C-254/97

I-4811

OPINION OF MR SAGGIO — CASE C-254/97

costs accounted for during that same period and under which costs accounted for in respect of expenditure on the carrying during that same period only in respect out in France of scientific and technical of expenditure on research carried out research relating to those same proprietary in the State of taxation may be medicinal products may be deducted when deducted from the taxable amount? calculating the taxable amount. 2 It is precisely the compatibility of that deduc- tion with Community law which is at issue since, in essence, it allows the taxable amount to be abated only with regard to research carried out in the territory of the 2. Does Article 95 of the Treaty establish- French Republic. ing the European Community preclude such legislation?

3. In the event that either of the previous 4. More specifically, the Conseil d'État questions is answered in the negative, is submits the following questions to the the deduction which is allowed for Court: expenditure on research carried out in the State of taxation to be considered aid within the meaning of Article 92 of the Treaty establishing the European Community?'

proprietary medicinal products (those nationals and to foreign companies estab- which are reimbursable and those which lished in France through subsidiaries, are approved for use by public bodies) of branches or agencies (secondary establish- expenditure incurred during that tax period ments). In reality, however, the conditions in respect of scientific and technical cannot be considered equal. Indeed, in the research carried out exclusively in French majority of cases, the subsidiaries (or territory. branches or agencies) of pharmaceutical companies established in other Member States are engaged in France only in distribution whilst research, or the bulk of it, remains concentrated in the country of origin where the parent company has its 6. The Court is therefore required once principal place of business. Since French again to rule on the compatibility with pharmaceutical companies have a large Community law of a national tax measure, proportion of their research activity located and more specifically one concerning direct in France, they enjoy, at parity of turnover, taxation. Although, unlike indirect taxa- a manifest tax advantage since they are able tion, where Community competence has to deduct a larger amount of research been widely exercised, direct taxation does expenditure from the taxable amount. This not as such fall within the competence of is therefore a case of indirect discrimination the Community, the general principle of against the plaintiffs, which is also prohib- cooperation contained in Article 5 of the ited by the principle of equal treatment Treaty means that the Member States must contained in Articles 52 and 58 of the nevertheless exercise their competence con- Treaty. sistently with Community law. 3 Thus, in the field of direct taxation, they must not adopt measures which would have the effect, without justification, of hindering the free movement of natural or legal persons. 4

products sold in France, since such research or on the grounds of fiscal cohesion as is normally carried out in the country of defined in the Court's case-law. establishment of the parent company. However, according to the French Govern- ment, that description of the situation does not correspond to reality. Indeed, having first stated that this is a matter for the national court to assess, the French Gov- 10. It seems to me that there can be no ernment observes that French pharmaceu- doubt that, in several respects, the measure tical research centres are rapidly becoming in question is indirectly discriminatory. secondary establishments of companies First, the French legislation allows tax whose principal place of business is abroad relief on the proceeds of the sales in France and that, moreover, research relating to a of certain medicinal products, provided single product is normally carried out in that the research relating to those products laboratories scattered over several States, has been carried out (and therefore the so that the picture of French pharmaceu- research costs incurred) in France. It is tical companies carrying out research obvious that, in an economic context in exclusively or mainly in France and foreign which research is normally carried out at pharmaceutical companies carrying out the parent company, two companies which research exclusively or mainly in their distribute comparable proprietary medic- respective States of origin does not corre- inal products in France will be treated spond to reality. differently depending on whether or not they are subsidiaries, branches or agencies of a parent company situated in another Member State where the research is carried out. In other words, however neutral tax legislation may appear to be in allowing the deduction of research expenditure on the basis of the objective condition that it is undertaken in France, in point of fact it penalizes companies with their principal place of business abroad which have exer- cised the right of establishment in the form 9. According to the Commission, the tax of a secondary establishment and which sell measure at issue is discriminatory from the in French territory proprietary medicinal point of view of exercise of the right of products for which the research is carried establishment since it ultimately favours out in the State of the parent company's pharmaceutical companies which carry out seat. research in France and, hence, in the majority of cases, companies whose princi- pal place of business is in France, as against pharmaceutical companies which merely distribute in France the products of research carried out in other Member States Secondly, the French legislation at issue where their parent companies have their also gives rise to a 'leaving' restriction in principal place of business. Such discrimi- the form of tax treatment which makes it nation is not justified either by the require- less attractive, for companies established in ments laid down in Article 56 of the Treaty France, to set up offshoots abroad through I - 4814

which to carry out research in other may be invoked vary depending on whether Member States. As the Court has now it is a matter of direct or indirect discrimi- consistently held, even though, according nation in the matter of establishment. In to their wording, the Treaty provisions on the former case, discriminatory national establishment '... are directed mainly to rules are compatible with Community law ensuring that foreign nationals and compa- only if they can be brought within the scope nies are treated in the host Member State in of an express derogation. 6In the latter the same way as nationals of that State, case, on the other hand, if the measure is they also prohibit the Member State of applicable without distinction, the restric- origin from hindering the establishment in tion may be justified, not only on the another Member State of one of its nation- grounds laid down in Article 56, but also als or of a company incorporated under its by other overriding requirements relating legislation which comes within the defini- to the public interest, provided that the tion contained in Article 58'. 5In so far as principle of proportionality is observed. the restriction, in the sense of exclusion from the enjoyment of a tax concession, affects affiliated companies which have their principal place of business in other Member States where they incur expendi- ture on research relating to products sold in 12. In the present case, as stated above, the France, the legislation in question constitu- French tax legislation which is the subject- tes an obstacle to the exercise of the matter of the main proceedings is only freedom of establishment guaranteed by indirectly discriminatory, in so far as it Articles 52 and 58 of the Treaty. makes the tax concession subject, not to the nationality of the company, determined on the basis of its seat, but rather to the circumstance that the company carries out in France research relating to products marketed there. In so far as the research is 11. In view of the restrictive nature of the carried out at the (foreign) seat of the legislation in question with respect to the parent company, the non-deductibility of exercise of the right of establishment, it is the research expenditure gives rise to indir- necessary to ascertain whether it may ect discrimination affecting the exercise of possibly be justified in the light of Com- the right to set up a secondary establish- munity law. ment.

in view of the restrictive interpretation tax was not payable if the insurers were which the Court of Justice has placed upon established abroad. In subsequent case-law, those derogations by making it clear that the need for fiscal cohesion has been the they do not include economic aims 7 such as subject of interpretations which have the reduction in tax revenue which could reduced its scope for purposes of justifying result from the deductibility of research indirect discrimination. Thus, the Court expenditure even if that expendure is has accepted that, whenever one State carried out in other Member States. recognises another's power to tax its own residents in respect of income obtained in the first State, the balance between the fiscal benefit and the need for revenue must be achieved at an overall level, and not necessarily within a single State. 9 In other cases, the Court has emphasised the need for a direct link between the granting and the financing of the benefit, ruling out any reliance on fiscal cohesion whenever such a link cannot be established. 10 Again, it was

pension and life assurance contributions conditional on the contributions being paid in the State concerned was justified by the need to maintain the cohesion of the tax system concerned. That restrictive approach was explained by the necessity 9 — See the judgment in Case C-80/94 Wielockx [1995] ECR to offset the loss of revenue resulting from I-2493. deduction of tax on pensions, annuities or 10 — In the judgment in Svensson and Gustavsson, cited in footnote 7, the Court excluded the existence of a direct capital sums payable by insurers, when that link between the grant of an interest rate subsidy to borrowers for the acquisition of a dwelling ana its financing by means of the profit tax on financialestablish-

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BAXTER AND OTHERS V PREMIER MINISTRE AND OTHERS

15. The French levy at issue here does not The second question enable any link to be established between the levy, which, it should be remembered, is a direct tax on pharmaceutical companies' turnover from sales of reimbursable pro- prietary products less expenditure on research carried out in France, during the 16. By its second question, the national period in question, and the purpose of the court asks the Court to interpret Article 95 tax, which is to balance the accounts of the of the Treaty in order to establish whether national social security scheme. In particu- or not it precludes domestic tax legislation lar, the prohibition on deducting expendi- such as that provided for by Order 96/51 of ture on research carried out in other 24 January 1996. Article 95 of the Treaty Member States is not justified by the need prohibits Member States from imposing to offset any loss of tax revenue caused by discriminatory internal taxes on imported the carrying out of scientific and technical products. It reinforces the protection research in other Member States. Put against any other pecuniary charges affect- simply, the contested levy represents a ing a product when, or at any rate because, greater tax burden (or, which amounts to that product crosses frontiers, which is the same thing, a lesser tax relief) for afforded by the prohibition contained in companies of other Member States market- Articles 9 to 12 of the Treaty, thus com- ing medicinal products in French territory plementing the aim of eliminating obstacles by means of a secondary establishment. to the free movement of goods in the Community.

products vis-à-vis similar or competing importing undertakings to a tax burden domestic products. Less relevant, but greater than that imposed on domestic equally significant for the purpose of products. However, in the present case, applying the provision in question only to the French tax legislation does not distin- indirect taxation, is the argument which guish the tax system applicable to impor- can be drawn from its schematic position. ters of medicinal products from that applic- Apart from Article 95, Chapter 2 of Title V able to domestic producers of similar or of the EC Treaty, which is devoted to tax competing products. The distinction provisions, contains provisions which all relates, not to the origin of the product, refer only to indirect taxation, providing in taken to mean the place where its produc- Article 99 in particular for powers to tion process is carried out, but rather to the harmonise legislation concerning turnover location of the scientific and technical taxes, excise duties and other forms of research from which that product has indirect taxation to the extent that such resulted. Indeed, even if they carried out harmonisation is necessary to ensure the the entire production process in France, the establishment and functioning of the inter- branches or subsidiaries of foreign compa- nal market. nies could not avail themselves of the right to deduct research expenditure if the scien- tific research preceding the manufacture of that product were in any case carried out at the parent establishment in another Mem- ber State. In such a case there would be discrimination and Article 95 could not reasonably be invoked. 13 For that reason also, I take the view that Article 95 cannot On the other hand, it must be borne in be used to assess the compatibility with mind that tax systems relating to direct Community law of the tax legislation taxation which contain rules likely to contested before the national court. produce discriminatory effects are incom- patible with other provisions of the Treaty, and in particular those on freedom of movement for persons or those concerning the free movement of goods. 12

the internal tax has a discriminatory or national court, I shall make the following protective effect, it must be examined observations. By its third question, the whether '. . . it may deter consumers' from Conseil d'État asks the Court to assess purchasing the imported product to the whether the deduction from the taxable benefit of the product of domestic manu- amount of only the expenditure relating to facture. 14 In the case of the French tax research carried out in the State of taxation legislation, it is in no way possible to is to be considered State aid to undertak- determine from the order for reference ings as referred to in Article 92 of the whether and to what extent the non- Treaty. deduction of research expenditure carried out abroad is reflected in the cost, and therefore in the price, of products sold by branches or subsidiaries of parent compa- nies established in other Member States, even having regard to the fact that those products are proprietary medicinal pro- 19. The submission of the question on State ducts which are reimbursable or, at any aid in the alternative in relation to the two rate, approved for use by public bodies. previous questions on the right of establish- ment and internal taxation of a discrimi- natory nature is also justified in the light of the relationship between the different Com- munity rules which apply in each case. Indeed, according to the Court's case-law on the relationship between the rules on the free movement of goods, those concerning the repeal of discriminatory tax provisions The third question and those on aid, the mere fact that a national measure may possibly be defined as aid within the meaning of Article 92 is not an adequate reason for exempting it from the prohibition contained in Arti-

question. However, should the Court take treatment in the fundamental sphere of the view that neither Articles 52 and 58 nor freedom of movement for natural and legal Article 95 of the Treaty preclude tax legis- persons, results in individual rights which lation such as that contested before the 15 — See the judgment in Commission v France, cited in footnote 12, at paragraph 13. Previously, although with 14 — See the judgment in Case C-113/94 Casari» [1995] ECR reference to those aspects of aid which were not necessary I-4203, at paragraph 22, in which the Court held that a for the attainment of its object or. for its proper function- system of taxation cannot be considered discriminatory ing, the Court had already held that the scheme of solely because only imported products come within the Articles 92 to 94 could not prevent the application of most heavily taxed category, but that the effect of the tax Article 30 (see judgment in Case 74/76 lannelli and Volpi on the pattern of consumer purchasing must be examined. [1977] ECR 557, at paragraphs 16 and 17).

Article 92, which states that any aid granted by a Member State or through As in the case of the free movement of State resources in any form whatsoever goods, the extension of the scope of the which distorts or threatens to distort com- rules on the right of establishment even- petition by favouring certain undertakings tually comes up against situations of dis- or the production of certain goods, in so far crimination affecting operators from other as it affects trade between Member States, Member States which could also fall within is incompatible with the common market, the ambit of other provisions of the Treaty, contains a very broad concept of aid, which such as those on State aid. However, the has since been clarified by the Court's case- partial overlapping of the areas of applica- law. In particular, aid is considered to tion of the respective rules must not lead to embrace not only positive benefits such as the provisions on establishment or on the subsidies '... but also interventions which, free movement of goods being considered in various forms, mitigate the charges inapplicable when, as in the present case, which are normally included in the budget certain aspects of the system of aid orga- of an undertaking and which, without nised by the State in question are capable of therefore being subsidies in the strict mean- being examined independently in the light ing of the word, are similar in character of those provisions. I am therefore of the and have the same effect'. It follows that a opinion that the French tax system intro- tax exemption which, although not invol- duced by the order being contested before ving a transfer of State resources, places the the national court can be assessed in the persons to whom it applies in a more light of the rules on the right of establish- favourable financial situation than other ment and that, once it has been established taxpayers constitutes State aid within the that those rules preclude such taxation, it meaning of Article 92. 17 will not be necessary to examine its com- patibility with the rules on State aid. 17 — See the judgment in Case C-387/92 Banco Exterior de España [1994] ECR I-877, at paragraphs 13 and 14, which applies a much earlier decision (see the judgment in Case 16 — The prohibition formula goes back to the judgment in Case 30/59 Steenkolenmijnen [1961] ECR 1, and in particular at 152/73 Sotgiu [1974] ECR 153, at paragraph 11. page 39.

Generally speaking, provided that the other parent companies are established in other conditions are satisfied, the possibility of Member States do not carry out research in deducting certain costs from the taxable France, such companies bear the tax bur- amount, resulting in a lower tax burden for den in full as they are not eligible to deduct the beneficiary undertakings, may therefore research costs from the taxable amount. It constitute State aid within the meaning of follows that this is a measure which will Article 92 of the Treaty. 18 favour pharmaceutical research in France and, more generally, the French pharma- ceutical industry.

With regard to the effect of the aid on intra-Community trade, the case-law regards this condition as satisfied even where the beneficiary operates exclusively on the domestic market, since the advan- tage enjoyed represents a barrier to entry The tax burden introduced by Order 94/96 into that market of companies operating in is imposed on the entire pharmaceutical other Community countries. 19 In the pre- industry which distributes its products in sent case, it would be difficult to argue that France. Deduction from the taxable the French undertakings in receipt of the amount applies exclusively to companies aid operate exclusively on the domestic which carry out scientific and technical market, since the sector concerned, that of research in France and which, in the the pharmaceutical industry, is character- majority of cases, are companies having ised by great openness of markets and their principal place of business in the State fierce international competition.

p. 10). The decision was not contested and the failure of consideration as aid, that the advantage was relatively the Italian Republic to comply with it was established by small. See also, to this effect, the judgment in Case judgment in Case C-280/95 Commission v Italy [19981 C-142/87 Belgium v Commission (1990] ECR I-959, at ECR I-259. paragraph 43.

(2) Article 95 of the EC Treaty does not preclude such legislation.

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BAXTER AND OTHERS V PREMIER MINISTRE AND OTHERS

In the alternative, only if the Court holds that Articles 52 and 58 of the Treaty do not preclude domestic legislation such as that described under (1) above, I propose that the Court answer the third question as follows:

(3) The deductibility from the taxable amount of expenditure on research carried out in the State of taxation is to be considered aid within the meaning of Article 92 of the EC Treaty.

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