Rewe Zentralfinanz eG v Finanzamt Köln-Mitte.
Date: 2007-03-29
21. It should be noted 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, Joined Cases C-397/98 and C‑410/98 Metallgesellschaft and Others [2001] ECR I-1727, paragraph 37; Case C-446/03 Marks & Spencer [2005] ECR I-10837, paragraph 29; Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas  [2006] ECR I-0000, paragraph 40; and Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I-0000, paragraph 25).
22. In accordance with settled case-law, national provisions which apply to holdings by nationals of the Member State concerned in the capital of a company established in another Member State, giving them definite influence on the company’s decisions and allowing them to determine its activities, come within the substantive scope of the provisions of the Treaty on freedom of establishment (see, to that effect, Case C-251/98 Baars [2000] ECR I-2787, paragraph 22; Case C-436/00 X and Y [2002] ECR I-10829, paragraph 37; Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 31; and Test Claimants in the Thin Cap Group Litigation , paragraph 27).
23. That is the case where, as in the main proceedings, a resident company such as ITS owns 100% of the shares in a company established in another Member State. A 100% holding by a taxpayer in the capital of a company having its seat in another Member State undoubtedly brings such a taxpayer within the scope of application of the provisions of the Treaty relating to the right of establishment ( Baars , paragraph 21).
25. Freedom of establishment, which Article 52 of the Treaty grants to Community nationals and which includes 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 Member State where such establishment is effected, entails, in accordance with Article 58 of the Treaty, 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, inter alia, Case C‑307/97  Saint-Gobain ZN  [1999] ECR I‑6161, paragraph 35; Marks & Spencer , paragraph 30; and Case C‑471/04 Keller Holding  [2006] ECR I-2107, paragraph 29).
26. Furthermore, even though, according to their wording, the provisions of the Treaty concerning freedom of establishment are directed to ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State, they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation (Case C-264/96 ICI [1998] ECR I‑4695, paragraph 21, and Marks & Spencer , paragraph 31).
27. The legislation at issue in the main proceedings provides that asset losses stemming from write-downs to the book value of shareholdings in subsidiaries in Germany are to be taken into account immediately and without restriction in calculating the taxable profits of parent companies which are subject to unlimited liability to tax in Germany.
28. By contrast, as is clear from Paragraph 2a(1) and (2) of the EStG 1990, losses of the same kind stemming from shareholdings in a subsidiary established in another Member State are deductible in the case of a parent company which is subject to unlimited liability to tax in Germany only under certain conditions linked to the income of that company or to the carrying on by its subsidiary of so-called ‘active’ activities.
29. It is true that, for a parent company resident in Germany, losses stemming from shareholdings in subsidiaries established in other Member States could be taken into account in Germany where those subsidiaries subsequently generated positive income. However, it remains the case that, even where sufficient positive income was established, such a parent company is not, unlike a parent company having subsidiaries established in Germany, entitled to have its losses taken into account immediately and is thus deprived of a cash-flow advantage (see, to that effect, Marks & Spencer , paragraph 32).
30. It follows that the tax situation of a parent company which is resident in Germany and has, like Rewe, a subsidiary and a second-tier subsidiary in another Member State is less favourable than its situation would be if such a subsidiary and such a second-tier subsidiary were established in Germany.
31. Such a difference in treatment gives rise to a tax disadvantage for a parent company which is established in Germany and has a subsidiary in another Member State. In the light of that difference, a parent company might be dissuaded from carrying on its activities through the intermediary of subsidiaries or indirect subsidiaries established in other Member States (see, to that effect, Case C-168/01 Bosal [2003] ECR I‑9409, paragraph 27).
34. Those companies are in a comparable situation as regards losses incurred by such resident parent companies in respect of write-downs made to the book value of their shareholdings in subsidiaries, whether the shares are held in subsidiaries established in Germany or in other Member States. In each case, first, the losses which it is sought to deduct are borne by the parent companies and, secondly, the profits of those subsidiaries, whether they come from subsidiaries which are taxable in Germany or from those which are taxable in other Member States, are not taxable in the hands of the parent companies.
37. Such a restriction on freedom of establishment can be accepted only if it pursues a legitimate aim compatible with the Treaty or is justified by overriding reasons of public interest. But even if that were so, application of that measure would still have to be such as to ensure achievement of the aim in question and not go beyond what is necessary for that purpose (see, inter alia, Marks & Spencer , paragraph 35 and the case-law cited there, and Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 47).
41. As the Advocate General stated at point 32 of his Opinion, it is necessary to define the scope to be accorded to the legitimate requirement of the balanced allocation of the power to impose taxes between the Member States. In particular, it must be noted that such a justification was accepted by the Court in the judgment in Marks & Spencer only in conjunction with two other grounds, based on the taking into account of tax losses twice and on tax avoidance (see, to that effect, Marks & Spencer , paragraphs 43 and 51).
42. It must be acknowledged in that regard that there are courses of action which are capable of jeopardising the right of the Member States to exercise their taxing powers in relation to activities carried on in their territory and thus of undermining a balanced allocation of the power to impose taxes between the Member States (see Marks & Spencer , paragraph 46) and which may justify a restriction on freedom of establishment (see Cadbury Schweppes and Cadbury Schweppes Overseas , paragraphs 55 and 56). The Court has thus held that the fact of giving companies the right to elect to have their losses taken into account in the Member State in which they are established or in another Member State would seriously undermine a balanced allocation of the power to impose taxes between the Member States, since the tax base would be increased in the first State, and reduced in the second, by the amount of the losses surrendered.
43. However, a difference in tax treatment between resident parent companies according to whether or not they have subsidiaries abroad cannot be justified merely by the fact that they have decided to carry on economic activities in another Member State, in which the State concerned cannot exercise its taxing powers. Accordingly, an argument based on the balanced allocation of the power to impose taxes between the Member States cannot in itself justify a Member State systematically refusing to grant a tax advantage to a resident parent company, on the ground that that company has developed a cross-border economic activity which does not have the immediate result of generating tax revenues for that State.
47. While it must be accepted that the Member States must be able to prevent the danger of tax losses being used twice (see Marks & Spencer , paragraph 47), it must be pointed out that the losses at issue in the main proceedings are not, as the Advocate General stated at points 37 and 38 of his Opinion, comparable to losses incurred by subsidiaries abroad which the resident parent company requires them to surrender to it in order to reduce its taxable profits, which was the position in Marks & Spencer .
51. It is sufficient to hold in that regard that the mere fact that in a particular economic sector, such as tourism, the tax authorities of a Member State may establish cases of significant and continuing losses incurred by foreign subsidiaries of parent companies which are resident in that State cannot suffice to establish the existence of purely artificial arrangements designed to create losses in respect of write-downs to the book value of shareholdings in subsidiaries established in other Member States (see, with respect to the requirement of the specific objective of counteracting purely artificial arrangements, ICI , paragraph 26; Marks & Spencer , paragraph 57; and Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 51).
55. While the effectiveness of fiscal supervision allows a Member State to apply measures which enable the amount of deductible charges in that State in respect of shareholdings in foreign subsidiaries to be ascertained clearly and precisely (see, to that effect, Case C-250/95 Futura Participations and Singer  [1997] ECR I‑2471, paragraph 31, and Case C-55/98 Vestergaard  [1999] ECR I-7641, paragraph 23), it cannot, however, justify that State being permitted to impose different conditions on that deduction, according to whether the shares relate to subsidiaries established in that State or in other Member States.
57. In addition, as regards the German Government’s argument that the monitoring of foreign operations often remains very difficult, even where there is collaboration with the authorities of another Member State, it is sufficient to note that the tax authorities concerned are entitled to demand from the parent company itself such evidence as they consider necessary in order to determine whether or not to grant a deduction applied for in respect of losses stemming from write-downs to the book value of shareholdings in subsidiaries established in other Member States (see, to that effect, Vestergaard , paragraph 26).
58. Such a possibility should be especially useful in a situation such as that which arises in the main proceedings, involving a parent company which should be in a position to demand all the necessary documents directly from its foreign subsidiaries. Moreover, the fact that there may be difficulties in determining the losses stemming from write-downs to the book value of shareholdings in subsidiaries established in other Member States cannot, in any event, justify an obstacle to freedom of establishment (see, to that effect, Case C-334/02 Commission  v France  [2004] ECR I-2229, paragraph 29, and Case C-319/02 Manninen [2004] ECR I-7477, paragraph 54).
62. Moreover, as regards the need to maintain the coherence of the national tax system established by the legislation at issue in the main proceedings, which, according to the German Government, those conventions serve to guarantee, it must be pointed out that, in paragraphs 28 and 21 respectively of the judgments in Case C-204/90 Bachmann [1992] ECR I-249 and Case C-300/90 Commission v Belgium [1992] ECR I-305, the Court recognised that the need to maintain the coherence of a tax system can justify a restriction on the exercise of the fundamental freedoms guaranteed by the Treaty. However, for an argument based on such reasoning to succeed, a direct link must be established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy (see, to that effect, Keller Holding , paragraph 40, and Test Claimants in the Thin Cap Group Litigation , paragraph 68).
67. In the second place, it must be held that, in the framework of the calculation of the taxable income of resident parent companies which hold shares in foreign subsidiaries, the prohibition on deducting losses such as those at issue in the main proceedings produces immediate effects. Accordingly, the fact that it is possible, subsequently, to obtain an exemption for capital gains realised on a disposal, assuming that a sufficient level of profit is achieved, does not constitute a consideration based on fiscal coherence which is capable of justifying a refusal to allow an immediate deduction in respect of losses incurred by parent companies which hold shares in foreign subsidiaries.
68. As regards, lastly, the principle of territoriality, as recognised by the Court in paragraph 22 of the judgment in Futura Participations and Singer , it must be held that that principle is also not capable of justifying the national legislation at issue in the main proceedings.
69. It is true that, in accordance with that principle, the Member State in which a parent company is established may tax resident companies on the whole of their worldwide profits but may tax non-resident subsidiaries solely on the profits from their activities in that State (see, to that effect, Marks & Spencer , paragraph 39). However, such a principle does not in itself justify the Member State of residence of the parent company refusing to grant an advantage to that company on the ground that it does not tax the profits of its non-resident subsidiaries (see, to that effect, Marks & Spencer , paragraph 40). As the Advocate General stated at point 49 of his Opinion, the purpose of that principle is to establish, in the application of Community law, the need to take into account the limits on the Member States’ powers of taxation. As regards the main proceedings, were the advantage claimed by Rewe to be granted, that would not result in a competing tax jurisdiction becoming involved. It concerns German-resident parent companies which are subject, in that respect, to unlimited liability to tax in that State. Accordingly, the legislation at issue in the main proceedings cannot be considered as an implementation of the principle of territoriality.
70. In the light of all the above considerations, the answer to the national court’s question must be that, in circumstances such as those of the main proceedings, in which a parent company holds shares in a non‑resident subsidiary which give it a definite influence over the decisions of that foreign subsidiary and allow it to determine its activities, Articles 52 and 58 of the Treaty preclude legislation of a Member State which restricts the right of a parent company which is resident in that State to deduct for tax purposes losses incurred by that company in respect of write-downs to the book value of its shareholdings in subsidiaries established in other Member States.
The interpretation of the provisions of the Treaty relating to the free movement of capital
71. Since the provisions of the Treaty relating to freedom of establishment thus preclude national legislation such as the legislation at issue in the main proceedings, it is not necessary to consider whether the provisions of the Treaty relating to free movement of capital also preclude that legislation (see, to the same effect, Keller Holding , paragraph 51).
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