Opinion of Mr Advocate General Jacobs delivered on 15 June 2000. - Commission of the European Communities v Kingdom of Belgium. - Loans issued abroad - Prohibition of acquisition by Belgian residents. - Case C-478/98.



European Court reports 2000 Page I-07587



Opinion of the Advocate-General

1. In this action brought under Article 169 of the EC Treaty (now Article 226 EC) the Commission seeks a declaration that, by prohibiting Belgian residents from acquiring Eurobonds issued by the Kingdom of Belgium on the Eurobond market, Belgium has failed to comply with its obligations under Article 73b of the EC Treaty (now Article 56 EC).

2. The action concerns a specific issue of Eurobonds made by the Kingdom of Belgium in 1994. Eurobonds are tradeable debt instruments with an original maturity of at least one year, i.e. a contractual obligation by a borrower to make payments of interest on and repayments of principal of borrowed funds at certain fixed dates. Eurobonds are underwritten, distributed and traded on the Eurobond market, which is currently worth over USD 3 000 billion. Issues are denominated in 29 different currencies, including the euro.

3. Several features of the Eurobond market are of particular relevance to this case. In particular, the bonds are issued in bearer form and are denominated in a currency other than that of the issuer and interest is paid free of withholding tax by a bank appointed by the issuer as its paying agent to investors who present coupons or the bond certificates. Most issues are structured so that investors are not required to sign certificates or otherwise identify themselves to the issuer. It is the practice in publicly traded Eurobond issues, especially those which are intended to be placed with retail investors, to respect the anonymous nature of the traditional Eurobond by not requiring any certification or declaration as to the identity of the holder. A substantial part of the market will simply disregard any issue requiring certification of investors' identities.

4. In October 1994 the Kingdom of Belgium made a DEM 1 000 million issue of bearer bonds on the Eurobond market. The issue, denominated in deutschmarks, was underwritten by an international syndicate of banks and financial institutions under the lead management of Dresdner Bank AG and Schweizerischer Bankverein (Deutschland) AG. The conditions of issue contained the following provision:

Sales restrictions

Kingdom of Belgium

The Bonds may not be offered or sold, directly or indirectly, to residents of, or corporations or other legal entities having their domicile in, The Kingdom of Belgium except, provided that the offer or sale does not constitute an offer to the public of The Kingdom of Belgium, to (i) a bank which is so resident or domiciled, (ii) a broker, similar intermediary or institution of international standing whose business involves dealing in securities or managing customers' funds, which is so resident or domiciled and (iii) an insurance company which is so resident or domiciled. ...

5. The issue was expressed to be made in pursuance of the Royal Decree dated 4 October 1994. That Decree reads as follows:

ALBERT II, King of the Belgians,

...

We have decreed and decree:

Article 1. Our Finance Minister is authorised to contract a public loan at a fixed rate for 1 000 million deutschmarks with the Dresdner Bank AG and the Schweizerischer Bankverein (Deutschland) AG in Frankfurt. This loan may be the subject, in whole or in part, of one or more swap transactions.

Art. 2. The terms and conditions of the loan and of any swap transactions will be determined by agreements to be entered into with the financial institutions concerned.

Art. 3. Withholding tax on interest payable on the loan is hereby waived.

Subscription by Belgian residents other than banks, financial intermediaries and institutional investors referred to in the agreements mentioned in Article 2 and the conditions there laid down is not permitted.

The definitive certificates will be delivered to the holders only on production of a certificate certifying that they are non-resident or that they fulfil the conditions referred to in the preceding paragraph.

Art. 4. The agreements referred to in Article 2 and any other document connected with the issue of this loan and any swap operations will be signed in the name of the Belgian State by Our Finance Minister or by a Treasury official to whom Our Finance Minister will give the necessary powers.

Art. 5. This Decree enters into force on 26 September 1994.

Art. 6. Our Finance Minister is responsible for execution of this Decree.

Issued in Brussels, 4 October 1994.

6. The Commission considers that the prohibition on acquisition by Belgian residents constitutes a restriction on the free movement of capital incompatible with Article 73b, which prohibits all restrictions on the movement of capital and on payments between Member States and between Member States and third countries. It accordingly launched the pre-contentious procedure required by Article 169. Belgium responded that the prohibition was prompted solely by fiscal concerns, with a view to ensuring that natural persons resident in Belgium did not evade tax due in Belgium by failing to declare interest received, and that the Royal Decree was based on Article 73d of the Treaty (now Article 58 EC), which permits Member States (a) to apply provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested and (b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation. According to Belgium, the prohibition is neither arbitrary nor discriminatory nor a disguised restriction on the movement of capital and payments; it is moreover proportionate to the aim of preventing tax evasion.

7. The Commission was unconvinced by those arguments and delivered a reasoned opinion to which Belgium made no reply. The Commission accordingly brought these proceedings.

8. Before the Court, Belgium has put forward a different argument from that adduced in the pre-contentious procedure. Its principal defence is that Article 73b is inapplicable to the issue of Eurobonds in question because that issue was a commercial transaction in which the Belgian State participated not in its capacity as public authority but on the same terms as a private borrower. Belgium's arguments that the impugned measure is justified and proportionate are adduced in the alternative only. I will accordingly first consider the principal issue whether the prohibition on acquisition by Belgian residents is in principle contrary to Article 73b. Before turning to the arguments, however, I propose to set out a brief history of the applicable Treaty provisions and a summary of the relevant case-law, since as will be seen the case-law on the previous texts continues to be relevant to the interpretation of Articles 73b and 73d.

Articles 73b and 73d in their historical context

9. The predecessor of Article 73b was Article 67 of the EC Treaty, which provided:

1. During the transitional period and to the extent necessary to ensure the proper functioning on the common market, Member States shall progressively abolish between themselves all restrictions on the movement of capital belonging to persons resident in Member States and any discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested.

2. Current payments connected with the movement of capital between Member States shall be freed from all restrictions by the end of the first stage at the latest.

10. Article 69 empowered the Council to issue directives for the implementation of Article 67. The First Directive for the implementation of Article 67 of the Treaty was adopted on 11 May 1960; the Second Directive, which amended the first, was adopted on 18 December 1962.

11. Those directives divided capital movements into four lists, each with a different level of liberalisation. List A comprised transactions or transfers for which Member States were required to grant all foreign exchange authorisations; they included direct investments in undertakings, investments in real estate, certain personal capital movements and commercial credits and transfers of moneys required for the provision of services. The transactions and transfers in List B required general permission by the Member States; they consisted primarily of operations in securities, in particular the acquisition and liquidation by non-residents of domestic quoted securities and by residents of foreign quoted securities. With regard to List C, Member States could in certain circumstances maintain or reintroduce exchange restrictions operative when the directive entered into force; List C included the issue and placing of securities of a domestic undertaking on a foreign capital market and of a foreign undertaking on the domestic capital market, cross-border acquisition and liquidation of unquoted securities and of units in unit trusts, and the granting and repayment of certain long-term credits. Finally, List D comprised the capital movements which were not required to be liberalised, including the opening and placing of funds on current or deposit accounts, the physical import and export of financial assets, and personal loans.

12. Article 5(1) of the First Directive provided:

The provisions of this Directive shall not restrict the right of Member States to verify the nature and genuineness of transactions or transfers, or to take all requisite measures to prevent infringements of their laws and regulations.

13. That regime continued until 1986, when Directive 86/566 amended the First Directive by in effect merging the old lists A and B into a new List A, subject to the same requirement to grant authorisation as applied to the previous List A, to which were added other transactions and transfers from the former List C, including the items mentioned above, and, as a new item, the acquisition and liquidation by residents of domestic quoted or unquoted securities issued on a foreign market. The remainder of List C was renamed List B and governed by the same system which had applied to List C; similarly, the former List D was renamed List C and remained not subject to liberalisation.

14. Directive 88/361, which came into force on 1 July 1990, finally established the basic principle of free movement of capital as a matter of Community law, requiring Member States to abolish restrictions on movements of capital taking place between persons resident in Member States. Annex I, Nomenclature of the capital movements referred to in Article 1 of the Directive, included the following:

III - Operations in securities normally dealt in on the capital market ...

(a) Shares and other securities of a participating nature ...

(b) Bonds ...

A - Transactions in securities on the capital market

...

2. Acquisition by residents of foreign securities dealt in on a stock exchange ...

4. Acquisition by residents of foreign securities not dealt in on a stock exchange ...

15. Article 4 of Directive 88/361 provided:

This Directive shall be without prejudice to the right of Member States to take all requisite measures to prevent infringements of their laws and regulations, inter alia in the field of taxation and prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information.

Application of those measures and procedures may not have the effect of impeding capital movements carried out in accordance with Community law.

16. Under Article 73a, inserted into the EC Treaty by the Treaty on European Union (the Maastricht Treaty), Articles 67 to 73 were replaced by Articles 73b, c, d, e, f and g with effect from 1 January 1994. Articles 73b and 73d read as follows:

Article 73b

1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.

...

Article 73d

1. The provisions of Article 73b 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.

2. The provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with this Treaty.

3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 73b.

17. I would add that, with effect from 1 May 1999, Articles 73b and 73d have been re-numbered Articles 56 and 58 but are unamended.

Overview of the relevant case-law

18. In the light of the legislative background to Articles 73b and 73d, it is clear that the case-law of the Court on the interpretation of certain aspects of the earlier legislation has continued relevance to those articles. The following cases in particular are helpful in the context of the present case.

19. In Brugnoni, the applicants in the main proceedings, Italian residents, had purchased DEM 5 000 worth of bonds issued by the European Coal and Steel Community and quoted on the German stock exchange for foreign securities. Italian legislation provided that Italian residents could hold shares or bonds issued or payable abroad only on condition that a deposit was paid and the securities lodged with an approved bank. The applicants submitted that the legislation was unlawful. The Court ruled that, although the requirement for a deposit was permissible, having been expressly authorised by a Commission decision, the requirement to lodge the securities was contrary to Article 67 of the Treaty and the First Directive unless it was indispensable for monitoring compliance with the conditions laid down by the legislation of the Member State concerned in conformity with Community law. It was for the national court to ascertain whether the measure was requisite within the meaning of Article 5 of the First Directive for the purposes of preventing infringements of the requirement for a bank deposit lawfully imposed by the Italian legislation.

20. Margetts and Addenbrooke concerned the question whether purchases by residents of domestic securities on a foreign market were within the scope of the rules on the free movement of capital; the Court, while noting that such transactions had been liberalised by Directive 86/566, ruled that they were not liberalised at the material time since that Directive had not then entered into force. In answer to a question put by the Court, the Commission explained that such transactions were not liberalised under the First and Second Directives principally because of

the necessity, felt at the time, to ensure that the floating of a loan abroad would result in a net capital inflow and not simply result in a re-routing of national savings through the financial market of another country. It was necessary to guard against that risk in so far as a loan floated abroad, particularly by the State, very often carries conditions which are superior to those being offered on the domestic market.

If such loans floated abroad could be freely bought by residents at home, the internal cost of public debt could be increased or the desired effect of obtaining a net capital inflow defeated. When the Commission made its proposals for a new directive, it had come to the conclusion that, in the context of the completion of the common market and more particularly the creation of a unified financial structure, and having regard to the present economic circumstances, the maintenance of restrictions of this kind was no longer justified.

21. In Bordessa the Court considered the question whether national legislation making the export of coins, banknotes or bearer cheques conditional on a prior declaration or authorisation could be justified under Article 4 of Directive 88/361. The Court noted that authorisation had the effect of suspending currency exports and making them conditional in each case upon the consent of the administrative authorities, to be sought by means of a special application: such a requirement would cause the exercise of the free movement of capital to be subject to the discretion of the administrative authorities and thus be such as to render that freedom illusory and might have the effect of impeding capital movements carried out in accordance with Community law, contrary to the second paragraph of Article 4. A prior declaration, on the other hand, may be one of the requisite measures which Member States are permitted to take since, unlike prior authorisation, it does not entail suspension of the transaction in question but does still allow the national authorities to exercise effective supervision in order to prevent infringement of their laws and regulations. The Spanish Government had argued that it was only by virtue of a system of prior authorisation that non-compliance could be classified as criminal and hence criminal penalties imposed; the Court rejected that argument on the ground that the Spanish Government had failed to provide sufficient proof that it was impossible to attach criminal penalties to the failure to make a prior declaration.

22. Sanz de Lera concerned the same national legislation as Bordessa; the relevant Community legislation was however Articles 73b and 73d of the Treaty rather than Directive 88/361. The Court stated that Article 73d covered in particular measures designed to ensure effective fiscal supervision and to prevent illegal activities such as, inter alia, tax evasion. The restriction on the free movement of capital resulting from the requirement of authorisation could be eliminated without thereby detracting from the effective pursuit of the aims of those rules: it would be sufficient to set up an adequate system of declarations indicating the nature of the planned operation and the identity of the declarant, which would enable the competent authorities to impose the requisite penalties if national legislation were being contravened. As regards the Spanish Government's argument that only a system of authorisation makes it possible to establish that a criminal offence has been committed and impose penalties under criminal law, the Court stated that such considerations could not justify the maintenance of measures which were incompatible with Community law.

23. More recently, Sandoz concerned legislation imposing stamp duty on loans contracted in another Member State. The Court noted that such legislation deprived residents of a Member State of the possibility of benefiting from the absence of taxation which may be associated with loans obtained outside the national territory. It was accordingly likely to deter such residents from obtaining loans from persons established in other Member States and hence constituted an obstacle to the movement of capital within the meaning of Article 73b. Since however the effect of the legislation was to compel the borrowers to pay the duty, it prevented taxable persons from evading the requirements of domestic tax legislation through the exercise of freedom of movement of capital guaranteed by Article 73b(1). Such legislation was therefore essential in order to prevent infringements of national tax law and regulations as provided for in Article 73d(1).

24. Finally, in Konle the Court considered inter alia the lawfulness of national legislation requiring prior authorisation of the acquisition of land. The Court accepted that the reasoning on which it had based its conclusions in Bordessa and Sanz de Lera - namely that a system of prior authorisation for currency exports could render the free movement of capital illusory and that an adequate system of declaration would attain the same end without restricting that freedom - could not be applied directly to the case before it since a declaration procedure would not enable the aim of the legislation (to ensure that the land was not used as a secondary residence) to be achieved. It continued, however, by stating that an infringement of the national legislation on secondary residences could be penalised by other means; in those circumstances, the authorisation procedure constituted a restriction on capital movements which was not essential if infringements of the national legislation on secondary residences were to be prevented.

The applicability of Article 73b

25. At issue in these proceedings is a prohibition on the acquisition of Eurobonds by the residents of a Member State. It is undisputed that such a prohibition, unless justified, is in itself contrary to the rules on the free movement of capital if imposed by a Member State: an outright prohibition is clearly contrary to a Treaty provision prohibiting restrictions. It is moreover clear from the case-law of the Court that the Treaty rules on the free movement of capital apply to restrictions imposed by a Member State on the acquisition of non-domestic securities by its nationals. It is also clear, as the Commission points out, that rules imposed by a Member State which are liable to dissuade or deter the parties concerned from exercising a right which constitutes a component element of the free movement of capital, or which require prior authorisation therefor, are in principle contrary to Article 73b. It is accordingly indisputable that a Member State which by prohibiting its residents from acquiring non-domestic securities goes far beyond dissuading or deterring residents from subscribing thereto, or requiring prior authorisation therefor, infringes Article 73b unless the measure is justified.

26. There are however two further questions to be addressed in determining whether Article 73b is applicable in the circumstances of the present case. First, if a Member State prohibits its residents from acquiring Eurobonds issued by that State, does that amount to a restriction on the movement of capital between Member States within the meaning of Article 73b; in other words, is there a sufficient intra-Community element for the Treaty rules to apply? Secondly, does the prohibition on restrictions on movement of capital in Article 73b apply to the actions of Belgium which have given rise to these proceedings or were those actions, as Belgium has pleaded, not carried out in its capacity as a Member State, thus precluding any liability for infringement?

The intra-Community element

27. Although Belgium does not seek to argue that, since the measure in question concerns Eurobonds issued by the Kingdom of Belgium and is addressed solely to Belgian residents, the situation is purely internal to Belgium, the Commission makes several preliminary submissions in support of the view that there is none the less a sufficient intra-Community element for the Treaty provisions on the free movement of capital to apply. Since that position is not contested, I will not set out the Commission's arguments in full. I fully endorse, however, the points that the principle of free movement of capital confers on natural persons the right to invest freely by acquiring securities issued in another Member State; that the issue in question is in any event international in nature: it was denominated in deutschmarks, subscribed by an international syndicate of banks and financial institutions, admitted to the Frankfurt Stock Exchange and governed by the laws of the Federal Republic of Germany; and that, even before the process of liberalisation of capital movements had been completed, the Court had held contrary to Article 67 of the EC Treaty (the predecessor of Article 73b; see paragraph 9 above) restrictions by a Member State on access by its residents to foreign capital.

Is Belgium liable as a Member State for the conditions of issue?

28. There are two connected aspects to Belgium's principal defence.

29. First, Belgium argues that the prohibition on subscription which triggered these proceedings is not a State measure of general application but a contractual term negotiated in the context of a transaction entered into on the same terms as a private borrower. The Royal Decree of 4 October 1994 simply authorises the Minister to act in a specific transaction on conditions to be agreed or there laid down, and it is only in that context that the impugned restriction on sale is mentioned in the Royal Decree. The restriction is applicable to third parties not by virtue of the decree but solely as a contractual provision governing the conditions of the borrowing. The decree is accordingly not a general legislative measure falling within the scope of Article 73b.

30. Secondly, Belgium submits that both the Community legislature, in Directive 80/723 on the transparency of financial relations between Member States and public undertakings, and the Court, in Piacentino and LTU v Eurocontrol, have drawn a distinction between the role of the State as public power and as private owner or operator. That distinction is important since actions by the State as private operator vis-à-vis other private operators cannot be caught by Article 73b; that provision has no horizontal direct effect. That article accordingly does not apply to a provision such as the impugned restrictions on sale included in the conditions of a loan issued by a State on the same terms as a private borrower.

31. The Commission responds that the State alone, in its capacity as public authority, is competent to waive withholding tax on interest payable on a given issue and to prohibit its fiscal subjects from subscribing to a Eurobond issue. Article 3 of the Royal Decree is a measure of general economic policy taken by the Belgian Government acting as public power and could not have been taken by a private investor issuing bonds on the Eurobond market.

32. The Commission adds that the examples given by Belgium cannot be extrapolated to the present case. Directive 80/723 concerns relations between Member States and public undertakings within each Member State and has nothing to do with the free movement of capital between Member States. Piacentino is irrelevant since in this case it is manifest that Belgium did not act in the same legal conditions as private operators: no private investor has the same power as the Belgian State and no private investor can decide to waive withholding tax on interest payments or prohibit its subjects (or other category of persons) from subscribing to an issue of Eurobonds. LTU v Eurocontrol is similarly irrelevant to the issue in the present case, concerning as it does the interpretation of the phrase civil and commercial matters within the meaning of the Brussels Convention.

33. As for the argument that the terms of the disputed issue are purely contractual, the Commission notes that, although the Royal Decree provides that the terms and conditions of the issue are to be determined by agreements to be entered into with the financial institutions concerned, the term in question was not so determined by agreement but derives from a regulatory act of the Minister for Finance. The Commission concludes that, since Belgium cannot be regarded as acting as a private investor, the fact that Article 73b has no horizontal direct effect does not mean that it is inapplicable.

34. Belgium's argument amounts to the proposition that the impugned measure, since it was not taken by the Belgian State in its capacity as public authority, cannot constitute an infringement within the meaning of Article 169; indeed the argument is expressed in this way in its rejoinder.

35. Article 73b prohibits all restrictions on the free movement of capital. The measure challenged by the Commission in these proceedings is an outright prohibition on the acquisition of certain Eurobonds by Belgian residents imposed by Royal Decree. As mentioned above, it is undisputed that such a prohibition, unless justified, is in itself contrary to the rules on the free movement of capital; Belgium's argument goes solely to the capacity in which the prohibition was imposed.

36. I cannot accept that argument. The prohibition is contained in the second paragraph of Article 3 of the Royal Decree. Belgium accepted at the hearing that the first paragraph of that article was a regulatory measure. It cannot in my view be maintained that a provision laid down in a Member State's legislation is not adopted by that State in its capacity as Member State. Neither the case-law referred to by Belgium nor Commission Directive 80/723 is relevant.

37. Piacentino concerned a specific provision of Community legislation which provided for public bodies to be treated as a taxable person in respect of activities or transactions where treatment as a non-taxable person would lead to significant distortions of competition. No such provision is at issue in the present case. In Piacentino moreover the Court stated: In so far as that provision makes such treatment of bodies governed by public law conditional upon their acting "as public authorities", it excludes therefrom activities engaged in by them not as bodies governed by public law but as persons subject to private law. A Member State legislating by Royal Decree is manifestly not acting as a person .... subject to private law.

38. The second case relied on by Belgium, LTU v Eurocontrol, in which the Court gave an autonomous interpretation of the concept of civil and commercial matters for the purposes of the Brussels Convention, is also of no assistance. The Court stated: Although certain judgments given in actions between a public authority and a person governed by private law may fall within the area of application of the Convention, this is not so where the public authority acts in the exercise of its powers. That proposition merely recognises that a public authority may sometimes act in the exercise of its powers and may sometimes act in another capacity. The public authority involved in the main proceedings in that case was the European Organisation for the Safety of Air Navigation (Eurocontrol) and the activity at issue was the imposition of route charges on owners of aircraft for the use of air safety services. A ruling by the Court that a judgment given in an action brought by Eurocontrol seeking payment of such charges is not within the scope of the Convention cannot support the argument that a Member State which by Royal Decree imposes a prohibition on the acquisition of Eurobonds by its residents is not acting in violation of the freedom of movement of capital.

39. Finally, Directive 80/723 seeks to ensure the effective application of the Treaty provisions on State aid without discrimination between public and private undertakings. More specifically, its purpose is to facilitate the monitoring function of the Commission, namely to enable the Commission to determine whether aid is involved when funds are provided, directly or indirectly, by public authorities to public undertakings. The context in which the Directive was adopted is clearly wholly different from the facts at issue in the present case, and I cannot see why the distinction drawn by the Directive between the role of the State as public authority and its role as proprietor is relevant here. The Court has moreover stated that that distinction flows from the recognition of the fact that the State may act either by exercising public powers or by carrying on economic activities of an industrial or commercial nature by offering goods and services on the market; on the basis of that distinction a prohibition imposed by Royal Decree would in any event appear to be an exercise of public powers rather than the carrying on of commercial activities.

40. I accordingly conclude that the measure at issue in the present proceedings which prohibits certain residents of Belgium from acquiring Eurobonds issued by the Kingdom of Belgium in October 1994 infringes Article 73b unless it is justified.

Possible grounds of justification for the prohibition

41. Belgium submits in the alternative that the impugned measure, if found to be imputable to the State, is within the scope of a number of grounds of justification and is proportionate.

42. Belgium addresses the issues of grounds of justification and of proportionality separately. I shall first consider its arguments that there are grounds on which the prohibition on subscription is justified. There are three submissions to this effect, which appear to be presented as distinct grounds of justification. First, Belgium refers to Article 73d(1)(b), which permits Member States to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation, provided that the measures do not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments. Next, Belgium pleads two further grounds of justification for the measure not based on the Treaty but drawn by analogy from the Court's case-law on possible grounds of justification for fiscal restrictions on the freedom of establishment: it invokes the need to preserve fiscal coherence, such as the Court acknowledged in Bachmann and Commission v Belgium, and the need to ensure the effectiveness of fiscal supervision, recognised by the Court as an overriding requirement of general interest in Futura.

Article 73d(1)(b)

43. With regard to Article 73d(1)(b), Belgium notes that, since one of the essential conditions of the Eurobond market is that no tax is levied by the issuer, all Eurobond documentation must contain either a requirement that no tax is withheld by the borrower when making interest payments or a gross-up clause. The use by Belgium of the Eurobond market thus involves a fiscal difficulty: since exemption from withholding tax is inherent in that market, steps must be taken to ensure that Belgian residents do not avoid tax by subscribing to loans issued abroad. Exclusion of Belgian residents from the issue is the only measure which will avoid discrimination between Belgian residents who subscribe to issues in Belgium, and are therefore subject to withholding tax, and Belgian residents who are not subject to that tax because they have acquired Eurobonds which are exempt from withholding tax. The prohibition is justified on the principal ground that Belgium needs to be able to operate on the international financial markets in such a way as to manage its debt properly and on an equal footing with private operators. It must therefore be in a position to comply with the essential characteristics of that market since otherwise its loan will not be classified as a Eurobond and it will have no assistance from financial intermediaries and no investor confidence.

44. The thrust of Belgium's argument appears thus to be that the prohibition on subscription is necessary in order to enable Belgium to raise loan finance on the international money markets. Whatever the economic validity of that argument, I do not see how in itself it can come within the terms of Article 73d(1)(b).

45. It may be however that Belgium is seeking to repeat the argument it put forward in the pre-litigation procedure, namely that the measure falls within Article 73d(1)(b) since it aims to prevent tax evasion. It is clear both from the wording of that provision, which refers to measures to prevent infringements of national law ... in the field of taxation, and from the case-law of the Court, that measures for the prevention of tax evasion may fall within the scope of the Treaty derogation.

46. It is also clear both from the wording of Article 73d(1)(b), which is limited to requisite measures, and from the case-law of the Court that a measure must satisfy the requirement of proportionality before it can fall within the derogation in Article 73d(1)(b); I will consider below whether the measure impugned in these proceedings satisfies that requirement.

47. The Commission makes a further point, raising the question whether a Member State may invoke Article 73d to justify a measure which purely and simply prohibits the free movement of capital. That argument however seems to me to go to the issue of proportionality, and I will accordingly consider it in that context.

The effectiveness of fiscal supervision

48. Belgium also submits that the measure is justified on the ground of the need to ensure the effectiveness of fiscal supervision, recognised by the Court as an overriding requirement of general interest in Futura, and argues that, since in this area there has been no harmonisation, Member States are entitled to take the necessary measures at national level to avoid tax avoidance and evasion.

49. The Court in Futura appeared to accept that even a discriminatory restriction on the freedom of establishment (in that case, a requirement that companies established outside Luxembourg with a branch in that State keep separate accounts for its branch's activities complying with Luxembourg tax accounting rules and hold such accounts at the place of establishment of its branch) could be justified by overriding requirements of general interest within the meaning of Cassis de Dijon, which include the effectiveness of fiscal supervision. Subsequently however it has been implied in several cases that that proposition is incorrect, and that the effectiveness of fiscal supervision can justify only measures which are applicable without distinction or, put another way, that measures which apply differently - such as a prohibition expressly directed at residents - may be justified only by express derogations in the Treaty.

50. I do not consider however that it is necessary to enter into that debate, although I would concur with the view that discriminatory measures may be justified only by derogations in the Treaty. As mentioned above, it is clear that measures for the prevention of tax evasion - provided that they are proportionate - fall within the scope of Article 73d(1)(b); the Court moreover stated in Sanz de Lera that measures which are necessary to prevent the commission of certain infringements and are permitted by Article 4(1) of Directive 88/361, including those designed to ensure effective fiscal supervision, are also covered by Article 73d(1)(b). There is accordingly no need to invoke the concept of effective fiscal supervision as an overriding requirement on the basis of Futura.

The need to preserve fiscal coherence

51. Belgium also refers by way of justification to the need to preserve fiscal coherence, such as the Court acknowledged in Bachmann and Commission v Belgium.

52. Bachmann is a case which has also aroused some debate, since the Court again appeared to accept that a measure which applied differently could be justified by the ground of fiscal coherence, an apparently new overriding requirement within the meaning of Cassis de Dijon. However, the Court in Bachmann appears to have accepted that, assessed in the context of freedom of movement of workers, the legislation at issue in fact applied without distinction (as to nationality of workers), and its ruling should perhaps be considered against that background. In any event, I do not consider that the justification of fiscal coherence is applicable to the present case for the following reasons.

53. Bachmann and Belgium, the only cases in which this justification has been permitted, concerned the question whether national legislation which made the tax deductibility of pension and life assurance contributions conditional upon their being paid in Belgium was compatible with Article 48 of the EC Treaty (now, after amendment, Article 39 EC). The Court was clearly much influenced by the connection or direct link between the deductibility of contributions and the liability to tax of sums payable by the insurers under pension and life assurance contracts, which meant that the loss of revenue resulting from the deduction of life assurance contributions from total taxable income was offset by the taxation of pensions, annuities or capital sums payable by the insurers, and ruled that provisions such as those at issue were justified by the need to ensure the coherence of the tax system of which they formed part. There have been numerous attempts by Member States since those judgments to argue that particular fiscal provisions were justified by the need to preserve fiscal coherence. In all those cases the Court has rejected the argument on the basis that there was no such direct link.

54. In this case, the Commission disputes that the prohibition can be justified on the ground of fiscal coherence since there is no such direct link between a fiscal advantage (e.g. deductibility of insurance premiums) and a corresponding disadvantage (e.g. liability to tax of sums payable under the insurance policy): the State, in choosing to raise money on the Eurobond market, has voluntarily waived the advantage, namely subjecting the interest paid to a withholding tax. Moreover the prohibition cannot be analysed as a corresponding disadvantage because first any interest received by Belgian residents is in principle taxable in Belgium and secondly the problem of tax evasion applies to any foreign income and in particular to income from securities acquired by Belgian residents in other Member States.

55. In Belgium's view, however, there is the requisite correlation. The waiver of withholding tax is not a fiscal policy measure; it is imposed on the Belgian State by the very nature of Eurobond borrowing. It is an indispensable condition of the State's being able to raise funds on that international market on terms reflecting the criteria for the good management of public debt. Admittedly, when the State borrows on the domestic market tax can be deducted at source. However, the State cannot be confined to such borrowing: that might lead to a loss for State revenue because of the less favourable market conditions; moreover and above all, domestic borrowing cannot provide the State with the necessary finance, in particular where, as here, debt must be refinanced in another currency. The State must therefore be able first to ensure that the exemption from withholding tax does not become a means of tax evasion and secondly to avoid the creation of both a domestic market subject to withholding tax and a Eurobond market without withholding tax accessible to individuals resident in Belgium. The prohibition on sale enables those requirements to be reconciled and accordingly ensures coherence in issuing policy.

56. There is in addition, in Belgium's view, an obvious correlation between the possibility of levying withholding tax and the final tax. Statistics show that income from securities, in particular from abroad, which is not subject to withholding tax is almost never declared. The close link between the waiver of withholding tax - inevitable consequence of using Eurobonds - and the almost certain loss of tax on interest payable on the bonds therefore forces the State to find a coherent solution to preserve the interests of the Treasury without providing Belgian taxpayers with a means of tax evasion. That solution should not be that the State abandons borrowing on the Eurobond market. Nor can it be a system of certification such as that advocated by the Commission, since such a mechanism is generally refused by the market and by financial intermediaries and would thus seriously undermine the State's ability to borrow on the Euro-market on favourable terms. Only prohibition of sale enables the two overriding requirements to be reconciled. Accordingly, the coherence of the system of State issues and revenue is ensured by the disputed measure while leaving the State the freedom to operate on the Eurobond market.

57. I confess to finding it difficult to follow Belgium's arguments. It is not clear to me what correlation is being asserted. The waiver of withholding tax is not at issue in these proceedings. There is no fiscal disadvantage being challenged, such as in the cases in which the justification has hitherto been pleaded, which concerned specific and identifiable fiscal advantages or disadvantages. At issue here is a prohibition on the acquisition of certain securities. Belgium appears to be arguing that that prohibition is justified by, on the one hand, its need to refinance its public debt by recourse to the Eurobond market and, on the other hand, its need to prevent tax evasion. The context thus sketched in which the impugned measure was taken is to my mind far removed from the direct offsetting of counterbalancing fiscal advantages and disadvantages which are the only circumstances which the Court has accepted as ensuring the need for fiscal coherence.

58. I accordingly conclude that the prohibition on the acquisition by residents of the Eurobonds in question cannot be justified on the ground of fiscal coherence. As indicated above, however, I consider that the prohibition may be justified as a measure designed to prevent tax evasion within the meaning of Article 73d(1)(b), subject to its being proportionate. I shall accordingly now consider that issue.

Is the prohibition proportionate?

59. Even though falling within one of the grounds of justification recognised by Article 73d(1)(b), a measure which restricts the free movement of capital will be lawful only if it is in addition proportionate: it must be appropriate for securing the attainment of the objective it pursues and must not go beyond what is necessary in order to attain it.

60. The Commission considers that, even if the prohibition were justified on one of the grounds pleaded by Belgium, it is in any event not proportionate since it is neither necessary nor appropriate in order to achieve the end pursued.

61. From an early stage in the pre-litigation procedure Belgium has asserted that the prohibition is compatible with Community law since the exclusion of Belgian residents from acquiring Government bonds issued in deutschmarks prevents such persons from evading Belgian tax by not declaring the interest received thereon, the Belgian State having waived the withholding tax normally deducted from interest payable on securities. The Commission responds that, since Belgium itself chose to raise money by way of a Eurobond issue, of which it set the conditions, it cannot (in effect) plead necessity.

62. Belgium retorts that the borrowing at issue could not have been replaced by other types of borrowing which did not have the same risk of tax evasion because market conditions for Eurobonds are totally different from and more favourable than those for domestic borrowing; a domestic issue was not a viable substitute for the issue concerned. The Belgian Government sets out detailed reasons for its recourse to borrowing deutschmarks in 1994, principally connected with the problems in the EMS in 1993 which led to higher interest rates in Belgium than in Germany. Moreover, private issues raise much less money and are more difficult to place. The two types of borrowing are accordingly not interchangeable.

63. In any event, when a State chooses, for the above reasons, to raise money on the international market, it must respect the rules applying on that market. Community law should not prevent a Member State from taking account in managing its debt of budgetary and economic constraints and from using to that end the most appropriate financial instruments to which it may have access on the international market. Similarly, Community law should not limit a Member State's choice, in particular in comparison with the private operators with which it is in competition.

64. Finally, Belgium seeks to refute the Commission's argument that there were alternatives to the issue in question which would have enabled a major obstacle to the free movement of capital to be avoided and enabled Belgium to attain its principal objective of counteracting tax evasion while at the same time refinancing its debt. First, according to the Commission, a declaration procedure could have enabled recipients of income from securities to be individually identified. Secondly, under Directive 77/799/EEC concerning mutual assistance in direct taxation the authorities could always request the authorities of another Member State to provide them with all the information enabling them to ascertain the correct amount of tax payable by a taxpayer. Belgium submits that neither measure would be a viable alternative. First, statistics show that only 0.5% of Belgian residents declare income on securities paid abroad. Secondly, Belgium could not rely on Directive 77/799 for assistance since the Member State where the issue was made may be bound by banking secrecy laws and hence by virtue of Article 8(1) of the Directive not be subject to the requirement to provide information; even if that were not so, the fact that Belgium has banking secrecy laws would entitle other Member States to withhold information from Belgium on the ground of reciprocity recognised in Article 8(3).

65. Belgium's arguments are thus essentially as follows: (i) recourse to the Eurobond market was necessary in order to refinance its debt; (ii) the prohibition was necessary in order to prevent tax evasion; (iii) the prohibition was appropriate, since no alternative measure would have been effective.

66. I am not convinced that the first proposition is relevant to an assessment of proportionality. What is at issue here is the lawfulness of the prohibition, not the lawfulness of Belgium's recourse to the Eurobond market. In any event, I do not see how the latter can be regarded as necessary as a matter of Community law. The Court has made it clear that it permits recourse to the Treaty derogations from the fundamental freedoms only where the conditions imposed by those derogations are strictly satisfied.

67. As for the second proposition, it is clear that in principle a national measure which has the effect of preventing taxable persons from evading the requirements of domestic tax legislation through the exercise of freedom of movement of capital guaranteed by Article 73b(1) of the Treaty may be lawful by virtue of Article 73d(1)(b). In the only case where that argument has succeeded, however, the measure at issue was simply legislation imposing duty on loan agreements wherever contracted, which deprived residents of the Member State concerned of the possibility of benefiting from the absence of taxation which might be associated with loans contracted outside the national territory. The Advocate General expressly stressed that the legislation did not impose a prohibition on contracting cross-border loans.

68. That brings me to Belgium's third proposition, that the prohibition was appropriate, since no alternative measure would have been effective. However, it seems to me manifest from Belgium's own assertions that a total prohibition is not apt to prevent tax evasion. As the Commission points out, the prohibition does not prevent Belgian residents from acquiring Eurobonds issued by other borrowers, in respect of which they will also be exempt from withholding tax, and it has not been shown that Belgian residents wishing to invest choose instead Belgian Government bonds issued on the domestic market which are subject to withholding tax. If indeed it is true that 99.5% of Belgian residents who receive income on securities paid abroad evade the payment of tax, it seems implausible to say the least that they will have responded to the prohibition on acquiring the Eurobonds at issue by voluntarily investing in securities which were subject to withholding tax when securities not so subject were equally available. Moreover, as the Commission points out, the Court stated in Leur-Bloem that a general presumption of tax evasion could not justify a general fiscal measure inconsistent with the aims of a directive; that conclusion applies a fortiori where what is at issue is an outright prohibition of the exercise of a fundamental freedom such as that guaranteed by Article 73b.

69. That in my mind is conclusive, since it means that the requirement of proportionality has not been met. In those circumstances, I do not consider it necessary to examine whether Belgium could, as the Commission has suggested, have met its objective of preventing tax evasion by measures less restrictive of the free movement of capital than the outright prohibition on subscription at issue in these proceedings, such as those suggested by the Commission.

Conclusion

70. Accordingly I am of the opinion that the Court should:

(1) declare that, by prohibiting Belgian residents from acquiring Eurobonds issued by the Kingdom of Belgium on the Eurobond market, the Kingdom of Belgium has failed to comply with its obligations under Article 73b of the EC Treaty (now Article 56 EC);

(2) order the Kingdom of Belgium to pay the costs of these proceedings.