Opinion of Mr Advocate General Fennelly delivered on 18 June 1998. - Manifattura italiana Nonwoven SpA v Direzione regionale delle entrate per la Toscana. - Reference for a preliminary ruling: Commissione tributaria provinciale di Firenze - Italy. - Directive 69/335/EEC - Taxes on the raising of capital - Tax on companies' net assets. - Case C-4/97.



European Court reports 1998 Page I-06469



Opinion of the Advocate-General

1 Does an annual tax on company assets, which is said to have effects which are economically equivalent to a capital duty, fall within the scope of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital, (1) in so far as it takes account of the amount of a company's subscribed capital?

I - Factual and legal background

2 By Decree-Law No 394 of 30 September 1992, the Italian Republic introduced an annual ad valorem tax on the net assets of, inter alia, capital companies, at a rate of 0.75% (hereinafter `the Italian tax'). (2)

3 In accordance with Article 2 of the Ministerial Decree of 7 January 1993, the tax base consists of the net assets of the company, minus the profits for the year, as set out in the balance sheet, and comprises the following elements:

`(1) subscribed capital, even if not yet paid up, or endowment funds or asset funds;

(2) payments made by members into a sinking fund or on capital account;

(3) share-premium reserves and equalisation interest paid by those subscribing for new shares or units;

(4) revaluation reserves included on the balance sheet on the basis of specific legal provisions, including those of the insurance companies mentioned in Article 36 of Law No 295 of 10 June 1978;

(5) statutory reserves, reserves required under the statutes of the company, reserves to which special arrangements apply to cover specific situations and overdue refunds of tax overpaid, and other reserves or funds regardless of the tax regime applicable thereto;

(6) reserves in respect of own shares in portfolio; (7) reserves linked to reinvestment;

(8) funds established in respect of general burdens, including the general bank risk fund referred to in Article 11(2) of Legislative Decree No 87 of 27 January 1992;

(9) funds earmarked for self-financing of future asset investments; (10) surplus deriving from mergers; (11) profits (and losses) carried forward from previous years; (12) loss for the financial year.

The net assets do not include the following:

- funds included on the balance sheet to cover specific burdens or liabilities and those which constitute asset adjustment items;

- reserves for premature redemption of the kind referred to in Article 67(3) of the Consolidated Law on income tax.'

4 On 30 November 1994, the applicants in the main proceedings (hereinafter `the applicants') applied for the reimbursement of the tax on assets paid in respect of the tax years 1992 and 1993. In the absence of any response from the Direzione Regionale delle Entrate (Regional Revenue Directorate), the applicants commenced proceedings to challenge the implied refusal of its request on the ground that the imposition of the tax was incompatible with the Directive. By order of 18 October 1996, registered at the Court on 9 January 1997, the Fourth Chamber of the Commissione Tributaria Provinciale di Firenze (Provincial Tax Court, Florence) referred the following question for a preliminary ruling:

`Is a statutory tax on the net assets of companies with share capital which has effects economically equivalent to those of an indirect tax on capital contributions compatible with Community law and in particular with Directive 69/335/EEC?'

5 Observations have been submitted by the applicants, the Italian Republic, the Hellenic Republic and the Commission.

II - The capital duty directive

6 In Ponente Carni, the Court identified the objectives of the Directive in the following terms:

`[t]he Directive aims at encouraging the free movement of capital which is regarded as essential for the creation of an economic union whose characteristics are similar to those of a domestic market ... the pursuit of such an objective presupposes the abolition of indirect taxes in force in the Member States until then and imposing in place of them a duty charged only once in the common market and at the same level in all the Member States.' (3)

7 To this end, the Directive seeks to harmonise the conditions under which Member States may charge duty on contributions of capital to capital companies (Article 1). Article 4 lists the types of transactions which must, or may, be subjected to capital duty. Article 7, as last amended by Directive 85/303/EEC, (4) fixes the maximum rate of capital duty at 1%, subject to certain exceptions which are not relevant here. Article 10 prohibits Member States from charging any taxes other than capital duty:

`(a) in respect of the transactions referred to in Article 4;

(b) in respect of contributions, loans or the provision of services, occurring as part of the transactions referred to in Article 4;

(c) in respect of registration or any other formality required before the commencement of business to which a company, firm, association or legal person operating for profit may be subject by reason of its legal form.'

III - Arguments of the parties

8 The applicants argue that the Italian tax has an equivalent effect to an increase in the rate of the tax on the raising of capital, or a re-imposition of the capital duty. The very existence of a company's capital presupposes that capital has been raised, and the imposition of an annual tax on the capital raised is therefore a tax a posteriori on the raising of capital. In its view, the tax on assets has an economic effect which is equivalent to capital duty, imposed at a later date than that of the capital contribution, and is therefore a capital duty. The imposition of such a tax over the three years following the creation of a company and the payment of the registration duty of 1%, for example, would be exactly the same as paying a single tax on the raising of capital of 3.25% (= 1% + 3 x 0.75%), though the Directive only permits capital duty up to a maximum of 1%. The deferment in time of such imposition does not render it compatible with the Directive, the sixth recital of which expressly states that `duty on the raising of capital within the common market by a company or firm should be charged only once'. The applicants rely on paragraph 31 of the judgment in Ponente Carni, where the Court held that `[the] fact that the charge is due not only on registration of the company but also in each subsequent year, cannot of itself free the charge from the prohibition laid down by Article 10 ... any other interpretation would deprive the provisions of Article 10 of any practical effect since it would enable Member States to burden capital companies with an annual fiscal charge the chargeable event for which would be merely the maintenance of the company in the register'; (5) they contend that the national tax in that case was similar to the tax at issue in the present proceedings.

9 The applicants argue that the Italian tax should be classified for the purposes of Community law as an indirect tax because of its effects, not its denomination. (6) They rely on Germany v Commission, and the Court's case-law on the notion of taxes having an equivalent effect to customs duties in Articles 9 and 12 of the Treaty. (7) In their view, the classification of taxes as `direct' or `indirect' is essentially an economic matter, and the Directive, contrary to its title, is not limited exclusively to indirect taxes; in particular, Article 10 does not make any distinction between these and direct taxes. They also rely on the fact that the tax base of the Italian tax is wider than that of the capital duty allowed under the Directive. The applicant appears to accept that the Italian tax would be illegal only in so far as it affects the original capital of the company.

10 For its part the Commission argues that the notions of `capital contributed' to a company and its `assets' are fundamentally different. While the net assets of a company are represented by the sum of the 12 accounting items listed at Article 2 of the Ministerial Decree of 7 January 1993 implementing the Italian Law, `subscribed capital not yet contributed' is just one component. The valuation of the net assets of a company cannot be assimilated to the operations enumerated in Article 4 of the Directive. Furthermore, the tax on assets cannot, by reason of the chargeable event which gives rise to it, and the definition of the tax base and those who are subject to it, be considered to be a capital duty.

11 Italy, largely supported by Greece, contends that the Directive only applies to indirect taxes, those which are imposed on the transfer of wealth from one person to another; the basic taxable amount of the contested tax, by contrast, is determined by the net assets of a company, and the tax is therefore a direct tax outside the scope of the Directive. Any tax on assets will apply to goods which have already been taxed when they were transferred to the person subject to the tax on assets. The two taxes in question are different in character and have different economic effects. In any case, the Directive only seeks to eliminate indirect taxes having the same characteristics as capital duty, whereas the Italian tax fulfils neither of these criteria. The concept of `charges having equivalent effect' is only used in the context of customs duties within the meaning of Articles 9 and 12 of the Treaty.

IV - Analysis

12 The thrust of the question referred is whether the Italian tax is compatible with the Directive; in the circumstances, the national court's reference to the economic effects of the tax in question serves merely to explain why it considers a ruling to be necessary.

13 The first matter to be clarified is whether the tax comes within the scope of the Directive. I agree with the applicants that the designation of a particular national tax as being direct or indirect is not decisive in this regard; as the Court held in Bautiaa, `the nature of a tax, duty or charge must be determined ... according to the objective characteristics by which it is levied, irrespective of its classification under national law'. (8) Similarly, the annual character of the Italian tax, though normally indicative of a direct tax, (9) does not suffice to take it outside the scope of the Directive. (10) Having regard to its objective characteristics, however, it does not appear to me that the Italian tax can be considered an indirect tax on the raising of capital within the meaning of the Directive.

14 In the first place, according to Article 1, the Directive applies to `contributions of capital to capital companies'; more specifically, as the Court stated in Solred, `the Directive is aimed in particular at achieving harmonisation of the factors involved in the fixing and levying of capital duty in the Community, by means of the elimination of tax obstacles which interfere with the free movement of capital'. (11) The types of transactions which must be subjected to capital duty, listed in Article 4(1), are all transactions whereby capital or assets are transferred to a capital company in the taxing Member State, whether through the formation of such a company (paragraphs (a) and (b)), an increase in the capital of an existing company through the contribution of assets (paragraph (c)), an increase in assets through the contribution of rights equivalent to members' rights (paragraph (d)), or the transfer of its effective centre of management or registered office from a third country or another Member State (paragraphs (e) to (h)). That the movement of capital or assets is the principal characteristic of the transactions subject to capital duty is confirmed by Article 4(3); in order to avoid double taxation, this provision excludes from the notion of `formation' a number of operations which, though significant in the legal existence of a capital company, do not lead to movements of capital. Similarly, the categories of transaction listed in Article 4(2), which are subject to capital duty at the option of the Member States, all result in an effective increase in the company's capital or assets. The imposition of a tax on assets such as that at issue in the present proceedings, on the other hand, does not depend on any transaction involving the movement of capital or assets, nor does it impede their free movement within the Community.

15 I am conscious of the soundness of the remarks of Advocate General Jacobs in Denkavit to the effect that `the contribution made by the directive to the free movement of capital is a relatively modest one ... [it] plainly does not seek to remove all the tax obstacles to the integration of capital markets arising from the differences in taxes on the wealth and profits of undertakings. Moreover, the mere fact that a tax is imposed on a company by reason of its legal form is not of itself sufficient to bring it within the scope of the prohibitions in Article 10 ...'. (12) Nor, I might add, is the fact that a tax imposed on a capital company takes into account the amount of its subscribed capital sufficient to bring the tax within the scope of the Directive; the tax in question in the present case, however formally described, is clearly a tax on the wealth of capital (and other) companies, rather than a tax on raising capital.

16 Secondly, a number of features of the tax at issue in the present proceedings distinguish it from capital duty and similar taxes covered by the Directive. The Italian tax is charged on the net assets of a capital company as disclosed by its annual accounts; it is not levied on any transaction involving the movement of capital or assets such as those listed in Article 10. The specific event giving rise to the application of Italian tax (the declaration of net assets) is not even of the same character as that which gives rise to capital duty regulated by the Directive, and the basis of assessment does not correspond to those laid down by the Directive. The tax at issue cannot therefore be compared, as the applicants have argued, with an annual tax on the capital of a capital company, which would indeed fall to be differently treated under the Directive, in accordance with Ponente Carni.

17 While it is true that the tax base defined in Article 2 of the Ministerial Decree of 7 January 1993 does take account of the amount of the subscribed capital of a company, it also takes account of various reserves and profits (or losses) carried over from previous years as well as any losses in the financial year of reference. I agree with the Commission that it would not be right to isolate one element of the tax base and treat it separately from the others. Furthermore, taken to its logical conclusion, the reasoning of the applicants could have very far-reaching effects which were not, in my view, intended by the Directive. The combined effect of Articles 4(2)(a) and 10, for example, is that, subject to Articles 11 and 12, Member States may not impose any taxes other than capital duty on the capitalisation of profits or of permanent or temporary reserves. Under the applicants' reasoning, if profits or reserves were to be capitalised, Member States would be unable to impose income tax on the profits or wealth tax on the reserves, if capital duty has been paid on the capitalisation transaction.

18 This is not to say that the notion of taxes of equivalent effect to capital duty is completely excluded from the ambit of the Directive. In particular, the last recital in the preamble to the Directive expressly applies to indirect taxes which, though legally distinct from capital duty, have `the same characteristics as the capital duty or the stamp duty on securities [the imposition of which] might frustrate the purpose of the measures provided for in this Directive'. In Società Immobiliare SIF, the Court noted that `the specific event giving rise to the registration charge, the mortgage registration fee and the Land Register fee is not the contribution of immovable property to a capital company', but accepted that `the application of those three charges following a contribution of immovable property to a capital company is equivalent, in terms of its effects, to charging them on the contribution', and that the charges therefore fell within the scope of Article 10 of the Directive. (13) However, the reliance on the effects of the charges at issue in Società Immobiliare SIF is based on the text of the Directive, and may not, in my view, be extended to the effects of taxes other than those contemplated by the Directive. Moreover, as the Court noted in Ponente Carni, `the object of the Directive is different from that of the provisions of the Treaty relating to charges having an effect equivalent to customs duties'. (14)

19 It could be argued, using the same kind of reasoning as that relied upon by the applicants in the present case, that the imposition of tax in Frederiksen had effects which were `economically equivalent' to those of the capital duty which Denmark was entitled to impose on the subsidiary. (15) There the national tax authorities sought to impose tax on a parent company which had granted an interest-free loan to a subsidiary company, on the basis of the estimated value of the interest which notionally accrued to the former. The transaction itself was held to be covered by Article 4(2)(b) of the Directive, while Article 10(b) clearly prohibits taxes on `loans ... occurring as part of the transactions referred to in Article 4'. Given the economic identity of parent and subsidiary company, the taxing of the parent company could be said to be economically equivalent to a further tax on the transaction after capital duty. This did not prevent the Court holding this to be outside the scope of the Directive, and hence not caught by the prohibition laid down by Article 10: (16)

`[t]he directive is intended to harmonise the taxes, charges and dues imposed on the raising of capital, within the confines of its field of application, ... [and] to abolish indirect taxes other than capital duty which possess the same characteristics as capital duty itself ... . Accordingly the harmonisation provided for by the directive does not extend to direct taxes, such as company income tax, which are a matter for the Member States themselves.' (17)

20 A similar argument based on the possible `economic equivalence' of a national tax to capital duty could also have been made in relation to the municipal charge on the appreciation of immovable property (`imposta comunale sull'incremento di valore dei beni immobiliari', or, for convenience, `the Invim') in Società Immobiliare SIF. (18) The Court noted that `[the] Invim taxes the appreciation in the value of immovable property accruing to the owner when it is alienated for consideration or, in the case of immovables owned by companies, the notional appreciation in value on the expiry of a 10-year period'. (19) Though the imposition of the Invim when the immovable property was contributed to SIF could be said to have economic effects which are equivalent to a duty on an increase in the capital by a contribution of assets, within the meaning of Article 4(1)(c), and hence was capped at 1%, the Court found that the Directive did not apply to the Invim. In reaching that conclusion, the Court took account of the fact that the Invim taxed the gain generated by the contribution and not the contribution itself, that the basis of assessment did not correspond to that established by Article 5(1)(a) of the Directive, and that it was the contributor, not the company, which was liable to pay it.

21 Finally, while some of the parties have referred to Article 10 to illustrate that the imposition of the Italian tax is compatible with the Directive, in my view this provision demonstrates rather that the tax falls outside the scope of the measure. Article 10 prohibits taxes other than capital duty in respect of `the transactions referred to in Article 4', certain ancillary transactions, and registration and other formalities. It does not prohibit a Member State's taking account of the amount of capital in the calculation of a tax on net assets, or in any way limit the powers of the Member States in respect of the imposition of such a tax.

22 I am therefore of the view that the Italian tax is neither a capital duty nor an indirect tax with the same characteristics as capital duty, and that its imposition in the circumstances described in the order for reference in the present case is not incompatible with the Directive.

V - Conclusion

23 In view of the foregoing, I recommend to the Court that it answer the question referred to it by the Commissione Tributaria Provinciale di Firenze by order of 18 October 1996, registered at the Court on 9 January 1997, as follows:

Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital, as amended by Council Directive 85/303/EEC of 10 June 1985 amending Directive 69/335/EEC, does not apply to the imposition on capital companies of a tax such as the annual tax on the net assets of companies introduced by virtue of Decree-Law of the Italian Republic No 394 of 30 September 1992.

(1) - OJ, English Special Edition, First Series 1969 (II), p. 412 (hereinafter `the [capital duty] Directive'). The Directive has been amended on a number of occasions (Directive 73/79/EEC, OJ 1973 L 103, p. 13; Directive 73/80/EEC, ibid., p. 15; Directive 74/553/EEC, OJ 1974 L 303, p. 9; Directive 85/303/EEC, OJ 1985 L 156, p. 23), though only the last is material in the present case (see section II, below).

(2) - Gazzetta Ufficiale della Repubblica Italiana No 230, 30 September 1992, p. 3; the Decree-Law has subsequently been converted into Law No 461 of 26 November 1992, GURI No 281, 28 November 1992, p. 5.

(3) - Joined Cases C-71/91 and C-178/91 Ponente Carni and Cispadana Costruzioni [1993] ECR I-1915, paragraph 19.

(4) - Cited in footnote 1 above.

(5) - Joined Cases C-71/91 and C-178/91, cited in footnote 3 above.

(6) - Joined Cases C-197/94 and C-252/94 Bautiaa and Société Française Maritime (hereinafter `Bautiaa'), [1996] ECR I-505, paragraph 39.

(7) - Joined Cases 52/65 and 55/65 [1966] ECR 159.

(8) - Joined Cases C-197/94 and C-252/94, cited in footnote 6 above, paragraph 39.

(9) - As noted by Advocate General Cosmas in his Opinion in Case C-42/96 Società Immobiliare SIF [1997] ECR I-7089, paragraph 51.

(10) - Joined Cases C-71/91 and C-178/91 Ponenti Carni, cited in footnote 3 above, paragraph 31.

(11) - Case C-347/96 Solred v Administracíon General del Estado [1998] ECR I-0000 (hereinafter `Solred'), paragraph 3.

(12) - Opinion in Case C-2/94 Denkavit Internationaal and Others v Kamer van Koophandel en Fabrieken voor Midden-Gelderland and Others (hereinafter `Denkavit'), [1996] ECR I-2827, paragraph 45, page I-2843.

(13) - Case C-42/96, cited in footnote 9 above, paragraphs 30 and 31.

(14) - Joined Cases C-71/91 and C-178/91, cited in footnote 3 above, paragraph 37.

(15) - Case C-287/94 Frederiksen v Skatteministeriet [1996] ECR I-4581.

(16) - The answer given by the Court was that `Article 10 ... does not preclude the levying of income tax' in these circumstances (operative part of the judgment, paragraph 2); it is clear, in my view, from the Court's reasoning, however, that it considered the income tax to be outside the scope of application of the Directive (see in particular paragraphs 21 and 22). The difference, though not relevant here, is that the prohibition in Article 10 is qualified by Article 12, while the exclusion of application of the Directive is absolute.

(17) - Loc. cit., paragraphs 16, 20 and 21.

(18) - Case C-42/96, cited in footnote 9 above.

(19) - Ibid., paragraph 21.