C-307/97

3. In 1988, Saint-Gobain SA held the following shareholdings through Saint- Gobain ZN's operating capital: 4. Since each of the two subsidiaries estab- lished in Germany has concluded an agree- ment with Saint-Gobain ZN to be treated as a single entity for tax purposes ('Organ- vertrag'), the dividends which they receive — 10.2% of the shares of the Certain from their foreign sub-subsidiaries are Teed Corporation (CTC), established regarded, in tax law, as being directly in the United States of America; taxable in the hands of Saint-Gobain ZN, and therefore of Saint-Gobain SA, which is subject to limited tax liability. They are not * Original language: French. therefore treated as resident companies, as

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they would be in the absence of such 8. Article XV of the US-German Conven- agreements to be treated as a single entity tion provides that, in the case of a German for tax purposes. company limited by shares, income from sources within the United States liable to taxation there is to be excluded from the basis upon which German tax is imposed. This includes income from dividends where they are paid by an American corporation to a German company limited by shares 5. In the main proceedings, Saint-Gobain which holds at least 25% of the voting ZN objects to various measures adopted by shares of the American corporation (this the Finanzamt in charging corporation tax rate is reduced to 10% under Paragraph for 1988 and assessing the value for tax 26(7) of the Körperschaftsteuergesetz (Law purposes of the business assets on 1 Janu- on Corporation Tax, hereinafter 'the ary 1989. KStG')).

7. That relief is provided for, in particular, in Article XV of the US-German Tax 10. Second, although the Finanzamt did Convention of 1954/1965 1 and Article 24 indeed credit against corporation tax the of the German-Swiss Tax Convention of tax withheld at source in the various States 1971, in the version in force in 1988. 2 in which the distributing company is esta- blished (the direct credit provided for in Paragraph 26(1) of the KStG), it refused to 1 — Convention concluded on 22 July 1954 between the Federal credit the tax paid on profits distributed by Republic of Germany and the United States of America for the Avoidance of Double Taxation with respect to Taxes on foreign subsidiaries and sub-subsidiaries in Income and to certain other Taxes, as amended by the the States in which they are established. Protocol of 17 September 1965 (BGBl. 1954 II, p. 1118; 1996 II, p. 745). This is the indirect credit provided for in 2 — Convention between the Federal Republic of Germany and the Swiss Confederation for the Avoidance of Double Paragraph 26(2) of the KStG, which pro- Taxation with respect to Taxes on Income and Capital of vides that where a parent company whose 11 August 1971, as amended by the Protocol of 30 Novem- ber 1978 (BGBl. 1972 II, p. 1022; 1980 II, p. 750). liability for tax is unlimited holds a share in

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the capital of a foreign subsidiary it may, corporation tax and capital tax constitutes upon application and under certain condi- an infringement of Articles 52 and 58 of tions, be allowed to credit against the the EC Treaty. corporation tax payable on the dividends distributed to it by its subsidiary any tax on the profits paid by that subsidiary.

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ment in Germany of a company having conditions as for a company having its its seat in another Member State not to seat in Germany?' be accorded Schachtelprivileg in respect of dividends under a double- taxation agreement with a non-mem- ber State under the same conditions as for a company having its seat in Germany? 17. It should be pointed out that the provisions described above have undergone significant amendments since the time of the material events. With effect from the 1994 tax period, under the Standortsiche- rungsgesetz of 13 September 1993 (Law to maintain and improve the Federal Republic of Germany as a location for economic activity), 4the German legislature extended to permanent establishments of foreign 2. Is it compatible with the applicable companies certain tax advantages pre- Community law, and in particular with viously reserved for companies whose lia- Articles 52 and 58 of the EC Treaty, bility for tax in Germany was unlimited. read together, for the tax levied in a Thus, Paragraph 8b(4) of the KStG pro- non-member State on the profits of a vides that persons subject to limited tax subsidiary in that State of a branch liability are entitled, in respect of their establishment in Germany of a com- permanent establishments in Germany, to pany having its seat in another Member the tax exemptions provided for in double- State not to be credited against the taxation agreements in respect of dividends German corporation tax on that Ger- from associated foreign companies. Para- man branch establishment under the graph 26(7) of the KStG accords permanent same conditions as for a company establishments in Germany the indirect having its seat in Germany? credit provided for in Paragraph 26(2) of the KStG.

21. The Court established the following principles.

25. Last, the Court held that the rights conferred by Article 52 of the Treaty are unconditional and that a Member State 22. It considered, first, that a distinction cannot make respect for them subject to the based on the Member State in which a contents of a double-taxation agreement company has its seat may, under certain concluded with another Member State conditions, be justified in an area such as (meaning the Member State in which the tax law. company has its seat).

23. However, where the legislation of a Member States places companies whose 26. The question which arises is whether registered office is in its national territory that judgment, which, unlike the present and branches and agencies situated in its case, concerned shareholdings in domestic

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companies, is capable of being transposed whether according to their statutes or de to this case. facto, is in Germany.

31. According to the Court's case-law, 7it is a company's seat that determines whether it belongs to the legal order of a State and the seat is therefore the same as nationality as 28. It follows from the order of reference, far as natural persons are concerned. and it is not disputed between the parties, that the unfavourable treatment alleged by Saint-Gobain ZN could have been avoided had the latter been a company formed under German law. The tax advantages at 32. The discrimination of which Saint- issue in the second and third questions are Gobain ZN complains therefore clearly conferred by national provisions which depends on the nationality of the parent apply solely to companies whose liability company. It is the Compagnie de Saint- for taxation in Germany is unlimited. Gobain SA, established in France, which is According to German tax law, 6companies the actual taxpayer in the case before the regarded as such are those whose seat,

7 — See, as an example of a consistent line of decisions, Case 6 — Paragraph 1(1) of the KStG and Paragraph 1(1)(2) of the C-1/93 Halliburton Services v Staatssecretaris van Tinancien Vermögensteuergesetz (Law on Capital Tax). [1994] ECR I-1137, paragraph 15.

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national court, although it is its German reduction in the tax payable by the parent branch that is the plaintiff before the company by crediting to the amount of that Finanzgericht. tax the foreign corporation tax already paid by its subsidiaries and sub-subsidi- aries. Here, too, the possibility of reducing the tax payable is available only to com- panies resident in Germany.

37. Since the unfavourable nature of the 34. Thus, the international group relief treatment conferred on non-resident tax- referred to in the first question is granted payers has been established, apart from one under bilateral agreements and makes it aspect specific to capital tax to be consid- possible to avoid the double taxation of ered below, it remains to examine the dividends distributed by foreign subsidi- arguments relied upon in support of the aries by excluding such dividends from the national provisions at issue. amount on which tax is assessed in the State in which the parent company is established. In this case, therefore, it leads to a tax exemption from which, as we have seen, companies not having their seat in Germany do not benefit. 38. The German Government denies that there is any discrimination in the present case. In that regard, it refers to the con- sistent case-law of the Court, according to which there is discrimination where the same situations are treated differently or 35. The indirect tax credit to which the where different situations are treated in the second question relates operates differently same way. In tax matters, however, the but has a similar effect. It leads to a situation of non-residents is fundamentally

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different from that of residents, as the 41. I shall therefore examine the differ- Court confirmed in the Schumacker judg- ences to which the German Government ment. 8 refers.

44. Quite clearly, however, the German Government is merely referring in general terms to the admittedly indisputable differ- ence between limited tax liability and 40. The Commission acknowledges the unlimited tax liability which results from truth of the German Government's argu- the limited fiscal sovereignty of the State in ment, but claims that the actual differences which the income originates compared are not fundamental as regards companies with that of the State in which the main limited by shares. 10 It maintains that these undertaking is established. differences result essentially from the nat- ure of things and cannot justify excluding foreign companies from the relief at issue in the present case. 45. The very facts of the present case show that that distinction must be qualified. 8 — Case C-279/93 Finanzamt Köln-Altstadt v Schumacker First, it is clear from the facts that compa- [1995] ECR I-225. 9 — Paragraph 20. nies whose liability for tax is unlimited are 10 — Point 10 of its observations. able to benefit from considerable reduc-

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tions in the basic amount on which the tax 48. I therefore disagree with the German to which they are subject is assessed, Government and consider that the differ- whether by virtue of German legislation ence between the situation of resident in the strict sense or by the effect of the companies, with unlimited tax liability, wide network of bilateral double-taxation and that of non-resident companies, with agreements concluded by the Federal limited tax liability, is not such that they Republic of Germany. cannot be regarded as comparable for the purpose of determining the basis on which corporation tax or capital tax is assessed.

47. As the plaintiff and the Commission 51. Since the tax liability exists indepen- observe, it is also paradoxical to rely on the dently of that question, the advantages fact that subsidiaries must in principle be associated with that liability, such as mea- taxed on their global income and branch sures intended to avoid double taxation, establishments on their domestic income to must also be granted, as a matter of justify provisions whose effect is, in the principle, independently of the residence former case, to reduce the burden of the criterion. non-domestic portion of the global income and therefore to bring the global income closer to the domestic income. As the Commission observes, this even leads to the paradoxical result that in Germany German companies are not taxed in respect 52. As the Commission stated at the hear- of their shareholdings: only foreign com- ing, it is a question of both sides of the panies are. same coin.

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53. It is also permissible to observe that in multiple taxation. In its view, the interest in the cases cited 1 1where the Court accepted avoiding such taxation is strongest for the that there was in principle a difference in State in which a company has its seat. nature between the situation of residents Consequently, it is for that State, and not and non-residents that did not prevent it the State in which the permanent establish- from concluding that, for the purpose of ment is situated, to eliminate the conse- the provisions at issue in those cases, the quence of any double taxation which might two situations were comparable. be borne by its resident companies.

58. That argument is not convincing. 'acceptance of the proposition that the Member State in which a company seeks to establish itself may freely apply to it different treatment solely by reason of the fact that its seat is situated in another Member State would deprive [Article 52] of all meaning'. 59. The aim of avoiding double taxation of companies established in Germany is per- fectly capable of being achieved without recourse to discriminatory provisions. The fact that the benefit of the latter provisions 56. The German Government refers to the is also granted to the branch establishments fact that the provisions at issue are of non-resident taxpayers does not in any designed to avoid double taxation, or even way jeopardise their capability of attaining the objective pursued by the legislature. As regards the advantages referred to in the 11 — See the Tax credit and the Schumacker judgments, cited first two questions, that observation finds above, and also, for example, Case C-80/94 Wielockx v Inspecteur der Directe Belastingen [1995] ECR I-2493. further confirmation in the fact that, as I 12 — Case C-330/91 The Queen v Inland Revenue Commis- have said, the German legislature found it sioners, ex parte Commerzbank [1993] ECR I-4017, paragraph 13. appropriate to amend the domestic provi-

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sions in question in 1993 and since then to justified by the need to maintain coherence confer equality of treatment on permanent in the tax system. That might be the case if, establishments. notwithstanding the fundamentally com- parable nature of the situations in question, there were none the less actual differences in the German tax system between the taxation of branches and that of subsidi- 60. It is a fact that such an extension of the aries which rendered the discrimination in scope of those provisions would be likely to question necessary. lead to a loss in revenue for the German tax authorities. However, it is settled law that such an argument is not capable of justify- ing discrimination contrary to a fundamen- tal freedom laid down in the Treaty. 13

justifies the differences in treatment at issue The rules governing the taxation of those in the present case. recipients, which are distinct taxpayers, cannot be taken into consideration for the purpose of drawing distinctions between the taxation of the branch and that of the subsidiary.

67. First, it follows from the submissions of the Commission and the plaintiff, which were not contradicted by the German Government on this point, that the propor- 70. Such an approach implies a broad tion of the dividend of the subsidiary which interpretation of the concept of tax system is distributed to the parent company is coherence underlying the Bachmann judg- taxed at a lower rate (36%) than the rate ment, 15 whereas, as an exception to the applied to the dividend transferred to the fundamental freedoms laid down in the parent company by the branch (50%). That Treaty, a mandatory requirement must be represents an advantage for the subsidiary. interpreted strictly. I therefore consider it far from clear that the disadvantage for the subsidiary result- ing from a deduction at source should necessarily be offset by a supplementary advantage when the level of the amount on which the tax is assessed is determined. 71. The Commission further considers that the wording of the statement of reasons of the 1993 Standortsicherungsgesetz, whereby, as we have seen, the German legislature extended to resident companies the forms of relief at issue in the first two 68. In any event, the argument must be questions referred to the Court, amounts to rejected as a matter of principle. It follows recognition by the German Government of from the case-law of the Court that a the discriminatory nature of the provisions Member State is not entitled to apply, in at issue prior to their amendment. some regards, less favourable treatment to branches and agencies to offset the advan- tages which they enjoy in other regards compared with subsidiaries. 14 72. The relevant passage in the statement of reasons states that:

73. That passage is not entirely unambig- 77. To my mind, however, it is the entire uous. The German Government considers area of direct taxation that continues to that it does not imply any recognition on its remain within the competence of the Mem- part of any infringement of the Treaty but ber States and there is no need to distin- that it refers solely to certain views guish between a Member State's provisions expressed by legal writers and that the on direct taxation which are purely domes- amendment was intended to preclude any tic in origin and those which derive from a criticism in the future. double-taxation agreement with another Member State or a non-member country. Once these agreements have been ratified by the national parliament, they form part of the national law on direct taxation, in 74. I myself consider that, no matter what the same way as purely domestic provi- meaning is to be ascribed to the passage, it sions. has no relevance to the interpretation which the Court is called upon to give of Articles 52 and 58 of the Treaty.

78. Accordingly, the principle laid down by the Court that Specific observations in regard to the impact of the international agreements

75. A number of the interveners put for- ward arguments based on the impact on the '[a]lthough direct taxation falls within the present case of international double-taxa- competence of the Member States, the tion agreements. latter must none the less exercise that competence consistently with Community law and therefore avoid any overt or covert discrimination by reason of nationality' fully applies in this regard. 16 76. It was claimed, first, that the determi- nation of those entitled to benefit from the double-taxation agreements falls within the 16 — See, in particular, the Wielockx judgment, paragraph 16.

81. What is decisive in the present case, in which agreements concluded by a Member State with non-member countries are at 84. The same happened when, by means of issue, is that, as the plaintiff and the the Standortsicherungsgesetz of 1993, the Commission have rightly pointed out, there German legislature conferred on permanent is no potential conflict between the obliga- establishments of companies of other Mem- tions which Community law places on the ber States the international group relief Federal Republic of Germany and those provided for in the bilateral agreements. It which follow from its commitments to therefore saw no difficulties resulting from the nature of the agreements which would prevent it from extending the scope of that 17 — See the Tax credit judgment, paragraph 26. relief in the way sought by the plaintiff.

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85. It is true that extending the scope of tax asks Member State B to apply to it the relief in this way entails a further loss of provisions of a bilateral agreement conclu- revenue, which, other things being equal, ded between Member State B and Member follows from the application of the agree- State C rather than that concluded between ments. As we have already seen, however, it A and B, a hypothesis which forms the is settled law that such an argument, of a subject-matter of the Metallgesellschaft and budgetary nature, can be no ground for Hoechst cases, 18 to which reference was restricting a fundamental freedom provided made at the hearing. The agreements from for in the Treaty. which Saint-Gobain ZN seeks to benefit were concluded with non-member States.

91. Lastly, it must be pointed out that the 87. However, that consideration appa- two cases concern claims which are funda- rently did not prevent the German Govern- mentally different. In the hypothesis out- ment from extending the scope of agree- lined above, the company established in ments, at least as regards the advantages at Member State A does not seek to be treated issue in the main proceedings. by Member State B as a company estab- lished in that State but as a company established in another Member State, C. That case therefore concerns a differ- ence in treatment between non-resident companies rather than between resident 88. Furthermore, the situations to which companies and non-resident companies. the Swedish Government refers, which concern quite specific hypothetical situa- tions, differ from the present case, where it is not alleged that there is a danger that the dividends will not be taxed in any country. 92. The basic problem is therefore not the same as that which arises in the present

18 — Case C-397/98 Metaligesellschaft and Others v Commis- sioners of Inland Revenue and HM Attorney General and 89. Just as different is the situation where a Case C-410/98 Hoechst and Others v Commissioners of Inland Revenue and HM Attorney General, OJ 1999 C 1, company established in Member State A pp. 7 and 11.

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case, where what the plaintiff claims is 95. Saint-Gobain ZN and the Commission equality of treatment with companies do not dispute that in principle that is so established in Germany, even though the (Paragraph 121(2)(4) of the BewG). They provisions which provide the basis for that point out, however, that as a general rule treatment are found in an agreement con- the effect of that provision is excluded by cluded with a non-member State. bilateral double-taxation agreements con- cluded by the Federal Republic of Ger- many.

94. It is certainly correct that a sharehold- ing in a sub-subsidiary does not form part of the assets of the subsidiary for the 98. It is for the national court to determine purpose of capital tax, owing to the whether that provision, taken together with international group relief available, those of the BewG, actually has the effect whereas, since that relief is not available that capital tax in respect of the share- to a branch, the branch is liable for capital holdings in question constitutes a greater tax on the value of the shareholding. burden for permanent branch establish- According to the German Government, ments than for subsidiaries. Should that however, the advantage enjoyed by the be the case the discriminatory treatment of subsidiary is offset by the fact that, for the plaintiff is established. the purposes of capital tax, the assets of the parent company include the value of its shareholding in the subsidiary in Germany, the assessment of which takes into account the subsidiary's holding in the sub-subsidi- 99. I would further point out that the ary. German authorities are not being asked to

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101. It follows from the foregoing that the difference in treatment, should it be esta- 104. Furthermore, the national provisions blished, would be unjustified. It would in question have the effect of hindering the therefore be precluded by Articles 52 and freedom of companies from other Member 58 of the Treaty. States to choose the form under which they wish to exercise their right to freedom of establishment. It follows from the second sentence of the first paragraph of Article 52 that a company from one Member State which wishes to exercise its right to free- dom of establishment is entitled to choose Final considerations between setting up a subsidiary or merely an agency or a branch in the Member State of establishment. This choice is hindered 102. It follows from all the foregoing, where unjustified differences in treatment therefore, that the effect of the national exist to the detriment of one or other of provisions is that, without objective justifi- these forms of establishment.

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Conclusion

105. I therefore propose that the Court answer the questions referred by the Finanzgericht Köln in the negative, and rule as follows:

(1) Articles 52 and 58 of the EC Treaty preclude a permanent branch establish- ment in Germany of a company limited by shares having its seat in another Member State from not being accorded international group relief ('Schach- telprivileg') granted in respect of dividends under a double-taxation agreement with a non-member State on the same conditions as for a company having its seat in Germany.