OPINION OF ADVOCATE GENERAL

LÉGER

delivered on 14 April 2005 ( )

Case C-253/03

CLT-UFA SA

v

Finanzamt Köln-West

(Reference for a preliminary ruling from the Bundesfinanzhof (Germany))

(Freedom of establishment – Tax legislation – Taxes on company profits – Final taxation of the profits of a branch of a non-resident company – National legislation which excludes the permanent establishments of non-resident companies from the possibility of reducing the rate of tax on their profits – Not permissible)

1. The question of the compatibility with Community law of national tax legislation which subjects a company established in a Member State to different rules according to whether it has opened a secondary establishment in another Member State in the form of a subsidiary, which has its own legal personality, or a place of business such as a branch, has already given rise to a number of references for preliminary rulings and continues to raise complex questions.

2. In the field of direct company taxation, such differences in the applicable rules have to do mainly either with the transnational offsetting of losses ( ) or with the grant of a tax concession in the taxation of profits. This case concerns the second category of differences.

3. It arises from the dispute between the company CLT-UFA SA ( ) and the Finanzamt Köln-West (District Tax Office, Cologne-West) (Germany) ( ) concerning the taxation of that company’s profits for the year 1994. CLT-UFA is a société anonyme (public limited company) which has its seat and business management in the Grand Duchy of Luxembourg and which carried on its activities in Germany in the year 1994 through a permanent establishment, which does not have its own legal personality, in the form of a branch. The company was taxed by the German authorities on the profits made by its branch in Germany and that taxation was set at a rate of 42% of those profits, in accordance with the national legislation in force.

4. CLT-UFA disputes that rate of tax on the ground that, if it had carried on its activities in Germany in the financial year at issue through a subsidiary and if that subsidiary had transferred its profits in full to CLT-UFA, the rate would have been reduced to 33.5% or 30%.

5. The Bundesfinanzhof (Federal Finance Court) (Germany) is asking whether such rules are compatible with Articles 52 ( ) and 58 ( ) of the EC Treaty and, if appropriate, whether the rate of tax on the profits made by the appellant in Germany must be reduced to 30%.

I – Community law

6. The field of direct taxation, which covers all charges to tax levied ‘directly’ on taxpayers, such as personal income tax and corporation tax, ( ) continues to fall within the competence of the Member States. Under Article 220 of the EC Treaty, ( ) it is for the Member States, ‘so far as is necessary’, to enter into the negotiations necessary to avoid the double taxation of their nationals within the Community. The EC Treaty does not therefore confer any powers on the Community legislature in matters of direct taxation, with the exception of Article 100 of the EC Treaty, ( ) which permits the Council, acting unanimously, to adopt directives which seek to approximate national laws in the fields which directly affect the establishment or functioning of the common market.

7. Thus, as regards the taxation of undertakings, despite the significant efforts made by the Commission of the European Communities to achieve a minimum degree of harmonisation among the national tax systems, ( ) the Member States retain the freedom to determine the basis of assessment and rate of tax applied to company profits.

8. However, that power is not without limits. It is settled case-law that the Member States must exercise their powers in the field of direct taxation in accordance with Community law. ( ) It follows that the rules by which the Member States determine how company profits are to be taxed and how the double taxation of those profits is to be avoided must not infringe the fundamental freedoms, such as the freedom of establishment enshrined in Articles 52 and 58 of the Treaty.

9. Article 52 of the Treaty, which is commonly said to ‘constitute one of the fundamental provisions of Community law’ and is directly applicable in the Member States, ( ) provides that the freedom of establishment of the nationals of a Member State in the territory of another Member State is to include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings under the conditions laid down for its own nationals by the law of the country where such establishment is effected. Under the second sentence of the first paragraph of that article, elimination of the restrictions on the freedom of establishment is also to apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of another Member State.

10. For its part, Article 58 of the Treaty extends to companies or firms formed in accordance with the law of a Member State, having their registered office within the Community and pursuing a profit-making aim, the rights conferred by Article 52 of the Treaty on natural persons. The Court has held that, in this context, the corporate seat performs a function similar to that of the nationality of natural persons in that it serves as the connecting factor with the legal system of a particular State. ( )

11. The purpose of the freedom of establishment guaranteed by the Treaty is therefore to allow companies having their seat in another Member State to carry on their activities in the State of establishment in accordance with the rules applicable in that State to national companies. Based on the same principles as the provisions of the Treaty on the freedom of movement for workers, ( ) the freedom of establishment prohibits, in principle, all overt discrimination by reason of nationality or, in the case of a company, the location of its seat in another Member State. ( ) It also prohibits indirect or covert forms of discrimination, that is to say rules which, by the application of criteria of differentiation other than those of nationality or the corporate seat, lead in fact to the same results. ( )

12. The freedom of establishment also precludes measures in force in the host State which, although applicable without distinction to all national and foreign undertakings, prohibit, impede or render less attractive the exercise of that freedom, ( ) as well as measures by which the State of origin hinders the establishment in another Member State of a company incorporated under its legislation. ( )

13. Moreover, the second sentence of the first paragraph of Article 52 of the Treaty, in conjunction with Article 58 of the Treaty, grants companies the freedom to choose the most appropriate legal form in which to pursue their activities in another Member State, be it an agency, a branch or a subsidiary. ( )

14. Finally, reference must be made to Council Directive 90/435/EEC ( ) which, although it does not cover transfers of profits from a branch to a parent company having its seat in another Member State, none the less has a bearing on the answer to be given to the questions submitted by the referring court. That directive introduced common rules designed, inter alia, to eliminate the double taxation of income distributed by subsidiaries to parent companies having their seat in another Member State. It essentially provides that, in order to prevent those profits from being taxed a second time when they are distributed to the parent company, the State of the parent company must exempt them from tax or, if it taxes them, allow the parent company to offset against its own tax liability the fraction of the tax paid by the subsidiary on the profits distributed. The directive is not to affect the application of domestic or agreement-based provisions designed to eliminate or lessen economic double taxation of dividends.

II – National law

15. The German tax legislation which was applicable in the financial year at issue is described by the referring court as follows.

16. With regard, first of all, to the taxation in Germany of profits made in that Member State by a branch of a company having its seat in another Member State, national law provided that foreign companies which have neither their central administration nor their seat in Germany are subject to corporation tax in that State only to a limited extent, that is to say only on the income generated in that State. ( ) Income which may be taxed in Germany in this way includes profits made in that State by a permanent establishment, such as a branch.

17. In addition, under a convention concluded between the Federal Republic of Germany and the Grand Duchy of Luxembourg, the profits of a company established in Luxembourg can be taxed in Germany only on the income generated by a permanent establishment of that company which is located in the territory of the latter State. The profits of that permanent establishment are calculated by attributing to it the profits which it would have made if it had carried on the same or similar activities under the same or similar conditions as an independent undertaking. ( )

18. The rate of corporation tax applicable to the profits of a permanent establishment is set at 42% of those profits. ( )

19. With regard to the taxation in Germany of profits made in that State by a subsidiary of a non-resident company, because their seat or business management is located in Germany, subsidiaries are subject in that State to unlimited liability to corporation tax. ( ) If those profits are retained, the rate of corporation tax is set at 45% of the profits.

20. If those profits are distributed by a subsidiary to its parent company up to 30 June 1996, without having previously been retained, the tax payable by the subsidiary on those profits is set at or reduced to 30% of those profits. The parent company is also taxed at a rate of 5% of the amount received, which brings the overall tax charged on the fully-distributed profits made by the subsidiary to 33.5% of the taxable income. ( )

21. If those profits are distributed to the parent company after 30 June 1996, the rate of tax is reduced to 30% and the parent company is not liable to additional taxation. ( )

22. Amendments were made to the German legislation subsequently to the facts of the main proceedings. With effect from the 2001 financial year, the tax on company profits made in Germany has been set at the single rate of 25%, irrespective of whether the company is subject to limited or unlimited tax liability in that State. ( )

III – The questions referred

23. CLT-UFA does not dispute the assessment of the amount of the profits made by its branch in the financial year at issue, but only the 42% rate of tax. Its action challenging that rate having been dismissed by the Finanzgericht (District Tax Court), the company brought before the Bundesfinanzhof an application for review on a point of law by which it seeks an order setting aside the judgment of the Finanzgericht and amending the contested tax assessment by reducing the rate of tax to 30%.

24. In its order for reference, the Bundesfinanzhof states that, because its seat is in Luxembourg, the appellant is treated differently and less favourably with regard to profits made by its branch in Germany than would have been the case if it had carried on its activity there in the legal form of a company having its seat in that State, since profits made by a subsidiary in Germany in the financial year at issue, if distributed in full to the appellant, would have been subject to a rate of tax not of 42% but of 33.5% at most.

25. The Bundesfinanzhof further states that it doubts whether that difference in the applicable rates of tax can be justified.

26. In particular, it cannot be justified by reference to the purpose and scheme of the German procedure for offsetting corporation tax, as the Finanzamt does. The purpose of that procedure is to avoid the multi-stage taxation of the profits of capital companies subject in Germany to unlimited tax liability which would take place if the company’s profits were taxed both through the company itself and through the shareholders, whether companies or individuals, when distributed to them. The offsetting procedure therefore allows the tax levied on the company to be set against the tax debt of beneficiaries subject to unlimited liability either to corporation tax or to income tax. The tax on profits is therefore reduced to a rate of 30% and, unlike the tax on profits made by a permanent establishment, does not constitute final taxation.

27. The Bundesfinanzhof points out, however, that the 30% rate of tax does not apply solely to profits distributed to shareholders subject in Germany to unlimited tax liability, but also to profits distributed by a German subsidiary to a parent company having its seat in another Member State, which means that, contrary to the contention of the Finanzamt, the rate of tax applicable where profits are distributed and the rate of tax charged on dividends through shareholders are not the same.

28. None the less, the Bundesfinanzhof doubts whether the case-law of the Court can provide immediate answers to the legal questions raised by CLT-UFA’s appeal. It points out that, in Royal Bank of Scotland, cited above, the Greek tax system, which was declared incompatible with Articles 52 and 58 of the Treaty, provided for the application of a 40% rate of tax to the taxable income of foreign companies, but a rate of only 35% to the income of national companies. However, in this case, the permanent establishments of companies having their seat in another Member State will be at a disadvantage only if it is assumed, by way of comparison, that, for a German company, profit distribution is the norm, since, if that company retains its profits, the rate of tax is 45%.

29. The Bundesfinanzhof then states that, since the appellant was able to dispose of the profits made by its subsidiary from the end of the 1994 financial year, the view can be taken that the appellant was in an objectively comparable situation to that of a parent company having its seat in another Member State which has had distributed to it by its German subsidiary all the profits the latter has made. In order to eliminate any infringement of Community law committed through the application of the tax system at issue, it would therefore be sufficient to reduce the rate of tax applied to the appellant to 33.5%.

30. In the light of these considerations, the Bundesfinanzhof decided to stay proceedings and refer the following questions to the Court for a preliminary ruling:

‘1) Is Article 52 in conjunction with Article 58 of the EC Treaty to be interpreted as meaning that charging the profits made in 1994 by a capital company from another Member State through a branch in Germany to German corporation tax at a rate of 42% (the “place of business tax rate”) constitutes an infringement of the right to freedom of establishment, given that:

– the profits would have been charged to German corporation tax at the rate of only 33.5% if they had been made by a company subject to unlimited corporation tax in Germany which was a subsidiary of a capital company from another Member State and had distributed all the profits to its parent by the end of 30 June 1996,

– [and that] the profits would initially have been charged to German corporation tax at the rate of 45% if the subsidiary had retained them until the end of 30 June 1996, but the liability to corporation tax would have been reduced retrospectively to 30% if the profits had been distributed in full after 30 June 1996?

2) If the place of business tax rate infringes Article 52 in conjunction with Article 58 of the EC Treaty, is it necessary to reduce it to 30% for the year in dispute in order to cure the infringement?’

IV – Analysis

A – The first question referred

31. By its first question, the Bundesfinanzhof essentially asks whether Articles 52 and 58 of the Treaty are to be interpreted as precluding the tax legislation of a Member State under which profits made in that State by the permanent establishment of a company having its seat in another Member State is subject to a fixed rate of corporation tax of 42%, with no possibility of reduction, whereas, if those profits are made by a company having its seat there, such as a subsidiary, and are distributed in full by that subsidiary to a parent company having its seat in another Member State, they are taxed at a rate of 33.5% if distributed up to 30 June 1996 and at a rate of 30% if distributed after 30 June 1996.

32. The German Government and the Finanzamt contend that the rules at issue do not contravene Articles 52 and 58 of the Treaty and that the Court should answer this question in the negative. The main points of their argument can be summarised as follows.

1. Arguments of the German Government and the Finanzamt

33. The German Government and the Finanzamt contend that the difference in treatment challenged by CLT-UFA is not contrary to the rules on the freedom of establishment because its situation is not comparable to that of a German subsidiary which distributes its profits to a parent company having its seat in another Member State.

34. They submit, first of all, that the transfer of profits by a branch to its parent company is not comparable to a distribution of all the profits of a subsidiary to its own parent company. Whereas, in the case of a branch, such a transfer is a purely internal operation within the same company, the effect of the distribution by a subsidiary of its profits to its parent company is that those profits no longer form part of the subsidiary’s assets.

35. They further state that, unlike the tax systems at issue in Commission v France, Royal Bank of Scotland and Saint-Gobain ZN, cited above, the difference in treatment provided for in the German tax system and challenged by CLT-UFA is based not on where the companies concerned have their seat but on whether the profits are distributed. If the profits are retained, the rate of tax is 45%; this rate is reduced to 33.5% or 30% only if the profits are distributed.

36. Thus, under the German legislation applicable in 1994, if the parent company and the permanent establishment operated by it both have their seat in Germany, the parent company is liable to tax in that State. The rate of tax on the profits, including those made by the company’s permanent establishment, depends on how they are used. If the profits are retained, the rate is 45%, whereas, if they are distributed to shareholders, the rate is reduced to 30%. If they are part retained and part distributed, the rate of tax is determined according to the proportions of the profits retained and distributed respectively.

37. The German Government and the Finanzamt point out that that reduction in the rate of tax on profits is linked to the procedure for offsetting tax, which is intended to avoid the double taxation of profits which would occur if a company’s profits were charged to corporation tax and then taxed through the shareholders when distributed to them. In their view, such a system can be applied only to companies whose profits are capable of giving rise to income taxable through those who receive it. The final rate of tax of 42% does not therefore apply only to foreign companies operating a permanent establishment in Germany, but also to national companies whose income cannot be taxed because of the way it is used. ( )

38. The scheme of those rules does not therefore allow the transfer of profits from a branch to its foreign parent company to be regarded as a distribution of profits, since the profits remain at the disposal of that company. The German Government concedes that, under that system, account should logically be taken of how the profits are used by the non-resident parent company. It states, however, that that option was not taken up because, on the one hand, that company falls within the tax jurisdiction of the Member State in which the company has its seat and, on the other hand, that option would pose practical problems which neither the company concerned nor the tax administration would readily be able to overcome. That is why the German legislature decided to subject such companies to the same rules as national companies whose assessment to tax is likewise not determined by the distribution of their income.

39. Finally, the German Government contends that the taxation of profits made in Germany by the permanent establishment of a company having its seat in another Member State at a rate of 30% would not be justified under the German legislation, since such a rate would apply irrespective of whether or not the parent company distributed its profits and could thus result in branches being treated more favourably. Furthermore, it is not established that German subsidiaries always distribute their profits in full to their non-resident parent companies.

40. The Finanzamt adds that, under the rules in force at the material time, the tax on the profits distributed by a subsidiary to its parent company is to be increased by a final levy on non-deductible business expenses. It provides a specimen calculation showing that the total levy on profits distributed to a parent company may rise from 33.5% to 35.59%.

2. Assessment

41. I do not concur with the arguments put forward by the German Government and the Finanzamt. Like the Commission and CLT-UFA, I take the view that Articles 52 and 58 of the Treaty preclude rules such as those at issue on the following grounds, which echo the method of analysis usually followed by the Court in such matters. ( ) Firstly, I take the view that the tax system at issue has the effect of treating companies whose seat is located in another Member State unfavourably and limits the choice available to those companies as to the legal form of their secondary establishment in Germany. Secondly, the situations to which this difference in treatment applies may, in my opinion, be regarded as being objectively comparable. Finally, I do not consider that restriction on the freedom of establishment to be justified.

(a) The existence of unfavourable treatment of companies whose seat is located in another Member State and of a limitation of the choice available to those companies as to the legal form of their secondary establishment in Germany

42. As stated above, freedom of establishment confers on the companies of a Member State the right to choose freely the legal form of their secondary establishment in another Member State. It is necessary to set out the scope of that right as determined by case-law.

43. In Commission v France, cited above, concerning a tax credit, known as an ‘avoir fiscal’, which was intended to avoid the double taxation of company profits, first in the form of corporation tax, and then through tax levied on beneficiaries of dividends, and which was available only to companies having their seat in France or in the territory of States having concluded with France conventions for the avoidance of double taxation, the Court was faced with the argument advanced by the French Government that the difference in treatment did not contravene the freedom of establishment of non-resident companies, because they could choose to carry on their activities in France through a subsidiary, rather than a branch, in order to benefit from that tax credit.

44. The Court rejected that argument on the ground that the freedom to choose the appropriate legal form for the pursuit of activities in another Member State, conferred on economic operators by the second sentence of the first paragraph of Article 52 of the Treaty, constitutes a freedom in itself and must not be limited by discriminatory tax provisions. ( )

45. In Saint-Gobain ZN, cited above, the Court set out the conditions in which that freedom of choice must be regarded as being restricted in a manner contrary to the Treaty. The tax system at issue in that case denied a non-resident capital company which operated a branch in Germany through which it held interests in companies established in other States and received dividends arising from those interests the benefit of certain tax concessions relating to the taxation of those interests or those dividends. ( ) Under that tax system, those concessions were available only to companies subject in Germany to unlimited tax liability, either under national legislation or under bilateral conventions concluded with non-member countries. The companies subject in Germany to unlimited tax liability were defined as being those having their seat or business management in that State, including the German subsidiaries of foreign companies.

46. The Court held that the refusal to grant the tax concessions at issue to the permanent establishments located in Germany of non-resident companies made it ‘less attractive’ for those companies to have intercorporate holdings through German branches, since those concessions were capable of benefiting only German subsidiaries, ‘which thus restricts the freedom to choose the most appropriate legal form for the pursuit of activities in another Member State, which the second sentence of the first paragraph of Article 52 of the Treaty expressly confers on economic operators’. ( ) It concluded from this that ‘[t]he difference in treatment to which branches of non-resident companies are subject in comparison with resident companies as well as the restriction of the freedom to choose the form of secondary establishment must be regarded as constituting a single composite infringement of Articles 52 and 58 of the Treaty’. ( )

47. That reasoning confirms, first of all, that the freedom to choose the legal form of a secondary establishment is an integral part of the rights conferred by Articles 52 and 58 of the Treaty, and that those articles prohibit any restriction on that freedom resulting from treatment that is contrary to Article 52 of the Treaty because it entails overt discrimination based on the location of the corporate seat. The view can also be taken, in the light of the phrase to that effect, that the rules at issue make it ‘less attractive’ for companies to create German branches, that those articles prohibit not only limitations on that freedom of choice which result from overt discrimination, but also those which follow from the other forms of restriction contrary to Article 52 of the Treaty, that is to say rules which are indirectly discriminatory, rules which make it less attractive to exercise the freedom of establishment or rules which hinder the establishment of a national company in another Member State.

48. Furthermore, the reasoning reproduced above shows that, where the branch of a non-resident company does not benefit from the same advantages as the branch of a foreign company, the freedom to choose the legal form of a secondary establishment, conferred by Articles 52 and 58 of the Treaty, is infringed. Indeed, a contrario, it shows that that freedom of choice requires that the branch of a company having its seat in another Member State should benefit in the host State from the same advantages as the subsidiaries of companies whose seat is likewise in another Member State.

49. Moreover, in accordance with the judgment in Saint-Gobain ZN, cited above, the scope of such equal treatment is not limited to the rights conferred by the law of the host State, but extends to the advantages provided for in conventions concluded by the host State with non-member countries.

50. The tax system at issue in these proceedings must be considered in the light of those considerations.

51. In these proceedings, the description of the German tax system provided by the referring court shows that, although profits made in Germany by a subsidiary may, if distributed to a non-resident parent company, benefit from a reduction in the overall rate of tax applied to them from 45% to 33.5%, or even 30% if distributed after 30 June 1996, no such possibility exists for non-resident companies which carry on their activities in Germany through a permanent establishment, such as a branch. It is established that profits made in Germany through a branch are taxed at a rate of 42% and that that rate is final, with the result that it applies irrespective of whether those profits are transferred in full or in part from the branch to the parent company.

52. In addition, even though, in certain situations such as that described by the Finanzamt, the profits of a German subsidiary which are distributed to its non-resident parent company may be the subject of a higher rate of tax than that applied to equivalent profits made by the branch of a foreign parent company, it would seem to be beyond serious dispute that a reduction in the rate of tax to 33.5% or 30% must, as a general rule, result in more favourable treatment than taxation at the final rate of 42%.

53. Finally, the disadvantage caused by that difference in the rate of tax on profits made in Germany cannot be eliminated by the convention concluded between the Grand Duchy of Luxembourg and the Federal Republic of Germany, since that convention does not provide for a system of offsetting the tax paid in Germany on profits made in that State, but excludes those profits from the basis of assessment to Luxembourg corporation tax, whether they have been made through a subsidiary or a branch. ( )

54. However, as the referring court points out, the specific feature of the system at issue is that such unfavourable treatment exists only if the German subsidiary distributes its profits to its foreign parent company, since, if that subsidiary retains its profits, the rate of tax is set at 45%, that is to say at a higher rate than that applicable to profits made in Germany by a branch of a non-resident parent company. The circumstances of this case are therefore different, in this regard, from the systems at issue in Commission v France and Saint-Gobain ZN, cited above.

55. In those cases, the advantages at issue were not subject to such a condition and they had a direct effect on the assets of subsidiaries. The difference in treatment was therefore between subsidiaries and permanent establishments. However, the real effect of the advantage at issue here, which results from the reduction in the rate of tax, is not on the assets of the subsidiary but on those of its non-resident parent company, since that reduction applies only if the profits are distributed to that company.

56. None the less, I do not consider this fact to be such as to support the view that the difference in treatment contained in the system at issue does not constitute a limitation on the freedom to choose the legal form of a secondary establishment, which is contrary to the Treaty. The purpose of the freedom of establishment is to allow companies having their seat in a Member State to open a secondary establishment in another Member State for the purposes of carrying on their activities there under the same conditions as national companies, and, consequently, to generate revenue there. It therefore seems to be inherent in the exercise of that freedom that the profits made by the secondary establishment should be distributed or transferred to the parent company. In this regard, the information provided by the referring court shows that domestic subsidiaries have generally distributed their profits to their foreign parent company and have thus qualified for the reduction in the rate of tax. ( )

57. In the light of those considerations, the effects on the freedom to choose the legal form of a secondary establishment of the fact that subsidiaries are afforded more favourable treatment than branches in relation to the conditions in which the former may distribute to their parent company the profits they have made in the State of establishment do not seem to me to be any different from those advantages at issue in Commission v France and Saint-Gobain ZN, cited above, which had the effect of directly reducing the rate of tax applied to subsidiaries on profits made in the host State. To that extent, the view can be taken that the tax system at issue, in that it affords to subsidiaries alone the possibility of benefiting from a reduction in tax when they distribute their profits to their non-resident parent company, confers on them a genuine advantage over branches which is capable of giving rise to a restriction on the freedom to choose the legal form of the secondary establishment through which non-resident companies may carry on their activities in Germany.

58. Furthermore, as stated above, the freedom of establishment prohibits, in principle, all forms of overt or indirect discrimination based on the location of the seat of the companies concerned in another Member State. It is also clear from the description of the tax system at issue that the companies which benefit from the possibility of reducing the tax on their profits if distributed are those which are subject in Germany to unlimited tax liability because they have their seat or business management in that State.

59. The criterion governing eligibility for the reduction in the rate of tax if profits are distributed seems to me to be the same as that which determined the eligibility for the tax concessions at issue in Saint-Gobain ZN, cited above. In that judgment, the Court held that the national legislation restricted the concessions at issue to companies subject in Germany to unlimited tax liability, and that those companies were defined in that legislation as being those having their seat or business management in that State. It inferred from this that the refusal to grant those concessions therefore affected primarily non-resident companies and was based on the criterion of the company’s seat. ( )

60. The same analysis may be made in this case. Even though, as the German Government and the Finanzamt contend, under the general scheme of the tax system at issue, the reduction in the rate of tax on profits made by capital companies is linked to the distribution of those profits, the fact remains that the criterion laid down in the legislation, which creates the entitlement to that reduction in the rate of tax in the event of distribution, is indeed the seat of the companies concerned. The referring court, within whose jurisdiction the interpretation of its national law falls, expressly states, in this regard, that the appellant is the subject of different and less favourable treatment ‘because its seat and business management are in Luxembourg’. ( )

61. In the light of the foregoing, I take the view that the conclusions drawn in the judgment in Saint-Gobain ZN, cited above, may be transposed to this case, inasmuch as the tax system at issue here results in the unfavourable treatment of non-resident companies based on the location of their corporate seat and makes it less attractive for those companies to pursue their activities in Germany through a branch, thus limiting the choice of the legal form of a secondary establishment which is afforded to them by the second sentence of the first paragraph of Article 52 of the Treaty.

62. I conclude from this that such a system must be declared to be contrary to Articles 52 and 58 of the Treaty if, as we shall see, the respective situations of non-resident companies which carry on their activities in Germany either through a branch or through a subsidiary may be regarded as being objectively comparable.

(b) The existence of objectively comparable situations

63. The freedom to choose the legal form of the secondary establishment through which an economic operator must be able to carry on its activities in another Member State, which is recognised in Articles 52 and 58 of the Treaty, logically implies, if that choice is to have real substance, that those different forms of secondary establishment are subject to separate rules of law. The freedom to choose the legal form of a secondary establishment is therefore intended to allow economic operators to carry on their activities through an agency or a branch, which does not have its own legal personality and whose obligations are binding on the parent company. That freedom of choice also allows them to choose to carry on their activities in the State of establishment through a subsidiary, that is to say a company having its own legal personality which is subject to generally more restrictive incorporation formalities, such as the deposit of share capital, whose obligations are not binding on the parent company and which, unlike an agency or a branch, will be regarded in the host State as a company having its seat in that State.

64. Since the criterion of residence is a commonly-used connecting factor in national tax legislation, the permanent establishments of non-resident companies are thus exposed to the risk of being the subject of treatment different from that reserved by the tax legislation of the State of establishment to resident companies, including the subsidiaries of companies having their seat in another Member State.

65. With a view to demonstrating that such a difference in treatment does not contravene the freedom of establishment, to the extent that that freedom prohibits discrimination and ‘discrimination’ is defined as the application of different treatment to persons in objectively comparable situations or the same treatment to different situations, ( ) the Member States concerned regularly submit that such different treatment does not infringe Community law because the situation of resident companies and that of non-resident companies are not objectively comparable.

66. That argument has been reflected in the case-law relating to natural persons, since in the judgment in Schumacker, cited above, it was held, with regard to national legislation restricting to residents certain tax concessions linked to their personal and family circumstances, that, in relation to direct taxes, the situations of residents and of non-residents are not, as a rule, comparable. ( ) The position is different only where the non-resident receives no significant income in the State of his residence and obtains the major part of his taxable income from an activity performed in the State of employment, with the result that the State of his residence is not in a position to grant him the benefits resulting from the taking into account of his personal and family circumstances. ( ) It is only in that situation, according to case-law, that there is no longer any objective difference in the State of employment between that non-resident and residents.

67. Unlike the German Government, I do not take the view that the premiss that the respective situations of residents and non-residents are not, as a rule, comparable can be transposed to the direct taxation of companies. For, in the case of natural persons, the criterion of residence is different from that of their nationality and may give rise to purely indirect discrimination, whereas, in the case of companies, their seat performs a function similar to that of the nationality of natural persons. Although the Court, in the judgment in Commission v France, cited above, which is the authoritative decision in these matters, accepted that the possibility cannot altogether be excluded that a distinction based on the location of the registered office of a company may, under certain conditions, be justified in the field of tax law, ( ) it immediately went on to say that acceptance of the proposition that the Member State in which a company seeks to establish itself may freely apply to that company different treatment solely by reason of the fact that the company’s registered office is situated in another Member State would deprive Article 58 of the Treaty of all meaning. ( ) To my knowledge, that analysis remains unchanged in relation to companies. ( )

68. However, an examination of the case-law on national tax systems which have treated companies differently on the basis of the location of their corporate seat shows that the infringement of Community law follows not from the reference to the corporate seat or the place of residence but from the fact that, within the same tax system, the Member State concerned has applied that connecting factor differently as between the determination of tax liability and the grant of tax concessions. In other words, the infringement of Community law follows from the fact that, in the context of the same tax system, the Member State in question treats non-resident companies as national companies for the purposes of determining the tax base and then excludes them from concessions linked to that tax in the context of its settlement.

69. Thus, in the judgment in Commission v France, cited above, which, it will be recalled, concerns a tax credit available only to companies having their registered office in France or in the territory of States having concluded conventions for the avoidance of double taxation with the French Republic, the Court, in its assessment of the French Government’s argument that the situation of those companies and that of companies having their registered office in another Member State were not comparable, held that, for the purposes of determining the income liable to corporation tax, the French legislation did not make any distinction between resident companies on the one hand and branches and agencies of non-resident companies on the other hand. Both categories of company were liable to tax on profits made in undertakings operated in France, to the exclusion of profits which are made abroad or which France is entitled to tax under the terms of a double taxation convention. ( )

70. The Court inferred from this that the legislation at issue could not, in the context of the same tax, treat those two categories of companies differently with respect to a concession relating to that tax without giving rise to discrimination. The Court held that, by treating resident companies and the permanent establishments of non-resident companies in the same way for the purposes of taxing their profits, the national legislature had admitted that there was no objective difference between the two with regard to the detailed rules and conditions relating to that taxation which could justify different treatment. ( )

71. The same method of analysis was applied in the judgments in Royal Bank of Scotland and Saint-Gobain ZN, cited above. In those judgments, the question was also raised whether the fact that, in the State concerned, the subsidiaries of non-resident companies were subject to unlimited tax liability, that is to say that they are taxed there on the basis of their global income, whereas non-resident companies which carry on their activities there through a permanent establishment are subject to only limited tax liability, that is to say that they are taxed there on the basis of only the profits made in the State in question by that establishment, is such as to prevent their situations from being regarded as being objectively comparable. ( )

72. The Royal Bank of Scotland case, cited above, concerned Greek legislation which provided for a 40% rate of tax on profits made by a bank having its seat in another Member State and carrying on its activities in Greece through a permanent establishment, whereas profits made by companies having their seat in Greece were taxed at a rate of 35%.

73. As in the judgment in Commission v France, cited above, the Court pointed out that, as far as the method of determining the taxable base is concerned, the Greek tax legislation did not establish any distinction such as to justify a difference in treatment between the two categories of companies. It held that the tax is calculated on the net profits, after deduction of the part thereof corresponding to non-taxable receipts, those profits being determined according to the same rules both for resident and non-resident companies. The Court added that the fact that companies having their seat in Greece are subject there to unlimited tax liability, whereas non-resident companies which operate a permanent establishment in that State are subject to tax there only on the basis of the profits made by that establishment, ‘is not such as to prevent the two categories of companies from being considered, all other things being equal, as being in a comparable situation as regards the method of determining the taxable base’. ( )

74. In the same way, in the judgment in Saint-Gobain ZN, cited above, which, as we have seen, concerns tax concessions relating to the taxation of shareholdings and dividends, the Court held that the situations of resident and non-resident companies were objectively comparable because the receipt of dividends in Germany and the holding of shares in foreign subsidiaries and sub-subsidiaries were taxable, irrespective of whether the dividends were received or the shares held by a resident or a non-resident company, since non-resident companies receive such dividends and hold such shares through a permanent establishment located in that State. ( )

75. It is necessary, therefore, to examine whether, as regards the determination of the basis of assessment to tax of profits made in Germany, the tax system at issue treats non-resident companies which pursue their activities through a permanent establishment in the same way as those which pursue them through a subsidiary.

76. The information provided by the referring court clearly shows that profits made by a subsidiary from its commercial activity in Germany are calculated in accordance with the same provisions as profits made in that State by a permanent establishment of a non-resident company. ( ) It also shows that, although, in certain situations, in the context of specific agreements between the parent company and its subsidiary, profits made by the latter may be higher than those which would have been attributed to a branch under otherwise identical conditions, that is not, however, generally the case. ( )

77. In addition, the Commission states, with regard to the method of determining the basis of assessment to tax, that the taxable income of non-resident companies which are subject, in principle, to a tax liability limited to profits made in Germany by their permanent establishment may also include, inter alia, dividends from foreign companies, interest from foreign debtors and fees paid by foreign licence-holders. It also points out that, conversely, profits from foreign sources made by companies having their seat in Germany and subject in that State to unlimited tax liability are frequently exempt under conventions for the avoidance of double taxation. ( ) The German Government has not disputed that description of the respective taxable bases of a permanent establishment and of companies having their seat in Germany.

78. In the light of the foregoing, I consider it reasonable to take the view that the system at issue, as regards the method of determining the taxable base, does not make any distinction between non-resident companies according to whether they carry on their activities through a branch or a subsidiary, and that the fact that non-resident companies are subject to only limited tax liability, whereas companies having their seat in Germany, including the subsidiaries of non-resident companies, are taxed on their global income, does not prevent the two from being regarded as being in objectively comparable situations, as was the case in Royal Bank of Scotland and Saint-Gobain ZN, cited above.

79. Next, it is necessary to consider whether, as the German Government and the Finanzamt contend, the fact that, under the German tax system, the reduction in the rate of tax on profits is linked to their distribution, and the fact that the appellant falls within the tax jurisdiction of another Member State are factors capable of demonstrating that foreign companies which are the parents of a German subsidiary or branch are not in objectively comparable situations.

80. I do not share that view for the following reasons. As the Court has pointed out in its recent case-law, ( ) the situations in question must be compared in the light of the purpose of the tax legislation at issue. According to the explanations given by the referring court as well as by the German Government and the Finanzamt, the reduction in the rate of tax applicable if profits are distributed by a subsidiary to its parent company is linked to the procedure for offsetting tax, which is intended to avoid the double taxation of those profits. In those circumstances, the tax on profits paid by the subsidiary is reduced to 30% and that tax must, in principle, be offset against the tax debt of dividend beneficiaries subject in Germany to unlimited liability to corporation tax or income tax.

81. None the less, as is also clear from the description of the national system provided by the referring court, that procedure for offsetting tax does not apply in the case of a non-resident parent company which has distributed to it by its German subsidiary the profits which the latter has made in Germany, since the parent company is not subject in that State to unlimited tax liability. For the purposes of the taxation of its income, that non-resident parent company falls within the tax sovereignty of a Member State other than Germany, as does a non-resident company which carries on its activities in that same State through a permanent establishment. In both situations, the possibility for those parent companies of a German subsidiary or branch of deducting the tax paid to the Federal Republic of Germany on profits made in that State depends on the convention for the avoidance of double taxation concluded between Germany and the State in which they are established or on the national law of that State.

82. In this regard, we have already seen that, if the parent company and the subsidiary concerned fall within the scope of Directive 90/435, ( ) that directive provides that, in order to prevent the profits made by the subsidiary from being taxed a second time in the State in which the parent company is established, that State may exempt them or, if it taxes them, allow that company to offset against its tax debt the taxes paid by its subsidiary on the profits distributed. The reduction in the rate of tax on profits made in Germany by the subsidiary of a foreign company is therefore not linked to the taxation of dividends through the foreign parent company, since a bilateral convention or national law may exempt those profits from its taxable income.

83. Indeed, that is the solution adopted in the convention concluded between the Grand Duchy of Luxembourg and the Federal Republic of Germany, under which profits made by a Luxembourg company through a branch in Germany are excluded from the basis of assessment to Luxembourg corporation tax, as are dividends which a Luxembourg company receives from its German subsidiary. ( ) The fact that profits made in Germany by those two types of secondary establishment are treated in the same way in Luxembourg confirms that, for the purposes of the States parties to that convention, the parent companies of those establishments were indeed in objectively comparable situations.

84. In opposition to that analysis, the German Government and the Finanzamt again contend that a transfer of profits from a branch to its non-resident parent company cannot be treated in the same way as a distribution of profits because such a transfer is an internal operation, whereas, in the case of distribution by a subsidiary, the distributed profits no longer form part of the subsidiary’s own assets.

85. In my view, that objection can be dismissed on the following grounds. On the one hand, it seems perfectly conceivable that a branch, even though it does not have legal personality, should be capable of being regarded, purely for tax purposes, as holding the equivalent of its own assets, of which profits made in the host State would form an integral part until transferred, if that were the case, to the parent company. There may be some confirmation of that analysis in the provisions of Article 7(2) of the OECD’s Model Convention, the wording of which is similar to that of Article 5 of the convention concluded between the Federal Republic of Germany and the Grand Duchy of Luxembourg, which, for the purposes of calculating direct taxes, treats the relationship between a parent company and a permanent establishment in the same way as the relationship between legally separate entities. I would also point out that the Federal Republic of Germany has accepted, in the context of its tax law, that a permanent establishment such as a branch of a non-resident company can hold its own assets, since, under the national provisions at issue in Saint-Gobain ZN, cited above, non-resident companies were taxed in Germany on their shareholdings in foreign subsidiaries and sub-subsidiaries through their permanent establishment in that State and on the dividends which they received from such subsidiaries and sub-subsidiaries through the permanent establishment. ( ) In my opinion, it is therefore reasonable to take the view that the transfer of profits from a branch to its parent company may be treated in the same way as a distribution inasmuch as it represents a movement of those profits from one set of assets, or the equivalent thereof, to another. ( )

86. On the other hand, the argument that, if a subsidiary distributes profits, those profits no longer form part of its assets is, in my opinion, also inconclusive. After all, the referring court has stated that, in practice, if that subsidiary needed those profits after having distributed them to the parent company, the parent company could place them at the subsidiary’s disposal in the form of share capital or a shareholders’ loan. ( ) The Finanzamt itself accepts in its written observations that that procedure, referred to as ‘Schütt-aus-hol-zurück’ (distribute and recover), has been used on a regular basis by non-resident companies in favour of their German subsidiaries.

87. In the light of all of the foregoing, I am of the opinion that a transfer of profits from a German branch to its non-resident parent company constitutes an operation which is sufficiently akin to a distribution of profits from a subsidiary to its foreign parent company to support the view that the situations in question are objectively comparable.

88. The German Government and the Finanzamt raise the objection, finally, that the systematic reduction in the rate of tax on profits transferred by branches to their non-resident parent companies would be unjustified under the German tax system because such a reduction would presuppose that subsidiaries always distribute all of their profits, which is not necessarily the case, and this would therefore give rise to a difference in treatment to the detriment of subsidiaries. The German Government and the Finanzamt further state that, in certain cases, the tax payable by a subsidiary was to be increased by a final levy on non-deductible business expenses.

89. In my view, however, that objection is not capable of demonstrating that the situations in question are objectively different. On the contrary, by submitting that the systematic reduction from 42% to 33.5% or 30% of the final rate of tax on profits transferred by a German branch to its non-resident parent company might have the effect of putting German subsidiaries at a disadvantage, the German Government and the Finanzamt implicitly accept that the situations in question may be regarded as being objectively comparable.

90. Moreover, it would not appear to be impossible for the competent national authorities to apply to transfers of profits from a German branch to its non-resident parent company rules equivalent to those applicable to the distribution of the profits of a subsidiary, or to provide for a reduction in the rate of tax which takes account of the proportion of the profits actually transferred. It does not, on the face of it, appear to be any more difficult for the national tax authorities to have knowledge of and take account of such a transfer than it is for them to determine the profits made in Germany by a non-resident company through a permanent establishment.

91. In the light of all of the foregoing, I take the view that, under the system at issue, the situation of a non-resident company which, like the appellant, carries on its activities in Germany through a branch may be regarded as being objectively comparable to that of a non-resident company which carries on its activities in that State through a subsidiary.

92. It is to be noted, finally, that the German Government and the Finanzamt have not put forward any of the grounds referred to in Article 56 of the EC Treaty ( ) to justify the restriction thus contained in the tax system at issue. Contrary to the customary practice of a Member State the compatibility of whose national tax system with Community law is the subject-matter of proceedings before the Court, the German Government and the Finanzamt have likewise not put forward any overriding reasons in the public interest to justify the contested restriction.

93. If they had submitted that the difference in treatment was justified by the need to preserve the cohesion of the tax system at issue, that argument could not have been accepted, in my opinion, despite the broader definition given to that concept in the judgment in Manninen, cited above. In that judgment, it was held that a restriction on the exercise of the fundamental freedoms guaranteed by the Treaty may be justified by the need to preserve the cohesion of the tax system at issue only on the condition that a direct link is established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy ( ) and that the difference in treatment observed does not go beyond what is necessary in order to attain the objective of the legislation at issue. ( ) In that definition, the Court did not refer to the additional condition, previously required by case-law, to the effect that the advantage and the offsetting must apply to the same taxpayer. ( ) It can be inferred from this that, mirroring in this regard the view taken by Advocate General Kokott, ( ) the Court has not ruled out the possibility that justification may now be based on fiscal cohesion where the relief provided for a taxpayer is offset by a charge on another taxpayer and the relief and the charge relate to the same income.

94. However, as the referring court has stated, there is in the system at issue no direct link between the reduction in the rate of corporation tax on profits payable by a German subsidiary and the taxation of those same profits through the foreign parent company once they have been distributed to it. Under the tax system at issue, the rate of tax on profits made by a German subsidiary is reduced from 45% to 33.5% or 30%, whilst the parent company is exempt from tax on those dividends in Luxembourg.

95. Finally, if, in accordance with the provisions of Directive 90/435 relating to profits made by a subsidiary, profits made in Germany by a subsidiary or by a permanent establishment of a Luxembourg company had been taxed, rather than exempted, and the parent companies had been authorised to deduct from the corporation tax payable by them in Luxembourg the tax paid on those profits in Germany, it is unlikely that I would have reached a different conclusion. For, as that directive provides, ( ) the offsetting of that fraction of the tax paid by the subsidiary which relates to those profits is permitted by the State in which the parent company is established only up to the limit of the corresponding domestic tax. The difference in the rate of tax between 42% and 33.5% or 30% could also, in such circumstances, be disadvantageous to parent companies having chosen to carry on their activities in Germany through a permanent establishment. Furthermore, and in any event, I do not see how the scheme of the system at issue made it necessary to maintain such a difference in the rate of tax.

96. It is in the light of those considerations that I propose that the answer to the first question referred should be that Articles 52 and 58 of the Treaty must be interpreted as precluding tax legislation of a Member State under which profits made in that State by the permanent establishment of a company having its seat in another Member State is subject to a fixed rate of corporation tax of 42%, with no possibility of reduction, whereas, if those profits are made by a company having its seat in that State, such as a subsidiary, and are distributed in full by that subsidiary to a parent company having its seat in another Member State, they are taxed at a rate of 33.5% if distributed up to 30 June 1996 or 30% if distributed after 30 June 1996.

B – The second question referred

97. By its second question, the Bundesfinanzhof asks whether the rate of tax applied to permanent establishments must be reduced to 30% in respect of the financial year at issue in order to eliminate the infringement of Articles 52 and 58 of the Treaty.

98. The referring court states that the profits made by CLT-UFA’s branch in the course of the 1994 financial year were transferred to CLT-UFA at the end of that financial year. It says that the rate of tax on profits distributed in full by a subsidiary to its non-resident parent company at that time would have been 33.5%. ( )

99. I interpret the second question from the Bundesfinanzhof, in the light of its wording and the foregoing information, as meaning that that court is seeking to ascertain whether the elimination of the infringement of Community law contained in the legislation at issue requires the rate of tax on profits made by the permanent establishment of a non-resident parent company to be reduced to 30% as a general rule or whether that reduction must be the subject of an assessment based on the circumstances of the particular case.

100. It must be borne in mind that, under the division of functions provided for in Article 177 of the EC Treaty, ( ) it is for the national court to apply the rules of Community law, as interpreted by the Court, since no such application is possible without a comprehensive appraisal of the facts of the case. ( )

101. As we have seen, by its first question, the referring court questions the compatibility with the freedom of establishment of a tax system such as the German system, under which the profits made by a Luxembourg capital company, such as CLT-UFA, in Germany through a branch were taxed at the final rate of 42%, whereas, if that company had carried on its activities there through a subsidiary and those profits had been distributed to it in full, they would have been taxed at a rate of 33.5% or 30%, depending on whether they were distributed up to or after 30 June 1996.

102. The question considered therefore concerns the compatibility with Community law of a national system which treated a non-resident company which carried on its activities in the host State through a branch less favourably than if that company had chosen to carry on its activities there through a subsidiary. The disadvantage in this case has thus been found to exist between two non-resident companies in relation to the legal form of their secondary establishment in the host State and not between the permanent establishment of a non-resident company and a national subsidiary.

103. If the Court follows my proposal and answers the first question to the effect that such a system constitutes a restriction on the freedom of establishment, it will be for the referring court to take the necessary measures to eliminate the unfavourable treatment suffered by CLT-UFA in comparison with a Luxembourg capital company which carried on its activities in Germany through a subsidiary. This disadvantage must thus be assessed in relation to the overall rate of tax which would have been applied to the same profits if they had been made by a subsidiary and distributed in full to its non-resident parent company. In other words, if, at the time when CLT-UFA received the transfer of the profits made by its German branch, the profits distributed by a German subsidiary to its non-resident parent company were to be subjected to an additional tax of 5% of the amount distributed, that additional tax would, in my opinion, also have to be taken into consideration, even though it would not be payable by the subsidiary but by the parent company.

104. I therefore propose that the answer to the second question referred should be that, in order to bring the infringement of Community law to an end, it is for the national court to determine the rate of tax which must be applied to profits made by a non-resident company through a permanent establishment, by reference to the overall rate of tax which would have been applicable if the profits of a subsidiary had been distributed to its parent company.

V – Conclusion

105. In the light of the foregoing considerations, I propose that the Court should answer the questions referred by the Bundesfinanzhof as follows:

(1) Articles 52 EC (now, after amendment, Article 43 EC) and 58 EC (now, after amendment, 48 EC) must be interpreted as precluding tax legislation of a Member State under which profits made in that State by the place of business of a company having its seat in another Member State is subject to a fixed rate of corporation tax of 42%, with no possibility of reduction, whereas, if those profits are made by a company having its seat in that State, such as a subsidiary, and are distributed in full by that subsidiary to a parent company having its seat in another Member State, they are taxed at a rate of 33.5% if distributed up to 30 June 1996 or 30% if distributed after 30 June 1996.

(2) In order to bring the infringement of Community law to an end, it is for the national court to determine the rate of tax which must be applied to profits made by a non-resident company through a place of business, by reference to the overall rate of tax which would have been applicable if the profits of a subsidiary had been distributed to its parent company.