Test Claimants in Class IV of the ACT Group Litigation v Commissioners of Inland Revenue.
Date: 2006-12-12
33. It is true that, in their observations to the Court, the claimants in the main proceedings also refer to the less favourable situation of ultimate shareholders receiving dividends from a non‑resident company, who are not entitled to a tax credit, by comparison with ultimate shareholders who receive dividends from a resident company, who are entitled to such a credit under the relevant United Kingdom legislation, or, in the case of non-resident shareholders, by virtue of a DTC. However, it is clear that the claimants in the main proceedings rely on the less favourable treatment applying to shareholders in non‑resident companies in order only to object to a restriction on freedom of establishment and free movement of capital as regards those companies themselves.
36. It should be recalled at the outset that, according to well-established case‑law, although direct taxation falls within their competence, the Member States must none the less exercise that competence consistently with Community law (see, inter alia, Case C-35/98 Verkooijen  [2000] ECR I‑4071, paragraph 32; Metallgesellschaft and Others , paragraph 37; and Case C‑471/04 Keller Holding  [2006] ECR I-2107, paragraph 28).
37. As regards the question whether the national legislation at issue in the main proceedings falls within the scope of Article 43 EC on freedom of establishment or Article 56 EC on free movement of capital, it must be noted that the question referred concerns national measures relating to the taxation of dividends, in terms of which, irrespective of the extent of the holding of the shareholder receiving the dividend, a resident company receiving dividends from another resident company is granted a tax credit, whereas, for a non-resident company receiving such dividends, the grant of a tax credit is dependent on the provisions of such DTC, if any, as the United Kingdom may have concluded with the State in which that company is resident. Under some DTCs, such as that concluded with the Kingdom of the Netherlands, the amount of the tax credit varies depending on the extent of the holding of the shareholder in the company making the distribution.
38. It follows that the measures at issue may fall within the scope of both Article 43 EC and Article 56 EC.
39. The order for reference shows that three of the cases chosen as test cases in the proceedings before the national court concern United Kingdom-resident companies which are wholly owned by non-resident companies. As the nature of the interest in question will confer on the holder definite influence over the company’s decisions and allow it to determine the company’s activities, the provisions of the EC Treaty on freedom of establishment will apply (Case C-251/98 Baars [2000] ECR I-2787, paragraphs 21 and 22; Case C-436/00 X and Y [2002] ECR I‑10829, paragraphs 37 and 66 to 68; and Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-0000, paragraph 31).
42. It should be pointed out in that regard that freedom of establishment, which Article 43 EC grants to Community nationals and which includes the right for them 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 Member State where such establishment is effected, entails, in accordance with Article 48 EC, for companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Community, the right to exercise their activity in the Member State concerned through a subsidiary, branch or agency (see, in particular, Case C-307/97 Saint‑Gobain ZN [1999] ECR I-6161, paragraph 35; Case C-446/03 Marks & Spencer [2005] ECR I-10837, paragraph 30; and Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 41).
43. In the case of companies, it should be borne in mind that their registered office for the purposes of Article 48 EC serves, in the way same as nationality in the case of individuals, as the connecting factor with the legal system of a Member State. Acceptance of the proposition that the Member State in which a company seeks to establish itself may freely apply different treatment merely by reason of its registered office being situated in another Member State would deprive Article 43 EC of all meaning (see, to that effect, Case 270/83 Commission  v France  [1986] ECR 273, paragraph 18; Case C-330/91 Commerzbank  [1993] ECR I‑4017, paragraph 13; Metallgesellschaft and Others , paragraph 42; and Marks & Spencer , paragraph 37). Freedom of establishment thus aims to guarantee the benefit of national treatment in the host Member State, by prohibiting any discrimination based on the place in which companies have their seat (see, to that effect, Commission  v France , paragraph 14, and Saint‑Gobain ZN , paragraph 35).
46. In order to determine whether a difference in tax treatment is discriminatory, it is, however, necessary to consider whether, having regard to the national measure at issue, the companies concerned are in an objectively comparable situation. According to well-established case-law, discrimination is defined as treating differently situations which are identical, or treating in the same way situations which are different (see Case C-279/93 Schumacker  [1995] ECR I‑225, paragraph 30, and Case C-311/97 Royal Bank of Scotland  [1999] ECR I‑2651, paragraph 26).
50. It is for each Member State to organise, in compliance with Community law, its system of taxation of distributed profits and, in that context, to define the tax base as well at the tax rates which apply to the company making the distribution and/or the shareholder to whom the dividends are paid, in so far as they are liable to tax in that State.
51. By virtue of Article 293 EC, Member States are required, so far as necessary, to enter into negotiations with each other with a view to securing for the benefit of their nationals the abolition of double taxation within the Community. However, apart from Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (OJ 1990 L 225, p. 10), no unifying or harmonising measure for the elimination of double taxation has yet been adopted at Community level, and Member States have not yet concluded any multilateral convention to that effect under Article 293 EC (see Case C‑336/96 Gill [1998] ECR I-2793, paragraph 23; Case C-376/03 D . [2005] ECR I-5821, paragraph 50; and Case C‑470/04 N. [2006] ECR I-0000, paragraph 43).
52. It is against that background that the Court has already held that, in the absence of any unifying or harmonising Community measures, Member States retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation, particularly with a view to eliminating double taxation ( Gilly , paragraphs 24 and 30; Saint‑Gobain ZN , paragraph 57; and N. , paragraph 44).
53. It is only in the case of companies of Member States which have a minimum holding of 25% in the capital of a company of another Member State that Article 4 of Directive 90/435, read in conjunction with Article 3 of that directive, in the original version applying at the time of the facts in the main proceedings, obliges each Member State either to exempt profits received by a resident parent company from a subsidiary resident in another Member State or to authorise that parent company to deduct from the amount of tax due that fraction of the corporation tax paid by the subsidiary which relates to those profits and, if appropriate, the amount of the withholding tax levied by the Member State in which the subsidiary is resident.
54. The mere fact that, for holdings to which Directive 90/435 does not apply, it is for the Member States to determine whether, and to what extent, a series of charges to tax and economic double taxation are to be avoided and, for that purpose, to establish, either unilaterally or through DTCs concluded with other Member States, procedures intended to prevent or mitigate such a series of charges to tax and that economic double taxation, does not of itself mean that the Member States are entitled to impose measures that contravene the freedoms of movement guaranteed by the Treaty.
55. Thus, where a Member State has a system for preventing or mitigating a series of charges to tax or economic double taxation for dividends paid to residents by resident companies, it must treat dividends paid to residents by non-resident companies in the same way (see, to that effect, Case C-315/02 Lenz  [2004] ECR I‑7063, paragraphs 27 to 49, and Case C-319/02 Manninen  [2004] ECR I‑7477, paragraphs 29 to 55).
56. Under such systems, the situation of shareholders resident in a Member State and receiving dividends from a company established in that State is comparable to that of shareholders who are resident in that State and receive dividends from a company established in another Member State, inasmuch as both the dividends deriving from a national source and those deriving from a foreign source may be subject, first, in the case of corporate shareholders, to a series of charges to tax and, secondly, in the case of ultimate shareholders, to economic double taxation (see, to that effect, Lenz , paragraphs 31 and 32, and Manninen , paragraphs 35 and 36).
57. However, although the situation of those shareholders must be treated as being comparable as regards the application to them of the tax legislation of the Member State in which they are resident, the same is not necessarily true, as regards the application of the tax legislation of the Member State in which the company making the distribution is resident, of the situations in which shareholders receiving dividends resident in that Member State and shareholders receiving dividends resident in another Member State are placed.
58. Where the company making the distribution and the shareholder to whom it is paid are not resident in the same Member State, the Member State in which the company making the distribution is resident, that is to say the Member State in which the profits are derived, is not in the same position, as regards the prevention or mitigation of a series of charges to tax and of economic double taxation, as the Member State in which the shareholder receiving the distribution is resident.
59. It must be held in that regard, first, that to require the Member State in which the company making the distribution is resident to ensure that profits distributed to a non-resident shareholder are not liable to a series of charges to tax or to economic double taxation, either by exempting those profits from tax at the level of the company making the distribution or by granting the shareholder a tax advantage equal to the tax paid on those profits by the company making the distribution, would mean in point of fact that that State would be obliged to abandon its right to tax a profit generated through an economic activity undertaken on its territory.
60. Secondly, as regards a procedure for preventing or mitigating economic double taxation by the grant of a tax advantage to the ultimate shareholder, it must be pointed out that it is usually the Member State in which the latter is resident that is best placed to determine the shareholder’s ability to pay tax (see, to that effect, Schumacker , paragraphs 32 and 33, and D. , paragraph 27). Likewise, in the case of shareholdings to which Directive 90/435 applies, Article 4(1) of that directive requires the Member State of the parent company which receives profits distributed by a subsidiary which is resident in another Member State, and not the latter State, to avoid a series of charges to tax, either by refraining from taxing such profits or by taxing such profits while authorising that parent company to deduct from the amount of tax due that fraction of the corporation tax paid by the subsidiary which relates to those profits and, if appropriate, the amount of the withholding tax levied by the Member State in which the subsidiary is resident.
61. As regards the national legislation at issue in the main proceedings, it must be pointed out that, where a company resident in the United Kingdom pays dividends to another company, neither the dividends received by a resident company nor those received by a non-resident company are subject to tax in the United Kingdom.
62. There is therefore no difference in treatment in that respect.
63. However, there is a difference between resident companies receiving dividends and non-resident companies receiving dividends as regards the ability of those companies to pay dividends to their ultimate shareholders under rules which entitle those shareholders to a tax credit equal to the fraction of the corporation tax paid by the company which made the distributed profits. It is not in dispute that only resident companies may do so.
64. It is in its capacity as the Member State in which the shareholder is resident that, when a resident company pays dividends to its resident ultimate shareholders, that Member State grants to such shareholders, on payment of the dividends, a tax credit equal to the fraction of the advance corporation tax paid by the company which made the distributed profits.
65. As regards the application of procedures intended to prevent or mitigate the imposition of a series of charges to tax or economic double taxation, the position of a Member State in which both the companies making the distribution and the ultimate shareholders are resident is thus not comparable to that of a Member State in which a company is resident which pays dividends to a non-resident company, which pays them, in turn, to its ultimate shareholders, in that the second State acts, in principle, only as the State in which the distributed profits are derived.
68. However, once a Member State, unilaterally or by a convention, imposes a charge to income tax not only on resident shareholders but also on non‑resident shareholders in respect of dividends which they receive from a resident company, the position of those non-resident shareholders becomes comparable to that of resident shareholders.
70. If the Member State of residence of the company making distributable profits decides to exercise its taxing powers not only in relation to profits made in that State but also in relation to income arising in that State and paid to non‑resident companies receiving dividends, it is solely because of the exercise by that State of its taxing powers that, irrespective of any taxation in another Member State, a risk of a series of charges to tax may arise. In such a case, in order for non-resident companies receiving dividends not to be subject to a restriction on freedom of establishment prohibited, in principle, by Article 43 EC, the State in which the company making the distribution is resident is obliged to ensure that, under the procedures laid down by its national law in order to prevent or mitigate a series of liabilities to tax, non-resident shareholder companies are subject to the same treatment as resident shareholder companies.
71. It is for the national court to determine, in each case, whether that obligation has been complied with, taking account, where necessary, of the provisions of the DTC that that Member State has concluded with the State in which the shareholder company is resident (see, to that effect, Case C-265/04 Bouanich [2006] ECR  I-923, paragraphs 51 to 55).
81. It should be pointed out in that regard that, in the absence of unifying or harmonising measures at Community level for the elimination of double taxation, the Member States retain competence for determining the criteria for taxation on income with a view to eliminating double taxation by means, inter alia, of international agreements. In those circumstances, the Member States remain at liberty to determine the connecting factors for the allocation of fiscal jurisdiction by means of bilateral agreements (see Gilly , paragraphs 24 and 30; Saint-Gobain ZN , paragraph 57; D ., paragraph 52; and Bouanich , paragraph 49).
84. As the Court noted in paragraph 54 of D ., the scope of a bilateral tax convention is limited to the natural or legal persons referred to in it.
87. The situations in which the United Kingdom grants a tax credit to companies resident in the other contracting State which receive dividends from a United Kingdom-resident company are those in which the United Kingdom also retains the right to tax the companies on those dividends. The rate of tax which the United Kingdom may charge in such cases varies according to the circumstances and, in particular according to whether the DTC provides for a full or a partial tax credit. There is thus a direct link between the entitlement to a tax credit and the rate of tax laid down under such a DTC (see, to that effect, Case C‑58/01 Océ Van der Grinten  [2003] ECR I‑9809, paragraph 87).
88. Thus, the grant of a tax credit to a non-resident company receiving dividends from a resident company, as provided for under a number of DTCs concluded by the United Kingdom, cannot be regarded as a benefit separable from the remainder of those DTCs, but is an integral part of them and contributes to their overall balance (see, to that effect, D ., paragraph 62).
89. The same applies to the provisions of the DTCs which make the grant of such a tax credit subject to the condition that the non-resident company is not owned, directly or indirectly, by a company resident in a Member State or a non-member country with which the United Kingdom has concluded a DTC which does not provide for such a tax credit.
90. Even where such provisions extend to the situation of a company which is not resident in one of the contracting Member States, they apply only to persons resident in one of those Member States and, by contributing to the overall balance of the DTCs in question, are an integral part of them.
91. The fact that those reciprocal rights and obligations apply only to persons resident in one of the two contracting Member States is an inherent consequence of bilateral double taxation conventions. It follows, as regards the taxation of dividends paid by a company resident in the United Kingdom, that a company resident in a Member State which has concluded a DTC with the United Kingdom which does not provide for such a tax credit is not in the same situation as a company resident in a Member State which has concluded a DTC which does provide for one (see, to that effect, D ., paragraph 61).
92. It follows that the Treaty provisions on freedom of establishment do not preclude a situation in which the entitlement to a tax credit laid down in a DTC concluded by a Member State with another Member State for companies resident in the second State which receive dividends from a company resident in the first State does not extend to companies resident in a third Member State with which the first State has concluded a DTC which does not provide for such an entitlement.
93. Since such a situation does not discriminate against non-resident companies receiving dividends from a resident company, the conclusion drawn in the preceding paragraph also applies to the Treaty provisions relating to free movement of capital.