European Commission v Federal Republic of Germany.
Date: 2011-10-20
44. According to the settled case-law of the Court, although direct taxation falls within their competence, the Member States must none the less exercise that competence consistently with European Union law (see, inter alia, Case C‑374/04 Test Claimants in Class IV of the ACT Group Litigation [2006] ECR I‑11673, paragraph 36; Case C‑379/05 Amurta  [2007] ECR I‑9569, paragraph 16; Case C‑540/07 Commission  v Italy  [2009] ECR I‑10983, paragraph 28; and Case C‑487/08 Commission  v Spain  [2010] ECR I‑0000, paragraph 37).
45. In particular, it is for each Member State to organise, in compliance with European Union law, its system for taxing distributed profits and, in that context, to define the tax base and the tax rate which apply to the shareholder receiving them (see, inter alia, Test Claimants in Class IV of the ACT Group Litigation , paragraph 50; Case C‑446/04 Test Claimants in the FII Group Litigation  [2006] ECR I‑11753, paragraph 47; Case C‑194/06 Orange European Smallcap Fund  [2008] ECR I‑3747, paragraph 30; and Case C‑128/08 Damseaux  [2009] ECR I‑6823, paragraph 25).
46. It must also be noted that, in the absence of any unifying or harmonising measures at European Union level, the Member States retain the power to define, by conventions 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; Commission  v Italy , paragraph 29; and Commission  v Spain , paragraph 38).
47. 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 ( Test Claimants in the FII Group Litigation , paragraph 103; Amurta , paragraph 18; and Commission  v Spain , paragraph 39).
48. 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 by 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 EC Treaty (see Test Claimants in Class IV of the ACT Group Litigation , paragraph 54; Amurta , paragraph 24; Commission  v Italy , paragraph 31; and Commission  v Spain , paragraph 40).
55. It follows from the case-law that, from the point of view 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 companies receiving dividends are not necessarily in a situation which is comparable to that of companies receiving dividends which are resident in another Member State (see, to that effect, Case C‑170/05 Denkavit Internationaal and Denkavit France  [2006] ECR I‑11949, paragraph 34; Amurta , paragraph 37; Commission v Italy , paragraph 51; and Commission  v Spain , paragraph 50).
56. 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 companies but also of non-resident companies from dividends which they receive from a resident company, the situation of those non-resident companies becomes comparable to that of resident companies (see, to that effect, Test Claimants in Class IV of the ACT Group Litigation , paragraph 68; Denkavit Internationaal and Denkavit France , paragraph 35; Amurta , paragraph 38; Commission  v Italy , paragraph 52; and Commission  v Spain , paragraph 51).
57. 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 companies are subject to the same treatment as resident companies (see Test Claimants in Class IV of the ACT Group Litigation , paragraph 70; Amurta , paragraph 39; Commission  v Italy , paragraph 53; and Commission  v Spain , paragraph 52).
58. In the present case, the Federal Republic of Germany clearly chose to exercise its power of taxation over dividends distributed to companies resident in other Member States. Non-resident companies in receipt of those dividends thus find themselves in a situation comparable to that of resident companies as regards the risk of a series of charges to tax on dividends distributed by resident companies, so that non-resident recipient companies cannot be treated differently from resident recipient companies ( Commission  v Spain , paragraph 53).
60. Apart from the fact that it cannot be ruled out that a company resident in a Member State other than the Federal Republic of Germany may have shareholders who are resident in Germany, comparing the tax burden on dividends paid to non-resident companies with the overall tax burden on dividends where a resident company in receipt of dividends redistributes them to its resident shareholders amounts to comparing systems and situations which are not comparable, namely, on the one hand, natural persons in receipt of national dividends and their income tax arrangements and, on the other, capital companies in receipt of dividends leaving the country and the withholding tax levied by the Federal Republic of Germany (see, to that effect, Commission  v Italy , paragraph 43).
62. As regards the effect of double taxation conventions, the Court has indeed held that it cannot be ruled out that a Member State may 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; Commission v Italy , paragraph 36; and Commission  v Spain , paragraph 58).
63. However, it is necessary for that purpose that the application of such a convention should allow the effects of the difference in treatment under national legislation to be compensated for (see Commission  v Italy , para graph 37, and Commission  v Spain , paragraph 59).
67. It must be observed in this respect that the application of the set-off method should enable the tax on dividends deducted in Germany to be set off in full against the tax payable in the State of establishment of the recipient company, so that, if the dividends received by that company were ultimately taxed more heavily than the dividends paid to companies established in Germany, that heavier tax burden could no longer be attributed to the Federal Republic of Germany, but to the State of establishment of the recipient company which exercised its power of taxation (see, to that effect, Commission  v Spain , paragraph 60).
68. Consequently, the difference in treatment may be neutralised by that method of set-off only where the dividends from Germany are sufficiently taxed in the other Member State. If those dividends are not taxed, or are not sufficiently taxed, the amount of tax deducted in Germany or a part thereof cannot be set off (see Commission  v Italy , paragraph 38, and Commission  v Spain , paragraph 62).
69. It should also be pointed out that the decision to tax income from Germany in the other Member State, or the choice of the level at which it is to be taxed, depends not on the Federal Republic of Germany but on the tax rules laid down by the other Member State ( Commission  v Spain , paragraph 64).
70. The Federal Republic of Germany cannot therefore claim that the setting off of the tax paid in Germany against the tax payable in the other Member State, pursuant to the double taxation conventions, allows in every case the neutralisation of the difference of treatment resulting from the application of the provisions of national tax legislation or of those conventions whose effect is to reduce the rate of the withholding tax (see also Commission  v Italy , paragraph 39, and Commission  v Spain , paragraph 64).
71. As regards, finally, the Federal Republic of Germany’s argument that companies in receipt of dividends which are established in another Member State are not required to pay business tax, which companies in receipt of dividends established in Germany are subject to, it suffices to point out that, in accordance with the Court’s case-law, unfavourable tax treatment contrary to a fundamental freedom cannot be regarded as compatible with European Union law because of the existence of other advantages, even assuming that such advantages exist (see, to that effect, Case C‑35/98 Verkooijen  [2000] ECR I‑4071, paragraph 61; Amurta , paragraph 75; and Case C‑233/09 Dijkman and Dijkman-Lavaleije  [2010] ECR I‑0000, paragraph 41).
72. It must therefore be concluded, in the light of the above observations, that the different treatment of dividends depending on whether they are distributed to resident or non-resident companies, as established by the German tax legislation, is liable to deter companies established in other Member States from making investments in Germany, and is also such as to constitute an obstacle to the raising of capital by resident companies from companies established in other Member States.
73. Consequently, that legislation constitutes a restriction of the free movement of capital, which is prohibited in principle by Article 56(1) EC.
– Justification of the restriction of the free movement of capital
74. In accordance with settled case-law, national measures restricting the free movement of capital may be justified by overriding reasons in the public interest, provided that they are appropriate to secure the attainment of the objective which they pursue and do not go beyond what is necessary in order to attain it (Case C‑112/05 Commission v Germany [2007] ECR I‑8995, paragraphs 72 and 73, and Dijkman and Dijkman-Lavaleije , paragraph 49).
76. The Federal Republic of Germany observes, moreover, that it follows from the case-law of the Court, in particular from Test Claimants in Class IV of the ACT Group Litigation , paragraph 59, and Case C‑182/08 Glaxo Wellcome  [2009] ECR I‑8591, paragraph 83, that to require the 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 would in fact mean that that State would have to abandon its right to tax a profit generated by an economic activity carried on in its territory.
77. It must be recalled here that a justification connected with the need to safeguard the balanced allocation between the Member States of the power to tax may be accepted, in particular, where the system in question is designed to prevent conduct capable of jeopardising the right of a Member State to exercise its powers of taxation in relation to activities carried on in its territory (see Case C‑347/04 Rewe Zentralfinanz  [2007] ECR I‑2647, paragraph 42; Case C‑231/05 Oy AA [2007] ECR I‑6373, paragraph 54; Amurta , paragraph 58; and Case C‑303/07 Aberdeen Property Fininvest Alpha  [2009] ECR I‑5145, paragraph 66).
78. However, it also follows from the Court’s case-law that, where a Member State has chosen not to tax recipient companies established in its territory in respect of income of this kind, it cannot rely on the argument that there is a need to ensure a balanced allocation between the Member States of the power to tax in order to justify the taxation of recipient companies established in another Member State ( Amurta , paragraph 59, and Aberdeen Property Fininvest Alpha , paragraph 67).
80. It is true that the Court has held that to require the 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 in fact mean that that State would have to abandon its right to tax a profit generated by an economic activity carried on in its territory (see Test Claimants in Class IV of the ACT Group Litigation , paragraph 59, and Glaxo Wellcome , paragraph 83).
83. However, in accordance with settled case-law of the Court, a reduction in tax revenue 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 (see, inter alia, Case C‑319/02 Manninen  [2004] ECR I‑7477, paragraph 49 and the case-law cited).
85. On this point, it should be recalled that the Court has already acknowledged that the need to maintain the coherence of a tax system can justify a restriction on the exercise of the freedoms of movement guaranteed by the Treaty (Case C‑204/90 Bachmann  [1992] ECR I‑249, paragraph 28; Manninen , paragraph 42; Case C‑418/07 Papillon  [2008] ECR I‑8947, paragraph 43; and Glaxo Wellcome , paragraph 77).
86. For an argument based on such a justification to succeed, however, the Court requires there to be a direct link between the tax advantage concerned and the compensating of that advantage by a particular tax levy, with the direct nature of that link falling to be examined in the light of the objective pursued by the rules in question ( Papillon , paragraph 44, and Glaxo Wellcome , paragraph 78).
95. One of the principal aims of the EEA Agreement is to provide for the fullest possible realisation of the free movement of goods, persons, services and capital within the whole EEA, so that the internal market established within the European Union is extended to the EFTA States. From that angle, several provisions of the agreement are intended to ensure that it receives as uniform an interpretation as possible throughout the EEA (see Opinion 1/92 [1992] ECR I-2821). It is for the Court, in that context, to ensure that the rules of the EEA Agreement which are identical in substance to those of the Treaty are interpreted uniformly within the Member States (Case C‑452/01 Ospelt and Schlössle Weissenberg [2003] ECR I‑9743, paragraph 29, and Commission  v Italy , paragraph 65).
96. It follows that, while restrictions of the free movement of capital between nationals of States party to the EEA Agreement must be assessed in the light of Article 40 of and Annex XII to that agreement, those provisions have the same legal scope as the substantially identical provisions of Article 56 EC (see Case C‑521/07 Commission  v Netherlands  [2009] ECR I‑4873, paragraph 33, and Commission  v Italy , paragraph 66).