Opinion of the Advocate-General



Opinion of the Advocate-General

1. The interpretation sought by this reference for a preliminary ruling concerns tax legislation which forms part of a national scheme to prevent economic double taxation when dividends are paid by a resident company to its shareholders.

2. It is necessary to determine whether a Member State may limit the opportunity for a resident taxpayer to deduct from his taxable profits the losses relating to the partial reduction in value of the shares he holds in a resident company where he has acquired his shares from a shareholder residing in another Member State.

3. That reference was made in the context of a dispute between Glaxo Wellcome GmbH & Co. and Finanzamt München II (2) concerning the assessment of its taxable profits for the period 1995 to 1998. The background to that dispute is the complex restructuring of the Glaxo Wellcome group, whose companies are established in various Member States, in this case the Federal Republic of Germany and the United Kingdom of Great Britain and Northern Ireland.

4. Under the applicable German legislation, a shareholder who resides in Germany and who receives a dividend from a company established in the same State may deduct from his taxable income not only the amount of the tax which the distributing company has already paid on its profits, by means of a tax credit, but also reductions in profits resulting from the depreciation of his shares.

5. In principle, only resident shareholders are granted tax credits. Nevertheless, that legislation could be circumvented in order to enable shareholders residing in another Member State and who are not taxable in that State to obtain that undue tax advantage.

6. It was in order to combat that practice that the German Government adopted the tax measure at issue.

7. In the present case, the Court is being asked to consider whether such a measure constitutes a restriction on freedom of establishment within the meaning of Article 43 EC or on the movement of capital within the meaning of Article 56(1) EC and, depending on the circumstances, whether that restriction may be justified.

8. For the purposes of this analysis, I suggest that the Court examine, first, the compatibility with Community law, and particularly with Article 56 EC, of the scheme of which the tax measure at issue forms part, which is designed to prevent shareholders who do not reside in Germany from obtaining the tax credit.

9. Then, on the basis of the conclusions of that initial analysis, I invite the Court to consider whether Article 56 EC precludes legislation of a Member State which limits the opportunity for a shareholder resident in that State to deduct from its taxable profits losses relating to the reduction in the value of shares which he holds in a resident company, where he has acquired his shares from a shareholder resident in another Member State, although it affords that opportunity to a taxpayer who has acquired his shares from a resident shareholder.

10. In this Opinion, I shall argue that such legislation does indeed constitute a restriction on the movement of capital within the meaning of Article 56 EC. However, I shall explain to what extent such a restriction may be justified by the need to prevent tax avoidance and shall indicate in what circumstances it may be regarded as proportionate to that objective.

I – Legal framework

A – Community law

11. The first paragraph of Article 43 EC prohibits restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State. Under the second paragraph of Article 43 EC, freedom of establishment includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings.

12. Under the first paragraph of Article 48 EC, the rights established by Article 43 EC also apply to companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Community.

13. Moreover, Article 56(1) EC provides that all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. (3)

14. However, that prohibition is subject to derogations set out in Articles 57 EC and 58 EC. Article 57 EC concerns only relations with non-member States and relates to movements of capital considered to be particularly substantial.

15. Article 58 EC describes the powers accorded to the Member States to restrict the movement to or from other Member States and non-member States. It provides:

‘1. The provisions of Article 56 shall be without prejudice to the right of Member States:

(a) 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;

(b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.

...

3. The measures and procedures referred to in [paragraph 1] shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 56 [EC].’

16. It is apparent from the case-law that the requisite measures to prevent infringements of the laws and regulations of a Member State include inter alia measures intended to combat tax avoidance. (4)

17. Furthermore, the list of justificative measures contained in Article 58(1)(b) EC is not exhaustive. The Court has acknowledged that the free movement of capital, like the other freedoms of movement, could be restricted on other grounds, described as overriding reasons in the public interest. (5) Thus, it has been held on several occasions that the need to maintain the coherence of a national tax system and the need to take action to counteract unlawful arrangements constitute overriding reasons in the public interest which can justify a restriction on the freedom of movement of capital. (6)

18. However, whatever the ground invoked, it is important that the measure in question be appropriate to attaining the objective it pursues and not go beyond what is necessary for that purpose.

B – National law

1. The German system governing the tax treatment of distributed profits

a) The position of resident shareholders

19. A natural person regarded as resident in Germany for taxation purposes is taxable on the whole of his worldwide income under a scheme called ‘unlimited tax liability’ or ‘full tax liability’.

20. When he receives a dividend, he may deduct from his taxable income the amount of corporation tax which the distributing company has already paid and also losses stemming from a partial reduction in the value of the shares he holds in that company.

i) The overall tax liability system and the tax credit granted to resident shareholders

21. The Federal Republic of Germany applies a ‘full tax imputation’ system to resident taxpayers. That system makes it possible to avoid the double economic taxation which occurs when dividends are paid. They are taxed in the hands of first, the company, which is taxed on its profits, and secondly, of the shareholder to whom the dividends are paid, who is charged corporation tax or income tax, depending on whether that shareholder is a company or an individual.

22. Under that system, any distribution of dividends by a resident company to a resident shareholder entitles the latter to a tax credit equal to the fraction of the amount of corporation tax paid by the distributing company. That tax credit is applied either to the shareholder’s income tax if he is a natural person, (7) or to its corporation tax if it is a company. (8) Accordingly, the tax credit may be deducted from the amount payable by the shareholder in respect of its taxable income.

23. Under Paragraph 36(4)(2) of the EStG, that tax credit may be converted into a refund if the taxpayer’s tax debt is lower than the amount of the advance corporation tax levied.

24. The effect of those provisions is that profits distributed by resident companies are subject to tax once in the hands of the companies and only give rise to tax for the final shareholder in so far as its income tax or corporation tax exceeds the tax credit to which it is entitled.

ii) Partial reduction in the value of the shares

25. As I have pointed out, a German taxpayer may also deduct from his taxable profit the losses relating to the partial reduction in the value of the shares he holds in a company. This is the fall in the price of the share when the company’s dividends are distributed. In principle, the price of the share reduces by the amount of the profits distributed. Thus, where a taxpayer’s shareholding in a company forms part of its working capital, Article 6(1)(1) of the EStG allows the shareholder, on receipt of the dividend, to reduce the value of that shareholding in his tax balance sheet.

b) The position of non-resident shareholders

26. In principle, taxpayers who do not reside in Germany are not taxable on the profits that they receive following a distribution of dividends by a resident company or a disposal of shares which they hold in that company. The full tax liability system provided for under the German tax system does not apply to them and therefore they cannot claim the tax credit attached thereto.

27. Nevertheless, on 26 November 1964, the Federal Republic of Germany concluded with the United Kingdom of Great Britain and Northern Ireland a convention relating to the abolition of double taxation and the prevention of fiscal evasion. (9)

28. Under Article III of the Convention, a company established in the United Kingdom is subject to corporation tax in Germany only in so far as it carries on a trade or business through a permanent establishment situated therein.

29. Furthermore, under Article XVIII(1)(b) of the Convention, it is entitled to a tax credit in respect of dividends paid by a company established in Germany if it controls directly or indirectly at least 25 per cent of the voting power of that company.

30. That provision is worded as follows:

‘Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):

...

(b) in the case of a dividend paid by a company which is a resident of the Federal Republic [of Germany] to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 25 per cent of the voting power in the Federal Republic company, the credit shall take into account ... the Federal Republic [of Germany] tax payable by the company in respect of the profits out of which such dividend is paid.’

c) Paragraph 50c(1) and (4) of the EStG

31. This provision applies to situations in which the taxpayer who is entitled to a tax credit acquires, from a seller who is not so entitled, shares in a company established in Germany.

32. Paragraph 50c of the EStG, in the version brought into force by the Law on the improvement of the taxation conditions to secure Germany as a business location in the European internal market, (10) is worded as follows:

‘1. A taxpayer with the right to offset corporation tax who acquires shares in a fully taxable capital company ... from a shareholder who does not have such a right ... may not, when determining profits, take into account reductions in profits arising from

1. the inclusion of the lower value as part of a going-concern or

2. the transfer or withdrawal of the holding,

in the year of acquisition or in one of the following nine years, in so far as the inclusion of that lower value or any other reduction in profits is attributable solely to the distribution of profits or to a transfer of profits pursuant to a special control agreement, and the total reduction in profits does not exceed the blocked amount within the meaning of subparagraph 4.

…

(4) The blocked amount is the difference between the acquisition costs and the nominal value of the holding.’

2. The German system relating to the taxation of company restructuring

33. The mechanism provided in Paragraph 50c of the EStG may also affect two kinds of transaction similar to the distribution of dividends, which may occur in connection with certain company restructuring operations. These are the case, to which Paragraph 4(4) to (6) of the Law amending tax law on company conversions of 28 October 1994 (11) refers, in which shares are transferred from a capital company to a partnership, and the case in which a capital company is converted into a partnership, which is subject to identical provisions. (12)

II – Facts and procedure in the main proceedings

34. I shall summarise as follows the facts which seem relevant for the purposes of my argument.

35. This case concerns the assessment of the taxable profits for the period from 1995 to 1998 of the applicant, a GmbH & Co. KG (limited partnership) established in Germany. That company is the result of the merger, on 25 August 1995, of Glaxo Wellcome GmbH (‘GW‑GmbH’) and Wellcome GmbH (‘W‑GmbH’).

36. The assessment of the company’s profits raised numerous problems since the Glaxo Wellcome Group to which it belongs was the subject of a complex restructuring operation during June and July 1995.

37. In the course of that restructuring, Glaxo Verwaltungs‑GmbH (‘GV‑GmbH’), which is a subsidiary of the Group established in Germany, acquired from its parent company established in the United Kingdom (13) all of the shares in GW‑GmbH. According to the Finanzamt, that operation gave rise to a blocked amount in respect of the shares acquired from the applicant of DEM 22 887 706.

38. Similarly, the applicant acquired from two companies in the Group established in the United Kingdom all of the shares in W‑GmbH, which is a subsidiary of the Group established in Germany. The Finanzamt took the view that that operation also gave rise to a blocked amount in respect of the shares acquired from that subsidiary of DEM 322 565 500.

39. The applicant in the main proceedings disputed before the Finanzgericht München the legality of the notices of additional assessment issued by the Finanzamt, in particular its valuation of the blocked amounts. The Finanzgericht München upheld that action by judgment of 10 February 2006. The Finanzamt then brought an appeal before the Bundesfinanzhof, Germany, for that judgment to be set aside.

III – The reference for a preliminary ruling

40. The Bundesfinanzhof decided to stay proceedings and to refer the following question to the Court of Justice for a preliminary ruling:

‘Do [Articles 43 EC and 56 EC] preclude legislation of a Member State which, in the framework of a national imputation system for corporation tax, excludes the reduction in the value of shares as a result of a distribution of dividends from the basis of assessment for that tax when a taxpayer who is entitled to a corporation tax credit has acquired shares in a company which is fully taxable from a shareholder who is not entitled to such a tax credit whereas, had the shares been acquired from a shareholder who is entitled to a tax credit, such a reduction in value would have reduced the acquirer’s basis of assessment?’

IV – Analysis

41. By its question the national court is asking, in essence, whether Articles 43 EC and 56 EC preclude legislation of a Member State which limits the opportunity for a shareholder resident in that State to deduct from his taxable profits losses in respect of a reduction in the value of shares which he holds in a resident company where he has acquired his shares from a shareholder resident in another Member State, although it allows a taxpayer who has acquired his shares from a resident shareholder to do so.

42. This issue covers two questions. It requires us to determine, first, whether the legislation concerned is to be analysed as a restriction on freedom of establishment within the meaning of Article 43 EC or on the movement of capital within the meaning of Article 56(1) EC. We then need to ascertain, if the answer to the first question is in the affirmative, whether such a restriction is justified.

43. Before examining the question raised by the referring court, it may be useful to provide a broad outline of the case-law on the framework for the powers of the Member States in matters relating to the taxation of dividends, in particular that concerning mechanisms intended to prevent situations leading to the double taxation of a company’s profits and the impact of bilateral conventions. (14)

A – Broad outline of the case-law

1. General framework

44. The taxation of dividends is part of direct taxation, competence in respect of which has not to date been expressly conferred on the Community. (15) Member States therefore have the sovereign right to define the conditions for their powers of taxation, that is to say, the rate, the basis of assessment, the procedures for recovery and the scope of their tax powers, unilaterally or by agreement in the form of inter-State conventions. (16)

45. However, as the Court regularly points out, that competence must be exercised in compliance with Community law, in particular the freedoms of movement laid down in the EC Treaty. (17)

46. The fact that the competence of the Member States is circumscribed by the freedoms of movement has given rise to two principles. The first is the prohibition of discriminatory measures. Under this principle, a taxpayer from another Member State must not be the subject of discriminatory tax treatment by the host Member State. The second principle is that of the prohibition, by the Member State of origin, of obstacles to the exercise of one of the freedoms of movement by one of its nationals. This is the prohibition of ‘exit barriers’.

47. Within the framework of the free movement of capital as applied to the taxation of company profits, those two principles find expression in case-law in the prohibition, firstly, of tax measures in a Member State which constitute an obstacle to the raising of capital in that State by foreign companies and, secondly, of tax measures in a Member State which dissuade taxpayers in that State from investing their capital in companies established in other countries.

48. In accordance with the principle of non-discrimination, a Member State may not apply different tax rules to comparable situations or the same tax rule to different situations. (18) That principle also prohibits not only overt discrimination based on nationality, (19) but also any discrimination which, by the application of other criteria of differentiation, leads to the same result.

49. As I have already pointed out in my Opinion in Orange European Smallcap Fund , the principle of non-discrimination and the retained competence of Member States have come into conflict in the area of direct taxation, in particular with regard to national measures providing for divergent treatment depending on the residence of the taxpayer.

50. On the one hand, residence for tax purposes is, in principle, the criterion which defines the respective taxation powers of the Member States. Thus, generally speaking, Member States tax natural and legal persons who are taxpayers and resident in their territory and may tax non-resident taxpayers on profits arising from activities carried on in that territory. Similarly, they provide tax advantages limited to resident taxpayers, such as measures designed to take account of their personal and family circumstances, which they are best placed to assess. On this point, the Court has accepted that the situations of residents and of non-residents are not, as a rule, comparable. (20)

51. On the other hand, national legislation of a Member State which reserves tax advantages for residents of the national territory principally benefits nationals of that State since usually the majority of non-residents are nationals of other countries. A rule based on the criterion of residence may therefore constitute indirect discrimination on grounds of nationality. (21)

52. As the Court has recently pointed out in the judgment in Persche , (22) that conflict is given expression in Article 58(1)(a) EC. That provision states that Article 56 EC is to be without prejudice to the right of Member States to establish in their tax law a distinction between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested, on condition, however, that those provisions do not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments which are prohibited by Article 58(3).

53. National legislation which draws a distinction between taxpayers on the basis of residence or the place where they invest their capital may therefore be considered compatible with Articles 56 EC and 58 EC only if that difference in treatment relates to situations which are not objectively comparable for the purposes of the application of the tax measure in question. (23) According to settled case-law, that examination must be carried out in concreto . (24)

54. Failing that, if the situations concerned are objectively comparable, such a distinction will, according to the case-law, be in accordance with Community law only if it is justified on one of the grounds set out in Article 58(1)(b) EC or by an overriding reason in the public interest, such as the need to safeguard the coherence of the tax system or to ensure the effectiveness of fiscal supervision. In order to be justified, moreover, the difference in treatment must not go beyond what is necessary in order to attain the objective of the legislation in question. (25)

2. Measures designed to prevent or mitigate double taxation

55. The Court has specified in a number of judgments the scope of this general framework for the competence of Member States in matters of direct taxation in the case of State or unilateral measures or measures pursuant to agreements designed to prevent or mitigate the double taxation of profits distributed by companies.

56. It should be noted at the outset that a company’s profits may be the subject of double taxation in a number of different situations. Thus, they may be the subject of a ‘series of charges to tax’ or ‘economic double taxation’, where they are taxed through two different taxpayers, first the company, as part of the taxation of profits, then, second, through the shareholder to whom they are distributed, as part of corporation tax or income tax, depending on whether that shareholder is a company or a private individual. (26)

57. Those profits may also be the subject of ‘juridical double taxation’, where a single taxpayer is taxed twice on the same income. This situation may arise where a shareholder who receives dividends is liable, on the one hand, to deduction at source on those dividends by the Member State in which the company making the distribution is established and, on the other hand, to income tax on those dividends in his State of residence.

58. On the basis of the presentation of the relevant case-law, it is appropriate to start from the premiss that double taxation is not, generally, contrary to Community law.

59. No measure for the division of powers between Member States aimed at eliminating double taxation has been adopted within the framework of the Treaty. Double taxation is prohibited only by a number of directives, such as Council Directive 90/435/EEC. (27) Moreover, leaving aside Convention 90/436/EEC, (28) Member States have not concluded any multilateral convention to that effect under Article 293 EC. (29)

60. Two consequences follow from this premiss. First, if double taxation results from the exercise by Member States of their respective powers, such as taxation of the taxpayer by his State of residence on the entirety of his income and taxation of the same taxpayer by the State in whose territory the dividends were released, up to the amount of those dividends, it does not, as such, constitute an infringement of Community law. (30)

61. Second, in the absence of measures and a multilateral convention to that effect, Member States are free to establish the criteria for the division between them of powers of taxation and to adopt, unilaterally or through bilateral conventions, the measures necessary to prevent cases of double taxation. (31) However, in exercising that competence, Member States must, within the framework of both unilateral measures and agreements, observe the requirements of Community law and in particular those following from the freedoms of movement. (32)

62. A number of cases have offered the Court the opportunity to illustrate the scope of that obligation with regard to the taxation by Member States of, on the one hand, incoming dividends, as the State of residence of the shareholder, and, on the other hand, outgoing dividends, as the source State of those dividends. (33)

63. As regards the taxation of incoming dividends, it follows from the case-law that, where a Member State taxes resident taxpayers on the entirety of the dividends they receive and adopts provisions to prevent or mitigate the double economic taxation of those dividends, it cannot limit the benefit of those provisions to nationally-sourced dividends but must extend that advantage to dividends paid by companies established in other Member States. (34)

64. The Court held that that equal treatment was necessary on the ground that, in the light of the purpose of such provisions, the situation of a taxpayer receiving dividends originating in other Member States was comparable to that of a taxpayer receiving nationally-sourced dividends in so far as, in each case, such dividends were liable to be subject to a series of charges to tax or to double economic taxation, which the said provisions were specifically intended to prevent or mitigate. (35)

65. As regards the taxation of outgoing dividends, the case-law is more qualified. Where the company making the distribution and the shareholder to whom it is paid are not resident in the same Member State, the Court considers that the Member State in which the profits are derived is not in the same position, as regards the prevention or mitigation of a series of charges to tax and of economic double taxation, as the Member State in which the shareholder receiving the distribution is resident.

66. In its case-law, the Court distinguishes between two situations, depending on the extent of the fiscal competence exercised by the Member State in which the company paying the dividend is resident.

67. In the first situation, that Member State makes not only resident shareholders but also non-resident shareholders liable to income tax on dividends which they receive from the resident company. In that case, the Court considers that that State must ensure that, with regard to the mechanism provided for in its domestic law to prevent or mitigate a series of charges to tax, non-resident shareholders are afforded treatment that is equivalent to that enjoyed by resident shareholders. (36)

68. In such a case, equal treatment is required of the Member State which is the source of the dividends because that State has decided to exercise its fiscal powers not only in relation to dividends paid to resident shareholders but also in relation to dividends distributed to non-resident shareholders. (37) It is solely because of the exercise by that State of its taxing powers that, irrespective of any taxation in another Member State, a risk of a series of charges to tax may arise.

69. In the second situation, the Member State in which the company generating the profits is resident does not make the shareholders to whom they are paid and who reside in another Member State liable to tax on the dividends received.

70. In that case, the Court acknowledges that, as regards the application of the tax legislation of that Member State of residence, the position of resident shareholders and non-resident shareholders is not comparable. (38)

71. It points out, first, that the Member State in which the company making the distribution is resident is not required to ensure that profits distributed to a non-resident shareholder are not liable to a series of charges to tax or to double economic taxation; if it were, that would mean in point of fact that that State would be obliged to abandon its right to tax a profit generated through an economic activity undertaken on its territory. The Court notes, secondly, that it is usually the Member State in which the final shareholder is resident that is best placed to determine the shareholder’s ability to pay tax.

72. In those circumstances, the Court considers that legislation of a Member State which, on a distribution of dividends by a company resident in that State, grants a tax credit only to companies receiving those dividends which are also resident in that State, but does not grant such a tax credit to companies receiving such dividends which are resident in another Member State and are not subject to tax on dividends in the first State does not constitute discrimination as prohibited by Articles 43 EC and 56 EC. (39)

3. Effect of bilateral conventions

73. An examination of the case-law on the effect of bilateral tax conventions provides two lessons which may be relevant to the present case.

74. The first is that rights derived from the freedoms of movement guaranteed by the Treaty within the European Union are unconditional and that a Member State may not make respect for them subject to the contents of a convention concluded with another Member State. In other words, a Member State may not make those rights subject to a reciprocity agreement entered into with another Member State for the purpose of obtaining corresponding advantages in that State. (40)

75. The second lesson is that, where a tax measure introduced by a Member State constitutes an obstacle to a freedom of movement provided for in the Treaty, a bilateral convention may be taken into account when it neutralises that obstacle. (41) The Court examines whether the combined application of the legislation at issue and the bilateral convention allows a restriction on the applicable freedom of movement to continue (42) or refers that assessment to the national court. (43)

76. I shall now examine the questions referred for a preliminary ruling by the Bundesfinanzhof in the light of that outline of the case-law.

B – The relevant freedom of movement

77. Since the national court is asking the Court of Justice for an interpretation of both Article 43 EC on freedom of establishment and Article 53 EC on free movement of capital, it is necessary to determine, first, whether and to what extent legislation such as that at issue in the main proceedings is likely to affect those freedoms. (44)

78. In its recent case-law, the Court has specified the scope of the freedom of establishment and the free movement of capital respectively.

79. It is apparent from that case-law that, where the legislation of a Member State, by reason of its objective, concerns situations in which a company has a shareholding in another company which gives it definite influence over that company’s decisions and allows it to determine that company’s activities, it is in the light of the provisions of the Treaty on the freedom of establishment, and only those provisions, that the legislation at issue must be examined. (45)

80. On the other hand, where the shareholder’s interest in the capital of a company does not give him definite influence over the decisions of that company and does not allow him to determine its activities, the provisions of Article 56 EC alone are applicable. (46)

81. The Court has also held that national legislation which makes the receipt of dividends liable to tax, where the rate depends on whether the source of those dividends is national or otherwise, irrespective of the extent of the holding which the shareholder has in the company making the distribution, may fall within the scope of both Article 43 EC on freedom of establishment and Article 56 EC on free movement of capital. (47)

82. According to well established case-law, in order to determine whether national legislation falls within the scope of one or other of the freedoms of movement, the purpose of the legislation concerned must be taken into consideration. (48)

83. According to the Commission of the European Communities, the aim of that legislation is to establish the circumstances in which undertakings may invest in the capital of another undertaking. It maintains, therefore, that the compatibility of the legislation at issue must be examined in the light of the Treaty provisions relating to free movement of capital.

84. The German Government maintains that the compatibility of the legislation at issue must be examined in the light of the Treaty provisions relating to freedom of establishment. In that regard, it bases its argument on the specific nature of the holdings concerned. Although the German Government points out that the application of the legislation at issue does not in fact depend on the size of the interest which the recipient company held in the company which paid the dividend, it maintains that the purpose of the two acquisition transactions in question was to take or to strengthen a controlling holding. In that context, it considers that, in accordance with the case-law of the Court, only Article 43 EC is applicable.

85. The applicant in the main proceedings suggests that the compatibility of that legislation be examined in the light not only of freedom of establishment but also of free movement of capital.

86. In essence, the legislation at issue restricts the entitlement of a resident shareholder to deduct from his taxable profits losses relating to the partial reduction in value of shares which he holds in a resident company where he has acquired his shares from a taxpayer residing in another Member State, before the distribution of the company’s dividends and at a price higher than the nominal value of the shares. That legislation is therefore designed to apply irr espective of the extent of the holding which the shareholder has in the resident company making the distribution. In those circumstances, I consider that that legislation may fall within the scope both of Article 43 EC on freedom of establishment and of Article 56 EC on free movement of capital.

87. However I take the view that the legislation in question should be assessed only in the light of Article 56 EC, in view of the specific circumstances of this case and of the objectives pursued by the German Government.

88. Indeed, a study of the facts in this case reveals that the purpose of the practice adopted by the undertakings concerned was not to take control of the undertaking making the distribution. What is more, that practice was part of a series of movements of capital within a group of companies whose decision-making mechanism has not altered following the share disposals. Also, the spirit of the German system is to combat practices which seek, by the purchase and subsequent resale of shares, to obtain an undue tax advantage.

89. I consider, in those circumstances, that the compatibility of the tax measure at issue with Community law should be examined in the light of the Treaty provisions on free movement of capital.

90. Nevertheless, since Article 56 EC also refers to restrictions on movement of capital between Member States and non-member States, I would point out that this Opinion will apply in so far as the dispute concerns Member States.

91. It is now necessary to consider whether the German legislation at issue constitutes a restriction on movement of capital and, if so, whether that restriction is justified.

C – The existence of a restriction on the movement of capital

92. In view of the particular complexity of the tax measure at issue, I think it is necessary fully to understand the scheme and context of which it forms part.

1. The basic tax system

93. As I have pointed out, the German tax system taxes each shareholder resident in Germany on all the profits distributed to him. However, when dividends are paid, that shareholder may deduct from his taxable income the amount of tax which the company distributing the dividend has already paid and also the profit reductions which are the result of a partial reduction in the value of the shares he holds in that company.

94. So far as concerns the tax credit, we have seen that it was introduced in order to prevent the risk of double economic taxation when dividends are paid by a resident company to its shareholders. The amount of that credit is equal to the fraction of the corporation tax which the company making the distribution has already paid.

95. The tax credit is, in principle, granted only to shareholders who are entitled to it, that is to say, taxpayers resident in Germany.

96. I understand that, under Article XVIII(1)(b) of the Convention, a tax credit is also granted by the United Kingdom to shareholders who reside in that State and who hold at least 25% of the voting rights in a company established in Germany. (49)

97. Thus, if the 25% threshold fixed by the Convention is not reached, shareholders resident in the United Kingdom have no right to the tax credit in respect of the distribution of the dividends of a German company.

98. The present dispute is set against that background. The holdings of the two United Kingdom shareholders, GG-Ltd and W-Ltd, in the capital of GW-GmbH and W-GmbH, both resident in Germany, were considerably below that threshold. In accordance with the provisions of the Convention, those holdings therefore did not entitle those shareholders to a tax credit in the United Kingdom when the dividends of those companies were paid.

2. Paragraph 50c(1) and (4) of the EStG

99. The purpose of that provision is to counteract a practice which has enabled certain shareholders established in another country to obtain, without entitlement and in advance, a tax credit allowed only to resident shareholders.

100. On the basis of information provided by the German Government, that practice is as follows: (50)

– Before the profits of the resident company are distributed, the shareholder established in the other country sells its holding in that company to a resident shareholder who, as such, is entitled to a tax credit in respect of the imminent distribution of dividends.

– That holding is sold at a price higher than its nominal value. The increase is equal to the tax credit which is, in principle, allowed in respect of the company’s distribution of dividends and which the foreign shareholder is not entitled to claim. That increase is paid by the purchaser from its hidden reserves. The increase enables the seller to make a capital gain, which is not taxed in Germany, to which is therefore added, in advance and without entitlement, the reimbursement of the amount of the tax which the company making the distribution has already paid on its profits. (51)

– When the dividends are distributed by the resident company, the new shareholder may, contrary to what would have been the case with the original shareholder, obtain the tax credit in accordance with the applicable legislation.

– It may also, in accordance with Paragraph 6(1) of the EStG, deduct from its taxable profits the losses on the partial reduction in value of its shares.

– Following the distribution of the dividends, the shares are sometimes sold back to the non-resident shareholder.

– The consequences for the foreign shareholder of disposing of his shares before the distribution of the profits it is therefore that it obtains, by means of an ‘inflated’ sale price, not only the taxed profits but also the tax credit in respect of the distribution of profits, even though it is not taxable in Germany. By that means the new resident shareholder gains an advantage consisting not only in the benefit of the tax credit but also in that of the partial reduction in value.

101. It was in order to combat this practice and to ensure the coherence of its tax system that the German Government adopted Paragraph 50c of the EStG.

102. As is apparent from the statement of reasons for the draft proposal for that provision, the German legislature wished to prevent the ‘risk ... that shareholders who are not entitled to the [tax] credit may be paid at least partially, when they sell shares to shareholders who are entitled to the [tax] credit, the corporation tax charged on the reserves’ and that ‘[t]he distinction, inherent in the imputation system, between shareholders who are entitled to the credit and those who are not, may therefore in many cases not appear in the economic result’. It is apparent from that statement of reasons that the German legislature was referring, in particular, to transactions carried out within a group of companies and, inter alia, share disposals between a non-resident parent company and subsidiaries established in Germany.

103. Essentially, Paragraph 50c of the EStG limits the new shareholder’s right to deduct from his taxable profits the losses on the partial reduction in value of the shares he holds in a resident company where he has acquired his shares from a shareholder who does not reside in Germany before the distribution of the company’s dividends.

104. That provision applies to all taxpayers whether they are natural persons or undertakings, members of the same group or otherwise. It covers losses on a partial reduction in value of the shares in the year of acquisition or in any of the nine following years and concerns only profit reductions resulting from a profits distribution or transfer in performance of a special control agreement.

105. That provision is designed to apply when the new shareholder has acquired his shares at a price higher than their nominal value. That amount, which is equal to the difference between the acquisition price paid by the resident shareholder and the nominal value of the share is known as a ‘blocked amount’. According to the German legislature, that amount represents, at least in part, the tax credit wrongly granted to the foreign shareholder. It is that amount which the tax authorities are going to carry forward to the basis of assessment of the new resident shareholder, by means of an accounting paper transaction which consists in disregarding, in respect of that shareholder, the losses on the partial reduction in value of his shares.

106. Accordingly, under Paragraph 50c of the EStG, once the resident company distributes its dividends to the new shareholder, he can no longer deduct from his basis of assessment the losses on the partial reduction in value of his shares, provided however that the amount of those losses does not exceed the blocked amount, that is to say the amount of the tax advantage which has been wrongly granted. Where that amount is nil, that is to say where the resident shareholder has acquired his shares at a price which corresponds to their nominal value, that provision therefore does not apply.

107. The taking into account of the blocked amount therefore eliminates the effects of the partial reduction in value where, and to the extent that, the reduction in the value of the shares is the result solely of the distribution of profits. The German Government thus manages to tax the capital gain which the non-resident shareholder has made on selling his shares, a gain which had not been subject to any tax.

108. In the present case, the question is whether such legislation constitutes a restriction on the movement of capital within the meaning of Article 56 EC.

109. In order to answer that question, I think it is necessary to consider, first, whether the basic tax scheme which underlies that legislation and which the German Government seeks to protect is compatible with the rules of the Treaty.

110. In other words, we must first of all consider whether Article 56 EC precludes legislation of a Member State which, on the distribution of dividends by a resident company, allows the tax credit only to resident shareholders, to the exclusion of shareholders established in another Member State.

3. The compatibility of the basic tax system with Article 56 EC

111. As I have pointed out, under the tax scheme at issue, only shareholders who reside on German territory may obtain a tax credit in respect of the distribution of dividends by a resident company. That difference in tax treatment does not form an integral part of the Convention.

112. In the present case, the question is whether that legislation constitutes a restriction on the movement of capital, contrary to the rules of the Treaty. (52)

113. The national court expresses many reservations with regard to the compatibility of that measure with Community law.

114. According to the Bundesfinanzhof, that scheme may discourage investors who are fully taxable from acquiring interests in German companies from shareholders established in another Member State. Also, that legislation, in that it denies the benefit of the tax credit to shareholders who reside in another Member State, discourages taxpayers established in the other Member States from investing their capital in companies established in Germany. That tax legislation has a restrictive effect as regards companies established in Germany in that it constitutes an obstacle to their raising capital in other Member States. Since, when national capital income is distributed, shareholders who do not reside in Germany are treated less favourably that shareholders who reside in that Member State, shares in companies established in Germany are less attractive to investors residing in another Member State.

115. The applicant in the main proceedings adopts a stricter position and maintains that that system, which is designed to exclude totally from the benefit of that tax advantage shareholders resident in other countries, has a discriminatory effect and obstructs the free movement of capital and freedom of establishment.

116. The German Government and the Commission argue, on the contrary, that the refusal to grant that tax advantage to non-resident shareholders does not constitute a restriction on the movement of capital within the meaning of Article 56(1) EC.

117. The Commission acknowledges that the basic system provided by the German legislature risks producing restrictive effects on the free movement of capital. That legislation may prevent resident taxpayers from acquiring shares in a company from shareholders resident in another Member State. Also, that legislation may have the effect of preventing foreign investors from investing their capital in German companies.

118. Nevertheless, the German Government and the Commission both maintain that that legislation is not contrary to Community law for the reasons stated by the Court in Test Claimants in Class IV of the ACT Group Litigation .

119. I agree with the German Government and the Commission that that tax legislation is admissible having regard to the position adopted by the Court in that judgment, the content and analysis of which I have presented in points 69 to 72 of this Opinion.

120. In that case, one of the questions raised was whether freedom of establishment and the free movement of capital preclude a rule of a Member State which, on a payment of dividends by a resident company, grants a full tax credit to the ultimate shareholders receiving the dividends who are resident in that Member State or in another State with which the first Member State has concluded a double taxation convention providing for such a tax credit, but does not grant a full or partial tax credit to companies receiving such dividends which are resident in certain other Member States. (53)

121. In the light of the competences retained by the Member States in connection with direct taxation, the Court held that legislation of a Member States which, on a distribution of dividends by a company resident in that State, grants companies receiving those dividends which are also resident in that State a tax credit equal to the fraction of the corporation tax paid on the distributed profits by the company making the distribution, but does not grant such a tax credit to companies receiving such dividends which are resident in another Member State and are not subject to tax on dividends in the first State, does not constitute discrimination prohibited by Articles 43 EC and 56 EC.

122. In the same case, the Court based its reasoning on the division and scope of the powers of taxation exercised by the Member States concerned. The Member State in question was not competent to tax the profits made by the non-resident shareholder companies, so it could not be required to grant them any tax advantage in respect of corporation tax. The tax credit granted to the resident shareholder companies was granted in respect of the corporation tax paid in their Member State of residence. (54)

123. That case-law was confirmed recently in Burda.

124. I think that that case-law may perfectly well be transposed to the present case since, according to the German legislation, shareholders who do not reside in Germany are not subject to income tax or to corporation tax on dividends distributed by a resident company. Shareholders residing in Germany and those residing in the United Kingdom are therefore not in an objectively comparable situation with regard to the national measure at issue. Therefore, and although there is a difference in tax treatment between those shareholders, I do not believe this is discriminatory.

125. In that regard, I wish to add that, in the present case, when the applicant distributes its dividends to GV‑GmbH, it is in its capacity as the shareholder’s Member State of residence that the Federal Republic of Germany grants GV‑GmbH a tax credit equal to the fraction of the corporation tax paid by the former company which generated the distributed profits.

126. The position of that State, in which both the company making the distribution and the shareholder receiving it reside, is not comparable to its position where the resident company distributes its dividends to a non-resident company, since, in that case, it is acting, in principle, only in its capacity as the Member State from which the distributed profits derive.

127. In light of the foregoing considerations, I therefore consider that Article 56 EC does not preclude a Member State, on a distribution of dividends by a resident company, from allowing the benefit of the tax credit only to shareholders residing in that State, but not granting it to shareholders who reside in another Member State.

128. I shall now examine the compatibility of the provisions of Article 50c of the EStG with Community law on the basis of that premiss.

4. The compatibility of Paragraph 50c of the EStG with Article 56 EC

129. As I have pointed out, Paragraph 50c of the EStG was adopted in order to combat practices allowing shareholders who do not reside in Germany to obtain in a roundabout way the tax credit allowed only to German residents.

130. As we have seen, that provision introduces a difference in tax treatment according to whether the resident taxpayer has acquired his shares in a resident company from a shareholder who is entitled to the tax credit, that is to say a shareholder who resides in Germany, or from a shareholder who is not entitled to it, that is to say a shareholder who resides in another Member State.

131. Thus, where a German shareholder has acquired his shares in a resident company from a shareholder who is entitled to the tax credit, the German tax authority deducts from his basis of assessment not only the amount of the tax which the company making the distribution has already paid on those dividends, but also the profit reductions resulting from the partial reduction in the value of the shares which he holds in that company.

132. On the other hand, where that taxpayer has acquired his shares from a shareholder who is not entitled to the tax credit and at a price higher than their nominal value, he cannot deduct from his taxable profits the losses relating to that reduction in value.

133. By its question, the national court is asking, in essence, whether Article 56 EC precludes legislation of a Member State which prevents a resident taxpayer deducting from his taxable profits losses relating to the reduction in the value of the shares which he holds in a resident company where he has acquired his shares from a non-resident shareholder, although that legislation allows a taxpayer who has acquired them from a resident taxpayer to do so.

a) The existence of a restriction on the movement of capital

134. I consider that the limitation at issue is contrary to Article 56 EC if we examine its effects on the movement of capital between shareholders resident in Germany and shareholders resident in another Member State.

135. It is not disputed that the German tax authority, when determining the basis of assessment, considers the reduction in value of the shares on distribution of the profits differently according to whether those shares have been acquired from a taxpayer resident in Germany or from a taxpayer resident in another Member State.

136. In those circumstances, it is more advantageous for German investors to acquire holdings in a German company from shareholders who are also entitled to a tax credit, that is to say from shareholders who reside in Germany. In that case, the German tax authorities may deduct from their taxable income profit reductions linked to the reduction in value of their shares, which results in a reduction in their basis of assessment. On the other hand, German investors are deprived of that tax advantage if they acquire their shares from shareholders who are not entitled to the tax credit, that is to say from shareholders who reside in another Member State.

137. It is clear to me that the possibility of obtaining a reduction in the basis of assessment is likely to have a significant influence on the attitude of German investors. That legislation may deter them from acquiring shares in German companies from shareholders who reside in another Member State. Also, that legislation may have restrictive effects in regard to those companies in that it constitutes an obstacle to their raising capital from other Member States and may deter foreign investors from acquiring shares in them. Since, on the acquisition of shares, German investors who buy their shares from a shareholder residing in another Member State are treated less favourably than German investors who buy their shares from a shareholder residing in Germany, the shares held by foreign investors are less attractive and therefore less interesting.

138. However, according to the case-law, such restrictions are contrary to the provisions of Article 56 EC only if they are the consequence of overt or covert discrimination, that is to say, if they are attributable to the same tax system in a Member State which applies a different rule to comparable situations or the same rule to different situations.

139. In the present case, we find that the Federal Republic of Germany accords very different treatment to situations which are objectively comparable. When we compare the way in which, under the tax system at issue, a German taxpayer’s basis of assessment is determined, we find that the German authorities treat the losses resulting from a partial reduction in value of the shares held in a resident company differently, according to whether those shares have been acquired from a shareholder resident in Germany or from a shareholder resident in another Member State.

140. In my view, that measure therefore constitutes a restriction on the movement of capital within the meaning of Article 56 EC, in that it imposes a difference in tax treatment between acquisitions made from a resident taxpayer and acquisitions made from a non-resident taxpayer.

141. In those circumstances, it seems to me that the tax system at issue constitutes a restriction on the free movement of capital, prohibited, in principle, by Article 56 EC.

142. Nevertheless, such a restriction may be regarded as compatible with the Treaty provisions if it pursues a lawful objective compatible with the Treaty or if it is justified by an overriding reason in the public interest. In order to be justified, moreover, the difference in treatment must be appropriate to attaining the objective in question and must not go beyond what is necessary in order to attain that objective. (55)

b) The justification for the restriction

143. The applicant in the main proceedings and, to a lesser extent, the national court, maintain that the restriction at issue cannot be justified by the need to safeguard the principle of a once-only charge to national tax or to prevent tax avoidance if its objective is to exclude non-resident shareholders from the benefit of the tax credit. The applicant adds, moreover, that that legislation is neither necessary nor appropriate.

144. The German Government and the Commission maintain that that measure is not contrary to Community law and that the restriction at issue is justified by overriding reasons in the public interest. They base their arguments on the compatibility of the basic system with Community law and emphasise the objective pursued by Paragraph 50c of the EStG, that is, to prevent shareholders in a company established in German territory unlawfully obtaining a tax advantage to which they would not have been entitled in the event of the distribution of profits. That provision therefore makes it possible to maintain the coherence of the full imputation system provided for by the German legislation and prevents the tax base being shifted abroad.

145. Nevertheless, the Commission leaves it to the national court to assess whether that legislation is limited to what is necessary for that purpose or whether it produces effects which may constitute direct or indirect discrimination against non-resident shareholders, contrary to Article 56 EC.

i) The need to safeguard the coherence of the national tax system

146. Unlike the German Government, I do not think that the provision at issue may be justified by the need to ensure the coherence of the national tax system and, in particular, its full imputation system.

147. It is true that the Court, in its judgments in Bachmann and Commission v Belgium , (56) recognised that the need to maintain the coherence of a tax system does indeed constitute an overriding reason in the public interest which may justify legislation restricting the fundamental freedoms guaranteed by the Treaty.

148. Nevertheless, the scope of that reasoning has been considerably limited in subsequent judgments. The Court has made the application of that ground conditional, on the one hand, on there being a direct link between the tax advantage in question and the offsetting of that advantage by a specific tax levy, the direct nature of that link to be assessed in the light of the objective of the legislation at issue, (57) and, on the other hand, on those two factors concerning the same taxpayer in respect of the same tax. (58)

149. Thus, in Bachmann and Commission v Belgium , there was a direct link, in respect of the same taxpayer, between the grant of a tax advantage and the offsetting of that advantage by a tax levy, which had been effected in connection with the same tax. On the other hand, when there is no such direct link, because, for example, separate taxes or different taxpayers are involved, the Court rejects the argument relating to the need to maintain the coherence of the tax system. (59)

150. I consider that, in the present case, there is no direct link of that kind. The tax system at issue seeks to prevent the double economic taxation which arises when a resident company distributes its dividends to a shareholder established in the same Member State. Therefore, it involves two different taxpayers, namely the company making the distribution and the shareholder.

151. In those circumstances and in the light of the case-law of the Court of Justice, I consider that the argument alleging the need to ensure the coherence of the tax system cannot apply in the present case.

ii) The need to prevent tax avoidance and to combat artificial arrangements

152. I agree with the German Government and the Commission that the restriction may actually be justified by the need to prevent tax avoidance and to combat artificial arrangements designed to circumvent the German tax system.

153. It is apparent from the Court’s case-law that the need to prevent tax avoidance and, in particular, to combat abusive practices may be relied on under Article 58(1)(b) EC to justify restrictions on the free movement of capital between Member States. (60) It also constitutes an overriding reason in the public interest which may justify legislation to restrict the fundamental freedoms guaranteed by the Treaty. (61)

154. In the present case I maintain that the provision at issue is indeed designed to combat artificial arrangements which enable a taxpayer who does not reside in Germany and who, as such, is not taxable in that State, to obtain a tax credit to which, in principle, he is not entitled under the tax legislation in force.

155. As is apparent from the statement of reasons for the draft law, the German legislature refers, in particular, to transactions carried out within a group of companies and, especially, to disposals of shareholdings between a non-resident parent company and subsidiaries established in Germany. It is clear from the observations lodged by the German Government that the legislature envisages a situation in which the non-resident parent company without justification obtains a tax credit by opting to sell the shares it holds in a resident subsidiary to another resident subsidiary – which, as such, may also obtain a tax credit at the time of the distribution of the dividends – at a price higher than the nominal value of its shares, before repurchasing them. (62) In this way, the non-resident parent company obtains a capital gain equal, in fact, to the tax credit.

156. The granting of such a tax advantage to a taxpayer who is not taxable in Germany and who, as such, is not entitled to the tax credit, infringes the German tax system under which only resident taxpayers may obtain a tax credit. I would remind you that I have concluded that that system is compatible with Community law. Also, the unjustified grant of that tax credit involves an erosion of the tax base and constitutes, in that regard, a particular case of tax avoidance which the German Government is entitled to combat.

157. In those circumstances, I consider that Paragraph 50c of the EStG may be justified by the need to prevent the tax avoidance in which certain fictitious arrangements culminate.

158. However, as I have pointed out, for the restriction to be justified, the national measure at issue must be appropriate for attaining the objective it pursues and must not go beyond what is necessary for that purpose, in accordance with the principle of proportionality.

159. In the present case, I consider that the measure at issue is indeed such as to prevent the fictitious arrangements to which certain operators may resort. By restricting the new shareholder’s right to deduct from his taxable profits the amount of the losses stemming from the reduction in value of the shares in question, in so far as they do not exceed the ‘blocked amount’, (63) the legislature reintroduces, for that shareholder, a basis of assessment which corresponds to the increase in the sale price and to the capital gain made by the foreign shareholder. In my view, such legislation is indeed appropriate for attaining the objective it pursues, that is to say the objective of ensuring that the tax credit is not transferred, without justification and in advance, to a non-resident taxpayer who, as such, is not entitled to that tax advantage.

160. The question we must now ask ourselves is whether the measure at issue in the main proceedings is proportionate to that objective.

161. For the purposes of that examination, I start from the premiss that that provision is designed to apply also where, under the Convention, the seller has more than 25% of the voting rights in the company making the distribution. Otherwise, the coherence of the tax system in question is, in my view, impaired.

162. It is settled case-law that a restriction may be justified on the ground that it combats unlawful practices, if its specific aim is to prevent acts consisting in the making of wholly artificial arrangements whose purpose is to obtain a tax advantage. (64)

163. In the present case, I consider that the measure at issue goes beyond that limit.

164. As I have pointed out, that legislation is designed to apply where a taxpayer resident in Germany has purchased his shares in a resident company, before the distribution of the company’s dividends, from a shareholder residing in another Member State. It covers situations in which the shares are sold at a price higher than their nominal value. In those circumstances, that measure restricts the deductibility, by the resident taxpayer, of the losses resulting from taking into account, in the year of acquisition or in any of the nine following years, the reduction in the value of the shares. It applies if the reduction in profits is the result of a transaction to distribute or transfer profits in performance of a special control agreement. Furthermore, it applies only to the extent that the losses do not exceed the blocked amount, that is to say the amount equal to the difference between the acquisition price and the nominal value of the shares. In other words, the measure at issue does not apply where the shares have been sold at a price equal to the nominal value of the share, since, in that case, the blocked amount is zero.

165. In spite of these conditions for its application, it seems to me that the legislation in question does not target specifically enough the situation in which the risk of tax avoidance is more likely to exist and which the Federal Republic of Germany wishes to combat.

166. Indeed, in the light of the artificial practices to which the German Government draws attention, (65) I consider that the artificial arrangement which the legislature is justified in combating is the mechanism by which a foreign shareholder sells at an increased price his holding in a resident company to a resident taxpayer, before the distribution of the dividends, then subsequently buys it back at a price which does not exceed its nominal value. In my view, it is that transaction, which has no economic reality, which reveals the existence of a wholly artificial arrangement.

167. However, it is not certain, from the description of the legal context given by the national court, that the national measure in question specifically targets that arrangement.

168. First, we know that the measure concerns all transactions of share disposal, whether between taxpayers who are natural persons or between companies which are independent or belong to the same group.

169. However, contrary to the indications in the statement of reasons of the draft measure, it does not specifically target transactions effected within a group of companies, where they seem easiest to carry out.

170. Secondly, we know that that provision applies where a taxpayer resident in Germany has bought his shares in a resident company from a foreign shareholder at a price which, for whatever reason, exceeds the nominal value of the shares.

171. Now, it seems to me that the increase in the sale price does not, on its own, constitute sufficient evidence that the transaction in question is an artificial arrangement designed to obtain a tax advantage, particularly if that price has been agreed between two taxpayers who do not belong to the same group of companies.

172. I think, therefore, that that measure creates a presumption of tax avoidance or evasion which cannot be based on that circumstance alone. I take the view that it is difficult to rule out the possibility that company shares may be sold at more than their nominal value for reasons other than to circumvent the tax legislation. Accordingly, under fully competitive conditions, (66) companies may agree to increase the sale price of the holding having regard, for example, to the value of the undistributed profits or in order to avoid, in the event of inflation, a devaluation of the shares.

173. In those circumstances, the national measure at issue may appear disproportionate.

174. In order to comply with the principle of proportionality, a measure designed to combat the artificial arrangements which have been described should permit the national court to carry out a case-by-case examination taking into consideration the particular features of each case, acting on the basis of objective factors, in order to assess the abusive or fraudulent behaviour of the persons concerned.

175. Indeed, the sale of shares which a shareholder residing in another Member State holds in a resident company to a resident shareholder and at a price higher than their nominal value may be an indication of the latter’s wish to obtain a tax advantage which he cannot claim under the applicable legislation. Nevertheless, in my view, that is not enough to show fraudulent intent.

176. On the other hand, the speed with which those shares are sold back to the foreign shareholder is a solid indication of tax avoidance and is, a priori, more in line with the objective pursued by the German Government, namely to avoid the unjustified transfer of a tax advantage to a foreign taxpayer by means of artificial arrangements which have no economic reality. The fact that a company which is not established in Germany arranges to sell its shares at an increased price and then repurchases them at a price equal to their nominal value constitutes, for the purchaser’s Member State of residence, objective and verifiable evidence to determine whether the transaction in question constitutes an artificial arrangement. The fact that the purchaser may acquire shares at a price higher than their nominal value, for no consideration, and then resell them at the normal market price shows that that transaction has no other aim than to enable the initial holder to obtain the tax credit unlawfully. Such a transaction suffices to show that the purchaser is, in fact, only an agent whose status as a resident shareholder enables the unjustified transfer of the tax advantage.

177. In such a situation, in view of the ease with which this kind of operation may be carried out, particularly within a group of companies, I do not find it excessive for a Member State to establish a presumption of tax avoidance. What is important, however, is that that presumption may be rebutted in cases in which the operators concerned show economical or financial reasons or very specific circumstances justifying such a transaction.

178. In any event, as I have pointed out, the application of the measure at issue must be able to be limited to wholly artificial arrangements whose purpose is actually to circumvent the national tax legislation.

179. However, as I have observed, I do not have sufficient information to be certain that the national legislation at issue specifically targets those arrangements for the sale and subsequent repurchase of shares.

180. In those circumstances, I consider that it is for the national court, which must examine whether the legislation in question is compatible with Community law, to assess the proportionality of that measure.

181. It is for that court inter alia to examine whether that provision may be interpreted in such a way as to limit its application to artificial arrangements intended to circumvent the national tax legislation. Accordingly, it must establish whether Paragraph 50c of the EStG does indeed target arrangements under which the resident taxpayer, after purchasing his shares from a shareholder established in another Member State in the circumstances envisaged by the present measure, sells the shares in question back to him within a very short time and at a price which does not exceed their nominal value.

182. In the light of the foregoing, I therefore consider that Article 56 EC is to be interpreted as meaning that it does not preclude national tax legislation which limits the opportunity for a resident taxpayer to deduct from his taxable profits losses stemming from a reduction in the value of shares which he holds in a resident company, where he has purchased his shares from a taxpayer residing in another Member State, before distribution of that company’s dividends and at a higher price than their nominal value, if that legislation applies only to purely artificial arrangements designed to circumvent national law.

183. The national court must therefore establish whether that legislation applies only in situations in which the shares in question are resold to the original shareholder within a very short period of time and at a price which does not exceed their nominal value.

184. In the context of the present dispute, it is for the national court to establish, in accordance with the national rules of evidence and in so far as that does not undermine the effectiveness of Community law, whether the constituents of an abuse are present in the transactions carried out by the applicant. In that regard, the national court will have to determine the actual content and significance of those transactions and may take into consideration the legal and/or economic links between the operators concerned.

V – Conclusion

185. In light of the foregoing considerations, I propose that the Court give the following reply to the question referred for a preliminary ruling by the Bundesfinanzhof:

Article 56 EC is to be interpreted as meaning that it does not preclude national tax legislation which limits the opportunity for a resident taxpayer to deduct from his taxable profits losses stemming from a reduction in the value of shares which he holds in a resident company, where he has purchased his company shares from a taxpayer residing in another Member State, before payment of that company’s dividends and at a higher price than their nominal value, if that legislation applies only to purely artificial arrangements designed to circumvent national law.

The national court must therefore establish whether that legislation applies only in situations in which the shares in question are resold to the original shareholder, within a very short period of time and at a price which does not exceed their nominal value.

(1) .

(2) – ‘The Finanzamt’.

(3) – In view of the precise and unconditional nature of that provision, the Court held, in its judgment in Joined Cases C-163/94, C-165/94 and C-250/94 Sanz de Lera and Others [1995] ECR I‑4821, that the principle of the free movement of capital had direct effect in that it precluded restrictions both between Member States and between Member States and non-Member States.

(4) – Case C-478/98 Commission v Belgium [2000] ECR I‑7587, paragraph 38 the case-law cited therein, and paragraph 39.

(5) – See, inter alia, the judgment in Case C-302/97 Konle [1999] ECR I‑3099, paragraph 40.

(6) – See, inter alia, as regards the need to ensure the coherence of the national tax system, the judgment in Case C-418/07 Papillon [2008] ECR I-0000, paragraph 43 and the case-law cited therein, and, as regards the need to prevent tax avoidance and to combat abusive arrangements, Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I‑2107, paragraphs 71 to 74.

(7) – Paragraph 36(2)(3) of the Einkommensteuergesetz (Law on income tax) 1990, BGBl. 1990 I, p. 1898 ( ‘the EStG’).

(8) – Paragraph 49 of the Körperschaftsteuergesetz (Law on corporation tax) 1996, BGBl. 1996 I, p. 340 (‘the KStG’). Under current German tax law, profits made, during a financial year, by any company resident in that Member State are subject to 30% corporation tax in that State (see Paragraph 27(1) of the KStG).

(9) – BGBl. 1966 II, p. 358. The Convention as amended by the Protocol of 23 March 1970, BGBl. 1971 II, p. 46 (‘the Convention’).

(10) – Gesetz zur Verbesserung der steuerlichen Bedingungen zur Sicherung des Wirtschaftsstandorts Deutschland im Europäischen Binnenmarkt (Standortsicherungsgesetz).

(11) – Umwandlungssteuergesetz, BGBl. 1994 I, p. 3267.

(12) – I should point out that the transfer of assets between a capital company and a partnership or the conversion of a capital company into a partnership may involve a change of tax system. Unlike capital companies, partnerships are not subject to tax as such. Only the partner is subject to tax, up to the amount of his holding, in respect of the profits made by the partnership. That has consequences where the assets of a capital company are transferred to a partnership. In that event, profits which were hitherto part of the assets of the capital company, are automatically attributed, by reason of merger, to the assets of the partner. The operation is treated in the same way as a distribution of its profits.

(13) – This was Glaxo‑Group Ltd (‘GG‑Ltd’). It was also controlled by Burroughs Wellcome Ltd (‘W‑Ltd’).

(14) – In that regard, I refer to the arguments devoted to that case-law in the Opinion I delivered in Case C-194/06 Orange European Smallcap Fund [2008] ECR I‑3747.

(15) – See, inter alia, the judgment in Case C-284/06 Burda [2008] ECR I‑4571, paragraph 66 and the case-law cited therein.

(16) – Ibid., paragraphs 86 and 87 and the case-law cited therein.

(17) – Ibid., paragraph 66 and the case-law cited therein.

(18) – Case C-374/04 Test Claimants in Class IV of the ACT Group Litigation [2006] ECR I‑11673, paragraph 46 and the case-law cited therein.

(19) – With regard to companies within the meaning of Article 48 EC, it is their seat that serves as the connecting factor within the legal system of a particular State, like nationality in the case of natural persons (Case C-330/91 Commerzbank [1993] ECR I‑4017, paragraph 13).

(20) – Case C-279/93 Schumacker [1995] ECR I‑225, paragraph 31.

(21) – See, as regards natural persons, Schumacker , paragraphs 28 and 29, and, as regards legal persons, Commerzbank , paragraph 15.

(22) – Case C-318/07 Persche [2009] ECR I-0000, paragraphs 40 and 41.

(23) – Ibid., paragraph 41.

(24) – See, inter alia, Case C-446/03 Marks & Spencer [2005] ECR I‑10837, paragraph 38.

(25) – Persche , paragraph 41 and the case-law cited therein.

(26) – See, inter alia, Test Claimants in Class IV of the ACT Group Litigation , paragraph 49.

(27) – Directive 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). See also 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) and 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 (OJ 2003 L 157, p. 49).

(28) – Convention of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (OJ 1990 L 225, p. 10).

(29) – By virtue of Article 293 EC, the Member States are required, so far as necessary, to enter into negotiations with each other with a view to securing for the benefit of their nationals the abolition of double taxation within the Community. See, inter alia, Test Claimants in Class IV of the ACT Group Litigation, paragraph 51 and the case-law cited therein.

(30) – See, on this point, Case C‑513/04 Kerckhaert and Morres [2006] ECR I‑10967, concerning Belgian legislation which, in the context of income tax, subjects dividends from shares in companies established in Belgium and dividends from shares in companies established in another Member State to the same uniform rate of taxation, without providing for the possibility of setting off the tax levied by deduction at source in that other Member State. The Court ruled that the tax system at issue made no distinction between the dividends of companies established in Belgium and those of companies established in another Member State. It held that the adverse consequences which might arise from the application of such a system for a taxpayer receiving dividends which had been subjected to deduction at source in another Member State resulted solely from the exercise in parallel by two Member States of their fiscal sovereignty (paragraph 20).

(31) – Test Claimants in Class IV of the ACT Group Litigation , paragraph 52 and the case-law cited therein.

(32) – Case C-307/97 Saint-Gobain ZN [1999] ECR I‑6161, paragraphs 57 and 58, and Test Claimants in Class IV of the ACT Group Litigation , paragraph 54.

(33) – Incoming dividends are paid to a shareholder residing in a Member State by a company established in another Member State, whereas outgoing dividends are paid by a company resident in the Member State concerned to a shareholder resident in another Member State.

(34) – See, with regard to the grant of an exemption from the income tax payable on dividends distributed to natural persons who are shareholders, Case C‑35/98 Verkooijen [2000] ECR I‑4071; with regard to the application of a discharge rate of tax or a rate reduced by half, see Case C‑315/02 Lenz [2004] ECR I‑7063; with regard to the grant of a tax credit, Case C‑319/02 Manninen [2004] ECR I-7477, and Case C-292/04 Meilicke and Others [2007] ECR I‑1835; and, with regard to an exemption from corporation tax on nationally-sourced dividends, where dividends of foreign origin were liable to that tax and conferred an entitlement to relief only as regards any withholding tax charged in the State in which the company making the distribution was resident, Case C-446/04 Test Claimants in the FII Group Litigation [2006] ECR I‑11753, paragraphs 61 to 71.

(35) – Test Claimants in the FII Group Litigation , paragraph 62. The same requirement does not necessarily apply to dividends paid by companies established in non-member countries. In that judgment, the Court accepted that it cannot be ruled out that a Member State may be able to demonstrate that a restriction on capital movements to or from non-member countries is justified for a particular reason in circumstances where that reason would not constitute a valid justification for a restriction on capital movements between Member States. This may be the case, in particular, in a situation involving verification of the tax paid by distributing companies established in non-member countries since the Community legislation aimed at ensuring cooperation between national tax authorities, such as Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation (OJ 1977 L 336, p. 15), is not applicable and thus it may be more difficult to determine the tax paid by those companies in the State in which they are resident than it would be in a purely Community context (paragraphs 169 to 171).

(36) – See, as regards the legislation of a Member State providing for a system of tax credits in respect of dividends paid by a resident company to its resident shareholders and to non-resident shareholders where this is provided for by a convention for the prevention of double taxation, Test Claimants in Class IV of the ACT Group Litigation , and, as regards national legislation taxing dividends paid by resident subsidiaries to parent companies established in another Member State and almost fully exempting dividends paid to resident parent companies, Case C‑170/05 Denkavit Internationaal and Denkavit France [2006] ECR I‑11949.

(37) – Test Claimants in Class IV of the ACT Group Litigation , paragraph 70.

(38) – Ibid., paragraph 57 et seq.

(39) – Ibid., paragraph 74.

(40) – Case 270/83 Commission v France [1986] ECR 273, paragraph 26.

(41) – Denkavit International and Denkavit France , paragraph 45 and the case-law cited therein.

(42) – Ibid., paragraph 47.

(43) – Test Claimants in Class IV of the ACT Group Litigation , paragraph 71.

(44) – Title III, point 2, of the order for reference.

(45) – See, inter alia, Burda , paragraph 69 and the case-law cited therein.

(46) – See to this effect Test Claimants in the FII Group Litigation , paragraph 38.

(47) – Case C-157/05 Holböck [2007] ECR I‑4051, paragraph 24 and the case-law cited therein.

(48) – Persche , paragraph 28 and the case-law cited therein.

(49) – Those shareholders have to control, directly or indirectly, at least 25% of the voting rights of the company making the distribution in order to obtain that tax advantage, which means, in other words, that they must own at least 25% of the shares in that company. In accordance with the principle of equal treatment, each partner in a limited partnership has a number of votes equal to the number of shares he owns.

(50) – Paragraph 10 of those observations.

(51) – A capital gain is a profit made when an asset is sold at a higher price than its acquisition cost.

(52) – See the settled case-law referred to in points 13 to 17 of this Opinion.

(53) – Paragraphs 29 and 30.

(54) – See points 69 to 72 of this Opinion. See also Lenaerts, K., and Bernardeau, L., ‘L’encadrement communautaire de la fiscalité directe’, Cahiers de droit européen, 2007, n° s 1 and 2, p. 19, particularly p. 86.

(55) – See, inter alia, Persche , paragraph 41 and the case-law cited therein.

(56) – Case C‑204/90 Bachmann [1992] ECR I‑249, paragraph 28, and Case C‑300/90 Commission v Belgium [1992] ECR I‑305, paragraph 21, respectively; see also the judgment in Papillon , paragraph 43 and the case-law cited therein.

(57) – See Papillon , paragraph 44 and the case-law cited therein; and also Case C-330/07 Jobra [2008] ECR I-0000, paragraph 34 and the case-law cited therein, and Case C-377/07 STEKO Industriemontage [2009] ECR I-0000, paragraphs 52 and 53.

(58) – Case C-168/01 Bosal [2003] ECR I‑9409, paragraph 30.

(59) – See to this effect Case C-251/98 Baars [2000] ECR I‑2787, paragraph 40, and Bosal , paragraph 30.

(60) – Commission v Belgium , paragraph 38 and the case-law cited therein, and paragraph 39.

(61) – See, inter alia, Case C-264/96 ICI [1998] ECR I‑4695, paragraph 26; Joined Cases C‑397/98 and C-410/98 Metallgesellschaft and Others [2001] ECR I‑1727; Case C‑436/00 X and Y [2002] ECR I‑10829, paragraph 61; Case C-324/00 Lankhorst‑Hohorst [2002] ECR I‑11779, paragraph 37, and Test Claimants in the Thin Cap Group Litigation, paragraphs 71 to 74 and the case-law cited therein.

(62) – Paragraph 10 of those observations.

(63) – We recall that the ‘blocked amount’ corresponds to the difference between the cost of acquiring the company shares and their nominal value.

(64) – See to this effect Test Claimants in the Thin Cap Group Litigation, paragraphs 72 to 74 and the case-law cited therein, and Jobra, paragraph 35 and the case-law cited therein.

(65) – See the statement of reasons of the draft law relating to the measure in question (paragraph 20 of the Commission’s observations) and the observations lodged by the German Government (paragraph 10).

(66) – I am referring to commercial conditions on which such companies may agree if they do not belong to the same group.