C-250/95

II — Compatibility of the Luxembourg Law on Taxation of Revenue with Articles 52 and 58 of the EC Treaty I -2478

1. The economic relationship between losses and income received locally I -2479

2. The requirement for proper accounts to be kept and permanently held in Luxembourg I -2480

(a) Discrimination against non-resident companies and firms I -2480

(b) Justification I -2483

(i) The requirement for accounts to be kept in the country I -2483

France, where Futura has its seat. This 109(1)(4)) apply to non-resident taxpayers apportionment was made on the basis of the subject to the condition that the losses turnover figures relating to each business should be economically related to income entity. The main proceedings concern the received locally and that accounts should be taxation of the branch for the year 1986. kept within the country. (This provision Profits for that year were calculated at came into effect from the 1986 financial LFR 4 390 000, giving rise to revenue year.) tax (l'impôt des collectivités) amounting to LFR 1 808 680.

2 — Convention entre le Grand-Duché de Luxembourg et la France tendant à éviter les doubles impositions et à établir 1 — Loi du 4 décembre 1967 concernant l'impôt sur le revenu des règles d'assistance administrative réciproque en matière (Memorial A 1967, p. 1228), in the version of 4 December d'impôts sur le revenu et sur la fortune (Memorial 1959, 1986 amending Article 157 (Memorial A 1986, p. 1104). p. 1064).

I - 2474

FUTURA PARTICIPATIONS AND SINGER v ADMINISTRATION DES CONTRIBUTIONS

forward of losses are to be applicable in the where necessary, agree to lay down appor­ assessment to tax of that establishment on tionment rules if there are no proper the same conditions as they are to taxpayers accounts showing clearly and precisely the resident in Luxembourg. profits attributable to the establishments in their respective territory.

I - 2475

OPINION OF MR LENZ — CASE C-250/95

Freedom of establishment shall include the choosing the appropriate legal form for pur­ right to take up and pursue activities as self- suing their activities in another Member employed persons and to set up and manage State. According to the case-law of the undertakings, in particular companies or Court, that freedom of choice must not be firms within the meaning of the second para­ restricted by discriminatory tax laws. graph of Article 58, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.'

13. Article 58 provides:

15. The court making the reference consid­ ered it necessary to examine the compatibil­ ity of the aforementioned tax laws with 'Companies or firms formed in accordance Community law. It therefore referred the with the law of a Member State and having following question to the Court for a pre­ their registered office, central administration liminary ruling: or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natu­ ral persons who are nationals of Member States.

"Companies or firms" means companies or Are Article 157 of the Law on Taxation of firms constituted under civil or commercial Revenue and, in so far as is necessary, Article law, including co-operative societies, and 4 and the second subparagraph of Article other legal persons governed by public or 21(2) of the France-Luxembourg Conven­ private law, save for those which are non­ tion on Double Taxation compatible with profit making.' Article 52 of the EEC Treaty inasmuch as they make application to non-resident tax­ payers having a permanent business in Luxembourg of provisions on the carrying forward of losses subject to the condition that the losses should be related to income 14. The applicants further claim that Article received locally and that accounts should be 52 expressly gives traders the possibility of duly kept and held within the country?

16. In its written observations, the Grand Duchy of Luxembourg states that the Comité du Contentieux du Conseil d'État in Luxembourg is regarded as part of the State judiciary and is therefore entitled to refer a 19. The details given in this reference for a question to the Court for a preliminary rul­ preliminary ruling are, however, insufficient ing under Article 177 of the Treaty. to judge the compatibility of national law with Community law. The applicants' and the defendant's arguments are reproduced only summarily. The French Government is therefore of the opinion that the question referred for a preliminary ruling is inadmis­ sible. 17. Nevertheless, the French Government sees a problem in relation to admissibility. It considers that the question referred for a preliminary ruling contains insufficient infor­ mation about the provisions applicable to Luxembourg companies on the carrying for­ ward of losses. For this reason, it is not pos­ sible to compare the situation of the non­ resident branch, Singer, with a company 20. At the hearing, both the applicants and resident in Luxembourg. In addition, it con­ the Luxembourg Government indicated that, siders that no details have been given about in their opinion, the question referred for a the factual and legislative context of the preliminary ruling was comprehensible and original case or that the details which have allowed Member States to take a position. been given are insufficiently precise. The The Luxembourg Government refers in this type and origin of the income of the branch regard to the written observations of the is therefore unknown. There is no infor­ United Kingdom, which show that the mation about the basis on which its Luxem­ bourg income is taxed and no more precise details are given either about the carrying 3 — Judgment in Case C-83/91 Meilicke [1992] ECR I-4871, at forward of losses or about the accounting paragraph 26, and order of 23 March 1995 in Case C-458/93 requirements imposed on resident undertak­ Saddik [1995] ECR I-511, at paragraph 12. 4 — Order in Case C-458/93 (cited in footnote 3, at paragraph ings. 13).

24. In examining the income taxation rules for possible discrimination, it is necessary to look again closely at the individual provi­ sions. Article 114(2) (2) provides that losses can be carried forward if there are proper 22. The details about Luxembourg tax law accounts for the period in which the losses provided in the reference are also sufficient. were incurred. This is a rule which applies to The conditions under which Luxembourg Luxembourg companies. Under Article companies can carry losses forward can be 157(2), it is applied to non-resident taxpayers deduced from the tax authorities' observa­ provided that the losses are economically tion, quoted by the national court, that both Luxembourg undertakings and permanent establishments must produce accounts duly 5 — Judgments in Case C-279/93 Schumacker [1995] ECR I-225, kept and held in Luxembourg for the year in at paragraph 21, and in Case C-80/94 Wielockx [1995] ECR I-2493, at paragraph 16; judgment in Case C-107/94 Asscher which the losses were incurred. [1996] ECR I-3089, at paragraph 36.

I - 2478

FUTURA PARTICIPATIONS AND SINGER v ADMINISTRATION DES CONTRIBUTIONS

related to income received locally and that 26. For permanent establishments of foreign accounts are kept within the country. This companies in Luxembourg, this means that provision is interpreted by the Luxembourg they must produce separate accounts, kept in tax authorities as requiring non-resident tax­ accordance with Luxembourg rules and per­ payers to produce proper accounts kept and manently held in Luxembourg. permanently held in Luxembourg. Accord­ ing to the explanations given by the Luxem­ bourg Government at the hearing, proper accounts are accounts kept in accordance with the rules applicable in the Grand Duchy of Luxembourg. 1. The economic relationship between losses and income received locally

2. The requirement for proper accounts to be intended to operate as cost-effectively as kept and permanently held in Luxembourg possible.

31. It makes no difference that the carrying forward of losses constitutes a tax advantage, 29. At the hearing the Commission and for which additional burdens, here additional Luxembourg pointed out that the second costs, must be accepted. The applicants con­ and third conditions relate to the question sider that they are discriminated against in how a taxpayer can or must prove that the comparison with companies resident in losses claimed actually relate to income Luxembourg as well as with foreign compa­ received locally. According to the Commis­ nies which set up a subsidiary in Luxem­ sion and the applicants, these conditions dis­ bourg and then establish different branches criminate against permanent establishments in the country. Those Luxembourg compa­ of foreign companies or firms in Luxem­ nies can carry losses forward, whereas the bourg. applicants cannot do so because the compa­ ny's seat is in France.

(a) Discrimination against non-resident 32. The Grand Duchy of Luxembourg companies and firms maintains, however, that there is no discrimi­ nation in the rule on the carrying forward of losses for non-resident companies. It is merely a question of applying to the perma­ nent establishments of foreign companies obligations which affect Luxembourg com­ panies in the same way.

35. For this reason, I cannot accept the argu­ ment of the United Kingdom and the Grand Duchy of Luxembourg that there is no dif­ ference in treatment between the branches of 34. Prima facie, there appears to be no dif­ foreign firms and Luxembourg companies. ference in treatment of foreign branches. The requirement for separate accounts However, the Law itself imposes additional results in additional administrative costs for conditions on non-resident companies, the branch and consequently for the non­ namely the requirements for there to be a resident taxpayer, namely the company hav­ relationship between losses and income ing its seat in France. received locally and for separate accounts to be kept and held in Luxembourg. There are no such obligations imposed on Luxem­ bourg companies. It is self-evident that they must keep accounts in accordance with Luxembourg rules and hold these in Luxem­ bourg. Keeping accounts at the undertaking's seat in accordance with the rules which 36. It is no answer to say, as Luxembourg' apply there is not an additional requirement does, that the requirements relating to for a Luxembourg company. For a branch of accounts would not be different if Futura a foreign company, however, it means that it had set up a subsidiary in Luxembourg. must keep a second set of accounts, separate Article 52 of the Treaty provides for different from those kept at the undertaking's seat, forms of establishment in another Member even though the branch has no legal person­ State. Branches are expressly mentioned here ality of its own. Although the demands and thus included in the protection afforded placed on a branch are no greater than those by Article 52. They are not in fact subsidiar­ placed on a Luxembourg company, it must ies which have their own seat in Luxem­ be borne in mind that we are dealing, in this bourg but are a more cost-effective form of case, with the taxation of a non-resident establishment since they entail fewer costs. company whose seat is in France. The Freedom to set up a branch in another Mem­ requirement to produce a second set of ber State would, however, be restricted if the accounts for the branch will result in addi­ branch were to incur additional costs. As the tional costs for that company. That means Commission and the applicants have rightly that a foreign company will be able to carry explained, different tax rules would restrict forward losses for its branch in Luxembourg freedom to choose between the various

38. As the Court also stated in Case 270/83, the possibility cannot altogether be excluded 39. No difference of treatment of Luxem­ that a distinction based on the location of a bourg companies and branches in the area of company's seat or the place of residence of a the taxation of profits is apparent in this case natural person may, under certain conditions, either. If the Luxembourg legislature treats 9 be justified in an area such as tax law. In the them in the same way in respect of the taxa­ Schumacker case and most recently in the tion of profits, it cannot follow that they are

7 — Judgment in Case 270/83 Commission v France [1986] ECR 10 — Case C-279/93 (cited in footnote 5, at paragraphs 31 to 38) 273, at paragraph 22. and Case C-107/94 (cited in footnote 5, at paragraphs 41 to 8 — Case 270/83 (cited in footnote 7, at paragraph 18). 49). 9 — Paragraph 19. 11 — Case 270/83 (cited in footnote 7, at paragraph 20).

I - 2482

FUTURA PARTICIPATIONS AND SINGER v ADMINISTRATION DES CONTRIBUTIONS

in a different situation as regards an advan­ (i) The requirement for accounts to be kept tage such as the carrying forward of losses. in the country Nor does this case entail taking into account personal circumstances, as in the Asscber case, -which can ultimately only be taken into account by another State, the State of resi­ 12 dence, but only concerns income earned in one State (Luxembourg) and the losses incurred there.

I - 2483

OPINION OF MR LENZ — CASE C-250/95

there are precise figures based on accounts. It 46. I tend to agree with the Commission's considers, however, that the requirement to submission that it is quite sufficient if there produce separate accounts in Luxembourg is are accounts at the company's seat, from disproportionate. As regards the requirement which the loss figures for Luxembourg can for proper accounts, in other words accounts be taken. drawn up in accordance with Luxembourg rules, the Commission rightly points out that this case is not about how accounts are to be drawn up, but simply about how to obtain precise figures for losses incurred in Luxem­ bourg. It cannot follow that accounts pro­ duced in accordance with the rules of another Member State are less precise or even inaccurate. This is even less likely to be the case since the rules on annual accounts of 47. The OECD Model Convention does not certain types of companies have been suffi­ expressly require separate accounts either. ciently harmonized so that annual accounts The commentary to the Model Convention can very well be compared, 13 as the Com­ merely points out that precise figures relat­ mission explained without being challenged ing to profits and losses can be obtained only on this point. Why should figures from on the basis of proper accounts and that this method is therefore to be used in normal accounts kept at the company's seat in cases. But this does not mean, however, that another Member State (in this case, Paris) the accounts must also be kept at the branch not provide sufficient information for tax or indicate whether it is sufficiënt if the fig­ purposes in Luxembourg? ures can be deduced from accounts kept at the undertaking's seat for both the undertak­ ing itself and its branch. Incidentally, it should be pointed out that the OECD Model Convention cannot provide a conclu­ sive reply in Community law to the question raised in this case.

49. At the hearing the Commission described quite graphically what accounts are and what they do. The Grand Duchy of 51. For this reason it is not necessary for Luxembourg itself listed all the things that separate accounts to be kept in order to go into accounts: they include customers' establish precisely the losses of a branch. A statements of account, which give infor­ joint set of accounts is sufficient. Nor do mation about income; also invoices of the these have to be drawn up in accordance branch, which show expenses, such as rent. with Luxembourg rules. Any such obligation The Commission then explained that in each imposed by the tax authorities is dispropor­ undertaking income and expenses are tionate. recorded daily and appropriate receipts are kept. So a branch with no accounts of its own in Luxembourg will send these figures to the undertaking's headquarters where they will be entered in the general accounts. It is therefore hard to see why the figures relevant to the taxation of the branch in Luxembourg should not be deducible from the accounts kept at the undertaking's seat. 52. The applicants also contend that there is another less onerous way of establishing the losses of the branch, namely through appor­ tionment. This possibility cannot be denied to foreign branches, particularly since the tax base itself can be calculated on this basis. The tax return form offers a choice between both possibilities: apportionment or the produc­ tion of accounts. There is no indication that 50. In reply to questions put to it at the the two possibilities are not considered to be hearing, the Luxembourg Government con­ equivalent. Above all, however, the tax form firmed that separate accounts are not drawn for non-residents does not draw attention to up for Luxembourg branches of a Luxem­ the fact that if apportionment is chosen, bourg company but that a register is kept, as losses cannot be carried forward. They also is also the case, according to the Commis­ point out that in Luxembourg apportion­ sion, with the branches of foreign compa­ ment is also allowed for the purposes of local nies. That means that even in this case there business tax.

55. As I have shown above, the requirement for precise figures for establishing losses is not discriminatory on its own because those figures can be determined from the joint accounts kept at the company's seat. This is therefore an appropriate, less onerous way of establishing losses. It is only the requirement for separate and proper accounts to be kept at the branch (in this case, in Luxembourg) which results in discrimination against non­ residents which is disproportionate and therefore unjustified in view of the fact that a less onerous method is available. 54. I must agree with them. An apportion- ment, as carried out in this case for the pur­ poses of taxing the branch, is an apportion­ ment of income on the basis of the turnover figures for the individual establishments. Therefore, the results can only be estimates or approximate values. It does not automati­ cally follow that losses cannot be established on the basis of an apportionment. This would depend on the taxing State accepting the resultant inaccuracies, which could work to its disadvantage, but also to its benefit. 56. It follows from the foregoing that On the other hand, a Member State should Luxembourg is entitled to stipulate that be allowed to allow losses to be carried for­ losses may only be carried forward if the ward only if the undertaking or branch can undertaking provides precise figures for provide precise figures relating to the losses, those losses. There is no obligation to allow provided that this condition applies in the losses to be carried forward on the basis of same way to Luxembourg undertakings and an apportionment, so that this possibility to branches of foreign companies. In other need not be examined further. This view is words, as long as there is no discrimination also taken by the Commission, as became against non-resident companies and no clear at the hearing.

59. It is for the court of reference to exam­ ine, should the need arise, whether an appor­ tionment must ultimately be allowed in this case, in view of the applicants' claim that the 62. The Luxembourg Government maintains tax declaration form is misleadingly drafted. that this requirement is justified by the need The answer to this question does not form for effective fiscal supervision. Effective fiscal part of the reply to the question referred to control is possible only if all the documents the Court on the relationship between and accounts are kept permanently in Article 157 of the Luxembourg Law on Luxembourg and the Luxembourg tax Taxation of Revenue to Article 52 of the authorities can gain prompt, unannounced Treaty. access to them.

I - 2487

OPINION OF MR LENZ — CASE C-250/95

67. In Schumacher the Court ruled that there was no administrative obstacle to account being taken of a non-resident's per­ sonal and family circumstances in his State of

14 — Council Directive 77/799/EEC of 19 December 1977 (OJ 65. As regards the problem of effective fiscal 1977 L 336, p. 15). controls, the Commission also refers to the 15 — Article 1(1) of the Directive. 16 — Judgment in Case C-1/93 Halliburton Services [1994] ECR directive concerning mutual assistance by the I-1137, at paragraph 21 et seq.).

I - 2488

FUTURA PARTICIPATIONS AND SINGER v ADMINISTRATION DES CONTRIBUTIONS

70. Even where such collaboration could not be required because it would infringe the protective provisions of the State from which information is sought, this does not justify 69. Article 1(1) of the Directive provides not allowing losses to be carried forward. As that the competent authorities of the Mem­ the Court ruled in Bachmann and Commis- ber States are to exchange any information sion v Belgium, there is nothing to prevent the tax authorities from requiring the person concerned to provide such proof as they 17 — Case C-279/93 (cited in footnote 5, at paragraph 43 et seq.). consider necessary and, where appropriate,

I - 2489

OPINION OF MR LENZ — CASE C-250/95

refusing to allow losses to be carried forward as a condition for the carrying forward of where such proof is not forthcoming. losses.

71. Where the provision of any information III — Compatibility of the Double-Taxation requested would contravene French protec­ Convention with Article 52 of the EC Treaty tive legislation, it must be borne in mind first of all that non-disclosure of protected infor­ mation would protect the applicants. It will then be for the foreign company to consider whether to waive its protection in France and have the information released which would enable it to carry losses forward. If it does not do so, it will not be allowed to 74. Like other provisions of domestic law, carry losses forward. double-taxation conventions as elements of domestic law must not contravene the requirements of EC law.

C — Conclusion

77. In view of the foregoing considerations , I therefore propose that the Court should give the following reply to the question referred for a preliminary ruling:

Article 52 of the EC Treaty is to be interpreted as meaning that a provision such as Article 157 of the Luxembourg Law on Taxation of Revenue and the provisions of the Double-Taxation Convention referring to rules of domestic law are incompat­ ible with Community law inasmuch as they make application to non-resident tax­ payers having a permanent establishment in Luxembourg of the provisions on the carrying forward of losses subject to the condition that accounts must be duly kept and held in Luxembourg .

I - 2491