C-350/98

HENKEL HELLAS V GREEK STATE

OPINION OF ADVOCATE GENERAL FENNELLY delivered on 9 September 1999 *

1. This case raises the question whether a 1995, Henkel Hellas ABEE (hereinafter duty imposed on the capitalisation of 'the plaintiff), a Greek public limited undistributed, but previously taxed, profits company, capitalised the undistributed of a capital company constitutes a capital profits taxed in its name in respect of the duty prohibited by Council Directive financial years 1972 and 1973 as well as 69/335/EEC of 17 July 1969 concerning 1981 to 1989, which amounted in gross to indirect taxes on the raising of capital a total of GRD 407 317 245 but to only (hereinafter 'the Directive'), 1as amended GRD 215 066 276 after deduction of the in particular by Council Directive 85/303/ corporation tax already lawfully paid when EEC of 10 June 1985 concerning indirect the profits in question were realised. The taxes on the raising of capital. 2 If the plaintiff submitted to the defendant tax impugned duty constitutes such a capital authority various (eleven) declarations for duty, the question also is raised whether the payment, under protest, of the duty due Directive confers on Greece a specific under Article 42(6) of Law 2065/1992 entitlement to introduce it even subsequent (hereinafter 'the 1992 Law'), which pro- to its implementation of the Directive. vides for a 3% tax on the capitalisation of undistributed profits. The taxable amount on which the duty due was calculated was determined, in accordance with the rele- vant circular of the Ministry of Finance (POL 1135/23.7.1992), on the conversion of the net profits of GRD 215 066 276 into the gross profits by adding back the I — The legal and factual context corporation tax already paid.

4. The Diikitiko Protodikio (Administra- B — The relevant Community and national tive Court of First Instance), Piraeus (here- law inafter 'the national court') has taken the view that Article 42(6) of the 1992 Law, in providing 'that undistributed profits are subject to a duty at a rate of 3% if they are capitalised, contains a provision which in principle diverges from Directive 69/335, in particular Articles 4 and 10 thereof'. How- 5. In order to consider these questions, I ever, it queries whether the fact, recognised shall refer to the main provisions of Com- by Directive 85/303, that 'no capital duty munity law and the relevant provisions of existed in Greece on 1 July 1984' makes a Greek law, bearing in mind that the trans- difference. Consequently, it has decided to action at issue is the capitalisation of refer the following questions to the Court undistributed (but already taxed) profits. of Justice : The Directive is a harmonising measure aimed, in particular, at 'the elimination of tax obstacles which interfere with the free movement of capital'. 3Article 4(1) lists the transactions, not including that in question, that Member States are in principle obliged to subject to capital duty. Article 4(2), as ' 1 . Is the duty charged by the Greek State amended by Article 1(1) of Directive pursuant to Article 42(6) of Law 85/303, prescribes the transactions which 2065/1992 equivalent to the capital may, 'to the extent that they were taxed at duty laid down by Article 4 of Council the rate of 1% as at 1 July 1984, continue Directive 69/335/EEC of 17 July 1969, to be subject to capital duty'. Those as subsequently amended, taking into transactions include, under Article 4(2)(a), account that on 1 July 1984 no such 'an increase in the capital of a capital capital duty existed in Greece? company by capitalisation of profits or of permanent or temporary reserves'. Arti- cle 1(1) of Directive 85/303 also adds the following subparagraph, which is specific to Greece, to Article 4(2): 'However, the

6. Article 7 of the Directive, as replaced by (a) in respect of the transactions referred Article 1(2) of Directive 85/303, deals with to in Article 4 ... .' the rate of duty chargeable. The first two sentences of Article 7(1) impose an obliga- tion on Member States to exempt with effect from 1 January 1986 at the latest those transactions which they subjected to capital duty at a rate of no more than 8. The Directive was transposed into Greek 0.5%, or exempted, on 1 July 1984, subject law by Law 1676/1986, under Article 21 of to the conditions of application which they which the rate of capital duty is fixed at applied at that date. The final sentence 1%. However, Article 22(2)(b) of that Law contains a further special provision for expressly exempts from capital duty any Greece which mirrors that added to Arti- increases in capital by way of capitalisation cle 4(2) under which 'the Hellenic Republic of profits or reserves. Corporate taxation, [is obliged to] determine which transactions conversely, is governed primarily by it shall exempt from capital duty'. Arti- Decree-Law 3843/1958, under which tax cle 7(2) is worded as follows: 'Member at the rate of 40% is applied to undistrib- States may either exempt from capital duty uted profits. However, the 1992 Law all transactions other than those referred to introduced a transitional regime which in paragraph 1 or charge duty on them at a amended the system applicable under the single rate not exceeding 1%'. In its 1958 legislation. Article 42(6) of the 1992 original 1969 version, Article 7(1) had provided that the rate of duty might 'not exceed 2% or be less than 1%'. This 4 — Council Directive 73/80/EEC of 9 April 1973 fixing com- maximum was reduced to 1%, with effect mon rates of capital duty, OJ 1973 L 103, p. 15.

10. The national court has found as a matter of fact that, pursuant to the 1995 shareholders' resolution, the plaintiff's undistributed profits generated in respect of the relevant earlier fiscal years were 12. The Court has had occasion expressly capitalised. I confess straightaway to find- to consider the effect of Article 4(2)(a) of ing persuasive the Commission's succinct submission that it is clear from the wording alone of Article 4(2)(a) of the Directive ('an 5 — Greece refers, in this respect, to Case C-287/94 Frederiksen increase in the capital of a capital company v Skatteministeriet [1996] ECR I - 4581 (hereinafter 'Freder- iksen'). by capitalisation of profits or of permanent 6 — See Bautiaa, cited in footnote 3 above, at paragraph 39 and or temporary reserves') that any taxation of the case-law to which reference is there made.

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HENKEL HELLAS V GREEK STATE

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OPINION OF MR FENNELLY — CASE C-350/98

The shareholders' decision to commit the economic potential of the latter, 'in so undistributed profits to the company must far as it enables the company to have the be regarded as a capitalisation transaction capital available without having to bear its for the purposes of Article 4(2)(a) of the cost', was to 'be regarded as likely to Directive. increase the value of the company's shares' for the purposes of Article 4(2)(b) of the Directive to the extent of the amount of interest saved. 14It was also asked whether Article 10 of the Directive precluded the levying of income tax on the grantor in respect of the interest it had agreed to forgo. The plaintiff in the main proceedings 14. This view is, to my mind, also rein- argued that such tax amounted in effect to forced by the second company-law direc- additional capital duty on the capital tive. 13 By virtue of Article 25(1), '[a]ny contribution to the borrower. The Court increase in capital' of a public company 'must be decided upon by the general distinguished clearly between direct taxa- meeting'. This essential requirement, com- tion and the indirect taxes that the Direc- bined with the provisions of Article 15 tive aims to abolish. Thus, the Directive restraining distributions which would does not preclude Member States from deplete the capital of a company, demon- levying income tax in respect of the interest strates the difference in character between payments forgone under interest-free loan profits available for distribution and those arrangements, which interest only arises which have become capital. This procedure after the increase in capital, namely the was, of course, followed by the plaintiff in grant of the loan, has occurred. 1 5As the instant case and, for this reason also, Advocate General La Pergola pointed out, the transaction in question falls within the 'the chargeable event' for income tax scope of Article 4(2)(a) of the Directive. purposes 'is necessarily distinct from [the] transfer of assets, even from a temporal point of view'. 1 6That is quite different from the present case. The chargeable event in Greek law is conterminous with the

18. Firstly, the tenor of the recitals in the preamble to Directive 85/303 is that capital duties should be abolished. They are 16. It would appear to follow from these described as being 'detrimental to the conclusions, with which the Commission regrouping and development of undertak- agrees, that the imposition of the tax in ings; ... [and] particularly harmful in the issue in Greece contravenes Articles 7 and present economic situation in which there 10 of the Directive. However, the Commis- is a paramount need for priority to be given sion submitted expressly at the hearing (a to stimulating investment ...' (second reci- view at best implicit in its written observa- tal). The 'best solution', namely abolition, tions) that Greece was free even in 1992 to was not pursued only because of the impose a new capital tax by virtue of the unacceptable losses of national revenue subparagraph added by Article 1(1) of that would have resulted (third recital). Directive 85/303, which obliged Greece to Emphasis was placed on exemptions, par- determine the transactions listed in Arti- ticularly for transactions then subject to a cle 4(2) which it would 'subject to capital reduced rate (third and fourth recitals). The duty'. Greece has not itself subscribed to special (fifth) recital relating to Greece then this argument, presumably because it reads: claims that the tax is not a capital duty and because to accept it would result in the rate of tax that it could legitimately impose being limited to 1%. The Commission went so far as to suggest, in answer to a question at the hearing, that there was and still is no time-limit on the right of Greece to intro- duce new capital duties on transactions listed in Article 4(2). On the other hand, it 'Whereas on 1 July 1984 no capital duty maintains that any such duty is subject to existed in Greece; whereas, for this reason,

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HENKEL HELLAS V GREEK STATE

formally be classified as constituting capital the main proceedings may be imposed by duty on the transactions covered by Arti- Greece. cle 4(2)(a) of the Directive, I shall consider its compatibility with the Directive. To my mind, if the Court were minded to take that view, it should, in any event, pursuant to Article 10, classify the duty at issue as a charge having equivalent effect to a capital duty on the capitalisation of profits within the meaning of Article 4(2)(a). In Potente Carni and Cispadana Costruzioni, the Court held that Article 10 of the Directive was to be interpreted as prohibiting 'indir- ect taxes which have the same character- istics as capital duty ...'. 17 This criterion is clearly satisfied in the present case. The impugned duty is imposed on the occur- rence of one of the precise economic transactions envisaged by Article 4(2)(a), the capitalisation of undistributed profits. On this analysis, the duty would be incom- 23. In view of the answer I propose to the patible with Article 10, read in combina- first question, there is no need to consider tion with Article 4, of the Directive. More- the second question in detail. It is obvious over, since the imposition of charges cov- that all capital duties, including those ered by Article 10 is absolutely prohibited, applied by Greece, are limited by Arti- subject to exceptions listed in Article 12 cle 7(2) of the Directive to a maximum rate which are immaterial to the present case, it of 1%. In the present case, if it is true that would follow that the answer to the the tax at issue is a capital duty which national court's first question would have exceeds that rate, the essential point is that to be that no duty such as that involved in its imposition is prohibited. Since Greece chose to exempt from capital duty, when implementing Directive 85/303, those transactions which fall to be considered within Article 4(2)(a), it may no longer impose any such duty whatsoever on such transactions, which include one such as that involved in the main proceedings. 18

(2) A Member State such as the Hellenic Republic, which, when transposing Council Directive 85/303/EEC of 10 June 1985 concerning indirect taxes on the raising of capital into national law, chose to exempt the transactions covered by Article 4(2)(a) of Directive 69/335 from capital duty, is no longer entitled to impose any capital duties on such transactions.

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