C-264/96

OPINION OF MR TESAURO — CASE C-264/96

OPINION OF ADVOCATE GENERAL TESAURO delivered on 16 December 1997

1. The points at issue in these proceedings Those provisions govern, inter alia, 'consor- are, first, the compatibility with Article 52 of tium relief'. l This essentially enables a com- the EC Treaty of domestic legislation which pany which is a member of a consortium to makes a particular form of tax relief available use losses incurred by subsidiaries controlled to companies belonging to a consortium sub- through a holding company to offset tax on ject to the condition that, where the consor- its profits. Thus, pursuant to the legislation tium controls a holding company, most of in question, the company belonging to the the subsidiaries thereof are resident in the consortium may set losses incurred by a sub- national territory; and, secondly, in the event sidiary against its chargeable profits — in that such legislation is incompatible, the proportion to the size of its shareholding — importance and extent of the national court's for the purposes of computing tax liability. obligation under Article 5 of the Treaty to The reasons why the legislation makes this adopt an interpretation which is consistent option available have been explained in the with Community law. The reference has course of the proceedings. However, they been made by the House of Lords, and the need not be considered here, save in order to relevant legislation is that of the United assess whether the domestic legislation gives Kingdom. rise to a restriction on freedom of establish- ment, contrary to the prohibition laid down in Article 52 of the Treaty, and, if so, whether that restriction is capable of being justified.

ing company which is in turn owned by a The facts and the questions referred consortium. In accordance with section 259(1) and (8)(a) of the Act, in cases where the claimant company is a member of a con­ sortium, only a fraction of the losses incurred by the surrendering company may be set off, that fraction being equal to the claimant company's share in the consortium. 5. Coopers Animal Health (Holdings) Ltd (hereinafter 'Holdings') was set up on 17 May 1984, its shares being beneficially owned by a consortium formed by Wellcome Foundation Ltd and Imperial Chemical Industries plc (hereinafter 'ICI') which, respectively, have a 5 1 % and a 49% interest in Holdings. The latter carries on no busi­ ness save that of holding shares in subsidiar­ ies. Of its 23 subsidiaries, only 4 are resident The availability of 'consortium relief' is also in the United Kingdom, 6 being resident in conditional on the company owned by the other Member States and the remaining 13 in consortium being a 'holding company' as non-member countries. defined in section 258(5)(b) of the Act, namely 'a company the business of which consists wholly or mainly in the holding of shares or securities of companies which are its 90 per cent, subsidiaries, and which are trading companies'.

6. One of the companies controlled by Holdings and resident in the United King­ dom is Coopers Animal Health Ltd (herein­ after ' C A H ' ) , which incurred considerable losses, particularly in the accounting periods ending, respectively, in 1985, 1986 and 1987. ICI accordingly applied to the Inland Rev­ enue under section 258 of the Act for relief 4. Lastly, section 258(7) provides that 'refer­ in respect of 49% of CAH's losses (the frac­ ences in this and the following sections of tion corresponding to ICI's shareholding in this Chapter to a company apply only to Holdings). bodies corporate resident in the United Kingdom'. This is the provision whose inter­ pretation and application have given rise to these proceedings.

Before the House of Lords, however, ICI introduced a fresh argument — based on Community law — to challenge the denial of relief. In short, ICI claimed that the legisla- 7. ICI brought an action challenging that tion at issue — or at least the Inland Rev- interpretation. Both the High Court and the enue's interpretation thereof — was incom- Court of Appeal upheld its claim owing to patible with Articles 52 and 58 of the EC their adoption of a different interpretation of Treaty in so far as the requirement that most the relevant legislation and, in particular, of of the companies controlled by Holdings section 258(7), from that proposed by the had to be resident in the United Kingdom Inland Revenue. In brief, both courts took constituted a restriction (albeit an indirect the view that access to tax relief cannot be one) on ICI's freedom of establishment and denied in cases such as this, where both the in particular of its right to own shares surrendering company and the claimant through a holding company in subsidiary company are resident in the United King- companies resident in another Member State. dom. It was not intended that, whenever the In any event, according to ICI, in view of term 'company' is used in the text of section the fact that the relevant legislation was open 258 (including, that is to say, references to to two possible interpretations — that the holding company or the subsidiaries), it adopted by the courts at first and second must be read in conjunction with the refer- instance, and that favoured by the Inland ence to 'company' in the opening words of Revenue — Article 5 of the Treaty placed the section 258(7), which merely defines the national court under a duty to choose the companies which may take advantage of the first, if it enabled any conflict, actual or relief provided for in that section. Thus, potential, with Community law to be according to that construction, companies avoided. resident in the United Kingdom cannot be denied relief in respect of losses incurred by subsidiaries which are also resident there.

(iii) Company A and Β jointly own a holding company (Company C) also 2. If the requirement under (v) is an unjus­ resident in the Member State tified restriction under Community law, does Article 5 of the E C Treaty require a national court to interpret the relevant national legislation, so far as is possible, so as to comply with Community law, even though neither Company A, Com­ (iv) Company C has a number of trading pany Β nor Company C is itself seeking subsidiaries, which are resident either to exercise any rights under Community in that Member State, other Member law, and even if an interpretation of States of the European Union or national legislation which would comply elsewhere in the world, and with Community law would have the effect of giving relief where the business of Company C consisted mainly in the holding of shares in subsidiaries estab­ lished outside the EC/EEA? O r does Article 5 have the consequence only that (v) Company A is precluded from being the national legislation, despite its inter­ entided to claim against its corpora­ pretation, takes effect subject to the tion tax liability relief in respect of requirements of Community law in a

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OPINION OF MR TESAURO — CASE C-264/96

case where these requirements are in Specifically, the United Kingdom Govern- point?' ment maintained that even if the legislation at issue were found to entail a restriction on freedom of establishment, incompatible with a proper interpretation of Article 52, that would have no relevance for the purposes of resolving the dispute in the main proceed- ings. ICI would in any event be denied the tax relief provided for by the Act, since the Question 1 majority of the companies controlled by Holdings (as many as 13 out of 23) are resi- dent, not in other Member States of the Community, but elsewhere.

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ICI ν COLMER (HMIT)

13. The first point I would make in that of subsidiaries that it could appear fruitless connection is that, according to estabished to seek an interpretation of Article 52 since case-law, it is for the national court to assess the majority of the companies in question the relevance of and the need for a prelimi­ are established outside the Community. The nary ruling. Given its direct knowledge of position would be different if, as contem­ the facts of the case and the relevant points plated in the order for reference itself, the of law, that court is in the best position to national court were to use turnover as a cri­ gauge the relevance of any questions con­ terion or apply some other test. In that case, cerning Community law raised in the dis­ appraisal of the compatibility of the legisla­ pute. 3 In principle, therefore, the Court con­ tion in question with Article 52 of the Treaty siders itself bound to answer, except in cases could well have a bearing on the decision as where the questions referred are purely to whether or not ICI is entitled to the relief hypothetical or where it is quite obvious that sought, if it transpired, for example, on the the requested interpretation or ruling on the basis of the information available, that the validity of a provision of Community law turnover of the companies controlled were has no bearing on the facts or purpose of the essentially attributable to those resident in main action. 4 the Community.

O P I N I O N OF MR TESAURO — CASE C-264/96

occasions, 'although, as Community law 16. The requirement that most of the subsid­ stands at present, direct taxation does not as iaries must be resident in the United King­ such fall within the purview of the Commu­ dom appears prima facie to be a restriction nity, the powers retained by the Member on freedom of establishment, prohibited by States must nevertheless be exercised consis­ the first paragraph of Article 52. Relief is tently with Community law'. 5 In the field of thereby precluded in all cases where the direct taxation, therefore, Member States holding company's business consists, wholly may not adopt measures which would have or mainly, in the holding of shares of com­ the effect of unjustifiably impeding freedom panies resident outside the United Kingdom, of movement for natural or legal persons car­ and thus even where such companies are rying on an activity in a self-employed established in other Member States. It is the capacity. 6 It scarcely needs to be mentioned latter aspect which is of significance for that taxation which is discriminatory or Community law, since in those circum­ which somehow impedes or limits the exer­ stances the legislation at issue limits, or at cise of the right of establishment is undoubt­ least discourages, the exercise by British edly caught by Article 52. 7 companies of the right to create corporate structures in other Member States.

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ICI ν COLMER (ΗΜΓΓ)

18. This is typical of restrictions on 'exits'. In that connection, both ICI and the Com­ Tax disincentives undoubtedly make the cre­ mission have ruled out that possibility. ation of cross-border corporate structures a According to the United Kingdom, on the less attractive prospect for companies estab­ other hand, it is a measure justified in terms lished in the United Kingdom. In so far as of its objective, which is to prevent the cre­ such a restriction applies to subsidiaries resi­ ation of foreign subsidiaries from being used dent in other Member States, the United as an easy means of depriving the United Kingdom legislation entails — I repeat — an Kingdom Treasury of tax revenue. obstacle to the freedom of establishment guaranteed by Article 52 of the Treaty. Fur­ thermore, the legislation at issue appears par­ ticularly unfavourable to companies which belong to a consortium as opposed to a group, since in the latter case the setting-off of losses against profits would still be pos­ sible (a point made by the Commission and not disputed).

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OPINION OF MR TESAURO — CASE C-264/96

21. Once again, the answer to the question ber States other than the United Kingdom. referred depends on where emphasis is However, that form of discrimination clearly placed. It is apparent, for example, that the cannot be challenged on the basis of Article legislation at issue discriminates between 52 of the Treaty, since there is no restriction companies resident in the United Kingdom, on freedom of establishment in the Commu- according to whether or not they have exer- nity. Although discrimination based on the cised their freedom of establishment in other place of establishment might have been Member States, through a holding company, eliminated in compliance with Article 52 in for instance. In other words, the distinction respect of the United Kingdom or other affects companies whose registered office is Member States of the Community, the in the same Member State and is linked to United Kingdom legislation discourages, if their decision whether or not to avail them- anything, the creation of subsidiaries in selves of the possibility, guaranteed by countries outside the Community. That is Article 52 of the Treaty, of setting up why, as we shall have occasion to verify branches or subsidiaries in other countries, when examining the second question, ICI even if they are Member States of the Com- seeks to rely on Article 5 of the Treaty with munity. a view to securing in any event the tax relief provided by the Act.

24. However, even if the measure at issue were to be regarded as applying without dis­ tinction, in view of the fact that the require­ ment is imposed on companies which are in any event liable to taxation in the United Kingdom, it would still be incompatible with the rules regarding freedom of establishment. I have no hesitation in stating that the argu­ In Bachmann, which concerned the applica­ ments put forward in this case to justify the tion to residents of domestic legislation mak­ legislation at issue are devoid of substance. ing the deduction of certain contributions from taxable income conditional on those contributions having been paid in that Mem­ ber State, the Court stated that the aim of the Belgian legislation was to enable the loss of tax revenue resulting from the deduction of life assurance contributions to be offset by the taxation of pensions, annuities or capital 25. Admittedly, on a number of occasions sums payable by the insurers. The cohesion the Court has acknowledged that the need of the tax system would thus have been for cohesion in the application of tax systems undermined if the Belgian State had been can constitute sufficient justification, linked compelled to offer the same tax advantages to persons insured with companies estab­ lished abroad, in view of the difficulty of col­ lecting tax on earnings paid abroad. 1 4Given 12 — Judgment in Bond van Adverteerders (cited in footnote 10); that the domestic legislation was expressly Case C-288/89 Gouda [1991] ECR I-4007, paragraph 11. In the judgment in Case C-484/93 Svensson [1995] ECR stated to be non-discriminatory, the Court I-3955, paragraph 15, given that the Luxembourgish legisla­ tion on interest rate subsidies in respect of loans for the therefore concluded that it could not be construction of housing entailed discrimination based on the place of establishment, the Court added that 'such dis­ regarded as incompatible with Article 59 crimination can only be justified on the general interest since it was justified by requirements in the grounds referred to in Article 56(1) of the Treaty [...] which o not include economic aims'. It should be noted, how­ general interest. ever, that on the same occasion the Court also considered whether the legislation at issue, albeit classed as discrimina­ tory, was necessary in order to safeguard the cohesion of the tax system. In so doing, however, the Court also deter­ mined whether the measure in question could be justified in terms of requirements which may be taken into account 13 — Case C-204/90 Bachmann [1992] ECR 1-249, paragraph 21; only in the case of measures which apply without distinc­ Schumacker (cited in footnote 5), paragraph 47; Case tion. In my Opinion of 16 September 1997 in Case C-80/94 Wielockx [1995] ECR I-2493, paragraph 25; and C-120/95 (Decker) and Case C-158/95 (Kohlt), still pend­ Asscher (cited in footnote 5), paragraph 59. See also my ing, I have already explained the difficulties in regard to Opinion in Case C-118/96 Safir (still pending), point 20 et consistency, raised by the Court's recent case-law (see, in seq. particular, points 49 and 50). 14 — Bachmann, cited in footnote 13, paragraphs 22 and 23.

27. According to the United Kingdom, that question should be answered in the affirma- tive. Obviously, there is no United Kingdom tax charge on a non-resident subsidiary. Accordingly, relief on losses incurred by a 29. I find it difficult to reconcile the need to subsidiary resident in the United Kingdom prevent tax evasion in order to preserve the would not be compensated by taxation of cohesion of the tax system with the fact that the profits made by other subsidiaries, resi- consortium relief is granted whenever only a dent in other States. In the United King- minority of companies is resident outside the dom's view, that is incompatible with the United Kingdom, and denied whenever such rationale underlying consortium relief, which companies are in the majority. To my mind is to extend the same tax treatment to a com- the risk of evasion, if indeed it exists, is also pany when it is a member of a consortium as present in the former set of circumstances, it would receive if it participated directly in albeit — according to the proportion of non- the business undertaken by the joint venture. resident companies — to a lesser degree.

28. I have serious reservations regarding that 30. Furthermore, it remains to be demon- argument. The objective is not so much that strated that no other measures, equally effec- of preserving the cohesion of the tax system tive but less restrictive of freedom of estab- as, quite simply, of preventing a fall in tax lishment, are available. O n that point, I revenue. If that is indeed the position, I do would suggest that neither the Inland Rev- not believe that it can justify a derogation enue nor the United Kingdom Government from a fundamental principle guaranteed by in its observations has established that the the Treaty. measures at issue are the only ones available

Secondly, nor can the duty of consistent 32. Once again I would refer to the particu­ interpretation laid down by Article 5 of the lar features of the present case and its impli­ Treaty be relied on in relation to the aspect cations for Community law. Article 52 of the of the present case which is not covered by Treaty is relevant in so far as a requirement Article 52 of the Treaty. The discrimination imposed by domestic legislation in respect of against companies which choose to hold tax relief also affects companies availing shares in subsidiaries, the majority of which themselves of the right of establishment in are resident in non-member countries, by other Member States of the Community. comparison with those whose subsidiaries What this means in practice is that, in the are all resident in the United Kingdom (or in present case, the domestic legislation is con­ the Community) or which have only a trary to Article 52 in so far as it restricts minority of subsidiaries resident outside the freedom of establishment in other Member United Kingdom (or the Community), is not States of the Community. relevant for the purposes of Community law.

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OPINION OF MR TESAURO — CASE C-264/96

It follows that neither Article 52 nor Article tent with Community law in respect of a 5 applies. Accordingly, the national court is situation, or, as in the present case, aspects of under no obligation pursuant to Article 5 of a situation to which Community law does the Treaty to adopt an interpretation consis- not apply.

33. In the light of the foregoing, I therefore propose that the Court should reply as follows to the questions referred by the House of Lords: