Commission of the European Communities v French Republic.
Date: 2004-03-04
21. It should be noted at the outset that although direct taxation falls within the competence of the Member States, they must exercise that competence consistently with Community law and therefore avoid any overt or covert discrimination by reason of nationality (see, inter alia, Case C-385/00 de Groot [2002] ECR I-11819, paragraph 75, and Case C-209/01 Schilling and Fleck-Schilling [2003] ECR I-0000, paragraph 21).
23. As the application of the fixed levy is restricted under Article 125 A I of the CGI to investment or life assurance contracts where the debtor is resident or established in France, it has the effect of discouraging taxpayers who are resident in France from entering into contracts of this type with companies which are established in another Member State. Article 49 EC precludes the application of any national legislation which has the effect of making the provision of services between Member States more difficult than the provision of services exclusively within one Member State (see, inter alia, Case C-118/96 Safir [1998] ECR I‑1897, paragraph 23).
24. The legislation in question also has a restrictive effect as regards companies established in other Member States as it prevents them from raising capital in France, given that the proceeds of contracts taken out with those companies are treated less favourably from a tax point of view than proceeds payable by a company which is established in France.  This means that their contracts are less attractive to investors residing in France than those of companies which are established in that Member State (for a similar situation, see Case C-35/98 Verkooijen [2000] ECR I-4071, paragraph 35, and Case C-478/98 Commission v Belgium [2000] ECR I-7587, paragraph 18).
27. The latter relies on the need to ensure payment of taxes and effective fiscal supervision.  It is true that the Court has repeatedly held that the prevention of tax avoidance and the need for effective fiscal supervision may be relied upon to justify restrictions on the exercise of fundamental freedoms guaranteed by the Treaty (see Case C-254/97  Baxter and Others [1999] ECR I‑4809, paragraph 18, and Commission v Belgium , cited above, paragraph 39). However, a general presumption of tax avoidance or fraud is not sufficient to justify a fiscal measure which compromises the objectives of the Treaty (see, to that effect, the judgment in Commission v Belgium , cited above, paragraph 45).
28. Furthermore, for a restrictive measure to be justified, it must comply with the principle of proportionality, in that it must be appropriate for securing the attainment of the objective it pursues and must not go beyond what is necessary to attain it ( Commission v Belgium , cited above, paragraph 41).  Compliance with that principle is especially important where national legislation excludes cross-border transactions from national rules altogether.
29. In the present case, deduction at source, operated directly by debtors resident in France, will admittedly be a straightforward process for the tax authorities.  Where debtors are resident in other Member States, it may prove more difficult to ascertain whether all the conditions necessary for the application of a particular rate of levy have been met.  However, that involves disadvantages of a purely administrative nature which are not, as the Advocate General has noted at points 29 and 30 of his Opinion, sufficient to justify a restriction on the freedom to provide services and on the free movement of capital of the type which the legislation in question gives rise to.
31. As regards effective fiscal supervision, the Commission has rightly referred to Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation (OJ 1977 L 336, p. 15), which can be invoked by a Member State in order to check whether payments have been made in another Member State, or to obtain all necessary information, where those payments and that information must be taken into account in determining the correct amount of income taxes (see  Bachmann , cited above, paragraph 18, and Case C‑55/98 Vestergaard  [1999] ECR I-7641, paragraphs 26 and 28).  Member States are free to resort to these arrangements when it appears appropriate to them to do so.
32. The French Government’s argument that this directive does not have effect in Member States which practise banking secrecy has already been rejected by the Court in its judgment in Case C‑300/90 Commission v Belgium [1992] ECR I-305, paragraph 13.  Accordingly, the impossibility of requesting cooperation of that kind does not justify the failure to make a tax advantage available to income received from those States.
33. Lastly, as regards the obstacles which the French Government claims exist in relation to the opportunities which Directive 77/799 provides, reference should be made to the analysis of these arguments and their rebuttal which are set out at points 34 to 36 of the Advocate General’s Opinion.