C-294/97
ECLI:EU:C:1999:25
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EUROWINGS LUFTVERKEHRS
OPINION OF ADVOCATE GENERAL MISCHO delivered on 26 January 1999 *
1. In proceedings between Eurowings Luft- stances of the taxpayer owning the estab- verkehrs AG ('Eurowings'), an aviation lishment. company incorporated under German law, and the Finanzamt (Tax Office) Dortmund- Unna concerning payment of the 'Gewer- besteuer' (trade tax), the Finanzgericht Münster has asked the Court to give a preliminary ruling on the interpretation of Article 59 of the EC Treaty in relation to certain aspects of the Gewerbesteuergesetz (Trade Tax Law, 'the GewStG'). 4. Paragraph 6 of the GewStG provides that the taxable amount consists of the trade earnings and the trade capital. 2
The national rules
2. Paragraph 2 of the GewStG of 21 March 1991 1provides that any perma- 5. 'Trade earnings' are the profits of the nent business establishment operating in business establishment, determined in Germany is subject to trade tax. accordance with the income tax laws or the corporation tax laws. These profits are subject to certain add-backs and deduc- tions, in accordance with Paragraphs 8 and 9 of the GewStG. The purpose of the add- backs and deductions is to determine the objective earnings of the business, irrespec- 3. Trade tax is a non-personal tax on the tive of whether the capital employed business establishment as such, irrespective belongs to the business itself or to a third of the resources or the personal circum- party.
* Original language: French. 2 — Since 1 January 1998 the taxable amount has been limited 1 — BGBl. I, p. 814. to the trade earnings.
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6. Thus Paragraph 8 of the GewStG, enti- added back pursuant to Paragraph 12(2) of tled 'Add-back to the taxable amount', the GewStG and the deductions provided provides in subparagraph (7) that there for in Paragraph 12(3) of the GewStG. The must be added to the earnings of the purpose of these add-backs and deductions business: is to determine the capital belonging to the business and to third parties which is objectively employed in the business.
'half of the rental payments made for the use of fixed business assets, other than real property, owned by another person. This does not apply where the payments are to be taken into account for the purposes of trade tax on the lessor's earnings, unless the 9. Paragraph 12(2)2 of the GewStG, enti- lease is of an undertaking (Betrieb) or part tled 'Trade capital', thus provides that the of an undertaking and the rental payments following amounts are to be added to the exceed DEM 250 000. The amount to be taxable value of the business: taken into account is that which the lessee has to pay to a lessor for the use of business assets which he does not own in the business establishment within a municipal- ity'.
'the (current) value of business assets, other 7. The GewStG therefore generally sup- than real property, used for the purposes of poses that the net income derived from the the business but owned by a member of the leased asset corresponds to one half of the business or by a third party, to the extent rental paid. that they are not included in the taxable value of the business. This does not apply where the assets form part of the lessor's trade capital, unless a business or part of a business is leased and the (current) value of the leased assets of the business (or part of a business) included in the lessor's trade capital exceeds DEM 2.5 million. The 8. 'Trade capital' corresponds to the value amount to be taken into account is the for tax purposes of the business capital total value of the business assets made determined in accordance with the law available by the lessor to the lessee for use laying down the criteria for assessment, in the business establishment within a adjusted to take account of the amounts municipality'.
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10. Like the second sentence of Para- aircraft, calculated according to its use on graph 8(7) in relation to rental payments, German territory, was DEM 1 320 000. By the second sentence of Paragraph 12(2)2 decision of 21 May 1996 the Finanzamt thus provides that the value of business Dortmund-Unna assessed the trade tax assets owned by a third party is not to be payable for 1993 by adding back to the added back in so far as those assets are trade earnings, in accordance with Para- already subject to trade tax in the hands of graph 8(7) of the GewStG, half the rental the lessor. p a y m e n t s a c t u a l l y m a d e , namely DEM 233 9 5 7 . P u r s u a n t to Para- graph 12(2) of the GewStG the Finanzamt also added back the current value of the leased aircraft, DEM 1 320 000, to the trade capital.
11. It is apparent from the observations submitted to the Court by Eurowings that trade tax is calculated in two stages. First, trade capital is subject to a 'tax coefficient' set at a uniform rate throughout Germany at 0.2% for trade capital and 5% for trade 13. On 13 June 1996 Eurowings lodged a earnings; the 'weighted taxable amount' complaint against the decision of the thus obtained is then multiplied by a 'rate' Finanzamt Dortmund-Unna, which the lat- determined by each municipality. In 1993 ter rejected by decision of 8 July 1996. On this rate varied between 0%, notably in the 11 July 1996 Eurowings brought an action municipality of Norderfriedrichskoog before the Finanzgericht Münster; it (Schleswig-Holstein), and 515% in Frank- claimed that Paragraphs 8(7) and 12(2) of furt-am-Main. In Dortmund, where the GewStG were incompatible with Arti- Eurowings has its registered office, the rate cle 59 et seq. of the EC Treaty. applicable in 1993 was 450%.
14. The Finanzgericht observes that under Community law Eurowings is able to rely on discrimination contrary to Article 59 of Background to the dispute the Treaty even though such discrimination does not directly affect Eurowings but affects the lessor incorporated under Irish law.
12. Eurowings operates scheduled and charter flights in Germany and in Europe. In 1993 it leased an aircraft from Air Tara Ltd, a company incorporated under Irish law based at Shannon; the rental was 15. The Finanzgericht further observes that DEM 467 914. The current value of the Irish limited companies are comparable to
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German share companies within the mean from a lessor established in Germany, ing of Paragraph 1 of the German corpora which might constitute covert discrimina tion tax law and that if such companies tion contrary to Article 59 of the Treaty. leased aircraft in Germany their activities would be regarded entirely as business activities under Paragraph 2(2) of the GewStG.
18. The national court considers it doubt ful whether the intention to ensure coher ence of taxation can justify the add-back 16. The Finanzgericht points out that the provisions of the GewStG. The Court of scheme of the add-back provisions relating Justice has held 3 that the aim of ensuring to trade tax is based on the legislative the cohesion of the tax system can justify a intention to ensure that the asssets difference in treatment between residents employed by a domestic business under and non-residents only where the fiscal taking are taxed, and taxed only once, disadvantage imposed on the national of a irrespective of whether they were financed Member State is compensated by a corre by the business or from outside and of sponding fiscal advantage which that whether the trade capital is owned by the national is able to enjoy, so that in reality undertaking for the purposes of civil law. there is no discrimination against him. A This was achieved by adding back rental mere link between the fiscal advantage payments and the value of the economic conferred on one taxpayer and the unfa assets to the earnings of the business. It is vourable fiscal treatment of another tax necessary in such a system, therefore, for an payer cannot justify discrimination exception to be made in cases where the between residents and non-residents. In rental payments or assets in question are that regard, the national court observes already subject to trade tax in the hands of that in a decision of 30 December 1996 4 the lessor. the Bundesfinanzhof considered that there was serious doubt whether the add-back provisions in the second sentence of Para graph 8(7) and the second sentence of Paragraph 12(2)2 of the GewStG were compatible with the prohibition on discri mination in Article 59 et seq. of the Treaty, although it had accepted in an earlier decision that they were. 5
17. The national court observes, however, 3 — Case C-80/94 Wielockx ν Inspecteur der Directe Belastin that the fiscal treatment of a lessee who gen [19951 ECR I-2493 and Case C-484/93 Svensson and leases an asset from a lessor established in Gustavsson v Ministère du Logement et de l'Urbanisme [1995] ECR I-3955. another Member State is less favourable 4 — BStBl. II, 1997, p. 466. than where the lessee leases such an asset 5 — Judgment of 15 June 1983 (BStBl. II, 1984, p. 17).
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19. Last, the Finanzgericht wonders whe- Preliminary observation ther it is necessary to take into considera- tion the fact that the Irish lessor pays no tax comparable to the German business tax and enjoys 'Shannon privileges' in the form of corporation tax at 10%. In the present case such fiscal advantages might neutralise 21. As the Commission correctly observes, the theoretical restriction of freedom to the question as formulated is inadmissible, provide services and mean that if the lessor since the Court is requested to rule on the enjoyed the same exceptions to the add- compatibility of provisions of German law back provisions as German lessors it would with Community law. be the latter that were victims of discrimi- nation. The Finanzgericht is not certain that such an argument can be upheld, however, since the Court has also held that the compensation of fiscal disadvantages by other fiscal advantages cannot justify dis- crimination. 6 22. The Court has consistently held, how- ever, that although the Court may not, under Article 177 of the Treaty, rule on the validity, in regard to Community law, of a provision of domestic law, as it would be possible for it to do under Article 169 of the Treaty, it nevertheless has jurisdiction to supply the national court with an interpretation of Community law on all 20. The Finanzgericht Münster therefore such points as may enable that court to decided to refer the following question to determine the issue of compatibility for the the Court for a preliminary ruling: purposes of the case before it. 7
23. The question referred by the Finanzge- 'Are the add-back provisions in the second richt Münster must therefore be under- sentence of Paragraph 8(7) and the second stood as seeking to ascertain, in essence, sentence of Paragraph 12(2)2 of the whether Article 59 of the Treaty prohibits [GewStG] compatible with the principle national rules such as those laid down in of freedom to provide services under Arti- the second sentence of Paragraph 8(7) and cle 59 of the Treaty on European Union of the second sentence of Paragraph 12(2)2 of 7 February 1992?' the GewStG.
6 — Case 270/83 Commission ν France [1986] ECR 273, 7 — See, in particular, Joined Cases C-304/94, C-330/94, paragraph 21, and Case C-107/94Asscher ν Staatssecretaris C-342/94 and C-224/95 Tombesi and Others [1997] van Financiën [1996] ECR I - 3089. ECR 1-3561.
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Analysis 26. The situation in question therefore concerns a restriction which is indirect, in the sense that the application of the Ger- man law to a German undertaking has the effect of dissuading it from having recourse to the services offered by a provider of services established in another Member Principles laid down in the case-law of the State. Court
24. I shall begin by examining the princi- ples laid down in the Court's case-law which are material to the issue before the 27. As the Finanzgericht Münster, Eurow- Court. The dispute before the national ings and the Commission have correctly court falls within the field of direct taxa- pointed out, it follows from the case-law 9 tion. The Court has consistently held that that Article 59 of the Treaty confers sub- '[a]lthough, as Community law stands at jective rights not only on the provider of present, direct taxation does not, as such, services but also on the recipient. fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law'. 8 In this field too, therefore, the Member States must observe the fundamental freedoms laid down in the Treaty, including the freedom to provide services. 28. As regards the matters prohibited by Article 59 of the Treaty, the Court has consistently held that that provision may be infringed not only where there is direct discrimination based on nationality or indirect discrimination based on the resi- 25. Second, it should be observed that the dence of the provider of services, but also provisions at issue are drafted in neutral where national rules applicable to all terms, in that they are in no way meant to traders without distinction have the effect apply specifically to providers of services of of making the provision of services between another nationality or to those intending to Member States more difficult than the carry out their activities in Germany while provision of services purely within one based in another Member State. In the Member State. 10 present case, moreover, it is the application of that provision to a German company operating in Germany that is disputed. 9 — See, in particular, Joined Cases 286/82 and 26/83 Luisi and Carbone ν Amministrazione delle Finanze dello Stato [1984] ECR 377 and Svensson and Gustavsson, cited above. 8 — See, in particular, Case C-279/93 Finanzamt Köln-Altstadt ν 10 — See, in particular, case C-381/93 Commission v France Schumacker [1995] ECR 1-225, paragraph 21. [1994] ECR I-5145, paragraph 17.
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Impact of the rules in issue can never be so where the lessor is esta- blished in another Member State.
29. Having outlined the framework esta- blished by the Court's case-law, I can now go on to consider the rules at issue.
34. The Finanzgericht Münster has already drawn the following conclusion in the order for reference: 11 30. It should be noted at the outset that the objective pursued by the German legisla- ture, as described by the Finanzgericht (point 16 above), is not something which is open to challenge.
'Comparison between domestic and foreign lessors means... that payments to a foreign 31. Nor can the principle that a German lessor entail a fiscal disadvantage for a lessee is subject to the Gewerbesteuer, person subject to domestic trade tax, which irrespective of the State of establishment may be in breach of the prohibition of of the lessor, be subject to challenge, it discrimination in the EC Treaty where the being merely an instance of the fiscal foreign lessor has the nationality of another sovereignty of the Federal Republic of Member State or has its seat or head office Germany. there'. The Finanzgericht goes on to state that this system represents a competitive disadvantage for a provider of services established in another Member State, since it 'may lead the German lessee — all other things being equal — to contract with a 32. Where the problem does arise, on the German lessor'. other hand, is at the level of the rules which determine how the lessee is taxed, depend- ing upon whether the lessor is in Germany or in another Member State.
35. As thus described by the national court, 33. The German legislature has provided the national rules and their effects give that the lessee is exempt from the add-back reason to think that they constitute a procedure if the amounts which should restriction on freedom to provide services. have been added back are already assessed for the purposes of the Gewerbesteuer in the hands of the lessor, which by definition 11 — Part II, 5(a), third paragraph.
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36. That they do is disputed, however, by dance with the first sentence of Para- the Finanzamt Dortmund-Unna and by the graph 8(7) of the GewStG. German Government, who put forward four arguments in that regard.
39. That would also be the case where the lessor was exempt from trade tax or where, like the Federation, the Länder or the municipalities, it was exempt as a sovereign authority. Thus where a harbour town leased a crane to a harbour company it Arguments put forward in defence of the would be necessary, pursuant to the first rules in issue sentence of Paragraph 8(7) of the GewStG, to add back half the rental payments to the company's earnings.
37. The German Government maintains, first, that the contested provisions entail 40. Eurowings and the Commission point not only no direct discrimination but also out, however, that it is only in very rare no 'hidden indirect discrimination' against cases that domestic lessors are not liable to providers of services established in other pay trade tax. Depending on the type of Member States, because lessees are also activities in which they are involved, enti- required to add back the relevant amounts ties which are not subject to the GewStG in respect of assets leased from lessors engage in rental or leasing operations only established in Germany where the lessors on an ancillary basis and occasionally, if at are not subject to the GewStG. all.
41. In the light of what was submitted at the hearing that fact can be regarded as 38. That would be the case where a chemist established. who had ceased to practise granted a lease on his chemist's shop in Germany. Since he no longer had any business activity the chemist would not be liable to trade tax. The lessee's activity would be subject to that tax, however, and it would therefore 42. Rules in a Member State which confer be necessary to add back to the earnings of a fiscal advantage on the majority of that activity half the rental payments made domestic operations and always deprive in respect of the chemist's shop, in accor- cross-border operations of that advantage
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undeniably constitute a restriction on the quence. There is no such link in the present freedom to provide services. case, since the more favourable fiscal treatment of one taxable person, the lessee, is motivated by the collection of tax from another taxable person, the German lessor. On this point they also refer to a decision of the Bundesfinanzhof of 30 December 43. In Safir12 the Court held that the tax at 1996 14to the effect that: issue in that case was capable of being higher in the majority of cases than the tax on purely domestic operations.
'Such a direct link is in any event lacking where the preferential tax arrangement 44. The German Government attempts, applies to one taxable person whereas the second, to justify the tax scheme in ques- fiscal disadvantage dictated by cohesion tion by the need to preserve the cohesion of affects another taxable person; there the the tax system, which was upheld by the relationship between the two tax rules is Court in Bachmann. 13 only indirect.
45. The Commission contends that the situation at issue in that case was not comparable, since the disadvantage suf- The same applies to the rules provided for fered by the taxpayer (non-deduction of by the trade tax: the possibility that the insurance premiums) was counterbalanced rental or lease payments and the value of as far as the taxpayer was concerned by a the leased asset may be deducted by the subsequent advantage (non-taxation of the taxable person in his capacity as lessee is insured amount). only justified, according to the principle of single taxation inherent in the trade tax, by the fact that the corresponding sums are taxed in the hands of another taxable person, the lessor. The prohibition on effecting such a deduction where the lease 46. The national court and Eurowings is concluded with a lessor established in correctly point out, moreover, that in the another Member State of the Community is recent Wielockx and Svensson and Gus- therefore liable to restrict the freedom to tavsson judgments the Court held that there provide services. The fact that that ulti- must be a direct link between the deduction mately makes no difference, because the made and the unfavourable tax conse- amount of the rental payments is influenced either by the fiscal burden in the form of trade tax borne by the lessor or by that 12 — Case C-118/96 Safir v Skattemyndigheten i Dalarnas Län [1998] ECR I-1897. 13 — Case C-204/90 Bachmann v Belgian State [1992] ECR I-249. 14 — Cited above.
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borne by the lessee, is irrelevant. The 49. Third, the German Government claims decisive factor is that the (domestic) lessee that there is no longer any justification for may be encouraged to deal with domestic adding back the relevant amounts to the lessors rather than with those established lessee's taxable amount where the (Ger- abroad in order to avoid the fiscal charge man) lessor is also liable to pay the trade resulting from the add-back provisions in tax, since to do so would lead to double Paragraphs 8(7) and 12(2)2 of the taxation of the rental payments and the GewStG. The market opportunities of value of the leased assets. Where an asset is foreign competitors in comparison with supplied by a lessor who is liable to pay the those of a domestic competitor with the GewStG the lessor incorporates the tax in same offer are therefore reduced. the amount of the rental payments and thus passes it on to the lessee. From an economic aspect it is therefore the lessee who ulti- mately bears the tax burden.
... It is extremely doubtful whether the add- back provisions in the second sentence of Paragraph 8(7) and the second sentence of 50. That argument seeks in essence to Paragraph 12(2)2 of the GewStG are com- demonstrate that in all circumstances it is patible with the prohibition on discrimina- the lessee who bears the tax burden. Where tion in Article 59 of the EC Treaty.' the lessor is not subject to the GewStG the lessee pays the tax directly by means of the add-back procedure, whereas where the lessor is subject to the GewStG the lessee pays the tax indirectly by virtue of the fact that the lessor passes it on in the price. 47. Eurowings observes that since the Bun- desfinanzhof was required to determine a procedural issue, namely an application to suspend enforcement of the fiscal decision, rather than the substance of the case, it was unable to refer the matter to the Court for a 51. I do not find that explanation convin- preliminary ruling. cing.
52. As Eurowings observed, without being 48. The Bundesfinanzhofs analysis is in contradicted by the German Government any event entirely consistent with the on that point, in the context of a German Court's case-law, including on the question lease the lessee is always exempt purely of fiscal cohesion. An overriding require- because the lessor is subject to the GewStG, ment associated with the need to preserve irrespective of the ways in which the latter the cohesion of the tax system cannot may avoid actually paying the tax. Unlike a therefore be accepted in the present case. lessee in a cross-border lease, the lessor has
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a number of means of reducing the level of 55. Other than in the case of VAT, which is the tax, such as, inter alia, the fact that it is specifically designed to ensure that the the book value rather than the market actual burden of the tax is borne by the value of the assets that is taken into end user, it is never safe to presume that a account, the fact that half rather than the fiscal charge is the same for the consumer whole amount of the long-term payments irrespective of whether it is paid by the are added back, the use of flat-rate finan- consumer qua taxable person or is paid by cing to purchase the assets in order to the supplier and incorporated in the price. reduce the trade capital and the fact that only actual earnings on assets leased in Germany, rather than half the rental pay- ments, are taken into account. Moreover, German banks offer 'leasing funds', the 56. In a competitive system there can be no prospectuses of which show that tax on presumption that a fiscal charge is passed trade earnings is not payable and that tax on either in full or automatically in the on trade capital is payable for only part of price of goods or services; whether and to the contract period. Furthermore, since a what extent that is so depends entirely on lessor of aircraft is not tied to a town with the competitive conditions prevailing in the an airport it can establish itself in a market at a particular time. There would municipality which has fixed a very low need to be an agreement in existence rate, or even a zero rate, for the GewStG. between German lessors (and it is by no means certain that such an agreement would be legal) before there could be any guarantee that the fiscal burden would automatically be passed on in full. Even if by some remote chance that were the case, I 53. It may very well be the case, therefore, fail to see how national rules could cease to that in reality the leased assets are not be illegal merely because their effect was actually taxed in the hands of the German neutralised by the conduct of traders. lessor under the GewStG, although the lessee is not subject to the add-back proce- dure. Thus the advantage which the lessee derives from exemption from the add-back provisions is not in any way linked to the 57. The German system cannot therefore amount paid by the lessor under the be regarded as neutral for competition GewStG. purposes as between German lessors and those established in other Member States. It actually encourages German lessees of fixed assets other than real property to deal with a lessor established in Germany, since such a lessor is able to offer its 54. I also consider that even if the assets customers a service the value of which will were taxed in the hands of the German not be taken into account for the purpose lessor it would be impossible to conclude of determining the basis on which the trade that that fiscal burden would be automati- tax payable by its customers will be cally passed on in full in the rental pay- assessed, even though the price of the ments in such a way that the burden would service does not necessarily include a fiscal be borne by the lessee. charge representing that tax.
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58. Fourth, it remains to consider an argu- 60. At the hearing the Agent of the Federal ment raised by the defendant in the main Republic of Germany also accepted that the proceedings, the Finanzamt, to the effect existence or otherwise of a comparable tax that 'in order to determine whether there is in other Member States was not to be taken a restriction on the free movement of into consideration. services, it is necessary to compare the fiscal circumstances as a whole (meaning that in the present case the lower taxes in Ireland must be taken into consideration)'. The national court asks whether it is necessary to take into consideration the fact that the leasing company established 61. Last, it remains to consider whether the under Irish law pays no tax comparable to tax regime in issue is the only one capable the German Gewerbesteuer. However, it of allowing the Federal Republic of Ger- doubts that such an argument can be many to achieve the objective pursued, or upheld, having regard to the Court's case- whether there are other means of attaining law. 15 that objective.
62. One possible method might be to reduce the charge represented by the Gewerbesteuer on the 'transnational' pro- vision of services to the level applicable in 59. The Finanzgericht's doubts are well the case of the 'domestic' provision of founded. One can only share the Commis- services. This method must remain purely sion's opinion that accepting such justifica- theoretical, however, as long as the rate of tion 'would interfere with the foundations the GewStG may vary between 0% and of the internal market. If differences in the 515%, depending on the municipality con- direct taxation of undertakings could be cerned, and as long as the question whether "neutralised" by compensatory levies the Gewerbesteuer is or is not passed on to imposed by Member States on intra-Com- the lessee by the lessor remains wholly munity movements of goods, services and uncertain. capital, little would remain of those funda- mental freedoms. Virtually all goods and services moving between Member States would be subject to one compensatory levy or another... Member States and under- takings must in principle accept differences in fiscal charges in the same way as 63. Another method of achieving equality differences in social charges or labour of treatment would be to require the lessee costs'. to add back the relevant amounts even where the leasing contract was concluded with a German lessor and, in return, to 15 — See point 19 above. exempt the lessor from the trade tax.
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64. In so doing the German authorities which this capital ceased to be taken into might find inspiration in the system already account for the purpose of determining the applicable where an undertaking (Betrieb) trade tax. or part of an undertaking is leased and the rental payments exceed DEM 250 000 (see the 'exception to the exception' in the second sentence in fine of Paragraph 8(7)). 67. The system at issue therefore also fails to meet the condition of being 'objectively necessary' to attain the end pursued. 65. The law provides that where the rental payments have thus been added back to the hirer's or lessee's business assets the basis for assessment of the tax is reduced by a corresponding amount in the hands of the 68. Having completed my reasoning, I lessor or owner of the leased assets (Para- must therefore conclude that a system such graph 9(4) of the GewStG). as that at issue in the main proceedings establishes a restriction on the freedom to provide services because the recipient of a cross-border service is always taxed, whereas it is by no means certain that the 66. For lease agreements of this type the recipient of a domestic service is required, same rules applied to the determination of in one form or another, to bear a compar- the trade capital (Paragraph 12(2)2 and able burden or even any burden whatso- (3)3) until 31 December 1997, the date on ever.
Conclusion
69. I therefore propose that the Court answer the question referred by the Finanzgericht Münster in the terms proposed by the Commission, namely that:
Article 59 of the EC Treaty is to be interpreted as prohibiting a Member State from subjecting the recipient of a service to a higher tax on his business if the
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provider of the service in question is established in another Member State than if the provider of the service is established in its own territory, by means of provisions on adding back to the taxable amount certain items relating to the earnings and capital of the business.
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