Oy AA.
Date: 2007-07-18
18. It should be noted as a preliminary observation that, according to consistent case-law, whilst direct taxation falls within the competence of Member States, the latter must nevertheless exercise that competence in a manner consistent with Community law (see, in particular, 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-7995, paragraph 40; and Case C-374/04 Test Claimants in Class IV of the ACT Group Litigation  [2006] ECR I-11673, paragraph 36).
20. According to consistent case-law, in a case concerning a shareholding which gives its holder definite influence over the company’s decisions and allows that holder to determine the company’s activities, it is the provisions of the EC Treaty on the freedom of establishment that are to be applied (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; Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 31; and Test Claimants in Class IV of the ACT Group Litigation , paragraph 39).
23. Since legislation such as that at issue in the main proceedings concerns only relations within a group of companies, it primarily affects the freedom of establishment and must therefore be examined in the light of Article 43 EC (see, to that effect, Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 32; Case C-446/04 Test Claimants in the FII Group Litigation  [2006] ECR I-11753, paragraph 118; and Case C-524/04 Test Claimants in the Thin Cap Group Litigation  [2007] ECR I-0000, paragraph 33).
24. Should that legislation have restrictive effects on the free movement of capital, those effects would be the unavoidable consequence of such an obstacle to freedom of establishment as there might be, and do not therefore justify an independent examination of that legislation from the point of view of Article 56 EC (see, to that effect, Case C‑36/02 Omega  [2004] ECR I‑9609, paragraph 27; Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 33; and Test Claimants in the Thin Cap Group Litigation , paragraph 34).
29. Freedom of establishment, which Article 43 EC 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 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, a branch or an agency (see, in particular, Case C-307/97 Saint-Gobain ZN  [1999] ECR I-6161, paragraph 35; Marks & Spencer , paragraph 30; Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 41; and Test Claimants in Class IV of the ACT Group Litigation , paragraph 42).
30. With regard to companies, it should be noted that it is their registered office, central administration or principal place of business, within the meaning of Article 48 EC, that serves as the connecting factor with the legal system of a particular Member State, like nationality in the case of natural persons. To accept that the Member State of establishment may freely apply different treatment solely because the registered office, central administration or principal place of business of a company is situated in another Member State would deprive Article 43 EC of its substance (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; Joined Cases C-397/98 and C-410/98 Metallgesellschaft and Others  [2001] ECR I-1727, paragraph 42; Marks & Spencer , paragraph 37; and Test Claimants in Class IV of the ACT Group Litigation , paragraph 43). Freedom of establishment is thus designed to guarantee the benefit of national treatment in the host Member State, by prohibiting all discrimination based on the place where the registered office, central administration or principal place of business of a company is situated ( Commission  v France , paragraph 14; Saint-Gobain ZN , paragraph 35; and Test Claimants in Class IV of the ACT Group Litigation , paragraph 43).
36. In a cross-border situation, where the transferee is not subject to tax in the Member State of the transferor, that latter Member State cannot guarantee that the transfer will be treated as taxable income of the transferee. The fact that the Member State of the transferor allows deduction of the transfer from the taxable income of the transferor does not guarantee that the aim pursued by the system applicable to transfers will be attained.
37. However, even if the Member State in which the subsidiary is established does not have competence over the parent company, which is established in another Member State and is not subject to tax in the first Member State, it may nevertheless make deductibility of the intra-group financial transfer from the transferor’s taxable income subject to conditions concerning the treatment to be applied to the transfer by that other Member State.
38. Therefore, in relation to the aim pursued by the Finnish system of intra-group financial transfers, the mere fact that parent companies which have their corporate establishment in another Member State are not subject to tax in Finland does not differentiate the subsidiaries of those parent companies from the subsidiaries of parent companies which have their establishment in Finland, and does not render the positions of those two categories of subsidiary incomparable.
39. A difference in treatment between resident subsidiary companies according to the seat of their parent company constitutes an obstacle to the freedom of establishment if it makes it less attractive for companies established in other Member States to exercise that freedom and they may, in consequence, refrain from acquiring, creating or maintaining a subsidiary in the State which adopts that measure (Case C‑324/00 Lankhorst-Hohorst  [2002] ECR I‑11779, paragraph 32, and Test Claimants in the Thin Cap Group Litigation , paragraph 61).
40. That conclusion cannot be called into question by the argument of the United Kingdom Government that the parent company could have attained the objective pursued by creating a branch in Finland rather than a subsidiary. The second sentence of the first paragraph of Article 43 EC expressly leaves traders free to choose the appropriate legal form in which to pursue their activities in another Member State and that freedom of choice must not be limited by discriminatory tax provisions ( Commission  v France , paragraph 22, and Case C‑253/03 CLT-UFA  [2006] ECR I‑1831, paragraph 14).
42. However, for legislation to be regarded as a restriction on the freedom of establishment, it is sufficient that it be capable of restricting the exercise of that freedom in a Member State by companies established in another Member State, without there being any need to establish that the legislation in question has actually had the effect of leading some of those companies to refrain from acquiring, creating or maintaining a subsidiary in the first Member State ( Test Claimants in the Thin Cap Group Litigation , paragraph 62).
44. A restriction on the freedom of establishment is permissible only if it is justified by overriding reasons in the public interest. It is further necessary, in such a case, that its application be appropriate to ensuring the attainment of the objective in question and not go beyond what is necessary to attain it ( Marks & Spencer , paragraph 35; Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 47; and Test Claimants in the Thin Cap Group Litigation , paragraph 64).
51. As is apparent from paragraph 51 of the judgment in Marks & Spencer , the need to safeguard the balanced allocation of the power to impose taxes between the Member States was accepted by the Court in conjunction with two other grounds of justification, based on the risks of the double use of losses and of tax avoidance (see also Case C‑347/04 Rewe Zentralfinanz  [2007] ECR I-0000, paragraph 41).
52. It should also be remembered 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 (Case C‑336/96 Gilly  [1998] ECR I‑2793, paragraphs 24 and 30; Case C‑470/04 N  [2006] ECR I-7409, paragraph 44; Case C‑513/04 Kerkhaert and Morres  [2006] ECR I-10967, paragraphs 22 and 23; and Test Claimants in the Thin Cap Group Litigation , paragraph 49).
53. Concerning, first, the need to safeguard a balanced allocation of the power to tax between Member States, it should be pointed out that that need cannot justify a Member State systematically refusing to grant a tax advantage to a resident subsidiary, on the ground that the income of the parent company, having its establishment in another Member State, is not capable of being taxed in the first Member State (see, to that effect, Rewe Zentralfinanz , paragraph 43).
54. That element of justification may be allowed, however, where the system in question is designed to prevent conduct capable of jeopardising the right of the Member States to exercise their taxing powers in relation to activities carried on in their territory ( Rewe Zentralfinanz , paragraph 42).
55. The Court has thus held that to give 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 ( Marks & Spencer , paragraph 46, and Rewe Zentralfinanz , paragraph 42).
56. Similarly, to accept that an intra-group cross-border transfer, such as that at issue in the main proceedings, may be deducted from the taxable income of the transferor would result in allowing groups of companies to choose freely the Member State in which the profits of the subsidiary are to be taxed, by removing them from the basis of assessment of the latter and, where that transfer is regarded as taxable income in the Member State of the parent company transferee, incorporating them in the basis of assessment of the parent company. That would undermine the system of the allocation of the power to tax between Member States because, according to the choice made by the group of companies, the Member State of the subsidiary would be forced to renounce its right, in its capacity as the State of residence of that subsidiary, to tax the profits of that subsidiary in favour, possibly, of the Member State in which the parent company has its establishment (see also Test Claimants in Class IV of the ACT Group Litigation , paragraph 59).
58. Concerning, finally, the prevention of tax avoidance, it must be acknowledged that the possibility of transferring the taxable income of a subsidiary to a parent company with its establishment in another Member State carries the risk that, by means of purely artificial arrangements, income transfers may be organised within a group of companies towards companies established in Member States applying the lowest rates of taxation or in Member States in which such income is not taxed. That possibility is reinforced by the fact that the Finnish system of intra-group financial transfers does not require the transferee to have suffered losses.
59. By granting a subsidiary the right to deduct an intra-group financial transfer in favour of its parent company from its taxable income only in cases where the latter has its principal establishment in the same Member State, the Finnish system of intra-group financial transfers is able to prevent such practices, likely to be encouraged by the finding of significant disparities between the bases of assessment or rates of tax applied in the various Member States and designed only to avoid the tax normally due in the Member State of the subsidiary on its profits.
60. Having regard to the combination of those two factors, concerning the need to safeguard the balanced allocation of the power to tax between the Member States and the need to prevent tax avoidance, this Court therefore finds that a system, such as that at issue in the main proceedings, which grants a subsidiary the right to deduct a financial transfer in favour of its parent from its taxable income only where the parent and the subsidiary both have their principal establishment in the same Member State, pursues legitimate objectives compatible with the Treaty and justified by overriding reasons in the public interest, and is appropriate to ensuring the attainment of those objectives.
61. It must, however, be examined whether or not such a system goes beyond what is necessary to attain all of the objectives pursued.
62. It should be noted at the outset that the objectives of safeguarding the balanced allocation of the power to impose taxes between Member States and the prevention of tax avoidance are linked. Conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory is such as to undermine the right of the Member States to exercise their tax jurisdiction in relation to those activities and jeopardise a balanced allocation between Member States of the power to impose taxes ( Cadbury Schweppes and Cadbury Schweppes Overseas , paragraphs 55 and 56, and Test Claimants in the Thin Cap Group Litigation , paragraphs 74 and 75).
63. Even if the legislation at issue in the main proceedings is not specifically designed to exclude from the tax advantage it confers purely artificial arrangements, devoid of economic reality, created with the aim of escaping the tax normally due on the profits generated by activities carried out on national territory, such legislation may nevertheless be regarded as proportionate to the objectives pursued, taken as a whole.
64. In a situation in which the advantage in question consists in the possibility of making a transfer of income, thereby excluding such income from the taxable income of the transferor and including it in the taxable income of the transferee, any extension of that advantage to cross-border situations would, as indicated in paragraph 56 of this judgment, have the effect of allowing groups of companies to choose freely the Member State in which their profits will be taxed, to the detriment of the right of the Member State of the subsidiary to tax profits generated by activities carried out on its territory.