C-375/98

EPSON EUROPE

OPINION OF ADVOCATE GENERAL COSMAS delivered o n 1 7 F e b r u a r y 2 0 0 0 *

Table of contents

I — Legal framework I -4245 A — The Community legislation I - 4245 B — The national legislation I -4249 II Facts — I - 4251 HI — Question referred for a preliminary ruling I - 4252 IV — Answer to the question referred for a preliminary ruling I - 4252 A — The issues raised I -4252 B — The system established by the Directive I - 4254 C — The tax at issue (ISD) in the light of the Directive I - 4256 V — Conclusion I -4252

1. In the present case, which came to the I — Legal framework Court by way of reference for a preliminary ruling from the Supremo Tribunal Admin- istrativo (Portugal), the Court is asked to interpret Article 5(4) of Council Directive 90/435/EEC of 23 July 1990 on the com- mon system of taxation applicable in the A — The Community legislation case of parent companies and subsidiaries of different Member States 1 (hereinafter 'the Directive') in respect of a special rule 2. The Community legislature adopted the applicable to Portugal only. Directive with the aim of establishing a common system of taxation applicable to parent companies and subsidiaries of dif- ferent Member States.

3. The need for the Directive arises from * Original language: Greek. the double taxation to which groups of 1 — OJ 1990 L 225, p. 6. companies established in more than one

'For the purposes of this directive "com- 2 Point 6 of the Opinion of Advocate General Jacobs in Joined pany of a Member State" shall mean any Cases C-283/94, C-291/94 and C-292/94 Denkavit and Others [1996] ECR I-5063. The Advocate General then company which: added that 'the income may be subject to further taxation at the company level if the parent company is merely an intermediate holding company owned by a company in another State'. The main issue in those cases was whether the Directive permits a Member State to apply a rule under which withholding tax must be deducted by a subsidiary company from distributions which it makes to its parent company in the first year following its acquisition by that company, so that the parent company is denied the exemption from withholding tax for the first year even where it ultimately maintains its holding beyond that (a) takes one of the forms listed in the period. Annex hereto;

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(b) according to the tax laws of a Member 7. Article 3 of the Directive provides: State is considered to be resident in that State for tax purposes and, under the terms of a double taxation agreement concluded with a third State, is not considered to be resident for tax pur- '1. For the purposes of applying this direc- poses outside the Community; tive:

(a) the status of parent company shall be attributed at least to any company of a Member State which fulfils the condi- tions set out in Article 2 and has a minimum holding of 25% in the capi- (c) moreover, is subject to one of the tal of a company of another Member following taxes, without the possibility State fulfilling the same conditions; of an option or of being exempt:

OPINION OF MR COSMAS — CASE C-375/98

company shall, except when the latter is Republic, for budgetary reasons, should be liquidated, either: authorised to maintain temporarily a with- holding tax'. 5

10. Thus, Article 5 states: — refrain from taxing such profits, or

' 1 . Profits which a subsidiary distributed to its parent company shall, at least where the — tax such profits while authorising the latter holds a minimum of 25% of the parent company to deduct form the capital of the subsidiary, be exempt from amount of tax due that fraction of the withholding tax. corporation tax paid by the subsidiary which relates to those profits and, if appropriate, the amount of the with- holding tax levied by the Member State in which the subsidiary is resident, pursuant to the derogations provided for in Article 5, up to the limit of the amount of the corresponding domestic tax.' 4. Notwithstanding paragraph 1, the Por- tuguese Republic may levy a withholding tax on profits distributed by its subsidiaries to parent companies of other Member States until a date not later than the end of the eighth year following the date of 9. Moreover, as regards exemption from application of this directive. withholding tax, the Community legisla- ture provided for certain exceptions to the common system for three Member States (the Federal Republic of Germany, the Hellenic Republic and the Portuguese Republic). 4 Specifically, although the Subject to the existing bilateral agreements Council considered that it was 'necessary, concluded between Portugal and a Member in order to ensure fiscal neutrality, that the State, the rate of this withholding tax may profits which a subsidiary distributes to its not exceed 15% during the first five years parent company be exempt from withhold- ing tax', it pointed out that 'the Portuguese 5 — The Federal Republic of Germany and the Hellenic Republic were authorised to maintain temporarily a withholding tax by reason of the particular nature of their corporate tax 4 — See the fifth recital in the preamble to the Directive. systems.

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tive 90/435/EEC of 23 July 1990, (c) of shares in companies whose seat is in makes available to a company estab- Portugal shall be withheld at a flat rate lished in another Member State which from the income from securities. meets the same conditions and has a direct holding in the capital of the former of not less than 25% for two consecutive years or since the incor- poration of the subsidiary, provided that, in the latter case, the holding is Proviso maintained for that period, in which case the rate of corporation tax shall be 15% until 31 December 1996, without prejudice to the provisions of bilateral conventions in force, and 10% from 1 January 1997 until 31 December The tax on transfers of shares in respect of 1999.' which no income is payable shall be calculated and paid in accordance with the ordinary law.'

15. When the Directive was transposed, however, Articles 182 and 184 of the Código do imposto municipal da sisa e do imposto sobre as sucessões e doacões (Code 17. Under Article 184 of the CIMSISD, governing the municipal tax on transfers entitled 'Rate of tax. Withholding tax': and the succession and donation tax, here- i n a f t e r ' t h e C I M S I S D ' ) remained unchanged. The articles provide for a succession and donation tax in respect of transfers, without consideration, of shares in companies (imposto sobre as sucessões e doacões, hereinafter 'ISD') which is levied, 'The flat-rate levy shall be 5% of the whenever profits are distributed, on the interest, dividends or any other income dividends paid by companies which have relating to shares and shall be deducted their seat in Portugal. from such income by the bodies which are required to make the relevant payment.

22. Taking the view that ISD was not I I— Facts payable in this case, Epson brought pro- ceedings before the Tribunal Tributário de Primeira Instância do Porto (Tax Court of First Instance, Oporto) to recover that tax. 19. Epson Europe BV (hereinafter 'Epson' or 'the parent company'), a company whose registered office is in the Nether- lands, holds more than 25% of the capital of Epson Portugal SA (hereinafter 'Epson Portugal' or 'the subsidiary'), whose regis- 23. The Tribunal Tributário de Primeira tered office is in Portugal. Instância do Porto upheld the action on the ground that the levy chargeable under the derogation provided for in Article 5(4) of the Directive had already been covered by the withholding tax imposed in respect of IRC and that liability to ISD as well would 20. It is clear from the order for reference render the Directive ineffectual. that the relationship between the parent company, a private limited company incor- porated under Netherlands law, and the subsidiary, a public limited company incor- porated under Portuguese law, falls within the scope of the Directive. 24. The tax authorities (the Fazenda Púb- lica, and the Ministério Público) appealed against that judgement to the Supremo Tribunal Administrativo.

21. By resolution of 31 March 1993, the subsidiary decided to appropriate PTE 80 000 000 to the distribution of dividends, that is a payment of PTE 1 066.66 for each 25. The Supremo Tribunal Administrativo share held. 6The dividends distributed to expressed doubts as to whether the scope of the parent company thus amounted to PTE the Directive extended to ISD and, there- 40 795 733. They were paid to the parent fore, whether the Portuguese Republic had company subject to deduction of IRC at the correctly transposed the Directive, in so far rate of 15% — a deduction of PTE as it had taken account of the Directive only as regards the liability of distributed profits to IRC and not their liability to ISD, 6 — Epson informs us that it holds 38 246 Epson Portugal under Articles 182 and 184 of the CIM- snares. SISD.

30. Specifically, the Commission and Or does it extend to any tax on the income Epson argue that the Directive, and Arti- from shares, levied on dividends, regardless cle 5(4) in particular, cover all taxation, of the legislative instrument which provides however described, which acts as a with- for it?' holding tax on dividends distributed by a

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subsidiary to its parent company in another Portuguese legal system and that it was Member State. even maintained when the CIMSISD was reformed in 1958. The flat-rate succession and donation tax (ISD) is not a tax on income but a particular way of taxing successions and donations. In actual fact, it is the equivalent of a succession and donation tax pre-payment and, as such, its 31. The Commission states that, by failing nature as a tax on transfers of assets to amend Articles 182 and 184 of the without consideration in lieu of a general, CIMSISD, the Portuguese Republic granted progressive-rate tax on succession and itself 'an additional derogation' which is donation cannot be doubted. not provided for by the Directive and is contrary to its content and objective. The only derogation granted to the Portuguese Republic, for a transitional period and by way of exception, concerns the rates pro- vided for by Article 5(4) of the Directive.

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sels. It also relied on various documents 9 attempts to harmonise direct taxation at which have not, however, been duly Community level. 10 brought before the Court.

37. That system displays the following two 35. Finally, the Portuguese Government basic characteristics. First, it aims to obvi- points out that during negotiations on ate double taxation of the profits distrib- agreements to avoid the double taxation uted by a subsidiary established in one of income, the nature of ISD was examined Member State to its parent company estab- and, although it forms part of the overall lished in another Member State. Second, it tax burden on dividends, it has always been abolishes, subject to certain exceptions, maintained that, since it is levied on withholding taxes on profits distributed succession despite the taxable amount (the by a subsidiary established in one Member dividends distributed) and the way it is State to its parent company in another collected (as a withholding tax), ISD Member State. 11 remained outside the scope of those agree- ments and was thus not affected by the maximum rates adopted for the taxation of dividends. In the same way, the tax rates provided for by the Directive do not apply to that flat-rate succession and donation tax. 38. Specifically, the Community legislature took the view 12 that the grouping together of companies of different Member States, that is, the formation of groups of such companies, might be necessary in order to create within the Community conditions analogous to those of an internal market and in order thus to ensure the establish- ment and effective functioning of the B — The system established by the Direc- common market, and that such operations tive ought not to be hampered by restrictions, disadvantages or distortions arising in par- ticular from the tax provisions of the

39. To ensure fiscal neutrality, the Directive provides for exemption from withholding 42. The Portuguese Republic's option to tax for a parent company, at least where it levy a withholding tax on profits distrib- holds a minimum of 25% of the capital of uted by subsidiaries to parent companies the subsidiary (Article 5(1)). established in other Member States consti- tutes a derogation from the principle of the exemption from withholding tax provided for in Article 5(1) of the Directive. Since it constitutes a derogation from the principle prevailing on the subject, it must be inter- 40. In Denkavit, 13 the Court held that, 'as preted strictly, as the Court has held in appears particularly from the third recital similar cases. 14 in its preamble, the Directive seeks, by the introduction of a common tax system, to eliminate any disadvantage to cooperation between companies of different Member States as compared with cooperation between companies of the same Member State and thereby to facilitate cross-border cooperation. Thus, with a view to avoiding double taxation, Article 5(1) of the Direc- 43. However, for the prohibition of with- tive provides for exemption in the State of holding tax or, in the case of the Portuguese the subsidiary from withholding tax upon Republic, the restriction of that tax, to distribution of profits'.

14 — In this connection, I would recall that in Denkavit, cited above at footnote 2, (paragraph 27), the Court reaffirmed the principle of the strict interpretation of the provisions of directives aimed at denying certain persons recognised by law advantages derived from provisions of Community law. The Court thus emphasised that 'the Member States' 41. Under Article 5(4), the Portuguese option to lay down a minimum period during which the parent company must maintain a holding in the subsidiary Republic was allowed, for budgetary rea- is to be interpreted strictly, since it constitutes a derogation from the principle of exemption from withholding tax provided for in Article 5(1) of the Directive. That option cannot, therefore, be given an interpretation going beyond the actual words of Article 3(2), to the detriment of 13 — Judgment cited above at footnote 2, paragraph 22. beneficiary undertakings'.

44. Moreover, given that the purpose of the 15 —Asheld by the Court in Denkavit, cited above at footnote Directive is to facilitate the tax arrange- 2, paragraph 26. In that case, the requirement that the minimum holding period be completed when the profits ments governing cross-border co-operation, for which the tax advantage was sought were distributed 'Member States cannot therefore, in this was a similar restrictive measure.

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47. The Directive aims, inter alia, to obvi- ate the double taxation of profits distrib- uted by a subsidiary to its parent company. According to the provisions of that Direc- tive, the profit made by the subsidiary must be exempt from tax at the level of the parent company, that is, exemptions apply to both the distribution of dividends in the country of origin — taxation at source — and their receipt in the country where the 49. That conclusion reached through a parent company is established — taxation literal and teleological interpretation is the upon entry. same as that reached through a systematic interpretation. Article 5(4) is a transitional provision and must be interpreted in con- 16 — The Court has held that the classification of a certain national tax as direct or indirect has no decisive signifi- junction with Article 5(1). Thus it is clear cance. Thus, in Joined Cases C-197/94 and C-252/94 that it constitutes a derogation from the Bautiaa and Société française maritime [1996] ECR I-505, paragraph 39, where the Court was asked to interpret rule enshrined in Article 5(1), which intro- provisions of Directive 69/335 concerning indirect taxes on the raising of capital, the Court held that 'the nature of a duces a general prohibition of withholding tax, duty or charge must be determined by the Court, tax on distributed profits. Therefore, as an under Community law, according to the objective char- acteristics by which it is levied, irrespective of its classi- exception to the general rule, it must be fication under national law'. These concepts are interpreted strictly, as previously discussed. independent of the concepts found in national law. In other words, as I have pointed out in the past (see point 60 of my Opinion in C-56/98 Modelo [19991 ECR I-6427), these concepts have their own content which cannot be determined in conjunction with analyses, distinctions and theories of the national laws of the now 15 Member States. 17 — See the second indent of Article 4(1) and Articles 5 and 6 of the Directive.

54. Moreover, the flat-rate tax provided for 18 — As previously mentioned, that rate is currently 10%. 19 — That is the conclusion drawn for example by Francisco de in Articles 182 and 184 of the CIMSISD is Sousa da Câmara, 'O regime fiscal comum aplicável às characterised by, first, the way it is col- sociedades-mães e sociedades afiliadas de diferentes esta- dos membros da Comunidade Europeia. Comentario à lected by deduction at source like a with- Directiva 90/435/CEE', Fisco, point 43-44, June 1992, pp. 40 to 48, p. 51 et seq. Also see Alberto Xavier, Direito Tributário Internacional, Tributação das operações inter- nacionais, Coimbra, Almedina, 1993, Chapter XXV and 584 p., p. 380. 21 — First indent of Article 4(1) of the Directive. 20 — I would recall that a company must take one of the forms 22 — First phrase of the second indent of Article 4(1) and second listed in the Annex to the Directive and be resident in that indent of the fourth recital in the preamble to the State for tax purposes. Directive.

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holding tax and, second, its actual effect. It of income from shares (the distributed is a tax of 5% on income received by share dividend), the taxable amount is the reason of the possession of certain shares, income from shares itself and the tax is as the Commission points out in point 28 deducted at source, I consider that ISD is of its written observations. different only in name, and not in sub­ stance, from the tax on distributed profits which the Portuguese Republic is author­ ised to levy under the Directive.

24 — Both the Commission and Epson discuss at length the difference of opinion in Portuguese law with regard to that 57. Since the chargeable event for succes­ tax, namely whether it is a tax on income or a tax on succession and donations, since it is levied irrespective of sion and donation tax (ISD) is the payment whether the transfer is inter vivos or mortis causa. On this issue, see by way of an example, F. de Sousa da Cămara, cited above at footnote 19, p. 51 et seq., and A. Xavier, cited above at footnote 19, p. 378 et seq. Also see the strong criticism of the present Portuguese tax system made 23 — The Commission points out that that tax is levied on at the opening session of the First Tax Law International income from shares at a 5% flat-rate and not at the Conference at the Fernando Pessoa University, Oporto, 22 fluctuating rate provided for by Article 41 of the CIM­ and 23 March 1997, by Ana Paula Dourado, Ό principio SISD, which changes according to the calculated value of de Direito Comunitário da não-discriminação na tributa- the transfers carried out (point 27 of the Commission's ção sobre o rendimento em Portugal', EC Tax Review. written observations). Vol. 1, 1997, pp. 10 to 17.

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corporation tax provided for by the CIRC. withholding tax, were given a different Both for IRC and for ISD the taxable name in order to bypass the prohibitions amount is the distributed dividend and they under the Directive 26 or had borne a are both deducted at source. different name under a provision of national law predating the Directive, which leads essentially to the same result.

62. Thus, the objectives of the Directive 26 — Moreover, in Case C-188/95 Fantask and Others [1997] ECR I-6783, paragraph 26, where the Court was asked to would be undermined if the Portuguese interpret the provisions of Directive 69/335 concerning indirect taxes on the raising of capital, it held that 'the Republic had the freedom to retain taxes objectives of the Directive would be undermined if the which, although in practice constituting a Member States were entirely free to retain taxes with the same characteristics as capital duty by categorising them as duties paid by way of fees or dues. It follows that the interpretation of the term at issue, considered in its entirety, cannot be left to the discretion of each Member 25 — See A. Xavier, op. cit., p. 123, and F. de Sousa da Câmara, State'. Also see Case 270/81 Felicitas [1982) ECR 2771, op. cit., p. 51 et seq. paragraph 14.

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29 — See, inter alia, Bautiaa, cited above at footnote 16, paragraph 5 1 , and Denkavit, cited above at footnote 2 , paragraph 29. Also see Case C-292/89 Antonissen [1991] ECR I-745, paragraph 18; Case 429/85 Commission v Italy [1988] ECR 8 4 3 , paragraph 9; Case 237/84 Com- mission v Belgium [1986] ECR 1247, paragraph 17; Case 143/83 Commission v Denmark [1985] ECR 427, para- 66. As regards the Portuguese Govern- graphs 12 and 13; Case 38/69 Commission v Italy [1970] ECR 47, paragraph 12. ment's claims that it is clear from a 30 — See point 4 3 of my Opinion in Bautiaa, cited above at declaration of the Council and the Com- footnote 16. I would recall that in that case the issue was whether the French Government could rely on a declara- mission that ISD was excluded from the tion to the Council which indicated that, despite the final scope of the Directive, I believe it does not wording of Directive 69/335, a special status had been granted to the French tax system in respect of a registration suffice to alter my opinion that the appli- duty payable on company mergers. The Court held (paragraph 51) that the French Government had been cation in the present case of ISD falls within unable to provide any information on the question whether the declaration was ever recorded in the minutes of the Council meeting. The declaration relied on by the French Government was not regarded as sufficient evidence t o support the conclusion that a special status for the tax at 27 — See Denkavit, cited above at footnote 2, paragraph 22. issue had been obtained despite the final wording of 28 — See the first recital in the preamble to the Directive. Directive 69/335.