Opinion of Mr Advocate General Fennelly delivered on 9 September 1999. - Henkel Hellas ABEE v Elliniko Dimosio. - Reference for a preliminary ruling: Dioikitiko Protodikeio Peiraios - Greece. - Directive 69/335/EEC - Indirect taxes on the raising of capital - Tax on the capitalisation of undistributed profits. - Case C-350/98.



European Court reports 1999 Page I-08013



Opinion of the Advocate-General

1 This case raises the question whether a duty imposed on the capitalisation of undistributed, but previously taxed, profits of a capital company constitutes a capital duty prohibited by Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (hereinafter `the Directive'), (1) as amended in particular by Council Directive 85/303/EEC of 10 June 1985 concerning indirect taxes on the raising of capital. (2) If the impugned duty constitutes such a capital duty, the question also is raised whether the Directive confers on Greece a specific entitlement to introduce it even subsequent to its implementation of the Directive.

I - The legal and factual context

A - The facts and national proceedings

2 Pursuant to a resolution of the general meeting of its shareholders on 31 August 1995, Henkel Hellas ABEE (hereinafter `the plaintiff'), a Greek public limited company, capitalised the undistributed profits taxed in its name in respect of the financial years 1972 and 1973 as well as 1981 to 1989, which amounted in gross to a total of GRD 407 317 245 but to only GRD 215 066 276 after deduction of the corporation tax already lawfully paid when the profits in question were realised. The plaintiff submitted to the defendant tax authority various (eleven) declarations for payment, under protest, of the duty due under Article 42(6) of Law 2065/1992 (hereinafter `the 1992 Law'), which provides for a 3% tax on the capitalisation of undistributed profits. The taxable amount on which the duty due was calculated was determined, in accordance with the relevant circular of the Ministry of Finance (POL 1135/23.7.1992), on the conversion of the net profits of GRD 215 066 276 into the gross profits by adding back the corporation tax already paid.

3 The plaintiff included a qualification in each declaration to the effect, first, that, in accordance with Articles 4 and 10 of the Directive, the capitalised profits should not be subject to the contested duty of 3% and, secondly, that the duty payable should be calculated on the basis of the amount of its net profits rather than its gross profits. If the latter, the plaintiff contended that the effective rate of taxation amounted to 5.68%. It subsequently brought an action contending that the imposition of the duty was incompatible with the Directive.

4 The Diikitiko Protodikio (Administrative Court of First Instance), Piraeus (hereinafter `the national court') has taken the view that Article 42(6) of the 1992 Law, in providing `that undistributed profits are subject to a duty at a rate of 3% if they are capitalised, contains a provision which in principle diverges from Directive 69/335, in particular Articles 4 and 10 thereof'. However, it queries whether the fact, recognised by Directive 85/303, that `no capital duty existed in Greece on 1 July 1984' makes a difference. Consequently, it has decided to refer the following questions to the Court of Justice:

`1. Is the duty charged by the Greek State pursuant to Article 42(6) of Law 2065/1992 equivalent to the capital duty laid down by Article 4 of Council Directive 69/335/EEC of 17 July 1969, as subsequently amended, taking into account that on 1 July 1984 no such capital duty existed in Greece?

2. If so, taking account of Greece's special fiscal situation, may the rate of that duty exceed the rate of 1% in the abovementioned directive?'

B - The relevant Community and national law

5 In order to consider these questions, I shall refer to the main provisions of Community law and the relevant provisions of Greek law, bearing in mind that the transaction at issue is the capitalisation of undistributed (but already taxed) profits. The Directive is a harmonising measure aimed, in particular, at `the elimination of tax obstacles which interfere with the free movement of capital'. (3) Article 4(1) lists the transactions, not including that in question, that Member States are in principle obliged to subject to capital duty. Article 4(2), as amended by Article 1(1) of Directive 85/303, prescribes the transactions which may, `to the extent that they were taxed at the rate of 1% as at 1 July 1984, continue to be subject to capital duty'. Those transactions include, under Article 4(2)(a), `an increase in the capital of a capital company by capitalisation of profits or of permanent or temporary reserves'. Article 1(1) of Directive 85/303 also adds the following subparagraph, which is specific to Greece, to Article 4(2): `However, the Hellenic Republic shall determine which of the transactions listed in [Article 4(2)] it will subject to capital duty'. Article 3 of Directive 85/303 provided that Member States were to `take the measures necessary to comply with [it] no later than 1 January 1986', and that they were to inform the Commission of those measures.

6 Article 7 of the Directive, as replaced by Article 1(2) of Directive 85/303, deals with the rate of duty chargeable. The first two sentences of Article 7(1) impose an obligation on Member States to exempt with effect from 1 January 1986 at the latest those transactions which they subjected to capital duty at a rate of no more than 0.5%, or exempted, on 1 July 1984, subject to the conditions of application which they applied at that date. The final sentence contains a further special provision for Greece which mirrors that added to Article 4(2) under which `the Hellenic Republic [is obliged to] determine which transactions it shall exempt from capital duty'. Article 7(2) is worded as follows: `Member States may either exempt from capital duty all transactions other than those referred to in paragraph 1 or charge duty on them at a single rate not exceeding 1%'. In its original 1969 version, Article 7(1) had provided that the rate of duty might `not exceed 2% or be less than 1%'. This maximum was reduced to 1%, with effect from 1 January 1976, by Article 1 of Council Directive 73/80/EEC. (4)

7 Finally, it should be noted that Article 10 provides that:

`Apart from capital duty, Member States shall not charge with regard to companies, firms, associations or legal persons operating for profit, any taxes whatsoever:

(a) in respect of the transactions referred to in Article 4 ... .'

8 The Directive was transposed into Greek law by Law 1676/1986, under Article 21 of which the rate of capital duty is fixed at 1%. However, Article 22(2)(b) of that Law expressly exempts from capital duty any increases in capital by way of capitalisation of profits or reserves. Corporate taxation, conversely, is governed primarily by Decree-Law 3843/1958, under which tax at the rate of 40% is applied to undistributed profits. However, the 1992 Law introduced a transitional regime which amended the system applicable under the 1958 legislation. Article 42(6) of the 1992 Law provides that the distribution or capitalisation of profits by companies is to be subject to taxation at a rate of 3%. It does not apparently provide for the taxation of undistributed profits which are retained in the reserves of a company. It would appear from the observations submitted by the plaintiff that the rate has actually been increased to 5% by Article 13(6) of Law 2459/1997.

II - Observations

9 Written observations have been submitted by the plaintiff, the Hellenic Republic and the Commission. Both Greece and the Commission also submitted oral observations.

III - Analysis

10 The national court has found as a matter of fact that, pursuant to the 1995 shareholders' resolution, the plaintiff's undistributed profits generated in respect of the relevant earlier fiscal years were capitalised. I confess straightaway to finding persuasive the Commission's succinct submission that it is clear from the wording alone of Article 4(2)(a) of the Directive (`an increase in the capital of a capital company by capitalisation of profits or of permanent or temporary reserves') that any taxation of such a transaction amounts to the imposition of capital duty. Greece, on the other hand, contends that the Law at issue merely imposes a second stage of corporation tax, which, although normally falling due on the distribution of dividends, has in this case been imposed on the occasion of their capitalisation; that is to say that it constitutes direct taxation. (5) The plaintiff, however, submits that the capitalisation of profits does not possess the essential characteristics of taxable revenue and may not be equated with a distribution of profits by way of a dividend. Such treatment, if permitted, would constitute a serious gap in the scope and operation of the Directive.

11 This issue is not to be resolved by reference to the treatment of the transaction under national law. The Court has consistently held that `the nature of a tax, duty or charge is to be determined by the Court under Community law, according to the objective characteristics by which it is levied, irrespective of its classification under national law ...'. (6)

12 The Court has had occasion expressly to consider the effect of Article 4(2)(a) of the Directive in Dansk Sparinvest. (7) That case concerned a Danish investment company which, for legal reasons, had been obliged to amend its shareholders' share certificates, and which took advantage of the occasion thus offered to double the number of their nominal shares, whose effect was simply to halve the previous market value of each share. The capital available to the company was not increased. The Danish authorities, none the less, took the view that the increase in the nominal capital constituted a capitalisation of profits or reserves. The Court disagreed. It observed that Article 4(2)(a) covers `transactions where the increase in capital arises from the company's own resources' and which involve, according to the provision itself, `the capitalisation of profits or of permanent or temporary reserves'. (8) It then held that `[s]uch a transfer assumes the existence of two funds, namely the capital, which is separate and distinct and serves as a guarantee for those who have dealings with the company and constitutes evidence of its economic strength, and on the other hand the profits and permanent or temporary reserves, funds which are at the disposal of the shareholders and cease to be under their control when they are capitalised'. (9) It is thus the transfer from the fund controlled by the shareholders to that available to the company which the Court regarded as `constitut[ing] in law a raising of capital which contributes to increasing the company's economic potential'. (10) The Court was not satisfied, however, that any such transfer had occurred in Dansk Sparinvest, since the assets held proportionately by each certificate holder were unaffected. It took the view that `[i]n such circumstances there cannot be said to have been a transfer of the assets referred to in Article 4(2)(a) leading to an increase in capital and it must be held that the transaction does not contribute to the strengthening of the economic potential of the company'. (11)

13 That analysis applies to the converse facts of the instant case. It seems to me that the operations at issue in this case have, unlike those involved in Dansk Sparinvest, precisely the effect of increasing the economic potential of the company. As counsel for Greece acknowledged at the hearing, the plaintiff's shareholders have been issued with new shares in return for agreeing to commit to the company the benefit of the undistributed profits earned during the relevant period. (12) They have thus sacrificed an immediate distribution for a longer-term probable increase in the real value of their shareholding. The tax cannot, as Greece contended, be regarded as tax on revenue derived from undistributed profits. The shareholders' decision to commit undistributed profits to the company must be regarded as a capitalisation transaction for the purposes of Article 4(2)(a) of the Directive.

14 This view is, to my mind, also reinforced by the second company-law directive. (13) By virtue of Article 25(1), `[a]ny increase in capital' of a public company `must be decided upon by the general meeting'. This essential requirement, combined with the provisions of Article 15 restraining distributions which would deplete the capital of a company, demonstrates the difference in character between profits available for distribution and those which have become capital. This procedure was, of course, followed by the plaintiff in the instant case and, for this reason also, the transaction in question falls within the scope of Article 4(2)(a) of the Directive.

15 However, in support of its contention that the impugned duty may be viewed as direct taxation, Greece refers to Frederiksen. In that case, the Court held that the grant of an interest-free loan by a parent company to a subsidiary, by strengthening the economic potential of the latter, `in so far as it enables the company to have the capital available without having to bear its cost', was to `be regarded as likely to increase the value of the company's shares' for the purposes of Article 4(2)(b) of the Directive to the extent of the amount of interest saved. (14) It was also asked whether Article 10 of the Directive precluded the levying of income tax on the grantor in respect of the interest it had agreed to forgo. The plaintiff in the main proceedings argued that such tax amounted in effect to additional capital duty on the capital contribution to the borrower. The Court distinguished clearly between direct taxation and the indirect taxes that the Directive aims to abolish. Thus, the Directive does not preclude Member States from levying income tax in respect of the interest payments forgone under interest-free loan arrangements, which interest only arises after the increase in capital, namely the grant of the loan, has occurred. (15) As Advocate General La Pergola pointed out, `the chargeable event' for income tax purposes `is necessarily distinct from [the] transfer of assets, even from a temporal point of view'. (16) That is quite different from the present case. The chargeable event in Greek law is conterminous with the precise event which gives rise to the increase in the value of the plaintiff's capital, to wit the capitalisation of its earned but undistributed profits.

16 It would appear to follow from these conclusions, with which the Commission agrees, that the imposition of the tax in issue in Greece contravenes Articles 7 and 10 of the Directive. However, the Commission submitted expressly at the hearing (a view at best implicit in its written observations) that Greece was free even in 1992 to impose a new capital tax by virtue of the subparagraph added by Article 1(1) of Directive 85/303, which obliged Greece to determine the transactions listed in Article 4(2) which it would `subject to capital duty'. Greece has not itself subscribed to this argument, presumably because it claims that the tax is not a capital duty and because to accept it would result in the rate of tax that it could legitimately impose being limited to 1%. The Commission went so far as to suggest, in answer to a question at the hearing, that there was and still is no time-limit on the right of Greece to introduce new capital duties on transactions listed in Article 4(2). On the other hand, it maintains that any such duty is subject to the 1% limit imposed by Article 7(2) as substituted by Directive 85/303.

17 In my view, several features of Directive 85/303 point strongly against the Commission's argument.

18 Firstly, the tenor of the recitals in the preamble to Directive 85/303 is that capital duties should be abolished. They are described as being `detrimental to the regrouping and development of undertakings; ... [and] particularly harmful in the present economic situation in which there is a paramount need for priority to be given to stimulating investment ...' (second recital). The `best solution', namely abolition, was not pursued only because of the unacceptable losses of national revenue that would have resulted (third recital). Emphasis was placed on exemptions, particularly for transactions then subject to a reduced rate (third and fourth recitals). The special (fifth) recital relating to Greece then reads:

`Whereas on 1 July 1984 no capital duty existed in Greece; whereas, for this reason, provision should be made for the possibility of introducing such duty in Greece and of exempting certain transactions from it.'

19 Secondly, the subparagraph added to Article 4(2) of the Directive obliged Greece to determine the listed transactions which it would `subject to capital duty'. It did not confer an option unlimited in time. If it had, it would have treated Greece differently from all other Member States. The special treatment afforded to Greece is explained as being due to the absence of any capital duty in Greece on 1 July 1984, a fact which would not justify such a derogation unlimited in time.

20 Thirdly, Article 3 of Directive 85/303 obliged Greece, like all other Member States, to take the necessary implementing measures before 1 January 1986. In my view, this obligation applied equally to the determination of any Article 4(2) transactions which Greece wished to subject to capital duty. That power amounts to a derogating provision which should be construed strictly, all the more so because of the terms of the fifth recital, which explains it and which could justify only the imposition of capital duty occurring within the framework of Greece's implementing measures. The fact that Law 1676/1986, by which Greece implemented Directive 85/303, was adopted somewhat tardily after the 1 January 1986 deadline is immaterial in this respect, since, as is noted in paragraph 8 above, it chose to exempt transactions capitalising profits or reserves, thus exercising one of the options conferred on all Member States to a greater or lesser extent and encouraged in the third recital.

21 Accordingly, I am of the opinion that Greece did not have any right to introduce new capital duties on transactions listed in Article 4(2), once it chose not to do so when implementing Directive 85/303.

22 In deference to Greece's argument that the duty at issue, imposed pursuant to Article 42(6) of the 1992 Law ostensibly as a tax on income, should consequently not formally be classified as constituting capital duty on the transactions covered by Article 4(2)(a) of the Directive, I shall consider its compatibility with the Directive. To my mind, if the Court were minded to take that view, it should, in any event, pursuant to Article 10, classify the duty at issue as a charge having equivalent effect to a capital duty on the capitalisation of profits within the meaning of Article 4(2)(a). In Potente Carni and Cispadana Costruzioni, the Court held that Article 10 of the Directive was to be interpreted as prohibiting `indirect taxes which have the same characteristics as capital duty ...'. (17) This criterion is clearly satisfied in the present case. The impugned duty is imposed on the occurrence of one of the precise economic transactions envisaged by Article 4(2)(a), the capitalisation of undistributed profits. On this analysis, the duty would be incompatible with Article 10, read in combination with Article 4, of the Directive. Moreover, since the imposition of charges covered by Article 10 is absolutely prohibited, subject to exceptions listed in Article 12 which are immaterial to the present case, it would follow that the answer to the national court's first question would have to be that no duty such as that involved in the main proceedings may be imposed by Greece.

23 In view of the answer I propose to the first question, there is no need to consider the second question in detail. It is obvious that all capital duties, including those applied by Greece, are limited by Article 7(2) of the Directive to a maximum rate of 1%. In the present case, if it is true that the tax at issue is a capital duty which exceeds that rate, the essential point is that its imposition is prohibited. Since Greece chose to exempt from capital duty, when implementing Directive 85/303, those transactions which fall to be considered within Article 4(2)(a), it may no longer impose any such duty whatsoever on such transactions, which include one such as that involved in the main proceedings. (18)

IV - Conclusion

24 In the light of the foregoing, I recommend that the Court answer the questions referred by the Diikitiko Protodikio, Piraeus as follows:

(1) A duty charged by a Member State on the capitalisation of undistributed profits, such as that at issue in the main proceedings, constitutes a capital duty on a transaction falling within Article 4(2)(a) of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital, as amended;

(2) A Member State such as the Hellenic Republic, which, when transposing Council Directive 85/303/EEC of 10 June 1985 concerning indirect taxes on the raising of capital into national law, chose to exempt the transactions covered by Article 4(2)(a) of Directive 69/335 from capital duty, is no longer entitled to impose any capital duties on such transactions.

(1) - OJ, English Special Edition, 1969 First Series II, p. 412.

(2) - OJ 1985 L 156, p. 23.

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

(4) - Council Directive 73/80/EEC of 9 April 1973 fixing common rates of capital duty, OJ 1973 L 103, p. 15.

(5) - Greece refers, in this respect, to Case C-287/94 Frederiksen v Skatteministeriet [1996] ECR I-4581 (hereinafter `Frederiksen').

(6) - See Bautiaa, cited in footnote 3 above, at paragraph 39 and the case-law to which reference is there made.

(7) - Case 36/86 Ministeriet for Skatter og Afgifter v Dansk Sparingvest (hereinafter `Dansk Sparingvest') [1988] ECR 409.

(8) - Ibid., paragraph 13.

(9) - Ibid.

(10) - Ibid., paragraph 13. In support, the Court cited Case 270/81 Felicitas v Finanzamt für Verkehrsteuern [1982] ECR 2771, paragraph 16.

(11) - Paragraph 14.

(12) - Apparently, 217 000 new shares with a nominal value of GRD 1 000 were issued.

(13) - Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ 1977 L 26, p. 1.

(14) - Paragraph 13.

(15) - See paragraphs 21 and 22.

(16) - Frederiksen, paragraph 11 of the Opinion. See also the view expressed by Advocate General Cosmas in respect of notaries' fees charged in respect of an increase in share capital in Case C-56/98 Modelo v Director-General dos Registios e Notariado, Opinion of 20 May 1999, paragraph 76.

(17) - Joined Cases C-71/91 and C-178/91 [1993] ECR I-1915, paragraph 29.

(18) - In the light of this conclusion, it is unnecessary for me to consider the validity of the basis of assessment adopted by the Greek authorities pursuant to the administrative circular governing the calculation of the impugned tax (see paragraph 2 above), to which reference is made in the order for reference. Suffice it to say, that if the Court were to agree with the Commission and rule that Greece remains entitled to impose capital duty up to the maximum rate of 1% on transactions falling within Article 4(2)(a) of the Directive, I would recommend that the taxable amount should not be calculated by reference to gross profits, since Article 5(1)(c) of the Directive specifies expressly, as the basis of assessment in the case of capitalisation of profits, `the nominal amount of such increase'.