C-275/97

5. Article 2 (5) provides that, where in The relevant provisions of the Fourth exceptional cases the application of a Directive provision of the Fourth Directive is incom- patible with the principle of a true and fair view, that provision must be departed from in order to ensure that that principle is observed. Any such departure must first be disclosed in the notes on the accounts together with an explanation of the reasons for it. 2. The Fourth Directive is intended to coordinate national provisions relating to the presentation and content of annual accounts and annual reports, the valuation methods used therein and their publication in respect of certain companies with limited liability in order to protect members and 6. Article 20(1) of the Fourth Directive third parties. 2 defines provisions for liabilities and charges. They are 'intended to cover losses or debts the nature of which is clearly * Original language: French. defined and which at the date of the 1 _ OJ 1978 L 222, p. 11. balance sheet are either likely to be incur- 2 — First recital in the preamble. red, or certain to be incurred but uncertain

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as to amount or as to the date on which sheet and the date on which it is they will arise'. drawn up,

7. Article 31 of the Fourth Directive sets out the general principles with which the Member States must comply when valuing the items shown in the annual accounts.

(d) account must be taken of income and charges relating to the financial year, irrespective of the date of receipt or 8. Thus, Article 31 (1) of the Fourth Direc- payment of such income or charges; tive provides that:

The relevant national provisions up to the balance sheet date, even if they become apparent only between the balance sheet date and the date on which the balance sheet is drawn up, and that only 11. The Fourth Directive was transposed profits made at the balance sheet date may into German law by the Bilanzrichtlinien- be taken into account. In addition, it also gesetz (Law on Accounting Guidelines) of states that departures from the principles 19 December 1985. 3 That Law was incor- set out therein, for which particular reasons porated into the Third Book (Paragraphs are to be given, are only possible in 238 to 342) of the Handelsgesetzbuch exceptional circumstances. (Commercial Code, hereinafter 'the HGB') of 10 May 1897. 4

15. In accordance with Paragraph 253(1) of the HGB, which transposes the first 12. In accordance with Paragraph 243(1) paragraph of Article 42, 'provisions are not of the HGB, 'annual accounts shall be to exceed in amount the sums which, on the drawn up in accordance with the principles basis of a reasonable business assessment, of proper accounting'. are necessary'.

21. The plaintiff brought an action before 18. DE + ES Bauunternehmung GmbH the Finanzgericht Köln and claimed that (hereinafter 'the plaintiff), a construction the contested notices of assessment should company incorporated under German law, be amended to take account of a global performs building contracts using subcon- provision for warranties amounting to 2% tractors as well as its own employees. of turnover, or DEM 88 396.

22. The defendant considers that if an undertaking claims the benefit of a higher global provision than that which is usual in 19. When the plaintiff calculated the Kör- the trade concerned, it must prove that in perschaftsteuer and Gewerbesteuer (trade the past the rate of warranty claims excee- tax) for which it was liable for 1993, it ded the normal rate. In this case, the sought to make a global provision liabilities defendant maintains that the evidence sub- under warranties which arose in particular mitted by the plaintiff is insufficient to contracts before the date of the balance substantiate its claim and therefore con- sheet but whose effects were likely to tends that it should be dismissed. appear after that date and which it valued at 2% of the turnover subject to warran- ties. Consequently, it claimed a tax exemp- tion equal to the amount thus valued. It is not disputed that it is required to guarantee 23. The referring court states that, in order reparation of defective work that comes to for such provision to be made under Ger- light during the two to five years which man law, the Einkommensteuer-Richtlinien follow the completion of that work or that (Income Tax Guidelines: 'EStR') and settled

' 1 . Is it compatible with the accounting — account is to be taken of all rules laid down by the Fourth Council foreseeable liabilities and potential

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losses arising in the course of the date, but to make global provision, by financial year concerned or of a way of a fixed percentage of the turn- previous one, even if such liabilities over subject to warranties? or losses become apparent only between the date of the balance sheet and the date on which it is drawn up (Article 31(1) (c) (bb)); 2. If the first Question is answered in the affirmative:

Subject to what preconditions, in accordance with what valuation cri- — the components of asset and liabi- teria and up to what percentage, on the lity items are to be valued sepa- basis, where appropriate, of an assess- rately (Article 31(l)(e)); ment by the business itself, may such global provision be made, regard also being had to any limited rights of recourse against the business, own employees and against subcontractors, and, in the event of doubt as to the amount of the provision needed, who bears the disadvantage of the fact that the matter is not susceptible of proof?'

— provisions are not to exceed in amount the sums which are neces- sary (first paragraph of Article 42),

has jurisdiction on the basis of the Court's taken in its Community context, is essential judgment in the Leur-Bloem case. 6 to resolve the case brought before it. That is because that term which appears in the Fourth Directive has been transposed in its entirety into national law and extended to situations similar to those purely internal situations envisaged by the Directive (that is to say, for the determination of the basis 27. I share that opinion. According to that for assessment to direct taxes). judgment, '[a] reference by a national court can be rejected only if it appears that the procedure laid down by Article 177 of the Treaty has been misused and a ruling from the Court elicited by means of a contrived dispute, or it is obvious that Community law cannot apply, either directly or indi- 29. So, according to that judgment, '... rectly, to the circumstances of the case...'. 7 where in regulating internal situations, domestic legislation adopts the same solu- tions as those adopted in Community law so as to provide for one single procedure in comparable situations, it is clearly in the Community interest that, in order to fore- stall future differences of interpretation, The Court considers that this is not the case provisions or concepts taken from Com- with '... questions concerning Community munity law should be interpreted uni- provisions in situations where the facts of formly, irrespective of the circumstances the cases being considered by the national in which they are to apply ...'. 9 courts [are] outside the scope of Commu- nity law but where those provisions had been rendered applicable either by domes- tic law or merely by virtue of terms in a contract... [T]he provisions of domestic law and the relevant contractual terms, which incorporated Community provisions, 30. The fact that the outcome of the main clearly [do] not limit application of the proceedings does not turn directly on the latter.' 8 application of Community provisions does not, in the circumstance of the case, raise any doubts as to the Court's jurisdiction.

33. I consider not only that the Fourth 36. It should be remembered that Arti- Directive does not preclude such provisions cle 20(1) defines provisions for liabilities from being made by way of a global and charges as being 'intended to cover valuation in a case such as that in the main losses or debts the nature of which is clearly proceedings but also that compliance with defined and which at the date of the those principles requires that a company balance sheet are either likely to be incur- which finds itself in a situation like that of red, or certain to be incurred but uncertain the plaintiff in the main proceedings must as to amount or as to the date on which

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40. The Court confirmed that interpreta- tion in its judgment in the case Tomber- ger 10, in which it ruled that 'the principle of the "true and fair view"... is the primary 38. Furthermore, I consider that obser- objective [of the Fourth Directive]'. vance of the principle of a true and fair view, which the Community legislature considers to be the primary objective of the Fourth Directive, requires such provi- sions to be entered as liabilities in the balance sheet and obliges companies to assess as accurately as possible their needs in this regard. To my mind, Article 20(1) of 41. The partners and creditors of the the Fourth Directive is not only based company concerned must be able to ascer- directly on the principle that valuation tain its actual assets and liabilities, which must be made on a prudent basis, to which they would be unable to assess if charges I will return, but also constitutes an impor- resulting from liabilities which arose before tant application of the principle of a true the date of the balance sheet but whose and fair view. effects appeared after that date were not shown in the balance sheet. Therefore, where there is a strong possibility that a charge or a loss will be incurred, the principle of a true and fair view requires the company to enter it into its balance sheet. Furthermore, the primacy that the 39. The principle set out in Article 2(3) of the Fourth Directive requires Member States to coordinate national provisions 10 — Case C-234/94 Tomberger [1996] ECR I-3133, paragraph relating to the presentation and content of 17.

42. Let us therefore consider whether enter- ing a global provision for liabilities and charges in the balance sheet breaches the principle that valuations must be made on a prudent basis and the principle that valua- 45. Thus, the principle that valuation must tions must be made separately. be made on a prudent basis must be interpreted as requiring a company such as the plaintiff to enter in its balance sheet losses or liabilities resulting from warranty claims that may be made after building 43. Observance of the principle that valua- work has been performed in a specific tion must be made on a prudent basis is financial year even if the defects have not prescribed in Article 31(l)(c) of the Fourth yet come to light or have come to light but Directive. It requires companies to present have not yet given rise to an actual claim a balance sheet which takes account of any against it. occurrences which could affect the finan- cial security of the undertaking's creditors. That means that only profits made at the date of the balance sheet may be entered, and also that account must be taken of all foreseeable liabilities and potential losses 46. In the Court's judgment in the Tom- arising in the course of the financial year berger case, cited above, it made clear the concerned or of a previous one, even if such proper application of the principle of a true liabilities or losses become apparent only and fair view also depended on observance between the date of the balance sheet and of Article 31 of the Fourth Directive. the date on which it is drawn up, of all depreciation, whether the result of the financial year is a loss or a profit, and of the income and charges relating to the financial year, irrespective of the date of receipt or payment of such income or 47. The Court ruled: 'With regard to charges [Article 31(1) (c)(aa), (bb) and Article 31 of the Fourth Directive, it should (cc) and (d)]. be borne in mind that the Fourth Directive seeks to coordinate national provisions concerning the presentation and content of annual accounts of certain types of companies... In order to coordinate the 44. Therefore, the costs incurred in per- content of annual accounts, the directive forming contracts in the course of the lays down the principle of the "true and

48. With regard to the requirement that 51. That view is based on the wording of separate valuations must be made, that Article 20(1) and (2) and the first para- requirement is contained in Article 31(1 )(e) graph of Article 42 of the Fourth Directive. of the Fourth Directive, which states that It follows from those provisions, read in 'the components of asset and liability items conjunction, that the creation of provisions must be valued separately'. is authorised even if the amount of losses or debts is uncertain, provided that they do not exceed the sums which are necessary. A global valuation necessarily satisfies that definition. My reply would have been quite different had the Community legislature stipulated that all the components of asset 49. The referring court and the Commis- and liability items had to be determined sion consider that the requirement that precisely. those components must be valued sepa- rately precludes a global valuation of provisions for liabilities and charges and that reasons must be given for exceptional circumstances in order that a departure may be made from it. However, the parties to the main proceedings and the intervening 52. In my view, by laying down the Member States take the view that the requirement that items be valued sepa- Fourth Directive authorises the making of rately, the Community legislature is helping a provision to cover several uncertain debts to ensure proper application of the general and mandatory rule prohibiting '[a]ny set- off between asset and liability items, or 11 — Tomberger, cited above, paragraph 17. between income and expenditure items', 12 — Ibid., paragraph 18. which is set out in Article 7 of the Fourth 13 — Ibid., paragraph 22. Directive and reiterated in more precise

The second question 56. As the Court recently stated in a judgment of 15 May 1997 in the case of Futura Participations and Singer, 16 '... no provision has been made for harmonising domestic rules relating to determination of 54. It follows from the grounds contained the basis of assessment to direct taxes. in the order for reference that, in order to Consequently, each Member State draws calculate the basis for assessment to the up its own rules governing the determina- direct taxes for which the plaintiff is liable, tion of profits, income, expenditure, deduc- the referring court seeks, by its second tions and exemptions as well as the question, to ascertain whether the Fourth amounts in respect of each of them which Directive lays down specific rules for may be included in the calculation of provisions and whether, in particular it lays taxable income or of losses which may be down the criteria for determining their carried forward'. amount. 15 — See, for example, Article 30 of the Fourth Directive which provides: 'The Member States may permit taxes on the 14 — As far as I am aware, in the majority of Member States profit or loss on ordinary activities and taxes on the there are no express rules on the global valuation of extraordinary profit or loss to be shown in total as one provisions for charges and liabilities. However, they are item in the profit and loss account before "Other taxes not clearly permitted in five States: in Austria (see, in shown under the above items". In that case, "Profit or loss particular, Geist, R. in: Kommentar zum Handelsgesetz- on ordinary activities after taxation" shall be omitted from buch, p. 1593 et seq., and p. 1689 et seq.); in France (Code the layouts prescribed in Articles 23 to 26. general des impôts. Article 39-1-5°); in the United King- Where this derogation is applied, companies must disclose dom (Statements of Standard Accounting Practice, 18, rule in the notes on the accounts the extent to which the taxes 6) and, by way of exception, where reasons are given for on the profit or loss affect the profit or loss on ordinary them, in Germany (HĢB, Paragraph 252(2)) and in activities and the "Extraordinary profit or loss".' Luxembourg (Conseil d'État, 7 February 1962, Comptoir 16 — C-250/95 Futura Participations and Singer v Administra­ des fers et métaux, No 5735, and Counseil d'État, 8 July tion des Contributions [1997] ECR I-2471, at paragraph 1953, Mayer-Reiffers, No 5015). 33.

(2) In the absence of harmonisation of national rules relating to the determina- tion of the basis for assessment to direct taxes, the Member States alone are competent to lay down the rules relating to tax deductibility of provisions for charges and liabilities.

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