OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 15 February 2007 1( )

Case C-464/05

Maria Geurts

Dennis Vogten

v

Belgische Staat

(Reference for a preliminary ruling from the Rechtbank van eerste aanleg te Hasselt (Belgium))

(Taxation – Inheritance tax – Exemption of shares in family companies employing at least five workers in the Flemish Region)





I – Introduction

1. The imposition of inheritance tax on controlling interests in family companies can jeopardise the continued existence of those undertakings following the death of the director, where funds have to be withdrawn from the undertaking to pay the tax owing. The Flemish Region of Belgium thus exempts such shareholdings from inheritance tax. This is subject to the condition, however, that the undertaking employed at least five workers in Flanders in the three years prior to the death of the deceased and that the heirs continue to employ those workers in the undertaking for five years.

2. Die Rechtbank van eerste aanleg te Hasselt (Civil Court of First Instance, Hasselt, Belgium) has doubts as to whether this type of rule is compatible with the freedom of establishment and the free movement of capital, on the ground that it treats shareholdings in an undertaking established in another Member State less favourably than shareholdings in domestic companies.

II – Legal framework

3. Article 60a of the Wetboek van Successierechten (Inheritance Tax Code), in the version introduced in the decree of the Flemish Parliament and applicable on the date of death of the deceased, reads as follows:

‘1. In derogation from Articles 48 and 482 the net value of the following shall be exempted from inheritance tax:

(a) assets invested by the deceased or his or her spouse in a family undertaking in the course of business; and

(b) shares in a family company or claims against such a company, on condition that in the three years preceding the death of the deceased at least 50% of the undertaking or the shares in the company belonged continuously to the deceased and/or his or her spouse, and that they are mentioned voluntarily in the declaration of estate.

…

3. “Family company” means a company the actual seat of management of which is situated in one of the Member States of the European Union and which:

– either itself complies with the conditions laid down in paragraphs 1, 5 and 8;

– or holds shares and, if appropriate, claims of subsidiaries which comply with those conditions.

In the latter case the shareholding condition shall be calculated on a consolidated basis; the employment condition referred to in paragraph 5 shall, however, be calculated in respect of each company.

4. …

5. The exemption shall be granted only on condition that the undertaking or company employed at least five full-time workers in the Flemish Region in the three years preceding the death of the deceased.

… That exemption shall be granted and maintained only if the shares or claims belong for five years following the death of the deceased to the heirs benefiting from the exemption. If an heir dies in the five-year period, the exemption shall be maintained only if his or her share is inherited in the direct line or between spouses.

...

10. Under penalty of withdrawal, Article 60a shall be applicable only if the following conditions are satisfied:

1. the declaration explicitly requests the application of Article 60a;

2. the certificate issued by the Flemish Region showing that the conditions relating to employment and capital laid down in this article have been satisfied is attached to the declaration.

If this certificate is not submitted before the inheritance tax falls due, the latter, calculated at the standard rate, shall, unless returned, be paid within the statutory period pursuant to Article 135(8);

3. The declaration shall set out, under a separate heading, the assets or shares in respect of which application of Article 60a is requested.

…’

4. By virtue of Articles 3(4) and 4(2) of the Special Law of 16 January 1989 concerning the financing of the Communities and Regions, ( ) and as the estate of the deceased arose in the Flemish Region, Article 60a of the Wetboek van Successierechten, inasmuch as it is applicable to any estate arising in the Flemish Region, is the provision in issue in the dispute in the main proceedings.

III – Facts and questions referred for a preliminary ruling

5. The claimants are the heirs of the late Joseph Vogten, who died on 6 January 2003. Mrs Maria Geurts was his wife, and Mr Dennis Vogten his son. At the time of his death the deceased had been resident in Belgium for 13 years, more specifically in the Flemish Region. His estate there is subject to inheritance tax pursuant to the Wetboek van Successierechten.

6. During the deceased’s lifetime, all their assets were held jointly by the first claimant and the deceased. All of the shares in Jos Vogten Beheer BV belonged to their joint assets. That company holds 100% of the shares in Vogten Staal BV. Both undertakings are established in Maastricht, the Netherlands, and for more than three years prior to the death of the deceased they had employed there more than five workers on a continuous basis. In addition, the joint assets included claims amounting to EUR 1 043 691 and a current account claim amounting to EUR 66 877 against Jos Vogten Beheer BV. The shareholding of Jos Vogten Beheer BV in Vogten Staal BV is valued at EUR 4 833 004 and accounts for 62.1% of the total value of the assets of Jos Vogten Beheer BV.

7. On 4 August 2003 the claimants paid inheritance tax in the amount of EUR 839 485.60. They paid that amount in order to avoid a final demand under Belgian inheritance law as well as fines, a tax increase and interest, but they continued in principle to contest the amount of the inheritance tax owed by them.

8. In their declaration of inheritance tax of 9 February 2004 they stated that the assets of the estate amounted to EUR 3 666 483.13. After deduction of liabilities, the taxable estate amounted to EUR 3 598 717.33. This amount is comprised principally of the value of the shareholdings in the companies and the claims against them, in so far as they were due to the deceased in the framework of the marital community of property. The scope of the basis of assessment of the inheritance tax is not disputed.

9. What is in dispute is only whether the claimants may rely on the application of Article 60a of the Wetboek van Successierechten, and therefore on the zero rate which would then apply, in respect of those parts of the estate. The defendant rejected an application to that effect by decisions of 28 October 2003 and 13 February 2004 on the ground that the claimants had not produced a certificate issued by the Flemish Region concerning the conditions in respect of employment and capital.

10. The claimants challenge those decisions in the dispute in the main proceedings and argue that they did not receive the certificate solely because the workers at Jos Vogten Beheer BV and Vogten Staal BV are employed in the Netherlands and not in the Flemish Region. According to the claimants, the relevant rule infringes Articles 43 EC and 56 EC.

11. By decision of 21 December 2005 the Rechtbank van eerste aanleg te Hasselt referred the following question for a preliminary ruling under Article 234 EC:

Must Community law, and in particular Articles 43 EC and 56 EC, be interpreted as meaning that a restriction arising from a provision in the legislation of a region of a Member State concerning inheritance, in this case Article 60a of the Belgian Wetboek van Successierechten as applicable to an estate arising in the Flemish Region, which exempts the shares in a family company or the claims of the legal successor of the deceased, his heir, against such a company from inheritance tax if the company has employed at least five workers in the three years prior to the death of the deceased, but restricts that exemption to cases in which at least five workers have been employed in a particular region of that Member State (in casu, the Flemish Region), is incompatible with those articles?

12. In the proceedings before the Court of Justice, submissions were made by the claimants, the Belgian Government and the Commission of the European Communities.

IV – Legal assessment

13. The referring court requests the Court to provide an interpretation of Articles 43 EC and 56 EC in respect of a rule of inheritance tax law.

14. It must first of all be pointed out that, although direct taxation, including inheritance tax, falls within the competence of the Member States, the latter must none the less exercise that competence in a manner consistent with Community law. ( )

A – Applicable fundamental freedom

15. As the referring court is examining the application of provisions on both the freedom of establishment and the free movement of capital, it must first be assessed which of the above provisions are relevant in a case such as the present.

– Freedom of establishment

16. The concept of establishment within the meaning of Article 43 EC is a very broad one, allowing a Community national to participate, on a stable and continuous basis, in the economic life of a Member State other than his State of origin. ( ) More particularly, the Court has held that a 100% holding in the capital of a company having its seat in a Member State other than that in which the owner of that holding lives undoubtedly brings such a taxpayer within the scope of application of the Treaty provisions on the right of establishment. ( )

17. Where a Community national lives in one Member State and has a shareholding in the capital of a company established in another Member State which gives him substantial influence over that company’s decisions and allows him to determine its activities, as is always the case where he holds 100% of the shares, his situation may thus fall within the freedom of establishment. ( )

18. The deceased resided in Belgium and together with his wife – in part directly, in part indirectly – held all the shares in companies established in the Netherlands. By succession in law those controlling interests passed to the claimants, who are also living in Belgium. Therefore this situation falls within the scope of the freedom of establishment.

– Free movement of capital

19. The Treaty contains no definition of the concept of ‘capital movements’. However, inasmuch as Article 56 EC substantially reproduces the contents of Article 1 of Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, ( ) and even though that directive was adopted on the basis of Articles 69 and 70(1) of the EEC Treaty (Articles 67 EEC to 73 EEC were replaced by Articles 73b to 73g of the EC Treaty, now Articles 56 EC to 60 EC), the nomenclature in respect of capital movements annexed to Directive 88/361 still has, according to established case-law, the same indicative value for the purposes of defining the notion of capital movements. ( )

20. Inheritance and legacies are listed under D under heading XI ‘Personal capital movements’ of Annex I to Directive 88/361. Furthermore, the Court has already confirmed in Barbier and Van Hilten-van der Heijden that inheritance is a movement of capital within the meaning of Article 56 EC, except in cases where its constituent elements are confined within a single Member State. ( ) In addition, financial loans and credits granted by non-residents to residents are referred to under heading VIII of Annex I to Directive 88/361.

21. The free movement of capital is thus affected by the domestic rules at issue, in the first place, because the claimants have inherited assets situated in another Member State. Secondly, they could possibly rely on Article 56 EC in their capacity as lenders to a company established in another Member State.

– The relation of freedom of establishment to free movement of capital

22. In my Opinion in Oy AA I recently took the view that the freedom of establishment and the free movement of capital can in principle be applied side-by-side. ( )

23. However, the Court has examined cases, falling within the scope of both fundamental freedoms, which give priority, on some occasions, to the criterion of free movement of capital ( ) and, on others, to the criterion of freedom of establishment. ( ) The Court thus observed in X and Y that the free movement of capital is not independently relevant, in so far as a rule already falls within the scope of the freedom of establishment, since it concerns the acquisition of an equity interest with decisive influence over the decisions of the undertaking concerned. ( ) In FidiumFinanz the Court recently held that the freedom to provide services, which was the predominant consideration in the light of the circumstances of that case, overrides the application of the free movement of capital even in the case where the person concerned, as a national of a non-member country, can, in the specific instance, rely only on the free movement of capital and not on the freedom of establishment. ( )

24. Accordingly, only the fundamental freedom which is the main focus as regards the substance of the matter should be applied.

25. The rule of inheritance tax applicable in the dispute in the main proceedings is directed at the continued existence of family companies after death of the deceased. Family companies are defined as undertakings controlled by a natural person, where appropriate, together with that person’s spouse. Company loans are treated in the same way as shareholdings under Article 60a(1)(b) of the Wetboek van Successierechten. In fact such loans are quite frequently used to replace a company’s share capital. ( ) The rule does not, however, apply to interests of an investment nature.

26. Therefore the rules altogether essentially relate to the freedom of establishment and are to be assessed according to that criterion alone.

27. The fact the Court has ruled on rules governing inheritance tax in Barbier and Van Hilten van der Heijden in the light of the free movement of capital does not preclude this conclusion. What distinguishes the present case is that the legacies in those cases consisted essentially of both real property and capital investments and not company shares conferring a decisive influence over an undertaking. The application of the freedom of establishment was therefore not in any way relevant in those cases.

B – Restriction of the freedom of establishment

28. Even though, according to their wording, the provisions concerning freedom of establishment are directed mainly at ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State, they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation. ( )

29. The Belgian Government is correct in pointing out that the contested rule does not discriminate as between heirs on the basis of their nationality.

30. However, a restriction on the freedom of establishment may arise where a Member State treats shareholders in a company limited by shares differently according to whether the company in which they have a controlling interest is established in that Member State or in another. ( ) Such a difference in treatment is liable to prevent, hamper or render less attractive the exercise of the freedom of establishment guaranteed by the EC Treaty. ( )

31. The contested provision relating to inheritance tax favours only interests in companies which continuously employ five workers in the Flemish Region, treating them more favourably than interests in undertakings which do not meet this criterion.

32. The Belgian Government therefore contends that the rule is not linked to establishment in the Flemish Region but to the employment of workers in that region. Undertakings established in another Member State would be treated just as favourably provided only that they employed five workers in the Flemish Region.

33. It is clear from the case-law that the rules regarding equal treatment forbid not only overt discrimination by reason of nationality or, in the case of a company, its seat, but also all covert forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result. ( ) Accordingly, unequal treatment is also contrary to the freedom of establishment, where it is linked not directly to the place of establishment of the company in which the taxpayer has its interest, but to other criteria which in practice concern first and foremost the interests in companies established in another Member State.

34. In fact, in most cases, only those undertakings which are established in the Flemish Region will also fulfil the condition as to employment of workers in that region. As the representative of the Belgian Government conceded at the hearing, very few cases are foreseeable in which an undertaking continuously employs five workers in the Flemish Region, without having a subsidiary there – at least in the form of a plant or factory.

35. A rule such as the contested provision relating to inheritance tax thus amounts to a restriction on the freedom of establishment, by exempting persons inheriting shares in a family company from inheritance tax on those shares only if the undertaking employed at least five workers in the Flemish Region in the three years prior to the death of the deceased and such employment has subsequently been maintained for five years.

C – Justification

36. In order for a rule such as the contested rule on inheritance tax to be capable of being regarded as compatible with Article 43 EC, however, the difference in treatment must concern situations which are not objectively comparable or be justified by overriding reasons in the public interest. ( ) In order to be justified by overriding reasons in the public interest, the rule must also be appropriate to ensuring the attainment of the objective pursued and must not go beyond what is necessary to attain it. ( )

– Considerations of employment policy

37. The Belgian Government submits that the rule at issue serves to preserve jobs in the Flemish Region and is justified on grounds of employment policy. The rule can thus only relate to domestic jobs as the Flemish Region has no power to adopt measures relating to employment policy affecting other Member States.

38. According to the Court’s settled case-law, aims of a purely economic nature cannot justify a barrier to the fundamental freedoms. ( ) While the safeguarding of domestic jobs may serve the public interest, it cannot justify a restriction on the exercise of the freedom of establishment. Otherwise, such a guarantee would be completely undermined by the fact that preferential treatment of domestic undertakings could in almost every case be justified by the promotion of domestic jobs.

39. Even if the employment policy objectives were to be regarded as overriding reasons in the public interest, it is not necessary for the attainment of that objective to reserve preferential treatment exclusively for those undertakings which to some extent create domestic jobs.

40. The argument that the Flemish Region lacks the power to adopt relevant measures in respect of employment policy in favour of undertakings established outside Belgium is not convincing. This is mainly due to the fact that the present case concerns a rule on inheritance tax which appears to fall within the competence of the region. The tax is levied not only on the domestic property of deceased persons living in the region, but also on property situated in other Member States. It is therefore not apparent why, since it is able to decide on the imposition of the tax, the region cannot also exempt undertakings established in other Member States from taxation in relation to shareholdings.

41. The basis of the financial burdens on heirs, which may jeopardise the continued existence of domestic as much as foreign companies, is the inheritance tax levied by the Flemish Region. With regard to the national measure’s objective of not jeopardising the continued existence of family companies by burdening them with inheritance tax, undertakings established in another Member State are in a similar situation to that of domestic undertakings. Therefore the Flemish Region is under a duty to provide the same relief in respect of shareholdings in family companies, irrespective of where the undertaking is established or of the number of workers employed in the region.

42. This approach is consistent with the judgments in Laboratoires Fournier ( ) and Commission v Portugal. ( )

43. In the first of those judgments, the Court held that national provisions awarding a tax credit for research purposes only where the relevant research activity is carried out in that country are contrary to the freedom of establishment. In that connection, it rejected in particular the argument that a Member State is not under a duty to promote research in another Member State. The Court also referred in this regard to the fact that Community policy on research under Article 163(2) EC is aimed specifically at removing fiscal obstacles to co-operation in the field of research.( )

44. The judgment in Commission v Portugal concerned a rule that profits from the sale of self-occupied residential property were exempt from tax on condition that the proceeds were reinvested in domestic property. The fact that the tax credit was not available where a new property was acquired in another Member State was contrary, in the view of the Court, to the fundamental freedoms on the free movement of persons (Articles 18 EC, 39 EC and 43 EC). In order to promote domestic housing policy, the Court considered that it was not necessary to exclude the acquisition of property abroad from the benefit of tax credit and thus impede free movement. ( )

– Influence of the provisions on State aid

45. At the hearing the question was raised as to whether a particular national rule, which treats only interests in domestic undertakings favourably for the purpose of preserving jobs, may, in certain circumstances, be regarded as permissible State aid.

46. According to settled case-law, the concept of aid is more general than that of a subsidy. It embraces not only positive benefits, such as subsidies themselves, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without therefore being subsidies in the strict meaning of the word, are similar in character and have the same effect. ( )

47. It follows that a measure by which the public authorities grant to certain undertakings a tax exemption which, although not involving a transfer of State resources, places the persons to whom the tax exemption applies in a more favourable financial situation than other taxpayers constitutes State aid within the meaning of Article 87(1) EC. ( )

48. Since the rule at issue in the present case does not apply to all economic operators, but only to family companies, it cannot be considered to be a general measure of tax or economic policy. ( ) At first sight, the measure also seems liable to affect intra-Community trade and to distort competition. Even if the rule favours family companies, it places no particular limits on the maximum size of the undertaking or an upper limit on the tax credit, with the result that it cannot in any way be regarded as a de-minimis aid. ( )

49. Consequently, the contested provisions of the Wetboek van Successierechten in principle require the Commission’s approval under Article 88(3) EC.

50. It is clear from the scheme of the EC Treaty, however, that the procedure under Article 88 EC may never lead to a result in which particular Treaty provisions conflict with one other. Therefore, State aid which infringes other provisions of the Treaty – in this case, the freedom of establishment – cannot be declared by the Commission to be compatible with the common market. ( )

– Effectiveness of fiscal supervision

51. As a further ground of justification, the Belgian Government invokes the effectiveness of fiscal supervision.

52. The Court has repeatedly held that the effectiveness of fiscal supervision constitutes an overriding requirement of general interest capable of justifying a restriction on the exercise of fundamental freedoms guaranteed by the Treaty. ( )

53. However, the refusal to grant tax credit to family companies, which continuously employ five workers only in another Member State, on the grounds of fiscal supervision alone goes beyond what is necessary. In any event, in so far as the person liable to inheritance tax continues to reside in Belgium, the authorities can without reservation require him, periodically, to provide proof as to the number of persons employed by the family company, even if the company is itself established in another Member State. ( ) For this purpose, items such as lists of salaries or documents on the payment of social security contributions in the other Member State may be obtained.

54. Therefore, justification on grounds of the effectiveness of fiscal supervision fails, irrespective of the possibilities of administrative assistance available to the Belgian fiscal authorities for checking the employment situation of the family company established in another Member State. ( )

– Allocation of fiscal powers

55. Finally, the Belgian Government argues, in substance, that the rule serves the allocation of fiscal powers between Member States.

56. It explains in this regard, referring to the facts in the case of Van Hilten-van der Heijden, ( ) that the Netherlands still requires its own nationals who die within ten years of leaving the Netherlands to pay inheritance tax. In that connection, however, credit is given for the inheritance tax paid in another Member State. If, in this situation, the payment of inheritance tax on shares in Netherlands companies were exempted under Article 60a Wetboek van Successierechten, credit would not be given in the Netherlands for the Belgian inheritance tax. However, the Netherlands tax, which would remove the benefit of the exemption, would remain in place. As a result, the exemption would thus only lead to an increase of the share in the Netherlands of the inheritance tax to be paid on death.

57. It must be pointed out, first of all, that this consideration is rather hypothetical in the light of the facts of the dispute in the main proceedings. The claimants explained in the hearing that the deceased moved to Belgium from the Netherlands thirteen years ago.

58. The extent to which the limitation of the exemption for interests in family companies which employ at least five workers in Flanders attains the objective of preventing the removal of a tax advantage by another Member State, in this case, the Netherlands, is also questionable. The Belgian Government thus assumes that the Netherlands requires payment of inheritance tax, on the death of a Netherlands national within ten years of his leaving the country, on those shares in an undertaking established in the Netherlands. This argument, however, is not at all cogent. It is also conceivable that shareholdings may be taxed, following departure from the country, solely on the basis of sovereign control over its own nationals and irrespective of where the undertaking in which the deceased held an interest is established. In this case, the exemption itself would then be ‘cancelled’ by virtue of the Netherlands inheritance tax, where the undertaking concerned is established in the Flemish Region and there employs five or more workers.

59. Quite apart from the specific facts of the dispute in the main proceeedings, the Belgian Government’s thinking is based on the assumption that credit must be given in the Netherlands for the Belgian inheritance tax. In the judgment in Kerckhaert and Morres, recently handed down, the Grand Chamber of the Court of Justice made clear, however, that, in any event, no prohibition on double taxation by two States can be derived from the fundamental freedoms. ( )

60. If the respective chargeable criteria were fulfilled, the taxation of the claimants’ inheritance by both the Belgian and Netherlands authorities could therefore be unlimited.( ) The tax exemption for shares in a family company by the Belgian fiscal authorities would thus lead, in the case of parallel taxation by two States, to an overall reduction in the tax burden. Whether and to what extent the Netherlands rules on inheritance tax provide for a credit for tax paid outside the Netherlands can thus have no effect on the granting of a benefit in Belgium.

V – Conclusion

61. In the light of the foregoing, I propose the following answer to the question referred by the Rechtbank van eerste aanleg te Hasselt:

Articles 43 EC precludes a provision in the legislation of a region of a Member State concerning inheritance, which exempts shares in a family company or claims against such a company from inheritance tax if the company has employed at least five workers in the three years prior to the death of the deceased and the heirs have continued to employ those workers for five years subsequently, but restricts that exemption to cases in which the workers have been employed in the region in question.