CELEX: 62015CC0628
Language: en
Date: 2016-12-21 00:00:00
Title: Opinion of Advocate General Wathelet delivered on 21 December 2016.

OPINION OF ADVOCATE GENERAL
WATHELET
delivered on 21 December 2016 (1)

Case C‑628/15

The Trustees of the BT Pension Scheme

v

Commissioners for Her Majesty’s Revenue and Customs

(Request for a preliminary rulingfrom the Court of Appeal (England and Wales) (Civil Division) (United Kingdom))
(Reference for a preliminary ruling — Article 63 TFEU — Free movement of capital — Tax legislation — Corporation tax — Reimbursement of tax paid in advance in the case of dividends paid by companies established in other Member States to a company established in the United Kingdom — Refusal to grant tax credits to shareholders)

I –  Introduction

1.        This request for a preliminary ruling, made by the Court of Appeal (England and Wales) (Civil Division) (United Kingdom) on 15 October 2015 and received at the Registry of the Court of Justice on 24 November 2015, concerns the interpretation of Articles 49 TFEU and 63 TFEU.

2.        The request has been made in the context of a dispute between the Trustees of the BT Pension Scheme and the Commissioners for Her Majesty’s Revenue and Customs (‘HMRC’) concerning the foreign income dividend (‘FID’) regime in effect in the United Kingdom between 1 July 1994 and 5 April 1999.

3.        Under the FID regime, UK-resident companies in receipt of dividends from overseas companies could, when distributing dividends to their own shareholders, elect for the latter to be treated as FIDs. That election had tax implications both for the distributing company and for the recipient shareholders.

4.        The present request for a preliminary ruling concerns the position of UK-resident shareholders in receipt of foreign-sourced dividends treated as FIDs from UK-resident companies. (2)

5.        More specifically, the request concerns the absence of any tax credit for shareholders exempt from tax on dividend income only in the specific case where they received foreign sourced dividends under the FID regime, (3) while, outside that regime, they would have been entitled to a tax credit.

6.        The referring court questions whether EU law confers rights on such shareholders, resident in the same Member State as the company distributing foreign-sourced dividends treated as FIDs, and, if so, what legal remedies may be available to them.

7.        I would observe that, in its judgment of 12 December 2006, Test Claimants in the FII Group Litigation(C‑446/04, EU:C:2006:774), the Court considered the FID regime in the context of claims made by resident companies in receipt of foreign-sourced dividends which had elected to be taxed under the FID regime.
II –  United Kingdom law

8.        Under the tax legislation in force in the United Kingdom, the profits made during an accounting period by every company resident in that Member State, and by every company which is not resident there but which conducts trading activities through a branch or agency there, are subject to corporation tax in that State. In 1973, the United Kingdom of Great Britain and Northern Ireland began operating a system of taxation known as ‘partial imputation’ under which, in order to avoid economic double taxation when a resident company distributed profits, part of the corporation tax paid by that company was imputed to its shareholders. Until 6 April 1999, the basis of that system was, on the one hand, the advance payment of corporation tax by the company making the distribution and, on the other hand, the granting of a tax credit to the shareholders receiving the dividend. In addition, UK-resident companies were exempt from corporation tax on dividends received from other UK-resident companies.

A –    Advance corporation tax

9.        Under section 14 of the Income and Corporation Taxes Act 1988 (‘ICTA’), in the version in force at the time of the facts in the main proceedings, UK-resident companies were liable, on paying dividends to their shareholders, to pay advance corporation tax (‘ACT’), calculated by reference to the amount or value of the distribution made.

10.      Companies were entitled, to a certain extent, to set ACT paid in respect of a distribution made during a given accounting period against their corporation tax liability for that period.

B –    The position of resident shareholders receiving dividends from resident companies

11.      Under section 208 ICTA, where a UK-resident company received dividends from a company also resident in that Member State, it was not liable to corporation tax in respect of those dividends.

12.      In addition, under section 231(1) ICTA, every payment of dividends subject to ACT by a resident company to another resident company gave rise to a tax credit in favour of the latter company equal to the fraction of the ACT paid by the former company. (4)

13.      A United Kingdom-resident company which received dividends from another resident company, the payment of which had given rise to entitlement to a tax credit, could take the amount of ACT paid by the latter company and deduct it from the amount of ACT which it itself had to pay when making a distribution of dividends to its own shareholders, with the result that it was liable for ACT only on any excess.

14.      According to the referring court, ‘where the tax credit was greater than the recipient’s income tax liability on the aggregate of the distribution and the tax credit (as in the case of a tax-exempt shareholder), that person could claim payment of the excess [under] sub-section 231(3) ICTA’.

15.      Under section 592(2) ICTA, approved pension schemes were entitled to claim exemption from income tax in respect of both UK-sourced and foreign-sourced dividends.

16.      Under section 231(3) ICTA, pension funds which were entitled to the tax credit referred to in section 231(1) ICTA in respect of dividends which they received from UK-resident companies were entitled to payment of that tax credit as they were exempt from tax on dividend income.

17.      By contrast, that payment of a tax credit pursuant to section 231(3) ICTA was not possible where the FID regime applied to the distribution. (5)

C –    The position of resident shareholders receiving dividends from non-resident companies

18.      When a UK-resident company received dividends from a company resident outside the United Kingdom, it was liable to corporation tax on those dividends. However, under sections 788 and 790 ICTA, it would be given credit for the tax paid by the distributing company in its State of residence.

19.      In such a case, the company receiving those dividends was not entitled to a tax credit.

20.      In addition, when a resident company itself paid dividends to its own shareholders, it was liable to pay ACT.

21.      Consequently, the receipt by a resident company of dividends from a non-resident company could result in surplus ACT, in particular because the payment of dividends by non-resident companies did not give rise to any tax credits that might be deducted from the ACT which the resident company had to pay when it distributed dividends to its own shareholders.

22.      On 1 July 1994, the FID regime was introduced to resolve this problem. It provided companies with a way of reducing the incidence of surplus ACT.

D –    The FID regime

23.      Under the FID regime, a resident company receiving dividends from a non-resident company could elect to pay a dividend to its own shareholders as a foreign income dividend or FID. ACT was payable on the FID but, to the extent that the FID was matched by foreign-sourced dividends received, the company could claim reimbursement of the excess ACT paid.

24.      A UK-resident company in receipt of foreign-sourced dividends had an incentive to elect for the FID regime. This was because such a company was likely to have an insufficient corporation tax liability against which to set off its ACT liability on any dividends it paid. Electing for a dividend to be an FID enabled the company to recover the ACT from HMRC, and so prevent it becoming surplus ACT.

25.      However, shareholders receiving foreign-sourced dividends treated as FIDs were not entitled to a tax credit. Indeed, section 246C ICTA expressly provided as follows:
‘Section 231(1) shall not apply where the distribution there mentioned is a foreign income dividend.’

26.      According to the referring court, section 246D ICTA nevertheless provided that taxable shareholders were to be treated as if the dividend was income that had already borne tax at the lower rate (20%) for the tax year in question. The effect of section 246D for taxable shareholders was the same as if section 231 ICTA had provided for a tax credit. Accordingly, for taxable shareholders, dividends paid under the FID regime and dividends paid outside the FID regime were effectively taxed in the same way.

27.      However, in the case of shareholders not subject to tax on dividend income (such as approved pension schemes), (6) the FID regime resulted in a difference in treatment: dividends paid outside the FID regime resulted in a tax credit payable in cash, but dividends paid as FIDs resulted in no tax credit.

28.      Indeed, as already mentioned, in accordance with section 246C ICTA, in respect of dividends received from companies that had elected for the FID regime to apply to those dividends, exempt approved pension schemes were entitled neither to a tax credit under section 231(1) ICTA (nor, a fortiori, to payment of a tax credit in cash, as provided for in section 231(3) ICTA).

29.      For dividends paid from 6 April 1999 onwards, the ACT system and the FID regime were abolished.
III –  The dispute in the main proceedings and the questions referred for a preliminary ruling

30.      The BT Pension Scheme (‘the pension fund’) is the largest defined benefit pension fund in the United Kingdom. Its members are employees and former employees of British Telecommunications Plc (‘BT’). The pension fund is managed by a corporate trustee, BT Pension Scheme Trustees Limited. For tax purposes the trustees of the pension fund (‘the Trustees’) are the relevant taxable entity, while the pension fund is the beneficial owner of the relevant assets.

31.      The pension fund is an approved pension scheme and is, and always has been, exempt from tax in the United Kingdom on its investment income.

32.      At all material times, approximately 70% to 75% of the investments of the pension fund (by market value) were in the form of shares in companies. Of the pension fund’s shareholdings, some were investments in companies resident in the United Kingdom and some were investments in companies resident elsewhere in the European Union or outside it. The vast majority (at least 97%) of the pension fund’s share portfolio was invested in large publicly quoted companies in the United Kingdom and overseas. In each case, the pension fund would typically hold less than 2% of the company’s share capital, and always less than 5%. The pension fund’s relationship to the companies in which it invested was purely that of shareholder.

33.      The pension fund’s investment portfolio included shares in UK-resident companies which had elected for application of the FID regime. The pension fund therefore received foreign-sourced dividends treated as FIDs. In accordance with the FID regime, the Trustees were not entitled to claim tax credits on these dividends, by virtue of section 246C ICTA.

34.      The Trustees, taking the view that the absence of any tax credit in respect of foreign-sourced dividends treated as FIDs was inconsistent with EU law, issued proceedings with a view to obtaining a tax credit or, in the alternative, the reimbursement of excess tax paid or damages in respect of the failure to grant a tax credit. They argued before the referring court that, since section 246C ICTA gave rise to a difference in treatment as between foreign-sourced dividends treated as FIDs and domestic-sourced dividends, which was precluded by EU law, in particular by Article 63 TFEU, and since they were the persons who had suffered the disadvantage in question, they were entitled, as a matter of EU law, to the disapplication of section 246C ICTA in their case, such as to enable them to claim payment of tax credits in respect of the FIDs they had received.

35.      The referring court notes that, according to the United Kingdom Government, the FID regime was incompatible with EU law in that it restricted the rights of UK-resident FID-distributing companies. The UK Government argued before the referring court, however, that it did not follow that the UK-resident shareholders of those companies also had rights under EU law which had been restricted by the FID regime and which entitled them to the disapplication of section 246C ICTA. The UK Government considers that the Trustees cannot rely on EU law to obtain the disapplication of section 246C ICTA because they were not exercising any directly enforceable EU rights when they invested in UK-resident companies which were subject to the FID regime: the Trustees represented a UK-resident pension fund investing in UK resident companies.

36.      The present request for a preliminary ruling has been made in the context of an appeal brought before the Court of Appeal (England & Wales) (Civil Division) against a decision of the Upper Tribunal (Tax and Chancery Chamber) (United Kingdom) dismissing appeals and cross-appeals brought against a judgment of the First-tier Tribunal (Tax Chamber) (United Kingdom).

37.      The First-tier Tribunal (Tax Chamber) and the Upper Tribunal (Tax and Chancery Chamber) both took the view that, in principle, the Trustees were entitled to be paid tax credits in respect of foreign-sourced dividends treated as FIDs which they had received in the 1997-1998 tax year, but that the Trustees’ claims in respect of other tax years were time-barred under national law.

38.      The referring court considers that the issue of whether the Trustees are entitled to claim tax credits on foreign-sourced dividends treated as FIDs raises questions of EU law concerning the scope of Article 63 TFEU. It considers that, unless the Trustees have directly applicable EU-law rights in relation to section 246C ICTA, then national law does not require the disapplication of that provision in the case of the Trustees and accordingly the Trustees’ claims for tax credits must fail.

39.      It was in those circumstances that the Court of Appeal (England & Wales) (Civil Division) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
‘1.      Given that the Court, in its answer to Question 4 in the judgment of 12 December 2006, [Test Claimants in the FII Group Litigation, (C‑446/04, EU:C:2006:774)], determined that Articles 43 and 56 of the EC Treaty — now Articles 49 TFEU and 63 TFEU — precluded legislation of a Member State which allows resident companies distributing dividends to their shareholders which have their origin in foreign-sourced dividends received by them to elect to be taxed under a regime which permits them to recover advance corporation tax paid, but, first, obliges those companies to pay that advance corporation tax and subsequently to claim repayment and, secondly, does not provide a tax credit for their shareholders, whereas those shareholders would have received such a tax credit in the case of a distribution made by a resident company which had its origin in nationally sourced dividends, are any rights under EU law conferred on those shareholders themselves, whether under Article 63 TFEU or otherwise, in cases where they are the recipients of the dividends elected to be paid under that regime, in particular where a shareholder is resident in the same Member State as the company distributing the dividends?
2.      If the shareholder referred to in Question 1 does not itself have rights under Article 63 TFEU, is it entitled to rely on any infringement of rights under Article 49 TFEU or Article 63 TFEU of the company distributing the dividend?
3.      If the answer to Question 1 or Question 2 is that the shareholder has rights under or can rely on EU law, does EU law impose any requirements as to the remedy to be provided to the shareholder under domestic law?
4.      Does it make any difference to the Court’s answer to the above questions that:
(a)      the shareholder is not liable to income tax in the Member State on any dividends received, with the consequence that, in the case of a distribution made by a resident company outside the above regime, the tax credit to which the shareholder is entitled under domestic legislation may result in a payment of the tax credit to the shareholder by the Member State;
(b)      the national court has decided that the infringement of EU law by the domestic legislation in question was not sufficiently serious so as to give rise to a liability of the Member State in damages in favour of the company distributing the dividends, under the principles established [in the judgment of 5 March 1996, Brasserie du pêcheur and Factortame (C‑46/93 and C‑48/93, EU:C:1996:79)], or that
(c)      in some cases, but not all, the company distributing the dividends under the above regime may have increased the amount of its distributions paid to all shareholders to provide a cash sum equivalent to that which would be achieved by an exempt shareholder from a payment of dividends outside the regime?’
IV –  The proceedings before the Court

40.      Written observations have been submitted by the Trustees, the United Kingdom Government and the European Commission. Those same parties presented oral argument at the hearing which was held on 9 November 2016.
V –  Analysis

A –    The first question referred

41.      By its first question, the referring court asks, in substance, whether EU law, and Article 63 TFEU in particular, confers rights on shareholders that have received foreign-sourced dividends treated as FIDs and are resident in the same Member State as the distributing company.
1.      The applicable provision of the FEU Treaty

42.      In paragraphs 89 to 92 of its judgment of 13 November 2012, Test Claimants in the FII Group Litigation (C‑35/11, EU:C:2012:707), the Court held that the tax treatment of dividends could fall within Article 49 TFEU on freedom of establishment and Article 63 TFEU on the free movement of capital. According to the Court, in order to establish whether national legislation falls within the scope of one or other of those freedoms, the purpose of the legislation concerned must be taken into consideration. National legislation intended to apply only to those shareholdings which enable the holder to exert a definite influence on a company’s decisions and to determine its activities falls within the scope of Article 49 TFEU on freedom of establishment. On the other hand, national provisions which apply to shareholdings acquired solely with the intention of making a financial investment without any intention of influencing the management and control of the undertaking must be examined exclusively in light of the free movement of capital. (7)

43.      In that same judgment of 13 November 2012, Test Claimants in the FII Group Litigation (C‑35/11, EU:C:2012:707), the Court held that it could not be determined from the purpose of the national legislation therein at issue, which was the same as that at issue in the present case, whether it fell predominantly within the scope of Article 49 TFEU or of Article 63 TFEU. In such circumstances, the Court takes account of the facts of the case in point in order to determine whether the situation to which the dispute in the main proceedings relates falls within the scope of one or other of those provisions. (8)

44.      Given that the pension fund typically held less than 2% of the share capital, and always less than 5% of the share capital, of the companies in which it had invested, and given that its relationship to those companies was purely that of shareholder, I consider that, as is submitted in the observations of the Trustees, the United Kingdom Government and the Commission, the investments in question fall predominantly within the scope of the free movement of capital provided for in Article 63 TFEU. Indeed, those investments did not enable the Trustees to exert a definite influence on any company’s decisions or to determine its activities.
2.      The position of a UK-resident company paying foreign-sourced dividends treated as FIDs (9)

45.      In its judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774), the Court held that ‘the tax treatment of resident companies receiving foreign-sourced dividends and opting for the FID regime [was] less favourable … than that which applie[d] to resident companies receiving nationally sourced dividends’. (10)

46.      In so far as concerns the absence of a tax credit, which is the issue in the present case, the Court held that ‘a shareholder receiving a payment of dividends from a resident company which [had] its origin in foreign-sourced dividends treated as FIDs, [was] not entitled to a tax credit’, and that such a shareholder ‘[had] no right to any repayment if he [was] not liable to income tax or where the income tax due [was] less than the tax on the dividend at the lower rate’. ‘That [meant] that a company which [had] elected to be taxed under the FID regime [had to] increase the amount of its distributions if it [wished] to guarantee its shareholders a return equivalent to that which would be achieved from a payment of nationally sourced dividends’. (11)

47.      It is important to bear in mind that the claimants in the main proceedings in that case were companies resident in the United Kingdom which held shares in companies resident in another Member State or in a third country. The present case, by contrast, concerns the position of the shareholders of companies such as those claimants, which, like them, are resident in the United Kingdom.
3.      The position of resident shareholders receiving from a resident company a payment of dividends which have their origin in foreign-sourced dividends and are treated as FIDs: unequal treatment

48.      The claimants in the main proceedings in the case which gave rise to the judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774) were UK-resident companies that held shares in companies resident in another Member State or in a third country. Notwithstanding that fact, the Court held, in paragraph 173 of the judgment that, in so far as concerned the shareholders of resident companies receiving foreign-sourced dividends treated as FIDs, ‘Articles 43 EC and 56 EC preclude[d] legislation of a Member State which, while exempting from advance corporation tax resident companies paying dividends to their shareholders which [had] their origin in nationally sourced dividends received by them, allow[ed] resident companies distributing dividends to their shareholders which [had] their origin in foreign-sourced dividends received by them to elect to be taxed under a regime which permit[ted] them to recover the advance corporation tax paid but … [did] not provide a tax credit for their shareholders, whereas those shareholders would have received such a tax credit in the case of a distribution made by a resident company which had its origin in nationally sourced dividends’. (12)

49.      In my opinion, it is clear from that paragraph of that judgment (13) that the Court took the view that shareholders, like the pension fund in the present case, which received a payment of foreign-sourced dividends treated as FIDs suffered a direct loss as a result of the discriminatory provisions (14) of the FID regime and, more particularly, by the absence of entitlement to a tax credit. (15)
4.      A purely internal situation?

50.      Despite this discriminatory treatment of those shareholders, precluded by Articles 49 TFEU and 63 TFEU, the United Kingdom Government submits that they do not derive any rights from Article 63 TFEU.

51.      Indeed, while the United Kingdom Government does not directly take issue with paragraph 173 of the judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774) or with paragraph 4 of the operative part thereof, it nevertheless submits that the acquisition by an investor resident in a Member State of shares in a company established in the same Member State is a purely internal situation that lies outside the scope of EU law. (16) Such an acquisition consequently entails no movement of capital within the meaning of Article 63 TFEU and such an investor is not exercising rights conferred by that provision.

52.      It also submits that it is clear from the nomenclature set out in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, (17) that the cross-border element of the transactions listed in that annex is an essential feature of the classification.

53.      The argument of the United Kingdom Government, to the effect that the dispute in the main proceedings, which concerns the rights of shareholders that received from a resident company a payment of dividends which have their origin in foreign-sourced dividends and are treated as FIDs, concerns a purely internal situation, should, in my opinion, be rejected.

54.      Indeed, this argument of the United Kingdom Government’s appears to me to be based on a selective and formalistic interpretation (18) of the FID regime and of the factual circumstances of the case in the main proceedings. The United Kingdom Government is solely focussing on one isolated aspect of the FID regime and of the factual circumstances, that is to say, the residency in the same Member State of the distributing company and of the shareholder, and is ignoring other aspects, in particular the economic objective and scope of the regime. (19) However, the FID regime and the unfavourable treatment of the shareholders in question must be assessed as a whole, rather than piecemeal, as the United Kingdom Government has done.

55.      The FID regime was adopted in order to provide resident companies that received dividends from non-resident companies with a means of reducing the incidence of surplus ACT. However, the right that companies were given to opt for the FID regime had significant and direct consequences not only for resident companies paying dividends which had their origin in foreign-sourced dividends and were treated as FIDs, but also for recipient shareholders, (20) who were placed at a fiscal disadvantage by comparison with recipients of purely domestic distributions. Suffice it to recall that section 246C ICTA expressly provided that section 231(1) ICTA, and thus the tax credit entitlement, did not apply where the distribution in question was a foreign income dividend.

56.      The very wording of section 246C ICTA makes it clear that the tax credit is linked to the nature of the revenue, foreign or domestic, giving rise to the dividend.

57.      It is therefore undeniable that the FID regime specifically targeted international dividend distributions and that the relevant components of that regime were not all restricted to a single Member State. I consider, as does the Commission, that the shareholders in question in the case in the main proceedings were clearly treated less favourably than shareholders of resident companies that received nationally sourced dividends.

58.      The Court’s judgment of 23 February 2006, Keller Holding (C‑471/04, EU:C:2006:143) is particularly instructive. That case concerned the compatibility with freedom of establishment and the free movement of capital of national legislation which excluded the deductibility of financing costs relating to shareholdings in a subsidiary in so far as those costs related to dividends from an indirect subsidiary (21) established in another Member State.

59.      The Court rejected at the outset the argument of the German and United Kingdom Governments to the effect that the dispute concerned a situation purely internal to a Member State, such that there was no need to interpret the Treaty provisions on freedom of establishment and the free movement of capital. The Court was examining the case of a parent company, with a registered office in Germany, which challenged a decision of the German tax authorities refusing it the benefit of deducting expenditure incurred for the purpose of acquiring a shareholding in a subsidiary also established in Germany. The decision of the German tax authorities was based on the direct economic link which was alleged to exist between that expenditure and the dividends paid by an indirect subsidiary established in Austria. (22) The Court held that the legislation that provided the basis for that decision had to be regarded as applying to situations relating to trade within the European Union, and that this could in turn lead to the application of the Treaty provisions relating to the fundamental freedoms. (23)

60.      I would also reject the argument which the United Kingdom Government bases on the nomenclature in Annex I to Directive 88/361, because there is clearly an international aspect to the financial transactions here in issue.

61.      It follows that Article 63 TFEU does indeed confer rights on shareholders receiving foreign-sourced dividends treated as FIDs, in spite of their residing in the same Member State as the distributing company, and that they may rely on those rights in legal proceedings.
5.      Justification

62.      It still remains to be determined whether the unequal treatment which the FID regime entails may be justified in light of the FEU Treaty provisions on the free movement of capital.

63.      Should the Court reject its argument that EU law does not apply, the United Kingdom Government submits that, in the event that the shareholders had relevant rights under EU law and the absence of a payable tax credit in respect of foreign-sourced dividends treated as FIDs paid to tax-exempt shareholders constituted a restriction of those rights, that restriction of the shareholders’ rights would be justified by the cohesion of the tax system.

64.      According to the United Kingdom Government, under the UK’s imputation system there was a direct link between the tax advantage granted to the shareholder, namely the tax credit on a dividend, and the ACT paid by the company in respect of that dividend. The United Kingdom Government points out that, in accordance with the logic of that system, because ACT on a FID was repayable to the company, the shareholder was denied the tax credit.

65.      In my opinion, the justification which the United Kingdom Government puts forward cannot be accepted.

66.      It is no more than a reiteration of similar arguments which that government put forward — and which the Court rejected — in the case which gave rise to the judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774).

67.      It is clear from paragraphs 93 and 163 of that judgment that the Court found that the unequal treatment established with reference to the FEU Treaty provisions on freedom of establishment and the free movement of capital was not justified by the need to preserve the cohesion of the tax system in the United Kingdom.

68.      It is clear from paragraph 173 of the judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774), that the unequal treatment there in question concerned, inter alia, the absence of a tax credit for shareholders receiving foreign-sourced dividends treated as FIDs, which is precisely the same situation at is in issue in the present case.

69.      In that judgment, the Court also rejected the United Kingdom Government’s argument that a tax credit was granted to shareholders receiving a distribution only where there was economic double taxation of the profits distributed which had to be prevented or mitigated. (24) The Court held that the ‘risk [of double economic taxation] exists in the case of dividends paid by a non-resident company, the profits of which are also subject to corporation tax in the State in which it is resident, at the rates and according to the rules applying there’. (25)

B –    The second question referred for a preliminary ruling

70.      The second question referred by the national court calls for an answer only if the shareholder receiving foreign-sourced dividends treated as FIDs cannot itself rely on any rights derived from Article 63 TFEU.

71.      Given my response to the first question referred by the national court, I consider there to be no need to answer the second question.

C –    The third and fourth questions referred for a preliminary ruling

72.      By its third and fourth questions, the national court asks the Court of Justice, in substance, about the consequences which the judicial authorities of a Member State must draw from a finding that provisions of national law are inconsistent with EU law and, more specifically, about the remedies that must be provided to shareholders receiving foreign-sourced dividends treated as FIDs (the third question) and whether or not certain circumstances make any difference to the Court’s answers (the fourth question).
1.      The consequences to be draw from a finding that certain provisions of national law are inconsistent with EU law

73.      Under the principle of sincere cooperation laid down in Article 4(3) TEU,      it is for the Member States to ensure judicial protection of an individual’s rights under EU law. In addition, Article 19(1) TEU requires Member States to provide remedies sufficient to ensure effective legal protection in the fields covered by EU law. (26)

74.      The Trustees submit that an effective remedy must result in the economic benefit derived by the Member State from the infringement of Article 63 TFEU being disgorged, otherwise the breach of that provision will be perpetuated. This, they submit, is a restitutionary remedy, which, in accordance with the principles identified in the judgments of 9 November 1983, San Giorgio (199/82, EU:C:1983:318), and of 8 March 2001, Metallgesellschaft and Others (C‑397/98 and C‑410/98, EU:C:2001:134), is the consequence of, and adjunct to, the rights conferred by provisions of EU law as interpreted by the Court.

75.      According to the Trustees, there is no legal principle that restitution by a Member State is limited to the amount of tax which it has levied from the person affected. They submit that the shareholders have a right to restitution of the sums of money which would have been paid to them if the national tax system had been in conformity with EU law, but which were not paid to them, the Member State itself benefiting instead from the sums in question. An effective remedy requires both payment of the sums in question and also interest as a result of the previous unavailability of those sums to the shareholders.

76.      The United Kingdom Government considers that, although a Member State is required under EU Law to repay charges levied in breach of EU law, that principle does not apply to the Trustees. It submits that the Trustees were exempt from tax on their dividend income under national law and, as a consequence, were not liable to pay, and did not pay any, tax on the FIDs which they received.

77.      I would observe that, in the absence of EU rules in the matter, it is not for the Court to determine what remedies must be available to shareholders which have received foreign-sourced dividends treated as FIDs, or the manner in which those remedies may be pursued. (27)

78.      Indeed, it is for the internal legal order of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding in full rights which individuals derive from EU law, provided that such rules are not less favourable than those governing similar domestic actions (the principle of equivalence) and that they do not render virtually impossible or excessively difficult the exercise of the rights conferred by EU law (the principle of effectiveness). (28)
a)      The recovery of sums unduly paid

79.      Contrary to the Trustees’ submission, I do not consider that the pension fund has any right to recover sums paid but not due, in accordance with the principles identified in the judgments of 9 November 1983, San Giorgio (199/82, EU:C:1983:318), and of 8 March 2001, Metallgesellschaft and Others (C‑397/98 and C‑410/98, EU:C:2001:134).

80.      The right to a refund of charges levied by a Member State in breach of the rules of EU law is the consequence and complement of the rights conferred on individuals by the provisions of EU law prohibiting such charges. The Member State is therefore required, in principle, to repay charges levied in breach of EU law. By way of exception to the principle of the reimbursement of charges incompatible with EU law, the repayment of duties wrongly levied can be refused, but only where repayment would entail unjust enrichment of the persons concerned, that is to say, where it is established that the person required to pay such charges has actually passed them on directly to, among others, the purchaser of goods. The right to the recovery of sums unduly paid helps to offset the consequences of the charge’s incompatibility with EU law by neutralising the economic burden which that charge has unduly imposed on the operator who, in the final analysis, has actually borne it. (29)

81.      It is important to bear in mind that, since the pension fund is an approved exempt scheme, the Trustees have paid no tax on, inter alia, the foreign-sourced dividends treated as FIDs which they received.

82.      It follows that, since the Trustees did not actually pay any tax, my view is that they have no right to recover sums paid but not due, in accordance with the principles identified in, inter alia, the judgments of 9 November 1983, San Giorgio (199/82, EU:C:1983:318), and of 8 March 2001, Metallgesellschaft and Others (C‑397/98 and C‑410/98, EU:C:2001:134).
b)      The principle of the primacy of EU law

83.      Does this mean that the shareholders which received foreign-sourced dividends treated as FIDs have no other means of redress? I think not.

84.      It should be recalled at the outset that, in accordance with the principle of the primacy of EU law, provisions of the Treaties and directly applicable measures of the institutions have the effect, in their relations with the internal law of the Member States, merely by entering into force, of rendering automatically inapplicable any conflicting provision of national law. (30)

85.      As is apparent from consistent case-law, when faced with a rule of law that is incompatible with directly applicable EU law, the national court is required to disapply that national rule and to apply, among the various procedures of the internal legal order, those which are appropriate to safeguard the individual rights conferred by EU law. (31)

86.      The principle of the primacy of EU law obliges the Member States to adopt such measures as are necessary to enable any person that has suffered discrimination prohibited by Article 63 TFEU to obtain the payment of any sums to which it would have been entitled in the absence of such discrimination. If the effectiveness of Article 63 TFEU is to be preserved and shareholders which have received foreign-sourced dividends treated as FIDs are to be ensured effective judicial protection, it is necessary that they should be placed, in so far as is possible and in a manner consistent with the principles of effectiveness and equivalence, in the position they would have been in had they not suffered discrimination as a result of the national provisions in question.

87.      In the present case, I consider that the principle of the primacy of EU law implies that, section 246C ICTA being disapplied, (32) the Trustees are entitled to a tax credit and also to the payment of that tax credit in cash, under section 213(3) ICTA, together with interest on the sum to compensate for its previous unavailability.
2.      Whether or not certain circumstances make any difference to the Court’s answers
a)      The circumstance that the shareholder was exempt from tax

88.      The fact that, in the Member State in which it was resident, (33) the shareholder was not liable to tax on any dividends received, with the consequence that, in the case of a distribution made by a resident company outside the FID regime, the tax credit to which the shareholder was entitled under domestic legislation could result in a payment of the tax credit to the shareholder by the Member State, makes no difference. (34) Compliance with Article 63 TFEU simply requires the application of the same rule in the context of the FID regime. In other words, the pension fund must be placed in the same position as exempt approved schemes which, outside the FID regime, were entitled to the payment of a tax credit (35) under section 231(3) ICTA.
b)      The circumstance that the national court has decided that there has not been a sufficiently serious infringement of EU law by the Member State, in accordance with the principles established in the judgment of 5 March 1996, Brasserie du pêcheur and Factortame (C‑46/93 and C‑48/93, EU:C:1996:79).

89.      In the case in point, the action for damages had been brought by the company which had distributed the dividends.

90.      As shareholders which have received from a resident company a payment of foreign-sourced dividends treated as FIDs, like the pension fund in the present case, have suffered direct loss as a result of the discriminatory rules of the FID regime and, more specifically, as a result of the failure to recognise their entitlement to a tax credit, and as Article 63 TFEU confers rights on such shareholders on which they may rely in court proceedings, the circumstance to which the national court refers can have no effect on those shareholders’ rights, which are independent of any rights conferred on the distributing companies. (36)

91.      The rights which Article 63 TFEU confers on the shareholders in question in the present case are independent of any rights conferred on the companies which distributed the dividends.
c)      The circumstance that the sums distributed may have been increased

92.      The referring court is unsure whether, in some cases, but not all, the company distributing the dividends under the above regime may have increased the amount of its distributions paid to all shareholders to provide a cash sum equivalent to that which would have been achieved by an exempt shareholder from a payment of dividends outside the regime. It questions whether that fact might be relevant. (37)

93.      I would observe that the referring court has stated that, ‘in the proceedings which are the subject of this reference, there is no evidence as to whether enhancement of dividends in fact occurred, if so to what extent, and whether it represented a true benefit to the shareholders or a true cost to the companies’. (38)

94.      In view of those matters, I consider the question referred by the national court to be very imprecise, if not purely hypothetical.

95.      In any event, I note further that the Court’s finding, in paragraph 173 of its judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774), that the shareholders had suffered discriminatory treatment applies irrespectively of any corrective measures that may have been taken for the benefit of their shareholders by resident companies paying foreign-sourced dividends treated as FIDs. Indeed, the Court attached no importance to the circumstance, which it nevertheless mentioned in paragraph 149 of its judgment, that a company which had elected to be taxed under the FID regime might be induced to ‘increase the amount of its distributions [in order] to guarantee its shareholders a return equivalent to that which would be achieved from a payment of nationally sourced dividends’.
VI –  Conclusion

96.      In light of the foregoing considerations, I propose that the Court answer the questions referred for a preliminary ruling by the Court of Appeal (England and Wales) (Civil Division) (United Kingdom) as follows:
(1)      Article 63 TFEU confers rights on shareholders which have received foreign-sourced dividends treated as FIDs on which they may rely in legal proceedings.
(2)      The principle of the primacy of EU law obliges the Member States to adopt such measures as are necessary to enable any person that has suffered discrimination prohibited by, inter alia, Article 63 TFEU to obtain the payment of any sums to which it would have been entitled in the absence of such discrimination. If the effectiveness of Article 63 TFEU is to be preserved and shareholders which have received foreign-sourced dividends treated as FIDs are to be guaranteed effective judicial protection, it is necessary that they should be placed, in so far as is possible and in a manner consistent with the principles of equivalence and effectiveness, in the position they would have been in had they not suffered discrimination as a result of the national provisions in question.
(3)      The Court regards as irrelevant:
–        the fact that, in the Member State in which it is resident, the shareholder is not liable to tax on any dividends received, with the consequence that, in the case of a distribution made by a resident company outside the FID regime, the tax credit to which the shareholder is entitled under domestic legislation could result in a payment of that tax credit to the shareholder by the Member State;
–        the fact that the national court has decided that the infringement of EU law by the domestic legislation in question is not sufficiently serious to give rise to liability in damages on the part of the Member State in favour of the company distributing the dividends, in accordance with the principles established in the judgment of 5 March 1996, Brasserie du pêcheur and Factortame (C‑46/93 and C‑48/93, EU:C:1996:79), as the rights which Article 63 TFEU confers on the shareholders in question are independent of the rights conferred on the companies distributing the dividends;
–        the fact that the company distributing the dividends under the abovementioned regime may have increased the amount of its distributions to all shareholders so as to pay a cash sum equivalent to that which would have been obtained by an exempt shareholder from a payment of dividends outside the FID regime.

1      Original language: French.

2      In its judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774, paragraph 148), the Court spoke of the ‘shareholder receiving a payment of dividends from a resident company which has its origin in foreign-sourced dividends treated as FIDs’.

3      These will be classified in the present Opinion as ‘foreign-sourced dividends treated as FIDs’.

4      Section 231(1) ICTA provided as follows: ‘... where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made’.

5      See points 23 to 29 below.

6      See section 592(2) ICTA and point 15 above.

7      See also the judgment of 15 September 2011, Accor (C‑310/09, EU:C:2011:581, paragraphs 30 to 32).

8      Judgment of 13 November 2012, Test Claimants in the FII Group Litigation (C‑35/11, EU:C:2012:707, paragraph 94 and the case-law cited).

9      In its judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774, paragraph 148), the Court used the expression ‘a payment of dividends from a resident company which has its origin in foreign-sourced dividends treated as FIDs’.

10      Judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774, paragraph 145). Emphasis added.

11      Judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774, paragraphs 148 and 149).

12      Emphasis added.

13      See also paragraph 4 of the operative part of that judgment.

14      I would observe that it is not disputed that the situation of shareholders receiving foreign-sourced dividends treated as FIDs is comparable to that of shareholders receiving nationally sourced dividends.

15      According to the referring court, ‘in the case of dividends paid outside the FID regime, the payment of tax credits had the consequence that the United Kingdom supplemented the dividend income of the pension fund. It was, in effect, a repayment to the pension fund shareholder of part of the corporation tax paid by the UK resident company (or by its domestic subsidiaries).’ It points out that ‘a dividend of 80 would lead to a tax credit of 20, resulting in total receipts for the pension fund of 100’.

16      The United Kingdom Government relies, in this connection, on the judgment of 16 July 1998, ICI (C‑264/96, EU:C:1998:370, paragraph 34). It states that ‘a movement of capital within Article 63 [TFEU] involves the acquisition by a person of foreign securities, not domestic securities. It follows that the acquisition by a resident shareholder of domestic shares is not a movement of capital within Article 63.’ I regard the judgment cited by the United Kingdom Government as irrelevant in this case. In paragraph 33 of the judgment cited, the Court held that Articles 49 TFEU and 54 TFEU on the freedom of establishment ‘[did] not preclude domestic legislation under which tax relief is not granted to a resident consortium member where the business of the holding company owned by that consortium consists wholly or mainly in holding shares in subsidiaries which have their seat in non-member countries’. It must be observed that, although the Court held in paragraph 34 that the dispute lay outside the scope of EU law, and of the freedom of establishment in particular, it made no comment of any kind on the question whether it was a purely internal situation or on the free movement of capital.

17      OJ 1988 L 178, p. 5.

18      It is an interpretation which disregards the ‘economic reality’, as the Commission submitted at the hearing.

19      I agree with the Trustees’ observations: ‘The FID regime creates an express link between the profits of the foreign companies and the tax treatment of shareholders such as [the pension fund]: only dividends which matched income originating in the profits of foreign companies were classified as FIDs resulting in the relief for surplus ACT which the companies sought’. ‘There is necessarily a foreign element involved in a FID. By definition, the FID represents the onward distribution of income which the UK parent company has derived from foreign subsidiaries.’

20      See paragraphs 148 and 173 of the judgment of 12 December 2006, Test Claimants in the FII Group Litigation(C‑446/04, EU:C:2006:774).

21      The parent company Keller Holding, which had its registered office and seat of management in Germany, held as sole shareholder the shares in another company established in Germany, Keller Grundbau GmbH. The latter in turn owned the shares in a company established in Austria, Keller Grundbau GmbH Wien (the parent’s indirect subsidiary or sub-subsidiary).

22      See, to that effect, judgment of 23 February 2006, Keller Holding (C‑471/04, EU:C:2006:143, paragraph 23). See also, by analogy, the judgment of 10 March 2005, Laboratoires Fournier (C‑39/04, EU:C:2005:161), in which the Court held that national legislation which provided for a corporation tax credit for research only where the research was carried out in that Member State was contrary to Article 59 TFEU. In his Opinion in Laboratoires Fournier (C‑39/04, EU:C:2004:789), at point 11, Advocate General Jacobs stated ‘those rules treat a resident company which has accepted services provided from within the Member State in question more favourably than a resident company which has accepted services provided from another Member State. They are therefore, albeit indirectly, based upon the place of establishment of the provider of services and are consequently liable to restrict its cross-border activities; it follows that they are in manifest conflict with Article [59 TFEU]’ (emphasis added). See also the judgment of 12 April 1994, Halliburton Services (C‑1/93, EU:C:1994:127, paragraph 20), in which the court held that a difference in treatment which had an indirect effect on the position of companies constituted under the laws of other Member States constituted discrimination on grounds of nationality prohibited by Article 49 TFEU.

23      Judgment of 23 February 2006, Keller Holding (C‑471/04, EU:C:2006:143, paragraph 24).

24      The United Kingdom Government had argued that there was no double economic taxation under the FID regime, ‘inasmuch as, first, no ACT [was] accounted for on foreign-sourced dividends and, secondly, the ACT which the resident company receiving those dividends [had to] account for on making a distribution to its shareholders [was] subsequently repaid’. See also, to that effect, judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774, paragraph 158).

25      Judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774, paragraph 159).

26      Judgment of 19 November 2014, ClientEarth (C‑404/13, EU:C:2014:2382, paragraph 52 and the case-law cited). See also point 81 of the Opinion of Advocate General Mengozzi in Texdata Software (C‑418/11, EU:C:2013:50), point 37 of the Opinion of Advocate General Sharpston in Star Storage and Others (C‑439/14 and C‑488/14, EU:C:2016:307) and footnote 32 to the latter Opinion, in which the Advocate General stated that, ‘to the extent that it applies to the Member States, Article 47 of the Charter echoes the second subparagraph of Article 19(1) TEU and gives specific expression to the principle of sincere cooperation laid down in Article 4(3) TEU. …’

27      See, by analogy, judgment of 12 December 2006, Test Claimants in the FII Group Litigation (C‑446/04, EU:C:2006:774, paragraph 201).

28      Judgment of 19 May 2011, Iaia and Others (C‑452/09, EU:C:2011:323, paragraph 16 and the case-law cited).

29      Judgment of 20 October 2011, Danfoss and Sauer-Danfoss (C‑94/10, EU:C:2011:674, paragraphs 20, 21 and 23).

30      Judgment of 4 February 2016, Ince (C‑336/14, EU:C:2016:72, paragraph 52).

31      See, to that effect, judgment of 19 July 2012, Littlewoods Retail and Others (C‑591/10, EU:C:2012:478, paragraph 33 and the case-law cited).

32      See, by analogy, judgment of 19 July 2012, Littlewoods Retail and Others (C‑591/10, EU:C:2012:478, paragraphs 25 and 33).

33      In casu, the United Kingdom.

34      Question 4(a) referred by the national court.

35      See, by analogy, paragraph 49 of the judgment of 7 September 2004, Manninen (C‑319/02, EU:C:2004:484), in which the Court held that, ‘for the Republic of Finland, granting a tax credit in relation to corporation tax due in another Member State would entail a reduction in its tax receipts in relation to dividends paid by companies in other Member States … [However, that] cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is in principle contrary to a fundamental freedom.’

36      Question 4(b) referred by the national court.

37      Question 4(c) referred by the national court.

38      See the judgment in The BT Pension Scheme (Trustees of) v HM Revenue and Customs, [2015], EWCA Civ 713. In paragraph 22 of that judgment, the Court of Appeal (England & Wales) (Civil Division) stated that ‘many of [the companies] chose to enhance dividends which they might otherwise have paid’. In paragraph 23, it stated that there had been no findings of fact to enable it to be known whether the FIDs were enhanced, ‘let alone sufficiently enhanced so as wholly to offset the disadvantage to the Trustees attendant upon the denial of a payable tax credit in relation to such dividends’. In paragraph 23, the Court of Appeal proceeded on the assumption that enhancements ‘did not fully offset that disadvantage’.