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2 — An accounting period, under section 12, is generally a period of 12 months. 3 — For convenience, I shall hereinafter adopt the expression 'mainstream CT', also used by the national court, to describe the normal obligation to pay CT which arises only 1 — Original language: English. following this year-long accounting period.

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3. The present case concerns the payment ACT had to be paid within 14 days of the of advance corporation tax (hereinafter end of the relevant quarterly ACT period so 'ACT'). 4It is important to note that the that, as the national court has found, '[T]he national court has unambiguously found as effect of ACT', on a company which chose a matter of United Kingdom law that, to distribute profits by way of dividend, under section 4 of the ICTA 1988, '[ACT] '[wa]s therefore to advance the date for is corporation tax and that there is nothing payment of the CT which would otherwise in any other provision of the 1988 Act be due, by a period that w[ould] vary from which calls that into question'. 5 Under eight and a half months (in the case of a section 14, certain 'qualifying distribu- distribution made on the last day of an tions', most typically the payment of divi- accounting period) to one year and five and dends, entailed the obligation to pay ACT. a half months (where the distribution [wa]s Any company resident in the United King- made on the first day of an accounting dom which made such a distribution was period)'. Moreover, where no mainstream liable, on that occasion, to pay ACT on a CT was payable in respect of the period in sum equal to the amount or value of the question, it is also pointed out in the order 'distribution' made. Companies were for reference that the ACT paid 'c[ould] be obliged to make quarterly returns showing set off against profits of subsequent peri- the amount of any 'distributions' made ods, in which case the advance w[ould] during that period. The resulting ACT was have been made for a longer and perhaps payable within 14 days of the end of that indefinite period'. quarterly period. 6

the group income election to apply in account in computing income for [CT]'. respect of a particular dividend. The Non-resident companies, on the other request for group income election had to hand, or those which did not trade in the be made to an Inspector of Taxes. If the United Kingdom through a branch or request was rejected, the requesting com- agency, although not chargeable to CT, pany could appeal to the Special or General were, in principle, subject to United King- Commissioners, from whose decision an dom income tax in respect of income appeal on a point of law lay (in England having its source in the United Kingdom, and Wales) to the High Court of Justice. which included dividends paid by compa- nies resident in the United Kingdom. How- ever, under section 233(1) of the ICTA 1988, in so far as a non-resident parent company of a United-Kingdom-resident subsidiary was not entitled to a tax credit 6. The alternative claim advanced in the in respect of such a dividend, it was not main proceedings concerns the entitlement subject to a charge to United Kingdom to a tax credit in respect of ACT paid. income tax on it either. Conversely, where Under section 231(1) of the ICTA 1988, it was entitled to a tax credit by virtue of a the payment of ACT by a subsidiary on double taxation convention ('DTC') in dividends distributed to its parent company force between the United Kingdom and its entitled the latter to a tax credit provided country of residence, it was chargeable in the parent company was resident in the the United Kingdom to income tax on United Kingdom. The amount of the tax dividends received from its United-King- credit was equal to the amount of ACT dom-resident subsidiaries. paid by the subsidiary. Such a tax credit could be used by the parent to offset its own liability to pay ACT when it made distributions to its shareholders; i.e. it would be liable to pay ACT only on the excess of those later dividends over those received from its subsidiary. Where a company that was resident in the United Kingdom, but wholly exempt from main- stream CT liability, received a dividend from a subsidiary in respect of which ACT had been paid, it was entitled to a reim- bursement of an amount equal to the tax 8. The DTC of 26 November 1964 credit. between the United Kingdom and Ger- many, as amended on 23 March 1970, grants no right to a tax credit to companies resident in Germany and holding shares in and receiving distributions from companies resident in the United Kingdom. Accord- 7. Under section 208 of the ICTA 1988, '... ingly, under United Kingdom law, a Ger- [CT was] not chargeable on dividends or man parent company is not assessable to other distributions of a company resident in tax in respect of dividends received from its the United Kingdom, nor [were] any such subsidiary resident in the United Kingdom dividends or distributions to be taken into and is therefore not entitled to any tax

10. In the main proceedings, both sets of companies (hereinafter referred to collec- B — Facts and reference tively as 'the plaintiffs') brought actions in 1995 before the national court in which they maintained that their United Kingdom subsidiaries had suffered a cash-flow dis- 9. The companies involved in Case advantage in comparison with the subsidi- C-397/98 are Metallgesellschaft Limited, aries of parent companies resident in the The Metal and Commodity Company Lim- United Kingdom, since, unlike the latter, ited, both of which are companies incorpo- which were permitted to benefit from a rated and resident in the United Kingdom, group income election, no such option was and Metallgesellschaft AG and Metallge- available to them. They claim principally sellschaft Handel & Beteiligungen AG, that that disadvantage constituted discri- which are both incorporated and resident mination contrary to Articles 6 and 52 of in the Federal Republic of Germany (here- the EC Treaty (now, after amendment, inafter 'Metallgesellschaft and Others'). Articles 12 EC and 43 EC). By way of an The companies involved in Case C-410/98 alternative limb to this claim, the plaintiffs contend that the contested restriction on the entitlement to make a group income 7 — The national court, whilst observing that the 'arrangements election infringed Article 73b of the EC vary' under such DTCs, states that 'the general pattern is to grant the tax credit in whole or in part and to make a Treaty (now Article 56 EC). Their second reduced charge to tax on the aggregate of the amount of the and alternative claim is that the parents dividend andthc amount of the tax credit', with the result that '|T]he net effect is to give a partial refund of the ACT'. 8 — On the example used by the Hoechst plaintiffs in their written and oral observations (which has not been disputed by the United Kingdom) and which related to a distribution 9 — The date of the facts in the main proceedings is nor stated in of GBP 43 000 000 paid by Hoechst UK Ltd to its German the orders for reference. However, in response to a written parent on 16 January 1989, ACT of GBP 14 333 333 was question from the Court, it was agreed between the paid. Thus, if Hoechst AG had been a Unitcd-Kingdom- Metallgesellschaft and Others and Hoechst, on the one resident parent company, it would have benefited from a full hand, and the United Kingdom, on the other, that the tax credit of GBP 14 333 333, while if it had been Dutch, it disputed payments of ACT in Case C-397/98 were made would have been entitled to a payment of half that tax credit between 16 January 1989 and 26 April 1994, while those less the 5% charge on the grossed-up amount, viz. to involved in Case C-410/98 were made between 16 April GBP 4 658 333. 1974 and 13 October 1995.

11. The defendants in the main proceedings — under United Kingdom law, group (the Commissioners of Inland Revenue and income elections can be made only the Attorney General) contended that ACT where both the parent company and its was designed to ensure that the company subsidiary are resident in the United making the distribution made a payment to Kingdom; match the tax credit or income tax exemp- tion given to the shareholder. If resident subsidiaries of non-resident parents could distribute profits free of ACT, the result would facilitate tax avoidance since neither the parent nor the subsidiary would have to pay ACT, while, conversely, in the case of a — the plaintiffs never made a group United-Kingdom-resident parent company, income election but could have been ACT would be payable once a distribution expected to do so if they had appre- was made by them outside the group. Thus, ciated that Community law required any differentiation based on the place of the right of election to be available residence of a subsidiary company's parent where the parent company was non- company was justified. As to the alternative resident; tax-credit claim, the fact that there is no provision for tax credits in the United Kingdom-Germany DTC, while such a provision exists in certain other DTCs, reflects differences between the German tax system and those of the other countries concerned, as well as the result of the — if they had tried to exercise such a overall negotiated arrangements agreed by right, their application would have the parties to the various DTCs. The been rejected by an Inspector of Taxes,

(2) If the answer to Question 1 is "no", do — under the law of the United Kingdom the abovementioned provisions of the there would have been no right to the EC Treaty give rise to a restitutionary repayment of such ACT even if the right to a resident subsidiary of a action had been successful. 10 parent company resident in another Member State and/or the said parent to claim a sum of money by way of 10 — In their written observations, Metallgesellschaft and Others observe that the defendants' submission is based on what they describe as a much criticised rule upheld and confirmed (albeit reluctantly) by the House of Lords in President of India v La Pintaaa Compania Navigáción 11 — The national court asks about Article 73b of the EC Treaty S.A. I1985Į 1 A.C. 104 (hereinafter 'Presidem of India'). (now Article 56 EC) only in respect of periods after The rule itself dates back at least to London, Chatham and 1 January 1995. It observes that, before that date, the Dover Railway Co. v South Eastern Railway Co. [1893] relevant provision concerning the free movement of capital A.C. 429, where the House of Lords, as a matter of English was Article 67 of the EC Treaty (repealed by the Treaty of common law, held that, 'in the absence of any agreement Amsterdam), as implemented by relevant directives; see or statutory provisions for the payment of interest, a court Council Directive 60/921 First Directive for the imple- had no power to award interest, simple or compound, by mentation of Article 67 of the Treaty (OJ, English Special way of damages for the detention (i.e. late payment) of a Edition, Series I (1959-1960), p. 49), as amended by debt'; per Lord Brandon in President of India ([1985] 1 Council Directive 63/21/EEC Second Council Directive of A.C. 104, p. 115). Lord Brandon (with whose speech the 18 December 1962 adding to and amending the First other Law Lords concurred) later expressed approval for Directive for the implementation of Article 67 of the the view that the rule now only applies to claims for Treaty (OJ, English Special Edition, Scries I (1963-1964), interest in respect of debts paid late Dut before any legal p. 5) for periods before 1 July 1990 and by Council proceedings for their recovery have been brought (IÍ985] 1 Directive 88/361/EEC of 24 June 1988 for the implemen- A.C. 104, pp. 127 to 129). Metallgesellschaft and Others tation of Article 67 of the Treaty (OJ 1988 L 178, p. 5) for contest the view that this rule covers a claim such as that the period between 1 July 1990 and 31 December 1994. involved in the main proceedings. Since that is a matter for As pointed out in footnote 8 above, it is common ground the national court alone to decide, I shall assume that the that periods involved in the main proceedings concern, rule, even as now restricted, applies to a claim such as that respectively, 16 January 1989 to 26 April 1994 and involved in these proceedings. 16 April 1974 to 13 October 1995.

12 — [1996] ECR I-1029 (hereinafter 'Brasserie du Pêcheur and 14. Written and oral observations were Factortame'). 13 — [1997] ECR 1-2163 (hereinafter 'Sutton'). submitted by the plaintiffs, the United

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Kingdom of Great Britain and Northern movement of capital. It is appropriate, Ireland, the Kingdom of the Netherlands therefore, first to consider the compatibility and the Commission. In addition, the with Community law of limiting the avail- Republic of Finland submitted written ability of a relief such as group income observations, while the Republic of Austria relief to companies resident in the United and the French Republic, as well as the Kingdom. Federal Republic of Germany, presented oral observations. The observations of the plaintiffs, the United Kingdom, Finland and the Commission treat of the various issues raised by the questions referred. The Neth- erlands has submitted observations in respect of the first and third questions concerning the group income election and IV — Question 1 and group income relief the tax credits, while Austria, France and Germany limited their oral observations to the third question.

A — Synopsis of the observations

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17. Furthermore, the denial of the group income election is not justified in the 18. The United Kingdom submits that the difference of treatment in respect of group income elections is justified by the need to 16 — Ibid., paragraph 22. 17 — Case C-264/96 ICI v Colmer (HMIT) [1998] ECR I-4695, paragraphs 25 and 26. 19 — See Case C-204/90 [1992] ECR I-249 (hereinafter 'Bach- 18 — Reference is made to Avoir fiscal, paragraph 25; Case mann') and Case C-300/90 [1992] ECR I-305. C-175/88 Biehl [1990] ECR I-1779, paragraph 16; Case C-288/89 Collectieve Antennevoorziening Gouda [1991] 20 — In Ireland, under section 46 of the Finance Act 1983, a ECR 1-4007, paragraph 11; Case C-484/93 Svensson and group income election was permitted once the Irish Gustavsson v Ministre du Logement et de l'Urbanisme subsidiary was at least 75% owned by the foreign parent [1995] ECR 1-3955, paragraph 15, and ICI v Colmer and provided there was a DTC in force between Ireland (HMIT), ibid., paragraph 28. and the State of residence of the parent company.

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adopted. It mitigates such double taxation by exempting corporate shareholders resi- dent in the United Kingdom from CT on the dividends they receive. As a company may have distributable profits and make distri- 19. The United Kingdom, supported by butions without making a taxable profit, to Finland and the Netherlands, submits that ensure that the tax exemption for the the difference in treatment between groups with resident parent companies and those dividend in the hands of the corporate with non-resident parents regarding such shareholder is matched by a charge to tax, group income elections is objectively justi- the company paying the dividend is fied because the positions of the two required to account for the ACT. This respective groups are not comparable; ensures that, before any relief or mitigation where the parent is resident, the exemption is afforded to the shareholder, there is a from ACT on the occasion of a distribution liability to tax on the paying company. 21 by the subsidiary (which matches the tax There is thus, in its view, 'a clear and direct exemption of the dividend in the hands of link between the tax exemption accorded the parent company) is itself matched by a to the dividend in the hands of the share- charge to ACT on the occasion of making a holder, and the matching charge to ACT', distribution by the parent company, while '[T]he logic of allowing a group whereas, in the case of non-resident par- income election for dividends paid between ents, the waiver of ACT on the occasion of a subsidiary and a parent company is that making a distribution by the subsidiary is such distributions amount in effect to matched by no corresponding payment. internal transfers within a single economic Whilst acknowledging that a different sys- tem could be applied, the United Kingdom denies that the restriction on the availabil- ity of the election is disproportionate.

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the sums paid out in due course by the subsidiaries cannot justify such discrimina- insurers. 23 Yet the Court upheld Belgium's tion. 24 right to formulate its own tax system. The legislative choice made by the United King- dom falls within the legitimate range of choices allowed to Member States by Community law.

B — Analysis

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26 — Op. cit., paragraphs 26 and 28. 27 — See paragraph 18 above.

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resident subsidiary and parent companies. to justify its refusal to allow group income The Netherlands expresses this in another elections by subsidiaries of non-resident way by invoking the principle of territori- companies, citing the need to preserve the ality, which, it asserts, would be infringed if fiscal cohesion of its tax system. In that one Member State were required to treat a case, a Belgian tax rule differentiated company established in another Member between contributions made to Belgian State and not doing business in the former insurance companies and contributions State as part of a fiscal group in that State. made to other non-resident insurance com- It should only be possible, in its view, to panies. Only those contributions which transfer profits and losses between those were made to resident insurance companies members of a corporate group which are were tax deductible. The loss of revenue resident in the same Member State. thereby resulting for Belgian tax revenues was offset by subjecting the capital sums or surrender values of the policies in question to tax, a tax which was not payable where there had been no deductions of contribu- tions. Belgium justified its differential treat- ment of insurance contributions by refer- ence to the need to ensure the coherence of 25. These submissions effectively amount its fiscal system. In particular, it could not to a contention that the difference in be sure that tax on capital sums could be treatment of subsidiaries of non-resident collected from non-resident insurance com- companies is justified by the fact that they panies. are not subject to United Kingdom CT liability on their profits. This difference in the respective fiscal situations of the par- ents does not provide a justification, in my view, for denying to the subsidiaries duly established in the United Kingdom, who are so subject, a tax advantage available to comparable subsidiaries of United King- dom parents.

to pay the tax in question could 'constitute sight, was reasonably comparable with an adequate safeguard', 29 since it would Bachmann. In the Netherlands, resident probably have to be supported by the but not non-resident taxpayers could deposit of a guarantee, the overall effects deduct payments to a pension reserve. of which 'would involve the insurer in Payments made on the liquidation of the additional expense' 30 which would be reserve, or made periodically from it, were passed on and probably remove the incen- treated as income and subject to tax. The tive for migrant workers to retain their Netherlands relied, inter alia, on the Neth- existing policies on moving to Belgium. erlands-Belgium DTC, under which such Although it recognised that bilateral trea- income was taxable only in the State of ties allocating fiscal competence between residence, to claim that the fiscal cohesion Member States or harmonised Community of its system would be jeopardised if direct taxation rules could remove Bel- Belgian residents like Mr Wielockx could gium's concern, it concluded that, as Com- deduct payments into the reserve from their munity law then stood, 'it [was] not Netherlands tax liability. The Court stated possible to ensure the cohesion of such a that the fiscal cohesion discussed in Bach- tax system by means of measures which are mann required 'a correlation between the less restrictive than those at issue in the sums which are deducted from the taxable main proceedings...'. 31 income and the sums which are subject to tax'. 33 It noted that the effect of the DTC was that the State of residence would tax all pensions received by its residents regard- less of where the contributions were paid and, conversely, waive the right to tax pensions received abroad even where it had treated the contributions made thereto on its territory as being tax deductible. The Court ruled that '[FJiscal cohesion ha[d] not therefore been established in relation to one and the same person by a strict correlation between the deductibility of contributions and the taxation of pensions but [wa]s shifted to another level, that of 28. The Court did not in Bachmann define the reciprocity of the rules applicable in the the notion of fiscal cohesion and that Contracting States'. 34 Where fiscal cohe- remains the only case in which a Member sion is secured by a DTC with another State has successfully invoked it to defend a Member State, 'that principle may not be national provision otherwise incompatible with one of the fundamental Treaty provi- sions. Wielockx v Inspecteur der Direckte Belastingen 32 was a case which, at first

29. A similar strict approach was applied a year later to a different tax situation in Asscher v Staatssecretaris van Financiën. 36 30. National rules designed to alleviate The Netherlands tax authorities sought to double imposition of tax on the same or justify applying a higher initial (first band) similar economic activity have led Member rate of income tax to non-resident than to States to provide certain tax advantages resident taxpayers. A less favourable rate of which are generally limited to resident taxation for non-residents could not be individuals or companies. The pursuit of justified by pointing to the fact that social such a policy, which is clearly legitimate security contributions were no longer and desirable in itself, underlies three of the deductible in the Netherlands, which was more recent cases concerning fiscal cohe- not necessarily the case in other Member sion. The problem is that, in withholding States. The Court held that there was 'no the benefits in question from non-residents, direct link between the application of a Member States refuse to take account of higher rate to the income of certain non- the foreign taxes which they pay. residents who receive less than 90% of their worldwide income in the Netherlands and the fact that no social security con- tributions [were] levied on the income of such non-residents from sources in the Netherlands'. 37 In ICI v Colmer (HMIT), the Court rejected the United Kingdom's submission that fiscal cohesion required that consortium relief, whereby the mem- 31. Eurowings Luftverkehrs v Finanzamt bers of a consortium could transfer losses Dortmund-Unna 39 concerned certain Ger- incurred by subsidiaries of a holding com- man trade tax rules which treated traders pany owned by them for relief against their leasing assets from non-resident lessors less own profits, be limited to cases where the favourably than those leasing from resi- majority of the subsidiaries in question dents. The trade tax was calculated by were United Kingdom residents. 38 It adding back half the rental value of the assets for the purpose of calculating leasing income only if the lessor did not pay German trade tax. The cohesion argument 35 — Paragraph 25. was that the rules in question were 36 — Case C-107/94 [1996] ECR 1-3089 (hereinafter ·Asscher). 37 — Paragraph 59. The Court noted that the non-application of designed to avoid only double payment of the Netherlands social security system to non-residents like German tax, i.e. not the duplication of Mr Asscher was probably justified under Council Regula- tion (EEC) No 1408/71 of 14 June 1971 on the applica- tion of social security schemes to employed persons and their families moving within the Community (OJ, English Special Edition, Series I (1971) (II), p. 416). 39 — Case C-294/97 [1999] ECR 1-7447 (hereinafter 'Eurow- 38 — Op. cit., footnote 17 above, paragraph 29. ings').

German tax and that of another Member established in another Member State are State. The Court held there was merely an not'. 44 'indirect link' between a fiscal advantage accorded to a German lessee of a German- established lessor and the unfavourable tax treatment of such lessors in the form of their liability to pay tax on their rental income. 40 At issue in Verkooijen was a partial exemption from personal income tax, conferred in respect of share dividends, 32. The cases on fiscal cohesion have arisen provided the companies paying the divi- in the context of all of the Treaty freedoms: dends were established in the Nether- Bachmann and Asscher concerned the free lands. 41 The Netherlands and other inter- movement of persons; ICI and Baars con- vening Member States supported the lim- cerned the freedom of establishment; itation of this advantage to the case of Eurowings concerned a recipient of ser- dividend income from resident companies. vices; while Verkooijen concerned the free The double taxation which the rules were movement of capital. In all cases, save designed to avoid was CT and income tax Bachmann, the Court held that the national on the same profits or income, and this rules in question could not be justified by would not arise if the former were paid in any notion of fiscal cohesion.

That taxation on the company and a personal Member State must take account of the wealth tax on the holder of its shares as liability of such non-residents to pay com- those which arose in Verkooijen. The parable taxes in their Member State of Court, rejecting the defence, held that it residence. Thus, it would seem that the true was 'irrelevant. . . that companies estab- scope for fiscal cohesion as a justification lished in the Netherlands are subject to for the differential treatment of non-resi- CT in the Netherlands and that companies dents would concern only situations in which there is a real and substantial risk that extending equal treatment in respect of a particular benefit would potentially facil- itate tax evasion in both the host Member state and the Member State of residence of 40 — Paragraph 42. 41 — Op. cit., footnote 24 above. 42 — Paragraph 58. 43 — Case C-251/98 Baars [2000] ECR I-2787. 44 —Ibid., paragraph 40.

45 - Much of the academic criticism of Bachmann has centred on the fact that the Court ignored Belgium's DTC with Germany, which might well have permitted Belgium to tax the capital payments made to migrant workers like Mr Bachmann, at least if they remained resident in Belgium, and the fact that there were probably less 35. I do not accept that this argument restrictive means by which the taxation of such payments could have been secured, such as by imposing obligations justifies the unfavourable treatment of non- on insurers who wished to have their policies qualify for deduction. See, inter alia, Knobbe-Keuk, 'Restrictions on resident taxpayers. It is based on the the Fundamental Freedoms Enshrined in the EC Treaty by Discriminatory Tax Provisions' (1994) EC Tax Review 74; misconception that ACT may, somehow, Hatzopoulos, 'Fiscalité directe des Etats membres et be regarded as a separate tax from main- "libertés personnelles" reconnues par le traité CE' (1995) Rev. Marché Unique Eur. 121, pp. 143 to 152; Quaghe- stream CT. Since there is no question beur, 'A Bridge over Muddled Waters — Coherence in the regarding the liability of the subsidiaries Case Law of the Court of Justice of the European Communities relating to Discrimination against Non- of both resident and non-resident parent resident Taxpayers' (1995/1996) The EC Tax Journal 109; Farmer, 'EC Law and Direct Taxation — Some companies to pay United Kingdom CT, the Thoughts on Recent Issues' (1995/1996) The EC Tax grant to one but not to the other of a Journal 101; Wattel, 'The EC Court's Attempts to Recon- cile the Treaty Freedoms with International Tax Law' significant tax advantage cannot be justi- (1996) 22 CML Rev. 223; Vanistendael, 'The Conse- quences of Schumacher and Wielockx: Two Steps Forward in the Tax Procession of Echternach' (1996) 33 CML Rev. 255; Lang, 'The Binding Effect of the EC Fundamental Freedoms on Tax Treaties' and Schuch, 'Will EC Law 46 — As corporate shareholders are not liable to pay CT on Transform Tax Treaties into Most-Favoured Nation dividends, no element of tax otherwise due by the German Clauses?', both in Gassner, Lang and Lechner, eds., Tax parents in the present case may be imputed to the ACT Treaties and EC Law (London, The Hague) (1997). payments made by their United Kingdom subsidiaries.

fied by a difference in the CT liability of the 37. If the Court were to disagree with this parent companies to which the dividends recommendation, the outright refusal in the are paid. In other words, the objectively United Kingdom rules to extend the exemp- different CT positions of resident and non- tion from ACT to subsidiaries of non- resident parents cannot justify the imposi- resident companies would, at all events, tion of an effectively higher CT burden appear to be disproportionate. I do not only on the subsidiaries of the latter. accept the United Kingdom's submission to the effect that, once legitimate concerns regarding fiscal cohesion underlie a differ- ential fiscal treatment of non-residents, the Member State concerned is not obliged to take into account the fact that there may be less restrictive means of achieving the desired coherence. Thus, I do not agree with the contention that, in answer to a specific claim of discrimination contrary to Article 52 of the Treaty made in respect of its rules, the United Kingdom was not obliged to consider the appropriateness of 36. Moreover, in the case of individual the less restrictive rules regarding non- shareholders of those parent companies resident parents applied by another Mem- who are resident in other Member States ber State (to wit Ireland) operating a very and who are, thus, subject to the tax laws similar system of ACT. of those States, there is nothing on the case- file to suggest that the United Kingdom authorities have ever been obliged to make any income tax reimbursements. There would, in the case of non-resident parent companies who make downstream divi- dends to individual shareholders of profits distributed to them by their United-King- dom-resident subsidiaries, be at most a remote link between allowing a group income election regarding the subsidiaries' obligation to pay ACT and possible claims, by the parents' own shareholders, for the reimbursement of the (United Kingdom) 38. In any event, as the Commission sub- income tax element imputed to the divi- mits, the objective underlying ACT could dends paid by those subsidiaries. This is a just as easily have been achieved by the fortiori the case since dividends paid by imposition of a general requirement, on non-resident parent companies do not carry some or all companies, to pay a certain a United Kingdom tax credit merely proportion of their CT liability in advance. because they were themselves funded from Indeed, as the plaintiffs point out, this, dividends received from United-Kingdom- indeed, is the system which has recently resident subsidiaries. There is therefore no been introduced in the United Kingdom, at real and substantial risk to the cohesion of least in respect of larger companies, by the United Kingdom tax system capable of sections 30 and 31 of the Finance Act justifying the differential treatment at issue. 1998. The refusal to permit subsidiaries of

parent companies resident in other Member his Opinion in Safir v Skattemyndigheten i States to make a group income election for Dalarnas Län 48 that, where the free move- ACT purposes thus clearly went beyond ment of capital and other fundamental what might conceivably have been capable freedom provisions of the Treaty are poten- of justification on the ground of preserving tially infringed by a particular national the fiscal cohesion of the system established rule, the Court should consider the former by the ICTA 1988. provision only 'if the measure at issue directly restricts the transfer of capital, rendering it impossible or more difficult, for example by subjecting it to mandatory authorisation...'.49 This view was impli- citly endorsed by the Court, which, having found that the impugned tax on life assur- 39. For all of the above reasons, I am ance contracts entered into with non-Swed- satisfied that a restriction on the availabil- ish established providers of such insurance ity of a tax advantage, such as the exemp- was incompatible with Article 59 of the EC tion from the obligation to make advance Treaty (now, after amendment, Article 49 payments of CT inherent in a group income EC), held that 'it [wa]s not necessary to election of the sort at issue in the main determine whether such legislation [wa]s proceedings, is incompatible with Arti- also incompatible with Articles 6, 73b and cle 52 of the EC Treaty. 73d of the Treaty'. 50 In my opinion, as a restriction like that at issue in the main proceedings is incompatible with the free- dom of establishment, it is unnecessary to consider whether it also constitutes a restriction on direct foreign investment in 40. In the circumstances, I am of the view the United Kingdom. that it is not necessary to consider whether the unfavourable treatment of non-resident companies regarding ACT hindered direct investment in the United Kingdom by companies resident in other Member States and so restricted the free movement of capital. As the Court pointed out unequi- vocally in Bachmann, in respect of the former Article 67 (later Article 73b) of the V — Question 2 and appropriate remedy EC Treaty (now Article 56 EC), 'it does not prohibit restrictions which do not relate to the movement of capital but which result indirectly from restrictions on other funda- mental freedoms'. 47 I agree with the view expressed by Advocate General Tesauro in 41. The second question referred by the national court raises two distinct issues, the first of which itself contains two alterna- 47 _ Paragraph 34. The Court, thus, accepted the recommen- dation of Advocate General Mischo that the transfer of capital necessary to pay contributions to non-Belgian insurers was not subject to any restraint and that any 48 — Case C-118/96 [1998] ECR I-1897. causal nexus between the non-deductibility of the pre- 49 — Paragraph 17 (emphasis in original). miums at issue and the free movement of capital was too remote to constitute a restriction on the latter. 50 — Paragraph 35.

tives. It asks first what remedy should be consider a claim based entirely on interest, available to taxpayers like the plaintiffs if to allow such a claim would constitute a they are correct in contending that subsidi logical extension of that case-law; it would aries of non-resident parent companies be futile to recognise the validity of their were discriminated against in being denied right to rely directly upon the right of the advantage involved in making a group establishment but not then to accord them income election; are they entitled to a any remedy. If their claim cannot be restitutionary claim or only to a compen classified as a restitutionary claim, they satory claim for damages for breach of assert, in the alternative, that they have a Community law?

They seek to distinguish Sutton, where, in the context of a claim for interest bn arrears of social security benefit, it was held that there was no right under Community law to interest 42. The plaintiffs contend principally that in connection with a claim for restitution, their claim amounts to a restitutionary on the basis that the payment of interest claim. They rely on the Court's well- was found not to be an essential component established case-law that Member States of the right in issue. 54 which have levied taxes in contravention of directly effective provisions of Community law must repay them; in their view, this is an adjunct of the directly effective nature of the Community-law rights which have thereby been infringed. 51 Although they recognise that the Court has not yet had to

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An reparation may be awarded in the case of application for interest must, therefore, be a breach of Community law cannot be made in accordance with the same proce- accepted. Especially in the context of dure as that applicable to recovery of the economic or commercial litigation, such a capital sum'. 64 The Court accepted this total exclusion of loss of profit would be advice. It ruled that 'in the absence of such as to make reparation of damage provisions of Community law on this point, practically impossible'. The same principle, it is currently for the national authorities, to my mind, applies in respect of a claim to in the case of the reimbursement of dues interest based on the loss of the use of improperly collected, to settle all ancillary money. questions relating to such reimbursement, such as the payment of interest'. 6S In Express Dairy Foods v Intervention Board for Agricultural Produce, which also con- cerned an action for the recovery of mone- tary compensatory amounts paid pursuant to a Community regulation which had been declared invalid, the Court held that, in the absence of harmonised Community rules, it was for national courts 'to settle all ancil- lary questions relating to such reimburse- ment, such as the payment of interest, by

The compensatory amounts) it had been obliged question of whether interest should also be to make to the relevant national authority paid was, as the Court made clear, 'ancil- acting, as agent for the Commission, under lary'. In the present case, as the plaintiffs a Commission regulation that was subse- stressed at the hearing, the claim for quently found to be invalid.63 Advocate interest represents the entirety of the claim. Although in Fromme v BALM, cited by the United Kingdom, the Court also classified 61 — Loc. cit., footnote 52 above, paragraph 26. 62 — Case 26/74 [1976] ECR 677. 63 — The applicant had obtained, in parallel proceedings brought before the national courts, an order for the 64 — Ibid., [1976] ECR 677, p. 691. reimbursement of the capital sum of the amounts actually paid; see paragraphs 3 to 7 of the judgment for an account 65 — Paragraph 12. of those proceedings. 66 — Case 130/79 [1980] ECR 1887, paragraph 17.

as ancillary the nature of claims to interest, arrears of a particular social security ben- that case may also be distinguished from efit which had initially been denied for the present case. 67 It concerned a claim by reasons which amounted to sex discrimina- the German authorities for interest to be tion contrary to Directive 79/7/EEC. 70 The paid by the undertaking Fromme in respect Court held that the right provided by of certain premiums for the denaturing of Article 6 of the Directive for victims of cereals which, it was common ground, had such discrimination was 'to obtain the been wrongly paid to it by those autho- benefits to which they would have been rities. The Court held that the Member entitled in the absence of discrimination', States' obligation under the relevant Com- but that 'the payment of interest on arrears' munity legislation was 'to take the mea- did not constitute 'an essential component sures necessary to recover sums lost as a of the right as so defined'. 71 The Court result of irregularities or negligence'; 68 it thus followed the advice of Advocate was therefore for national law to regulate General Léger, who, noting that the benefit 'ancillary questions' such as that concern- claimed had been paid to Ms Sutton, ing the payment of interest subject to the observed that 'the discrimination [had] requirement that the obligations imposed already been removed in conformity with on undertakings having received payments the rules of national law and the national based on Community law 'not be more system can be regarded as having ensured stringent' than those imposed on under- the effectiveness of the principle in prac- takings having received payments based on tice'. 72 Thus, in the absence of Community national law. 6 9In my view, this case-law rules, he was satisfied that the question provides no support for the view defended by the United Kingdom; that, even in a case whether the claimant also had a right to which only concerns interest, the matter interest should be left to national law. The falls to be regulated by national law alone, situation is different, in my view, in a case regardless of whether the relevant rules such as the present. Not only is the claim preclude such purely interest-based claims. for interest essential, it is the only claim made by the plaintiffs. This arises from the fact that the breach of Community law consists entirely in the temporary removal of sums of money from the resources of certain companies. If Community law were not to require that national legal provisions which would preclude such claims be set aside, the result would be wholly to negate the exercise of a right based on a funda- mental principle of Community law. Such a consequence would undermine the effec-

tiveness of the right of establishment by United Kingdom. If it had been possible to rendering 'impossible in practice' the exer- bring legal proceedings during this period, cise of the right. 73 the plaintiffs would, in my view, have been entitled to interest. It is neither logical nor just to deprive them of this entitlement merely because, in the meantime, the liability of the United Kingdom to repay the principal sum has been discharged. In a • practical sense, also, the claim for interest is closer to a restitutionary rather than a 51. I would reject the submission of the compensatory claim. The underlying sums United Kingdom that the plaintiffs' claims are known and indisputable. All that is in the main proceedings cannot be regarded necessary is for the national court to as restitutionary in nature, solely because, establish an appropriate interest rate for not having sought to exercise a group the relevant period. income election, their action should, at best, be treated as akin to an action for damages against the United Kingdom for the loss they suffered as a result of being left in uncertainty as to their Community- law rights. The ACT payments made by the plaintiffs were made on the basis of national legislation which allowed them no choice. Since such legislation is not compatible, in my view, with Community law, they should, in principle, be entitled to seek restitution for those payments. 53. If, however, the Court were to disagree with my view that a restitutionary claim to interest for the loss of the use of money should be available in circumstances such as those involved in the main proceedings, it would have to consider the plaintiffs' alternative claim that there should be a 52. I believe that it is more correct and right of action for compensatory damages more logical to treat the plaintiffs' claim as for such a loss. While it is true that in that restitutionary rather than as a compensa- case-law the damages allegedly suffered by tory claim for damages. ACT was, on the the claimants have normally been unliqui- basis of my foregoing analysis, exacted dated in amount, I see no reason, in from them in contravention of Community principle, why it should not be possible to law and, therefore, unlawfully. In the claim compensatory damages for a loss that period between payment of ACT and its is quantifiable, as in the present case, being taken into account in respect of the provided the relevant conditions are satis- CT liability of the subsidiaries, it should fied. The United Kingdom relies on the fact have been repaid to the plaintiffs by the that, while the three basic conditions for potential Member State liability are set out in the relevant case-law, 'the national law 73 — See paragraph 172 of the Opinion of Advocate General on liability provides the framework within Jacobs in Case C-90/94 Haahr Petroleum v Åbenrå Havn which the State must make reparation for and Others [1997] ECR I-4085.

the consequences of the loss and mately to determine whether they are damage...'. 74 This framework, in its view, satisfied, I do not propose to consider them includes the question of interest. However, in detail. However, as it may be of some the Court has been equally clear that the assistance to the national court, I shall rules in question must be non-discrimina- briefly consider the Commission's submis- tory and 'must not be so framed as to make sion that those three conditions are met in it virtually impossible or excessively diffi- the present case. cult to obtain reparation'. 75 This latter principle requires, in my view, that an action seeking compensation in the form of interest in respect of the cash-flow disadvantage occasioned by the loss of the use of money be, in principle, permissible where that is the only loss suffered as a result of a Member State's breach of 55. First, it is beyond doubt that Article 52 Community law. of the Treaty creates rights for individuals and that a breach of that provision would therefore satisfy the first condition. 77 Sec- ondly, it seems to me manifest that, in principle, there is a direct causal link between the statutory exclusion of the group income election to subsidiaries whose parents were not resident in the United Kingdom and the loss suffered by the plaintiffs. As regards the nature of the breach, I agree with the Commission that 54. The three conditions which must be the national court may have some doubts as satisfied before a State may be held liable to whether the breach of Community law for a breach of Community law have been by the United Kingdom constituted such a confirmed consistently by the Court since sufficiently serious breach of Community its initial decision in Francovich. They are law as to justify imposing liability on it. that: 'the rule of law infringed must be The United Kingdom submits that any intended to confer rights on individuals; the breach of Community law was excusable breach must be sufficiently serious; and and that any damage caused was involun- there must be a direct causal link between tary. 78 the breach of the obligation resting on the State and the damage sustained by the injured parties'. 76 As no questions have been referred in respect of the interpreta- tion of these conditions, and as it is for the national court in each concrete case ulti- 56. Since there can be no question in the 74 — Sec, for example, Prancorich, paragraph 41, Brasserie du present case of the Community institutions Pêcheur and padoriame, paragraph 83 and Sutton, para- graph 33. 75 — Sec, for example, Prancovich, paragraph 43, Brasserie du Pêcheur and Padurtame, paragraph 83 ami Sutton, para- 77 — Sec Brasserie du Pêcheur and Padurtame, paragraph 54. graph 33. 78 — It relies particularly upon Brasserie du Pêcheur and 76 — See, for example, Sutton, paragraph 32. Padoriame, paragraph 56.

having contributed to the infringement of concerns indirect discrimination. 84 Indirect Community law at issue, the question for discrimination should, in general, be regar- the national court would be whether, in the ded as 'sufficiently serious'. As the Court exercise of its legislative powers, the United declared as long ago as 1986 in respect of Kingdom 'manifestly and gravely disregar- direct taxation, '[A]cceptance of the pro- ded the limits on the exercise of its position that the Member State in which a powers'. 79 The issue is whether the clarity company seeks to establish itself may freely and precision of Article 52 of the EC apply to it a different treatment solely by Treaty were such that the breach may be reason of the fact that its registered office is regarded as sufficiently serious. This has to situated in another Member State would be viewed in the light of the widespread use thus deprive [Articles 52 and 58 of the EC of residence as a criterion for direct taxa- Treaty] of all meaning'. 85 As regards the tion purposes coupled with the state of possible defence of fiscal cohesion, the development of the relevant case-law 80 at Court's recognition in Bachmann that such the material time. 81 This will concern the indirect discrimination may be capable of limits which affect the use by Member justification on grounds connected with States of that criterion where it is detri- preserving fiscal cohesion does not, in mental to the interests of residents from itself, render 'excusable' the breach of other Member States. In short, was the Community law. To classify a breach of refusal to allow the group income election, Article 52 of the Treaty such as that viewed objectively, 'excusable or inexcusa- involved in the present case as 'excusable', ble'? 82 Although it is clear that measures the national court must be satisfied not which discriminate directly on grounds of only that the United Kingdom authorities nationality and which are not justified on genuinely believed that refusing to extend the basis of one of the exceptions set out in the benefit of the group exemption in the Treaty itself would fall to be considered question to groups whose parent company as 'sufficiently serious', 83 the present case was non-resident was strictly necessary, but also, viewed objectively in the light of Bachmann and the principle of strict inter- pretation of exceptions to fundamental Treaty rules like the freedom of establish- ment, that this belief was reasonable. The

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58. Since I consider that the Court should rule that the denial of the option to make a group income election to subsidiaries whose parent companies were resident in other Member States constituted unlawful discrimination contrary to Article 52 of the 86 — Brasserie du Pêcheur and factortame, paragraph 84. See also paragraph 104, in particular, of the Opinion of EC Treaty, and that the mere fact that the Advocate General Tesauro in those cases.

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OPINION OF MR FENNELLY — JOINED CASES C-397/98 AND C-410/98

(1) It is contrary to Article 52 of the EC Treaty (now, after amendment, Article 43 EC) for the legislation of a Member State to permit a tax advantage

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such as a group income election (allowing distributions to be paid by a subsidiary to its parent without the subsidiary being required to make advance payments of corporation tax in respect of the profits it has earned in that Member State) only when both the subsidiary and parent are resident in that Member State;

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