C-161/78

MINISTERIET FOR SKATTER OG AFGIFTER (Ministry for Fiscal Affairs)

on the interpretation of Council Directive No 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital,

THE COURT

composed of: J. Mertens de Wilmars, President of Chamber, Acting as President, Lord Mackenzie Stuart (President of Chamber), P. Pescatore, M. Sørensen, A. O'Keeffe, G. Bosco and A. Touffait, Judges,

Advocate General: G. Reischl Registrar: A. Van Houtte

gives the following

I — Summary of the facts and certain circumstances, the value of the procedure assets contributed "may" at the option of the contributor who retains the right to manage the company in his capacity as 1. Under Danish law relating to the principal shareholder, be fixed at companies limited by shares the capital their value "for accounting purposes" as of a newly formed company may be determined by applying the tax laws, in raised by the contribution of assets other which case there is no charge to tax on than cash such as goods in stock and the contributor's profits arising out of goods on order pursuant to binding the transfer of the assets which he has contracts but not yet delivered ("goods contributed. on order"). In such a case the newly-formed That law forbids the valuation of these company is subrogated to the rights and contributions at a level higher than that liabilities of the contributors for tax of their actual value, but does not purposes as far as this writing down of prevent assets other than cash which assets is concerned. This means that, in have been contributed from being written so far as the assets in question are down. Writing down in fact presupposes realized subsequently, for a sum in that there is a hidden reserve so that excess of their written down value, the when the company is formed the actual company is liable to pay corporation tax value of its shares is greater than their on the difference. nominal value and this does not expose the company's creditors to any risks. 2. The permissible depreciation and deductions in relation to contributions to The fact that the founder members of a company which determine their value the company may write down assets for accounting purposes are under which are contributed cannot of course Danish law: prevent the application of the general principle of tax law that they remain — depreciation for tax purposes; liable to be taxed on any profits which they may derive from the contributions — the creation of certain tax exempt calculated at their actual value. Thus, reserves; should the founder members write down the assets which they have contributed — writing down for tax purposes of they have to treat as a taxable profit the difference between the actual value (a) goods in stock and determined by the tax authorities and the written down value which they have used (b) goods bought pursuant to for the purpose of their tax accounting. binding contracts ("goods on order").

"On formation ... and on an increase in As provided for in Article 5 of that Law the capital of a company duty shall be the amount by which an item of goods is levied at the rate of 2% of the value of written down is entered separately under the assets of any kind contributed by the liabilities (since goods not yet delivered members after the deduction of liabilities cannot appear in the balance sheet as assumed and expenses borne by the goods in stock which have been written company as a result of each contri­ down) and is subsequently included in bution." the profits for the following year.

The "value of the assets contributed" to In so far, however, as goods delivered which this provision refers is their during the following year appear in the "actual" value and not the value written balance sheet as stock of the undertaking down for tax purposes or the value for at the end of that year a deduction of accounting purposes. 30% may be taken in accordance with the rules governing the writing down of stock. A second Council Directive (73/79/­ EEC) of 9 April 1973 (Official Journal L 103 of 18 April 1973, p. 13) provided 3. One of the effects of the accession that there might be a deduction of 50% of Denmark to the Community on 1 or more of capital duty in the case of January 1973 has been to make certain company arrangements and applicable to Denmark Council Directive reconstruction. Pursuant thereto Council (69/335/EEC) of 17 July 1969 (Official Directive 73/80/EEC of 9 April 1973

JUDGMENT OF 27. 6. 1979 — CASE 161/78

When it was formed it received by way the goods on order pursuant to binding contracts. Since the Bar Council refused of assets contributed by two founder members a stock of goods worth Dkr to accept the reasoning on which that 3 925 804 and also binding contracts, part of the decision dealing with the entered into in 1973, covering goods alternative claim was based, it submitted which had been ordered for delivery in in its appeal to the Byret, Copenhagen, 1973 having a value of Dkr 3 million, that the amount liable to capital duty be calculated after deduction for tax that is to say stock and orders amounting in the aggregate to Dkr 6 925 804. This purposes of 37%, so that at least part of amount had been reduced for tax the liability duty on the company purposes by being written down by an attributable to this writing down was aggregate amount of Dkr 1 927 740, covered. The Byret dismissed this claim broken down as follows: Dkr 1 177 740 in its judgment of 7 December 1976. The in respect of goods in stock (30%) and Bar Council then appealed to the Østre Dkr 750 000 in respect of the goods on Landsret [Eastern Division of the High order (25%). Court], the grounds of its appeal being that according to Article 5 (1) (a) of Council Directive 69/335/EEC of 17 The formation of the new company gave July 1969 concerning indirect taxes on rise to the levying of capital duty at the the raising of capital (Official Journal, rate of 2%, pursuant to the above- mentioned Council Directive (69/335/­ English Special Edition 1969 (II), p. 412), the amount of the assets on which EEC) of 17 July 1969 relating inter alia capital duty has to be assessed must be to the duty on "the raising of capital" and to Article 6 (1) of the Danish Law valued by taking account of the potential No 284 of 23 May 1973. tax liability which the company has had transferred to it, created the written down contributions or, more precisely, In its return of contributions of 16 by the difference between the market December 1974 the company calculated value of the goods in stock and on the taxable amount to be Dkr 1 million, order, which formed pan of the contri­ without taking account of the deductions butions and the written down value of for tax purposes from the value of the those goods (their book value). The Bar stock and of the goods on order Council submits that, since the company pursuant to binding contracts (Dkr had had this potential tax liability 1 927 740). transferred to it, it contracted a tax "debt" which, in accordance with the But the tax authorities assessed the above-mentioned provision and the rules taxable amount at Dkr 2 927 740 by applied in this sphere by the tax auth­ adding to the figure arrived at by the orities, should be deducted from the company the deductions taken. amount liable to capital duty.

1. The duty shall be charged: "1. Must the provisions of Article 5 (1) (a) of the Council Directive of 17 (a) in the case of formation of a July 1969 concerning indirect taxes capital company or of an increase on the raising of capital (69/335/­ in its capital or assets, as referred EEC) be interpreted to mean that to in Article 4 (1) (a) (c) and (d): on the actual value of the assets those provisions prevent a Member State, in assessing the liability to of any kind contributed or to be duty on the raising of the capital of contributed by the members, after the deduction of liabilities a newly-formed limited company A, whose share capital was created by assumed and of expenses borne by contributions from an existing under­ the company as a result of each taking belonging to a person B, from contribution. Member States may refusing a deduction for any tax on postpone the charging of capital an untaxed reserve which is regarded duty until the contributions have been effected". as an asset in the assessment of duty and which was created when B contributed to A the undertaking's goods in stock and goods on order The Bar Council has also maintained at a value written down for tax that the provision ought also to be purposes less than the actual value of interpreted in the light of the Fourth the relevant goods in stock and Council Directive No 78/660/EEC of 25 goods on order?

JUDGMENT OF 27. 6. 1979 — CASE 161/78

Pursuant to Article 20 of the Protocol on essential reference point in this case. the Statute of the Court of Justice of the EEC written observations were submitted by the Bar Council, represented by Niels Although the rules set out in the Th. Kjølbye, by the Danish Government, directive allow some freedom in selecting represented by its Ministry for Fiscal the transactions liable to capital duty and Affairs, in turn represented by Per the exemption therefrom, the provisions, Lachmann and Gregers Larsen, by the as to the bases of assessment (Article 5) Netherlands Government represented by on the other hand are both exhaustive its Minister for Foreign Affairs and by and mandatory. There is nothing in the the Commission of the European statement of the reasons upon which Communities represented by its Legal Article 5 of the directive is based or Adviser, Antonino Abate, assisted by Bjarne Hoff-Nielsen. elsewhere to substantiate the argument that this article is to be given a restrictive Having heard the report of the Judge- interpretation in that, in spite of its Rapporteur and the views of the wording, the tax authorities can refuse to Advocate General the Court decided to allow by way of deduction from the open the oral procedure after calling on basic taxable amount a tax of the kind at the Commission to furnish certain infor­ issue in this case. mation in writing.

Such a refusal is even contrary to the II — Written observations sub­ reasons underlying the directive as stated mitted under Article 20 of by the Commission in its proposal the Protocol on the Statute relating thereto, which refer to the of the Court of Justice of elimination, which is very much to be the EEC desired, of taxes which could stand in the way of the establishment of a free A — The Bar Council draws attention capital market between Member States to the provisions of both Danish law and and those reasons also indicate that it

was solely the need for a comprehensive These observations on the meaning of approach to the problems raised by the writing down of stock may be illus direct taxation which caused the trated with the help of the facts of this Commission during the first stage only case in which the stock and the goods on to regulate by indirect taxation capital order, which were transferred to the duty on the raising of capital. company when it was formed, were intended to be sold immediately by the new company and it was likewise Having made these general submissions assumed that these assets were going to the Bar Council then goes on to criticize be resold at their actual value, as the argument put forward by the tax determined when the capital duty was authorities that the possible collection of calculated and what is more at a profit. this tax from the company depends on a By means of such a transaction the number of uncertain factors. company would have made a taxable profit — all other things being equal — There is no doubt whatever that contri and consequently incurred a tax liability buting stock and goods on order, which corresponding to the liability (in the have been written down in accordance form of potential tax on the deductions with tax law, to the new company taken from the value of the goods) implies that the company would have a assumed by the company when it was

Approxi actual tax liability for the company's mately the same rule applies to the financial year under consideration. That written down stock transferred to the does not however mean that the new company. This follows from the fact deduction cannot then be included in the that the gross profit is calculated as the profits for the following financial years. difference between the goods sold and the goods utilized, the latter being calculated as the value of the stock at the Should there be a profit for the end of the company's financial year after following financial year the yield from taking into account goods purchased the tax will be larger, since the loss for during the year and the stock on hand at the preceding years which can be set the beginning of the year; the profits for against the profit, will have been smaller one of the company's financial years are because of the inclusion in the profits of thus increased by the amount the amounts by which goods in stock corresponding to this writing down and goods on order were written down. compared with the profits which the As provided for in Danish law an under company would have made if the goods taking is allowed to set losses against in stock had been transferred without profits for five years after the losses their actual value having been written arise. It is only if the undertaking makes down. a loss for five years running, following

The said considerations, on the other hand, do not apply to the potential tax in respect of fixed assets which have not The Bar Council emphasizes, viewing the been acquired for resale, will probably be problem from another angle, that the retained by the company for a fairly long vested fiscal interest which the tax auth­ period and could only be realized if orities have in levying capital duty certain special conditions are fulfilled. cannot in such circumstances justify their refusal to allow as a deduction the potential tax on the amounts by which the stock and goods on order were The Bar Council goes on to say that the written down. The founder members of Danish tax provisions, which cover the the company, which is liable for payment possibility that when a single trader or of the tax, could in fact have elected first partnership is convened into a limited of all to sell the stock which was to be company contributions derived from contributed and then to contribute the goods in stock and goods on order have proceeds of sale thereof to the newly- been written down, are justified by the formed company. In such circumstances presumption that, in accordance with the the contribution in cash would have been preceding considerations, the newly- reduced by the tax charged on the formed company will be taxed on the amounts by which the stock, which had profit margin equivalent to the writing been disposed of by the sale, had been down carried out for tax purposes.

CONRADSEN v MINISTERIET FOR SKATTER OG AFGIFTER

The Bar Council, having then gone on to assert that the profit and loss account of Conradsen — amplified with the help of — that Article 5 (1) (a) of Council statistical data for the periods 1 January Directive of 17 July 1969 must be 1974 to 31 May 1975 and 1 June 1975 to interpreted as meaning that in this 31 May 1976 — confirms that its case there are grounds for allowing argument is well founded, concludes by the potential tax chargeable on the stressing that its submission that allowing writing down in question for tax a deduction in respect of the tax purposes, the basis of assessment chargeable on the additional writing whereof consists of goods in stock down of the items comprising the current and goods purchased pursuant to assets, of the kind contemplated in this binding contracts, to be deducted; case, in the assessment of the value of the contributions (other than in kind) subject to capital duty complies with the principles laid down in the Fourth Council Directive of 25 July 1978 — that consequently the Ministry for (78/660/EEC) on the annual acounts of Fiscal Affairs must, having regard to certain types of companies (Official the facts of the case, allow, when it Journal 1978 L 222, p. 11). This assesses capital duty, a deduction for directive, with special reference to the potential tax chargeable on the Articles 9.B and 10.J thereof, to the above-mentioned writing down for provisions of Articles 2 (3) thereof and tax purposes. to the general principle laid down in Article 20 thereof giving Member States a discretion, provides that an untaxed reserve in the form of an additional writing down of stock, in accordance B — The Danish Government re­ with tax rules, can never be included in presented by the Ministry for Fiscal the capital of the company without the Affairs, as a party to the main action,

submits first of all some general obser­ depreciation from assets for tax vations. After summarizing the purposes, create certain tax-exempt Community and Danish laws applicable reserves and write down assets by way of to the dispute, it points out to begin with deductions from the actual value of that Conradsen has not entered into any goods in stock and goods bought binding obligation to discharge the tax at pursuant to binding contracts, called issue. It is not in fact certain that the goods on order. effect of the company's taking into account the deduction for tax purposes from the value of the stock and goods on order is to produce a corresponding taxable profit, since this eventuality The system of writing down for tax depends on facts which are completely purposes is in particular governed by uncertain including in particular the Law No 255 of 10 May 1973 ("Varelag- commercial steps which the company has erloven") concerning the valuation for itself taken. It is therefore impossible to tax purposes of stock and the like. determine objectively with due regard to the fiscal rules whether the taking over of assets written down for tax purposes will involve the company in any charge to tax and even more impossible to Under these rules the stock valuation ascertain the date on which the liability carried out at the end of the financial will arise. In these circumstances there is year must be taken as the value of that therefore no justification for holding that stock at the beginning of the next the company is entitled to deduct the financial year, with the result that the "potential" tax from the amount on deduction made at the end of the which the capital duty is assessed. financial year is taken as an increase for the following year. But, if the under­ taking also had goods in stock at the end of that year, it can effect a deduction again so that, if the level of the stock The Danish Government, after having remains the same, the writing down does drawn attention to the fact that the not affect the taxable profits, even if the Danish legislation implementing Council undertaking continues to make the same Directive of 17 July 1969 abides strictly deduction at the end of each financial by the principles laid down by the latter, year. Should the undertaking maintain its describes the relevant system of writing policy of writing down and the level of down for tax purposes which applied in its stock remains the same the deductions Denmark at the time the dispute arose. do not in fact increase its taxable profit.

Similarly as far as concerns the writing A tax system of this kind based on this down of goods on order the company writing down, can also be applied to the can avoid an increase in taxable profits conversion, as in this case, of a part­ for the year following its formation in so nership into a limited company. Under far as these goods have been included in the terms of the circular of the the goods in stock and form part of them "Ligningsdirektorat" (Directorate Gen­ at the end of the said year, so that in fact eral of Taxes) of 12 October 1962, the company takes a deduction from the relating to taxation on the conversion of value of these goods pursuant to the a private undertaking into a limited rules governing the writing down of company, the tax authorities raise no stock. If the volume of goods in stock objections, provided that certain remains constant the deduction can conditions are fulfilled, to the contri­ continue unchanged from year to year. bution (other than a contribution in cash) being calculated on the basis of its book value to the contributor. If the contributor decides to exercise this option the deductions from the actual Thus the fact that a limited company is value of the contribution do not affect subrogated to the contributor in so far as his tax position at all. The taking into the tax attributable to the writing down account of untaxed reserves, after the of certain contributions is concerned contribution has been made, is only of does not necessarily lead to an increase importance in relation to the amount of in the company's taxable profit so long the company's taxable profit which is as the stock does not decrease. thus for this purpose subrogated to the contributor.

writing down in question is in fact the Fourth Council Directive of 27 July conditional on the goods being delivered 1979 on the annual accounts of certain pursuant to the terms of the binding types of companies. As far as concerns contract during the year following the the first point it draws attention to company's financial year in respect of Article 105 (13) of the Law concerning which the deduction has been taken. limited companies which provides that Now if the goods are included in the "in so far as a realization of any assets at undertaking's stock at the end of the said their value as shown on the balance sheet year it may write down the value of gives rise to a tax liability and the those goods by up to 30%. Thus the corresponding charge to tax does not company can, by increasingly writing appear as a separate item under the down its stock, offset the inclusion in its heading of amounts payable that liability profits of the amount by which goods on should be mentioned". order have been written down for tax purposes. That provision applies to those cases where the accounts published by the The Danish Government, in reliance on company show some assets of which the this reasoning, having placed on record book value for tax purposes has been that, according to Article 13 of Law No revalorized. However, even if the aim of 149 of 10 April 1922, as subsequently the provision in question is to prevent a amended, "in calculating the capital picture of the company being given to subject to capital duty there must be third parties which is too optimistic there deducted from the basic taxable amount: is no obligation under this particular (a) the debts payable by the taxable legal provision to enter the potential charge to

The States with the partial exception of the company may, if it wishes to do so, enter Netherlands allows the deduction at this amount under liabilities, but this issue. It is indeed possible that the rules entry differs from the ordinary debit in force in certain Member States item, because its amount depends on the relating to the taxation of profits do not tax rules which would apply in the event cover a contribution consisting of of a subsequent assignment, because it untaxed reserves when a limited will perhaps never be assigned or, lastly, company is formed, so that it is difficult because the limited company may avoid to draw a direct comparison between the paying the tax by including the gain in a answers given by this Member State and financial year in which it makes a loss". the present case. For all that parts of the

CONRADSEN v MINISTERIET FOR SKATTER OG AFGIFTER

Article 39 (1) (e) of that directive indicates that a The first question company, which has received a contri bution other than in cash at a written The main purpose of this question is to find out whether Council Directive of 17 down value, is allowed to enter that value in its official accounts. It seems July 1969 must be interpreted as meaning that the difference with reference to the that it precludes national rules which do not allow the deduction of the actual tax Danish rules applicable at the present time, in so far as this dispute is relating to untaxed reserves contributed concerned, lies solely in the fact that the to a limited company. amount of the deduction must be given in a note (annex) to the accounts. Now on the one hand Article 5 (1) (a) and in particular the words "the actual value of assets of any kind contributed Should untaxed reserves be entered in or to be contributed by the members" the official accounts the Fourth Council therein contained make it quite clear that Directive does not require that any tax in determining the value of the assets which may be levied thereon be entered contributed the first thing to do is to as one of the company's debts, but pre calculate the objective value of those scribes that reserves which are intended

The above- "Provisions for liabilities and charges are intended to cover losses or debts the mentioned provision does not in fact use the words "liabilities" and "expenses" in nature of which is clearly defined and isolation but in the context of "liabilities which at the date of the balance sheet assumed and of expenses borne by the are either likely to be incurred, or certain to be incurred but uncertain as to company as a result of each contri bution". Consequently the event giving amount or as to the date on which they rise to the liability must occur at the will arise".

JUDGMENT OF 27. 6. 1979 — CASE 161/78

case of conversion into a capital any particular amount and it is the company only liabilities and expenses company's commercial operations after "for which the company is responsible at its formation which alone determine, if it that time" may be deducted. The liability should be necessary to do so, whether must therefore be perfected when the there is in fact a taxable profit, and, if assets are contributed to the company. so, the amount thereof. This conclusion also applies if it is possible to foresee with certainty that the company is going to pay corporation tax, because for This being the case it is also necessary to instance it has hitherto regularly made a ask whether the liability, which is legal profit. The liability to pay the tax only arises from the date when the tax has and binding, must not also be "perfected" in the sense that it must not become payable, that is to say after the be conditional on future and uncertain company has been formed. On the other circumstances. hand if, when a company is formed, it assumes responsibility for arrears of tax not yet paid by the contributor in consideration of the capital or assets he has brought in, that company has clearly Now, in answering this question it must not be overlooked that the deduction undertaken to discharge a debt which is regarded as fixed and which can be ascer­ which may be allowed is taken from the tained from the amount of the taxable "actual" value of the assets. For a capital or assets contributed. This deduction to be possible, there must therefore also be an actual basis for calcu­ however is not what happened in the case in point. lating the amount of the deduction.

CONRADSEN v MINISTERIET FOR SKATTER OG AFGIFTER

JUDGMENT OF 27. 6. 1979 — CASE 161/78

consider general commercial partnerships second question must be in the affirm­ as capital companies, the conversion into ative. a limited company of a limited part­ nership is governed by the general rules The same applies if the Court takes the applicable to a limited company. view that it is for the Member States to determine whether such a deduction must be allowed or not. The national court therefore is right to refer to the provisions of Article 5 (1) (a) and not to those of Article 5 (1) (b) According to the information obtained from the other Member States there is although they both produce the same answer. no evidence of potential tax liabilities having arisen in similar cases on such a scale as to call for the extension of the Member States' freedom of action to the The Brit ish Government considers, on the strength of these considerations, that organization of a system in which a the first question must be answered in potential tax liability is treated in the the negative. same way as arrears of tax calculated as a liability of the contributor and taken over by the company. It is the practice in But, even if the Court does not accept the Netherlands only to allow a tax rebate of less than one half of the the interpretation suggested above, it is amount of the tax calculated in nevertheless not certain that the first question calls for an affirmative answer. accordance with the guidelines referred to in the second question.

CONRADSEN v MINISTERIET FOR SKATTER OG AFGIFTER

C — The Netherlands Government That is the specific objective of the stresses with reference to the first directive which, by abolishing stamp duty question that when its domestic law was on certain operations relating to adapted to conform to Council Directive securities as well as all indirect taxes 69/335/EEC of 17 July 1969, it was of other than capital duty, has harmonized the opinion that Article 5 (1) (a) thereof all those factors which must be in principle authorized Member States, considered in fixing and levying this in the circumstances described by the duty. court making the reference to the Court of Justice, to allow, in the calculation of The Commission summarizes the main the taxable capital raised, the deduction features of the rules laid down for this therefrom of any tax which may be purpose by the directive. In giving its charged in respect of an untaxed reserve. opinion specifically on Article 5 (1) (a) it The tax liabilities payable in respect of puts forward the argument that the debts this reserve may in fact be regarded as or liabilities mentioned in that directive expenses within the meaning of this for which the company is responsible are directive. That is why Article 35 (1) of — and this is confirmed by the French, the Netherlands Law on the taxation of Italian and English versions of this certain transactions expressly allowed provision — this deduction.

— first the liabilities and expenses With reference to the second question, resulting from acts which have the Netherlands Government states that already been performed and which the Netherlands Law fixed the deduction give rise to debts which are ascer­ at 20% of the amount of the reserves. tained and payable when the assets Fixing a flat rate is due to the fact that it are contributed; is not certain whether the reserves will be realized and, if so, when. The amount of — secondly the expenses and all other the deduction depends on the tax sums payable by the newly-formed provisions in force in the Member State company by reason of the contri­ in question viewed as a whole. butions of assets.

other than that of levying capital duty preciation implies that the capital cannot therefore be taken into company has taken over a tax liability consideration; on the other hand the which may be classified as a debt or criteria used for determining the basic liability which is ascertained and payable. taxable amount for the purposes of capital duty have been completely The fact that the company in the end harmonized and cannot be affected at all actually pays the tax on the untaxed by national laws. reserves carried forward to the next financial year depends — according to the information received — on uncertain Naturally when all the factors forming the basis of this assessment are factors such as the company's writing considered the sums deductible from the down and depreciation policy and the actual value of the assets are only taken operating results of the years ahead. In into consideration to the extent to which so far as the debt or liability in question the national law itself treats them as cannot be regarded as a liability which is being of such a kind as to be regarded as ascertained and payable it is "liabilities or expenses" within the incompatible with the provisions and meaning of the directive. Now it stands objectives of the directive to deduct it to reason that a tax which under national from the basic taxable amount for the

Taking a potential or latent tax into consideration is incompatible with the The second question harmonized basic taxable amount introduced by the directive. It is of Assuming that the deduction at issue is in course for the national court to find as a principle allowed the amount thereof fact whether the practice adopted under must be determined. The directive Danish tax law in the matter of de- precludes a deduction equal to the

CONRADSEN v MINISTERIET FOR SKATTER OG AFGIFTER

The Bar Council, represented by Niels The Advocate General delivered his Th. Kjølbye, the Danish Government, opinion at the hearing on 29 May 1979.

JUDGMENT OF 27. 6. 1979 — CASE 161/78

Decision

1 By order of 30 June 1978 received at the Court Registry on 28 July 1978 the Østre Landsret, Copenhagen, referred to the Court of Justice pursuant to Article 177 of the EEC Treaty two questions on the interpretation of certain provisions of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (Official Journal, English Special Edition 1969 (II), p. 412).

2 These questions have been raised in the course of an action between the Advokatrådet (hereinafter referred to as "the Bar Council") as representative of P. Conradsen A/S and the Danish Ministry for Fiscal Affairs concerning the calculation of the basic taxable amount liable to the capital duty provided for in Article 5 (1) (a) of the said directive.

3 The file relating to that action indicates that P. Conradsen A/S was formed by a memorandum of association dated 26 July 1974 as a limited company with a share capital of Dkr 1 000 000. The memorandum of association provided inter alia that two of the three founder members were to transfer to the company by way of contribution the undertaking P. Conradsen, which they had owned and managed until then as a general commercial part­ nership, the value thereof being fixed in accordance with the opening balance sheet prepared on 1 January 1974. That balance sheet included among the items on the assets side goods in stock and goods ordered pursuant to binding contracts, for delivery in 1974, valued in the aggregate at a cost price of Dkr 6 925 804 and entered thereon after deducting Dkr 1 927 740.

7 The tax authorities amended this valuation by increasing the figure in the tax return by the amounts deducted from the value of the stock and the goods on order pursuant to binding contracts, namely Dkr 1 927 740.

8 P. Conradsen A/S, through the Bar Council, has asserted in particular that the taxable amount had to be reduced in any case by the charge to tax on the amounts by which the stock and the goods ordered pursuant to binding contracts were written down.

9 The tax authorities rejected this argument and submitted that the possible taxation of the amounts deducted is one stage in the general taxation of the profits of a company after it has been formed and that it is furthermore not certain that if the amounts deducted are taken into account this will necessarily result in the company's being taxed on profits of an equivalent amount, since such a possibility is contingent on uncertain factors, including in particular the commercial arrangements made by the company. The charge to tax which may arise out of these deductions is not a "liability" within the meaning of Article 5 (1) (a) of Council Directive No 69/335/EEC and cannot be deducted from the amount attracting capital duty.

10 In order to obtain clarification of this problem the Østre Landsret decided to refer to the Court the following questions:

JUDGMENT OF 27. 6. 1979 — CASE 161/78

"1. Must the provisions of Article 5 (1) (a) of the Council Directive of 17 July 1969 concerning indirect taxes on the raising of capital (69/335/­ EEC) be interpreted to mean that those provisions prevent a Member State, in assessing the liability to duty on the raising of the capital of a newly-formed limited company A, whose share capital was created by contributions from an existing undertaking belonging to a person B, from refusing a deduction for any tax on an untaxed reserve which is regarded as an asset in the assessment of duty and which was created when B contributed to A the undertaking's goods in stock and goods on order at a value written down for tax purposes less than the actual value of the relevant goods in stock and goods on order?

11 Since the two questions relate to the same subject-matter they fall to be considered together. In order to answer them both the wording of Article 5 (1) (a) of Council Directive 69/335/EEC and the main objectives which this article has in view should be considered in the context of this directive. As the recitals in its preamble indicate, the latter aims at encouraging the free movement of capital which is regarded as essential for the creation of an economic union whose characteristics are similar to those of a domestic market. As far as concerns taxes on the raising of capital the pursuit of such an objective presupposes the abolition of indirect taxes which had been in force in the Member States until then and imposing in place of them a tax levied only once in the Common Market and at the same rate in all the Member States. For these purposes the directive provides for the levying on capital which has been raised a capital duty, which, as stated in the seventh recital', should be harmonized with regard both to its structures and to its rates, so as not to interfere with the movement of capital.

12 The harmonization of such a duty, especially of its structure, implies, primarily, that the basis for its assessment shall be calculated in each Member

CONRADSEN v MINISTERIET FOR SHATTER OG AFGIFTER

State in accordance with objective criteria which apply uniformly within the Community and are unaffected by national laws. To this end Article 5 (1) (a) of Council Directive 69/335/EEC expressly states what the main elements are which go to make up this tax by providing that "The duty shall be charged: ... on the actual value of assets of any kind contributed or to be contributed by the members, after the deduction of liabilities assumed and expenses borne by the company as a result of each contribution ...".

JUDGMENT OF 27. 6. 1979 — CASE 161/78

of members and others, are required by Member States of companies or firms within the meaning of the second paragraph of Article 58 with a view to making such safeguards equivalent throughout the Community".

16 In these circumstances, although entering "Provisions for taxation" under liabilities fulfils the requirements for the presentation by companies of their balance sheet, in accord with the interests of the members and of third parties, it does not imply that such an entry may affect the value of capital which has been raised and is liable to the capital duty introduced by Directive No 69/335/EEC.

17 Although Article 20 (1) of the Fourth Council Directive does not rule out the possibility that provisions for liabilities and charges are intended to cover losses or debts the nature of which is clearly defined and which at the date of the balance sheet are either likely to be incurred, or certain to be incurred but uncertain as to amount or as to the date on which they will arise, paragraph (3) of the very same article states that the said provisions "may not be used to adjust the values of assets", and thus makes it clear that entering these provisions in the accounts relates to the requirements for the presentation of the balance sheets of certain types of companies but cannot in fact alter the basis for the assessment of a tax such as capital duty which in substance is based on the actual value of the assets.

18 For the same reasons it is of no avail in this case to rely on the attitude taken up by the Danish Companies Registry which the plaintiff in the main action mentioned during the oral procedure. This attitude, the implications of which the parties dispute, is not determinative for the purpose of valuing the taxable amount for capital duty which, for the reasons already given, meets its own special needs, and must be applied in all the Member States in accordance with objective and uniform criteria.

As the proceedings are, in so far as the parties to the main action are concerned, in the nature of a step in the action pending before the national court, the decision on costs is a matter for that court.

On those grounds,

THE COURT

in answer to the questions referred to it by the Østre Landsret by order of 30 June 1978, hereby rules:

The provisions of Article 5 (1) (a) of Council Directive No 69/335 of 17 July 1969 concerning indirect taxes on the raising of capital must be interpreted to mean that those provisions prevent a Member State, in assessing the liability to capital duty on the raising of the capital of a

OPINION OF MR REISCHL — CASE 161/78

OPINION OF MR ADVOCATE GENERAL REISCHL DELIVERED ON 29 MAY 1979 1

Mr President, association of 28 June 1974. The Members of the Court, nominal capital of the company was 1 000 000 Danish kroner which was P. Conradsen A/S, a company limited by raised in such a way that two of the shares, the plaintiff in the main action, founder members, Per Conradsen and was formed by a memorandum of Inge Olsen, contributed the assets and

I — Translated from the German.