 above.
(40)  –	See Denkavit, cited in footnote 7 above, paragraphs 18 to 23, and point 37 of the Opinion of Advocate General Jacobs where he describes the second indent of Article 3(2) of the parent subsidiary directive as ambiguous.
(41)  –	Denkavit, paragraph 25 et seq.
(42)  –	Denkavit, paragraphs 24 to 27 and paragraph 32.
(43)  –	Thus, for example, the Dutch, French, German and Italian versions use past tenses, the Portuguese and Spanish versions use present tenses whilst the English version uses a present perfect.
(44)  –	See points 78 to 79 above. See also Denkavit,
cited in footnote 7 above, paragraph 26, and the Opinion of Advocate General Jacobs at point 38.
(45)  –	The Commission’s report on the operation of Directive 2003/49, cited in footnote 37 above, indicates that of the 20 Member States that were obliged to implement Directive 2003/49 by 1 January 2004, 11 had introduced a minimum holding period under Article 1(10). Three of those Member States require the holding condition to be satisfied at the time the interest payment is made, with no possibility for subsequent fulfilment of the condition.
(46)  –	See for example, Case C‑91/92 Faccini Dori
[1994] ECR I‑3325, paragraphs 19 to 23; Denkavit, cited in footnote 7 above, paragraphs 38 and 39; see more recently C‑138/07 Cobelfret
[2009] ECR I‑731, paragraphs 49 and 50.