Metallgesellschaft Ltd and Others (C-397/98), Hoechst AG and Hoechst (UK) Ltd (C-410/98) v Commissioners of Inland Revenue and HM Attorney General.
Date: 2001-03-08
21 Under section 247 ICTA, two companies resident in the United Kingdom, one of which holds at least 51% of the other, may make a group income election.
22 The result of such election is that the subsidiary does not pay ACT on the dividends which it pays to its parent company, unless it gives notice that it does not wish the election to apply to a particular distribution of dividends.
23 A request for group income election must be made to an Inspector of Taxes. If the request is rejected, the requesting company may appeal against that decision to the Special or General Commissioners and, as the case may be, may appeal from them on a point of law to the High Court.
24 Where a dividend is paid under a group income election by a subsidiary resident in the United Kingdom to its parent company which is also resident in the United Kingdom, no ACT is payable by the subsidiary and the parent company is not entitled to a tax credit. A group of companies may not simultaneously benefit from a group income election and from a tax credit in respect of the same dividend.
25 ACT was abolished by section 31 of the Finance Act 1998 with effect from 6 April 1999. The legal provisions described above in paragraphs 5 to 24 are those which were in force prior to that date.
The facts of the main proceedings
37 It should be remembered that, according to settled case-law, although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with Community law and avoid any discrimination on grounds of nationality (Case C-80/94 Wielockx [1995] ECR I-2493, paragraph 16, Case C-107/94 Asscher [1996] ECR I-3089, paragraph 36, Case C-311/97 Royal Bank of Scotland [1999] ECR I-2651, paragraph 19, and Case C-251/98 Baars [2000] ECR I-2787, paragraph 17).
38 It follows from the Court's case-law that the general prohibition of all discrimination on grounds of nationality laid down by Article 6 of the Treaty applies independently only to situations governed by Community law for which the Treaty lays down no specific non-discrimination rules (Case 305/87 Commission v Greece [1989] ECR 1461, paragraphs 12 and 13, Case C-1/93 Halliburton Services [1994] ECR I-1137, paragraph 12, Royal Bank of Scotland, cited above, paragraph 20, and Baars, cited above, paragraph 23).
39 It is common ground that, in relation to the right of establishment, the principle of non-discrimination was implemented and specifically laid down by Article 52 of the Treaty (Halliburton Services, cited above, paragraph 12, Case C-193/94 Skanavi and Chryssanthakopoulos [1996] ECR I-929, paragraph 21, and Baars, paragraph 24).
41 Article 52 of the Treaty constitutes one of the fundamental provisions of Community law and has been directly applicable in the Member States since the end of the transitional period. Under that provision, freedom of establishment for nationals of one Member State within the territory of another Member State 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 country where such establishment is effected. The abolition of restrictions on freedom of establishment also applies to restrictions on the setting up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of another Member State (Case 270/83 Commission v France [1986] ECR 273, paragraph 13, and Royal Bank of Scotland, paragraph 22).
42 Freedom of establishment thus defined includes, pursuant to Article 58 of the Treaty, the right of 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 Community, to pursue their activities in the Member State concerned through a branch or agency (Case C-264/96 ICI [1998] ECR I-4695, paragraph 20, and the case-law cited therein, and Case C-307/97 Saint-Gobain ZN [1999] ECR I-6161, paragraph 34). With regard to companies, it should be noted in this context that it is their corporate seat in the above sense that serves as the connecting factor with the legal system of a particular State, like nationality in the case of natural persons (ICI, cited above, paragraph 20, and the case-law cited therein, and Saint-Gobain ZN, cited above, paragraph 35). Acceptance of the proposition that the Member State in which a company seeks to establish itself may freely apply to it a different treatment solely by reason of the fact that its registered office is situated in another Member State would thus deprive Article 52 of all meaning (Commission v France, cited above, paragraph 18).
44 It is not disputed that this gives the subsidiary of a parent company resident in the United Kingdom a cashflow advantage inasmuch as it retains the sums which it would otherwise have had to pay by way of ACT until such time as MCT becomes payable, that is to say, for a period of between eight and a half months, at the least, and 17 and a half months, at the most, depending on the date of distribution. Where MCT is not payable at all for the accounting period in question, this entails an even longer period, since ACT can be set off against corporation tax due in respect of subsequent accounting periods.
53 The proportion of corporation tax which a resident subsidiary need not pay in advance when distributing dividends to its parent company under the group income election regime is in principle paid when the subsidiary's MCT liability falls due. It should be remembered that a resident subsidiary of a company resident in another Member State is liable to MCT in the United Kingdom in respect of its profits in the same way as a resident subsidiary of a resident parent company.
54 Consequently, to afford resident subsidiaries of non-resident companies the possibility of making a group income election would do no more than allow them to retain the sums which would otherwise be payable by way of ACT until such time as MCT falls due. They would thus enjoy the same cashflow advantage as resident subsidiaries of resident parent companies, there being no other difference assuming equal bases of assessment between the amounts of MCT for which the two types of subsidiary are liable in respect of the same accounting period.
55 Second, the fact that a non-resident parent company will, unlike a resident parent company, not be subject to ACT when it in turn pays out dividends cannot justify denying the resident subsidiary of the non-resident parent the possibility of exemption from payment of ACT when paying dividends to the parent.
56 The fact that a non-resident parent company is not liable to ACT is attributable to its not being liable to corporation tax in the United Kingdom, since it is subject to that tax in its State of establishment. Logic therefore requires that a company should not have to make advance payment of a tax to which it will never be liable.
57 Third, as regards the risk of tax avoidance, the Court has already held that the establishment of a company outside the United Kingdom does not, of itself, necessarily entail tax avoidance, since that company will in any event be subject to the tax legislation of the State of establishment (ICI, paragraph 26).
59 Fourth and finally, as regards the loss of revenue for the United Kingdom tax authorities which would result from affording resident subsidiaries of non-resident parent companies the possibility of making a group income election and thus to be exempted from paying ACT, suffice it to point out that it is settled case-law that diminution of tax revenue cannot be regarded as a matter of overriding general interest which may be relied upon in order to justify a measure which is, in principle, contrary to a fundamental freedom (see, in relation to Article 52 of the Treaty, ICI, paragraph 28).
60 Consequently, as the Advocate General has pointed out in paragraph 25 of his Opinion, the difference in the tax treatment of parent companies depending on whether or not they are resident cannot justify denial of a tax advantage to subsidiaries, resident in the United Kingdom, of parent companies having their seat in another Member State where that advantage is available to subsidiaries, resident in the United Kingdom, of parent companies also resident in the United Kingdom, since all those subsidiaries are liable to MCT on their profits irrespective of the place of residence of their parent companies.
76 The answer to the first question must therefore be that it is contrary to Article 52 of the Treaty for the tax legislation of a Member State, such as that in issue in the main proceedings, to afford companies resident in that Member State the possibility of benefiting from a taxation regime allowing them to pay dividends to their parent company without having to pay advance corporation tax where their parent company is also resident in that Member State but to deny them that possibility where their parent company has its seat in another Member State.
The second question
81 It must be stressed that it is not for the Court to assign a legal classification to the actions brought by the plaintiffs before the national court. In the circumstances, it is for Metallgesellschaft and Others and Hoechst to specify the nature and basis of their actions (whether they are actions for restitution or actions for compensation for damage), subject to the supervision of the national court.
84 According to well-established case-law, the right to a refund of charges levied in a Member State in breach of rules of Community law is the consequence and complement of the rights conferred on individuals by Community provisions as interpreted by the Court (judgments in Case 199/82 San Giorgio [1983] ECR 3595, paragraph 12; Case 309/85 Barra [1988] ECR 355, paragraph 17; Case C-62/93 BP Supergas [1995] ECR I-1883, paragraph 40; Case C-343/96 Dilexport [1999] ECR I-579, paragraph 23; and judgment of 21 September 2000 in Joined Cases C-441/98 and C-442/98 Michailidis [2000] ECR I-7145, paragraph 30). The Member State is therefore required in principle to repay charges levied in breach of Community law (Joined Cases C-192/95 to C-218/95 Comateb and Others [1997] ECR I-165, paragraph 20, Dilexport, cited above, paragraph 23, and Michailidis, cited above, paragraph 30).
85 In the absence of Community rules on the restitution of national charges that have been improperly levied, it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, second, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness) (see, in particular, Case C-231/96 Edis [1998] ECR I-4951, paragraphs 19 and 34, Case C-260/96 Spac [1998] ECR I-4997, paragraph 18, Case C-228/96 Aprile [1998] ECR I-7141, paragraph 18, and Dilexport, paragraph 25).
86 It is likewise for national law to settle all ancillary questions relating to the reimbursement of charges improperly levied, such as the payment of interest, including the rate of interest and the date from which it must be calculated (Case 26/74 Roquette Frères v Commission [1976] ECR 677, paragraphs 11 and 12, and Case 130/79 Express Dairy Foods [1980] ECR 1887, paragraphs 16 and 17).
87 In the main proceedings, however, the claim for payment of interest covering the cost of loss of the use of the sums paid by way of ACT is not ancillary, but is the very objective sought by the plaintiffs' actions in the main proceedings. In such circumstances, where the breach of Community law arises, not from the payment of the tax itself but from its being levied prematurely, the award of interest represents the reimbursement of that which was improperly paid and would appear to be essential in restoring the equal treatment guaranteed by Article 52 of the Treaty.
88 The national court has said that it is in dispute whether English law provides for restitution in respect of damage arising from loss of the use of sums of money where no principal sum is due. It must be stressed that in an action for restitution the principal sum due is none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax.
89 Consequently, Article 52 of the Treaty entitles a subsidiary resident in the United Kingdom and/or its parent company having its seat in another Member State to obtain interest accrued on the ACT paid by the subsidiary during the period between the payment of ACT and the date on which MCT became payable, and that sum may be claimed by way of restitution.
91 In that regard, as the Court has already held in paragraph 87 of its judgment in Brasserie du Pêcheur and Factortame, cited above, total exclusion of loss of profit as a head of damage for which reparation may be awarded cannot be accepted in the case of a breach of Community law since, especially in the context of economic or commercial litigation, such a total exclusion of loss of profit would be such as to make reparation of damage practically impossible.
94 Moreover, in paragraphs 23 to 25 of Sutton, the Court distinguished the circumstances of that case from those of Case C-271/91 Marshall [1993] ECR I-4367 (Marshall II). In the latter case, which concerned the award of interest on amounts payable by way of reparation for loss and damage sustained as a result of discriminatory dismissal, the Court ruled that full compensation for the loss and damage sustained cannot leave out of account factors, such as the effluxion of time, which may in fact reduce its value, and that the award of interest is an essential component of compensation for the purposes of restoring real equality of treatment (Marshall II, cited above, paragraphs 24 to 32). The award of interest was held in that case to be an essential component of the compensation which Community law required to be paid in the event of discriminatory dismissal.
96 The answer to the second question referred must therefore be as follows:
Where a subsidiary resident in one Member State has been obliged to pay advance corporation tax in respect of dividends paid to its parent company having its seat in another Member State even though, in similar circumstances, the subsidiaries of parent companies resident in the first Member State were entitled to opt for a taxation regime that allowed them to avoid that obligation, Article 52 of the Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the Member State concerned have benefited as a result of the advance payment of tax by the subsidiaries.
The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely does not constitute a ground for dismissing such an action.
While, in the absence of Community rules, it is for the domestic legal system of the Member State concerned to lay down the detailed procedural rules governing such actions, including ancillary questions such as the payment of interest, those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law.
The third and fourth questions
104 Finally, the orders for reference make it clear that an appeal against such a refusal by the tax authorities could have been brought before the Special or General Commissioners and then, if necessary, before the High Court. According to the national court, before judgment could be given in such an appeal, the subsidiaries would still have had to pay ACT in respect of all the dividends which they had paid out and, furthermore, if the appeal had succeeded, they would not have obtained reimbursement of the ACT, since no such right to reimbursement exists under English law. If the subsidiaries had chosen not to pay ACT in respect of dividends paid before the determination of their appeals, they would nevertheless have been assessed to ACT, would have had to pay interest on those sums and would have laid themselves open to statutory penalties if they had been judged to have acted negligently and without reasonable cause.
106 The exercise of rights conferred on private persons by directly applicable provisions of Community law would, however, be rendered impossible or excessively difficult if their claims for restitution or compensation based on Community law were rejected or reduced solely because the persons concerned had not applied for a tax advantage which national law denied them, with a view to challenging the refusal of the tax authorities by means of the legal remedies provided for that purpose, invoking the primacy and direct effect of Community law.