European Commission v Kingdom of Spain.
Date: 2010-06-03
24. The Court has confirmed, in particular, in the judgments in Case C‑374/04 Test Claimants in Class IV of the ACT Group Litigation  [2006] ECR I‑11673, paragraph 58, and Case C‑282/07 Truck Center  [2008] ECR I‑10767, paragraph 42, the distinction between the powers of the State of residence of the recipient company and those of the State of the source of the income. Similarly, Article 4(1) of Directive 90/435 requires the Member State of residence of the parent company which receives the profits distributed by a subsidiary resident in another Member State to prevent double taxation.
34. As a preliminary point, it must be observed that, according to consistent case-law, the question whether a Member State has failed to fulfil its obligations must be determined by reference to the situation obtaining in the Member State at the end of the period laid down in the reasoned opinion (see, inter alia, Case C‑173/01 Commission  v Greece  [2002] ECR I‑6129, paragraph 7; Case C‑519/03 Commission  v Luxembourg  [2005] ECR I‑3067, paragraph 18; and Case C‑562/07 Commission  v Spain  [2009] ECR I‑0000, paragraph 23).
35. In the present case, that period expired two months after the receipt by the Kingdom of Spain of the reasoned opinion sent to it on 13 July 2006 and, in accordance with settled case-law, subsequent changes cannot be taken into account by the Court (see, in particular, Case C‑135/03 Commission  v Spain [2005] ECR I‑6909, paragraph 31).
37. According to settled case-law, although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with European Union law (see, inter alia, Test Claimants in Class IV of the ACT Group Litigation , paragraph 36; Amurta , cited above, paragraph 16; and Case C‑540/07 Commission  v Italy  [2009] ECR I‑0000, paragraph 28).
38. It must also be noted that, in the absence of any unifying or harmonising measures at European Union level, 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 (Case C‑336/96 Gilly  [1998] ECR I‑2793, paragraphs 24 and 30; Case C‑307/97 Saint-Gobain ZN  [1999] ECR I‑6161, paragraph 57; Amurta , paragraph 17; and Commission  v Italy , paragraph 29).
39. As appears particularly from the third recital in the preamble to Directive 90/435, the aim of that directive is, by the introduction of a common system of taxation, to eliminate any disadvantage to cooperation between companies of different Member States as compared with cooperation between companies of the same Member State and thereby to facilitate the grouping together of companies at European Union level (Case C‑294/99 Athinaïki Zithopiïa  [2001] ECR I‑6797, paragraph 25; Case C‑446/04 Test Claimants in the FII Group Litigation [2006] ECR I‑11753, paragraph 103; and Amurta , paragraph 18).
40. In respect of shareholdings not covered by Directive 90/435, it is for the Member States to determine whether, and to what extent, economic double taxation or a series of charges to tax on distributed profits is to be avoided and, for that purpose, to establish, either unilaterally or through double taxation conventions concluded with other Member States, procedures intended to prevent or mitigate such economic double taxation or series of charges to tax. However, this does not of itself mean that the Member States are entitled to impose measures that contravene the freedoms of movement guaranteed by the Treaty (see, Test Claimants in Class IV of the ACT Group Litigation , paragraph 54; Amurta , paragraph 24; and Commission  v Italy , cited above, paragraph 31).
47. The differences in treatment authorised by Article 58(1)(a) EC must thus be distinguished from the forms of discrimination prohibited by Article 58(3) EC. The case-law of the Court shows that in order, for national tax legislation such as that at issue here to be capable of being regarded as compatible with the provisions of the Treaty on the free movement of capital, the difference in treatment must concern situations which are not objectively comparable or be justified by an overriding reason relating to the public interest (Case C‑35/98 Verkooijen  [2000] ECR I‑4071, paragraph 43; Case C‑319/02 Manninen  [2004] ECR I‑7477, paragraph 29; Amurta , paragraph 32; and Commission  v Italy , paragraph 49).
50. It is to be borne in mind that the Court has already held that, in the context of measures laid down by a Member State in order to prevent or mitigate the imposition of a series of charges to tax on, or the economic double taxation of, profits distributed by a resident company, resident shareholders receiving dividends are not necessarily in a situation which is comparable to that of shareholders receiving dividends who are resident in another Member State (Case C‑170/05 Denkavit Internationaal and Denkavit France  [2006] ECR I‑11949, paragraph 34; Amurta , paragraph 37; and Commission  v Italy , cited above, paragraph 51).
51. However, as soon as a Member State, either unilaterally or by way of a convention, imposes a charge to tax on the income, not only of resident shareholders, but also of non-resident shareholders, from dividends which they receive from a resident company, the situation of those non-resident shareholders becomes comparable to that of resident shareholders ( Test Claimants in Class IV of the ACT Group Litigation , paragraph 68; Denkavit Internationaal and Denkavit France , paragraph 35; Amurta , paragraph 38; and Commission  v Italy , paragraph 52).
52. It is solely because of the exercise by that State of its power of taxation that, irrespective of any taxation in another Member State, a risk of a series of charges to tax or economic double taxation may arise. In such a case, in order for non‑resident companies receiving dividends not to be subject to a restriction on the free movement of capital prohibited, in principle, by Article 56 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 or economic double taxation, non-resident shareholder companies are subject to the same treatment as resident shareholder companies ( Test Claimants in Class IV of the ACT Group Litigation , paragraph 70; Amurta , paragraph 39; and Commission  v Italy , paragraph 53).
53. It must, in the circumstances of this case, be stated that the Kingdom of Spain chose to exercise its power of taxation over dividends distributed to companies established in other Member States. Non-resident recipients of those dividends thus find themselves in a situation comparable to that of resident companies as regards the risk of economic double taxation of dividends distributed by resident companies, so that non-resident recipients cannot be treated differently from resident recipients.
54. In that regard, the reference by the Kingdom of Spain to the judgment in Truck Center is irrelevant. The difference in treatment between companies receiving income from capital, established by the legislation at issue in the main proceedings which gave rise to that judgment, consisted in the application of different taxation arrangements to companies established in Belgium and to those established in another Member State ( Truck Center , paragraph 41). However, under the legislation at issue in the present case, the dividends paid to companies resident in another Member State are taxed, whereas the dividends paid to companies resident in Spain are exempt.
56. On the first point, the Court has already ruled that the disadvantages which could arise from the parallel exercise of powers of taxation by different Member States, to the extent that such an exercise is not discriminatory, do not constitute restrictions prohibited by the Treaty (see, to that effect, Kerckhaert and Morres , paragraphs 19, 20 and 24; Case C‑194/06 Orange European Smallcap Fund  [2008] ECR I‑3747, paragraphs 41, 42 and 47; and Case C‑128/08 Damseaux  [2009] ECR I‑0000, paragraph 27).
58. As regards the second point, it is true that the Court has held that the possibility cannot be excluded that a Member State might succeed in ensuring compliance with its obligations under the Treaty by concluding a convention for the avoidance of double taxation with another Member State (see, to that effect, Test Claimants in Class IV of the ACT Group Litigation , paragraph 71; Amurta , paragraph 79; and Commission  v Italy , paragraph 36).
59. However, it is necessary for that purpose that application of such a convention should allow the effects of the difference in treatment under national legislation to be compensated for. Thus, the Court has held that the difference in treatment between dividends distributed to companies established in other Member States and those distributed to resident companies does not disappear unless the tax withheld at source under national legislation can be set off against the tax due in the other Member State in the full amount of the difference in treatment arising under the national legislation (see, Commission  v Italy , cited above, paragraph 37).
60. In order to attain the objective of neutralisation, the application of the method of deduction relied on by the Kingdom of Spain should therefore enable the tax on dividends levied by that Member State to be deducted in its entirety from the tax due in the Member State of residence of the recipient company, so that if the dividends received by that company were ultimately taxed more heavily than the dividends paid to companies resident in Spain, that heavier tax burden could no longer be attributed to the Kingdom of Spain, but to the State of residence of the company receiving dividends which exercised its power to impose taxes.
61. In the present case, the majority of the conventions for the avoidance of double taxation concluded by the Kingdom of Spain provide that the amount deducted or set off in respect of tax withheld in Spain cannot exceed the fraction of the tax in the Member State of residence paid by the recipient company, calculated before the deduction, corresponding to taxable income in Spain.
62. Therefore, the difference in treatment may be neutralised only where the dividends from Spain are sufficiently taxed in the other Member State. If those dividends are not taxed, or are not sufficiently taxed, the sum withheld in Spain or a part thereof cannot be deducted. In that case, the difference in treatment arising from the application of national legislation cannot be compensated for by applying provisions of the double taxation convention (see, Commission  v Italy , paragraph 38).
64. The choice as to whether to tax income from Spain in the other Member State or the level at which it is to be taxed, depends not on the Kingdom of Spain but on the tax rules laid down by the other Member State. The Kingdom of Spain is therefore wrong to argue that deduction of the tax withheld at source in Spain against the tax due in the other Member State, pursuant to the provisions of conventions for the avoidance of double taxation, allows in all cases for the difference in treatment arising from the application of national legislation to be neutralised (see, Commission  v Italy , paragraph 39).
66. First, a Member State cannot rely on the existence of a tax advantage granted unilaterally by another Member State in order to escape its obligations under the Treaty ( Amurta , cited above, paragraph 78). Second, in the present case, an exemption such as that granted by the Republic of Cyprus cannot in any event neutralise the double taxation arising from the exercise by the Kingdom of Spain of its powers of taxation.
70. As a preliminary point, it must be recalled that the Court may of its own motion examine whether the conditions laid down in Article 226 EC for bringing an action for failure to fulfil obligations are satisfied (Case C‑362/90 Commission  v Italy  [1992] ECR I‑2353, paragraph 8; Case C‑439/99 Commission  v Italy  [2002] ECR I‑305, paragraph 8; Case C‑98/04 Commission  v United Kingdom  [2006] ECR I‑4003, paragraph 16; and Case C‑195/04 Commission  v Finland  [2007] ECR I‑3351, paragraph 21).
71. By virtue of Article 21 of the Statute of the Court of Justice and Article 38(1)(c) of the Rules of Procedure of the Court, the application must contain the subject-matter of the dispute and a brief statement of the pleas in law on which the application is based. Accordingly, in any application lodged under Article 226 EC, the Commission must indicate the specific complaints upon which the Court is called to rule and, at the very least in summary form, the legal and factual particulars on which those complaints are based (see, inter alia, Case C‑390/07 Commission v United Kingdom  [2009] ECR I‑0000, paragraph 339).