62003CC0242_EN
Opinion of the Advocate-General
Opinion of the Advocate-General
I – Introduction
1. The Cour administrative (Higher Administrative Court), Luxembourg, is uncertain as to the compatibility of a national provision on income tax with the rules on the free movement of capital. Under the contested tax provision in Article 129c of the Loi concernant l’impôt sur le revenu (Income Tax Law; ‘LIR’), (2) a married couple assessable jointly to income tax could in the year 2000 deduct from their taxable income expenditure up to the sum of LUF 120 000 on the purchase of shares issued on formation of a company or on an increase in capital. However, the deduction, hereinafter referred to as ‘the tax relief’, applied only to the purchase of shares in fully taxable resident capital companies.
2. The married couple, Mr Weidert and Mrs Paulus, believe that it is contrary to the free movement of capital that they cannot similarly deduct for tax purposes the costs of the purchase of shares in a Belgian undertaking. The Luxembourg Government defends the provision on the grounds of the cohesion of the tax system and cites in that connection the rules on the taxation of dividends in the double-taxation agreement between Belgium and Luxembourg of 1970.
II – Facts and main proceedings
3. In their tax return for the year 2000 Mr Weidert and Mrs Paulus claimed tax relief under Article 129c of the LIR for expenditure on the purchase of new shares in the Belgian company Interbrew SA amounting to LUF 267 743. The tax authority did not allow that expenditure in the notice of assessment of 26 July 2001.
4. The Tribunal administratif (Adminstrative Court) allowed the application brought by Mr Weidert and Mrs Paulus and changed the notice of assessment to the effect that expenditure in the sum of LUF 120 000 was tax deductible. Relying on the judgment in Verkooijen, (3) it held that the national provision was incompatible with the free movement of capital.
5.
The Cour administrative, before which the appeal of the tax authority against the judgment at first instance is pending, stayed the proceedings by decision of 3 June 2003 and referred the following question to the Court of Justice for a preliminary ruling under Article 234 EC:
‘Is Article 129c of the Law of 4 December 1967 on income tax, as amended, in the version applicable to the 2000 tax year, which, subject to certain conditions and limits, grants tax relief to taxpayers who are natural persons and acquire shares representing cash contributions in fully-taxable resident capital companies, compatible with the principle of the free movement of capital within the European Community as laid down by Article 56(1) of the EC Treaty, taking account of the restrictions on that principle laid down inter alia by Article 58(1)(a) of the EC Treaty?’
III – Arguments of the parties
6. In the written procedure Mr Weidert and Mrs Paulus, the Luxembourg Government and the Commission submitted observations.
A – Restriction on the free movement of capital
7. In the opinion of Mr Weidert and Mrs Paulus and the Commission, the contested provision restricts the free movement of capital, as it makes the purchase of foreign shares less attractive. It appears from the legislative documentation that private savings are to be mobilised to raise capital for Luxembourg undertakings. There is a restriction on the free movement of capital if only because equivalent incentives were created solely in favour of the purchase of shares in resident undertakings. (4) Although the tax incentive is set up differently from that in Verkooijen, (5) its effects are the same.
8. In addition, the provision hinders the raising of capital in Luxembourg for undertakings registered in another Member State.
B – Justification for the restriction
9. The Luxembourg Government takes the view that the provision is justified on the grounds of cohesion of the tax system, as the disadvantage on the purchase of foreign shares is offset by an advantage on the taxation of dividends.
10. The double-taxation agreement between Belgium and Luxembourg provides that dividends are generally subject to tax in the country of residence of the recipient. However the country in which the company paying the dividend is registered has the right to levy tax at source on the dividend of up to 15%. This withholding tax is credited when the dividend is taxed in the country of residence of the recipient.
11. If a taxpayer buys shares in resident undertakings, he enjoys the tax relief; at the same time however the dividend paid to him is fully subject to income tax in Luxembourg. If the taxpayer buys shares in Belgian undertakings, on the other hand, the tax on the dividend in Luxembourg is reduced by the deduction of the Belgian withholding tax in accordance with the double-taxation agreement. Unlike in Verkooijen, there is therefore a direct link between the tax advantage and the tax levy with respect to the same taxpayer. To that extent the situation corresponds to the facts in Bachmann. (6)
12. Mr Weidert and Mrs Paulus take the view however that reliance on the cohesion of the tax system, an argument recognised exceptionally in the Bachmann
judgment, has to be ruled out here. It is in breach of the principle of proportionality to refuse completely the tax concession on capital investments in Belgium. On an investment to the extent of the tax relief the dividends are low and they in any event escape Luxembourg taxation to a maximum of 15% only through the Belgian withholding tax.
13. They dispute that there is a direct link between the taxation of the dividend and the tax relief. In Luxembourg unearned income is tax-exempt up to a maximum of LUF 120 000. In addition only 50% of dividends from resident companies over this sum were subject to income tax in the year 2000.
14. The Commission takes the view that a justification of overriding reasons in the general interest is necessarily precluded since the measure is discriminatory. (7) A justification could arise at most from Article 58 EC. However that provision also does not allow taxpayers to be treated differently according to whether they have invested their funds in domestic or foreign securities. Furthermore, the measure is in fact justified solely by the purely economic aim of providing capital to resident undertakings and not by overriding reasons in the general interest.
15. The tax exemption does not have a direct link with the taxation of the dividends, as the Court of Justice found in the Bachmann and Commission v Belgium judgments. If that were the case, the provision would lay down a more favourable taxation of dividends where an investment does not fall within the scope of the tax relief provision.
16. Nor can Luxembourg plead that the non-application of the tax relief is coherent, because the dividends from investments in Belgium are not fully subject to Luxembourg tax as a result of the application of the double-taxation agreement. (8) The provisions in the agreement are based on the principle of reciprocity and enable Luxembourg likewise to levy a withholding tax on dividends which are paid to recipients in Belgium. It is the difference in treatment of investments in Belgian undertakings which leads to a lack of cohesion.
IV – Legal analysis
A – Preliminary remark on the formulation of the question referred
17. A At the outset it must be recalled that the Court has consistently held that, in the context of the application of Article 234 EC, it has no jurisdiction to decide whether a national provision is compatible with Community law. The Court may, however, ‘extract from the wording of the questions formulated by the national court, and having regard to the facts stated by the latter, those elements which concern the interpretation of Community law, for the purpose of enabling that court to resolve the legal problems before it’. (9)
18. It is to be inferred from the grounds of the order for reference that the Cour administrative requests an interpretation of the provisions on the free movement of capital, in particular Article 56 and Article 58(1)(a) EC, to enable it to determine whether the contested national provision is compatible with Community law.
B – Restriction on the free movement of capital
19.
In respect of the applicability of the free movement of capital to national provisions concerning direct taxation, the Court has consistently held that ‘although, as Community law stands at present, direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law’. (10) Therefore the Luxembourg tax legislator must have regard to the fundamental freedoms and in particular the provisions on the free movement of capital.
20. Under Article 56(1) EC all restrictions on the movement of capital between Member States are to be prohibited. The purchase of shares in another Member State is a transaction falling within the scope of the free movement of capital. Every measure which hinders the cross-border transfer of capital or makes it less attractive and is therefore liable to dissuade investors from doing so constitutes a restriction. (11) The concept of a restriction on the free movement of capital corresponds in this respect to the concept of a restriction which the Court of Justice has developed in the area of the other fundamental freedoms, in particular the free movement of goods. (12)
21. A national rule such as Article 129c of the LIR, under which a tax deduction can be claimed for the purchase of shares in resident undertakings, but not in undertakings in another Member State, makes investment in another Member State less attractive and therefore restricts the movement of capital to the disadvantage of the investor.
22. A further restriction lies in the fact that undertakings in other Member States find it more difficult to raise capital from private investors in Luxembourg.
C – Justification for the restriction
23.
It is in question whether the restriction on the free movement of capital is justified. First, Article 58(1)(a) EC will be considered as a ground of justification, (13) which allows Member States ‘to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested’.
24. The contested national provision treats taxpayers who have invested in resident undertakings differently from taxpayers with equivalent investments in another Member State. There is thereby a distinction depending on the place where capital is invested, which Member States are allowed in principle to make in their tax law in accordance with Article 58(1)(a) EC.
25. However, Article 58(1)(a) EC must be read in conjunction with Article 58(3) EC, which provides that the measures and provisions in paragraph 1 are not to cause arbitrary discrimination or a disguised restriction on the free movement of capital.
26. In addition, the Court of Justice stated in Verkooijen : (14) ‘… the possibility granted to the Member States by Article 73d(1)(a) of the Treaty [now Article 58 EC] of applying the relevant provisions of their tax legislation which distinguish between taxpayers according to their place of residence or the place where their capital is invested has already been upheld by the Court.
According to that case-law, before the entry into force of Article 73d(1)(a) of the Treaty, national tax provisions of the kind to which that article refers, in so far as they establish certain distinctions based, in particular, on the residence of taxpayers, could be compatible with Community law provided that they … could be justified by overriding reasons in the general interest, in particular in relation to the cohesion of the tax system …’. (15)
27. The Court of Justice therefore almost classified Article 73d of the EC Treaty as a codification of its existing case-law. That provision however was not applied directly in Verkooijen, as that case concerned transactions preceeding the entry into force of the Maastricht Treaty. The passage cited should, however, be taken to mean that when examining Article 58 EC the existence of grounds of justification previously developed in the case-law must be taken into account. (16)
28. There is thus no need to deal with the question raised by the Commission whether direct reliance on overriding reasons in the general interest is precluded because the provision is discriminatory. (17) In so far as the overriding reasons must be taken into account within the framework of Article 58 EC, it follows from the very wording of the provision that a difference in treatment depending on the place of residence or the place where capital is invested can in principle also be justified.
29. A difference in treatment between taxpayers expressly admissible under Article 58(1)(a) and (3) EC inevitably entails a difference in treatment between capital companies which source capital from another Member State and in that way wish to make use of the free movement of capital. That can be justified on the same grounds as the difference in treatment of taxpayers, even if the wording of Article 58(1)(a) EC allows only the latter. Within the framework of the examination of proportionality, in addition to the rights and interests of taxpayers, the rights and interests of the companies whose sourcing of capital from another Member State is hindered should however then also be taken into consideration, as appropriate.
30. It must be examined whether the disputed provision serves overriding reasons in the general interest, in particular preservation of the cohesion of the tax system, and is appropriate for attaining that objective, necessary and proportionate in the narrower sense. (18)
31. According to the case-law, a justification on the grounds of cohesion of the tax system presupposes that there is a direct link between the grant of a tax advantage and the offsetting of that advantage by a tax levy. (19)
32. The Luxembourg Government establishes the following link: the concession on the purchase of shares in resident undertakings is offset by the fact that the dividend paid later on those shares is fully subject to income tax in Luxembourg. That is not the case with shares in Belgian undertakings, as Belgium levies a withholding tax of 15% for which a tax credit is granted in Luxembourg in accordance with the double-taxation agreement between Belgium and Luxembourg, so that the dividend is no longer fully taxable in Luxembourg.
33. That circumstance pleaded by the Luxembourg Government does not however constitute a direct link within the meaning of the case-law which would justify a restriction on the movement of capital.
34. It may be true that the dividends accruing in Belgium are not taxable in Luxembourg to the extent that withholding tax has already been levied in Belgium for which an income tax credit is granted in Luxembourg. That is however not an advantage for the taxpayer which must be offset by the unavailability of tax relief for the purchase of shares in Belgian undertakings. The tax which falls on dividends of foreign companies is overall no lower than the tax on domestic investment income. Rather the tax revenue is simply divided between two States.
35. Consequently the core of the argument of the Luxembourg Government amounts to this: the Luxembourg tax revenue accruing subsequently on the taxation of dividends turns out to be lower if a taxpayer purchases shares in an undertaking registered in Belgium. Reduction in tax revenue cannot however be adduced to justify a measure which is contrary to a fundamental freedom. (20)
36. That is even more true, if the submission of Mr Weidert and Mrs Paulus is correct, that unearned income in Luxembourg in the period in question was exempt from tax up to a sum of LUF 120 000 and above that sum only 50% of unearned income was taxable, so that in any case a large proportion of private investors in fact paid no tax on dividends, and yet enjoyed the tax relief.
37. Moreover a direct link between the concession on the purchase of shares and the taxation of dividends has to be ruled out if only because it is not certain that a dividend will be paid at all in any single case. Even if a dividend is paid, there is no link whatsoever, between the amount of income tax which may be payable on the dividends, and the amount of the tax relief on the costs of the purchase of the shares.
38. Finally, the objective of the law to generate private capital for investments in resident undertakings cannot be invoked either to justify the restriction on the free movement of capital because that is a purely economic ground. (21)
V – Conclusion
39. In the light of the foregoing considerations, I therefore suggest that the Court give the following answer to the question referred by the national court:
1. Article 56(1) EC precludes a legal provision of a Member State under which taxpayers who are natural persons may claim tax relief in respect of the purchase costs of shares in capital companies registered in that Member State, but not in respect of the costs of equivalent investments in companies registered in another Member State of the Community.
2. Such a provision is not justified under Article 58(1)(a) and (3) EC on the grounds of cohesion of the tax system where there is no direct link between the grant of the tax advantage and the offsetting of that advantage through a tax levy.
(1) .
(2)
–	Loi concernant l’impôt sur le revenu of 4 December 1967 (Mém. A 1967, p. 1228) as amended by the Loi du 22 décembre 1993 ayant pour objet la relance de l’investissement dans l’intérêt du développement économique (Mém. A 1993, p. 2020). The Loi du 21 décembre 2001 portant réforme de certaines dispositions en matière des impôts directs et indirects (Mém. A 2001, p. 3312) provides for the gradual reduction of the tax relief until its full abolition in 2005.
(3)
–	Case C-35/98 Verkooijen [2000] ECR I-4071.
(4)
–	On that point Mr Weidert and Mrs Paulus refer, inter alia, to Case 249/81 Commission
v Ireland
[1982] ECR 4005 (the ‘ Buy Irish ’ case).
(5)
–	Cited in footnote 3.
(6)
–	Case C-204/90 Bachmann [1992] ECR I-249. See also Case C-300/90 Commission v Belgium [1992] ECR I-305.
(7)
–	The Commission cites on that point, in particular, the Opinion of Advocate General La Pergola in Verkooijen, cited above, point 18.
(8)
–	The Commission refers on that point to Case C-80/94 Wielockx [1995] ECR I-2493, paragraphs 24 and 25.
(9)
–	Joined Cases C-332/92, C-333/92 and C-335/92 Eurico Italia and Others [1994] ECR I-711, paragraph 19, and Case C-224/01 Köbler [2003] ECR I-0000, paragraph 60.
(10)
–	Case C-279/93 Schumacker [1995] ECR I-225, paragraph 21; see, in addition, Verkooijen
(cited in footnote 3, paragraph 32) and Case C-364/01 Barbier
[2003] ECR I-0000, paragraph 56.
(11)
–	To this effect see Case C-222/97 Trummer and Mayer [1999] ECR I-1661, paragraph 26.
(12)
–	See the landmark
decisions in Case 8/74 Dassonville [1974] ECR 837, paragraph 5, Case C-76/90 Säger [1991] ECR I-4221, paragraph 12, and Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 37.
(13)
–	Under Declaration No 7 annexed to the Maastricht Treaty, that provision is to apply only with respect to national tax law provisions which existed at the end of 1993. Article 129c of the LIR was introduced by the Law of 22 December 1993 (cited in footnote 2) which also entered into force in December 1993. Therefore it was a tax provision which existed at the end of 1993. Moreover, Article 129c of the LIR reproduces a substantially similar provision in existence since 1984 (Loi du 27 avril 1984 visant à favoriser les investissements productifs des entreprises et la création d’emplois au moyen de la promotion de l’épargne mobilière, Mém. A 1984, p. 611; the ‘Loi Rau’).
(14)
–	Verkooijen (cited in footnote 3, paragraph 43).
(15)
–	The Court of Justice refers here to the judgments in Bachmann (cited in footnote 6) and in Commission v Belgium (cited in footnote 6).
(16)
–	To this effect see also Advocate General Tizzano in his Opinion in Case C-516/99 Schmid
[2002] ECR I-4573, point 44.
(17)
–	See the critical remarks of Advocate General Jacobs in his Opinion in Case C-136/00 Danner [2002] ECR I-8147, paragraphs 40 and 41, and the analysis of Advocate General Stix-Hackl in the Opinion in Case C-42/02 Lindman
[2003] ECR I-0000, point 67 et seq.
(18)
–	See on the application of the principle of proportionality to measures under Article 58(1)(b) EC: Case C-478/98 Commission
v Belgium
[2000] ECR I-7587, paragraph 41, and Joined Cases C-163/94, C-165/94 and C-250/94 Sanz de Lera and Others
[1995] ECR I- 4821, paragraph 23.
(19)
–	Case C-484/93 Svensson and Gustavsson [1995] ECR I-3955, paragraph 18, Case C-264/96 ICI
[1998] ECR I-4695, paragraph 29, Verkooijen
(cited in footnote 3, paragraph 57) and Case C-168/01 Bosal Holding
[2003] ECR I-0000, paragraphs 29 and 30.
(20)
–	Case C-385/00 de Groot [2002] ECR I-11819, paragraph 103, Verkooijen (cited in footnote 3, paragraph 59) and ICI
(cited in footnote 19, paragraph 28).
(21) 	Cf. on this point, inter alia, Verkooijen
(cited in footnote 3, paragraph 48).
It may be merely noted in passing that the Luxembourg provision could also constitute State aid in favour of resident capital companies, which under Article 88(3) EC is not to be put into effect until it has been approved by the Commission. Cf. a similar provision classified as State aid by which a tax advantage was granted for certain domestic investments: Case C-156/98 Germany
v Commission
[2000] ECR I-6857.