C-516/99

SCHMID

OPINION OF ADVOCATE GENERAL TIZZANO delivered on 29 January 2002 1

1. By order of 21 December 1999, Beru- of the Treaty. Article 73b(1) provides that fungssenat V (Appeal Chamber V) of the 'all restrictions on the movement of capital Finanzlandesdirektion für Wien, Niederös­ between Member States and between terreich und Burgenland (Regional Tax Member States and third countries shall Authority for Vienna, Lower Austria and be prohibited'. However, Article 73d pro­ Burgenland) (hereinafter the 'Appeal vides as follows: Chamber') applied to the Court for a preliminary ruling on two questions con­ cerning the interpretation of Articles 73b and 73d of the EC Treaty (now Articles 56 and 58 EC). Essentially, the Appeal Chamber has asked the Court whether national provisions which apply different '1 . The provisions of Article 73b shall be rules to the taxation of investment income without prejudice to the right of Member from domestic and foreign companies States: respectively are compatible with Commu­ nity law.

(a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of I — The legal framework residence or with regard to the place where their capital is invested;

The relevant Community provisions

(b) to take all requisite measures to pre­ vent infringements of national law and regulations, in particular in the field of 2. The relevant Community provisions for taxation and the prudential supervision present purposes are Articles 73b and 73d of financial institutions, or to lay down procedures for the declaration of capi­ tal movements for purposes of adminis­ 1 — Original language: Italian. trative or statistical information, or to

3. Under the Austrian tax system, income from domestic limited companies is subject to two forms of taxation: on companies, in that their revenue is taxed at a fixed 6. In the first case, the taxpayer will have to corporation rate of 34%, and on share­ pay tax at 25 % on his investment income holders, in that tax is levied on dividends which will thereby cease to be subject to and other profits distributed by companies ordinary income tax since, as explained, (i.e. investment income). that payment is final. The investment income will not be taken into account in his assessment to income tax, with the result that a lower rate of income tax will probably apply since the rate varies accord­ ing to the level of income. The final tax is, 4. As regards the taxation of shareholders, which is of more direct concern here, the 2 — Paragraph 93(2) of the Law on Income Tax (1988/400), in relevant provisions distinguish between the version in force in 1997.

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in principle, recovered by withholding tax That is because, as I have said, under the at source (i.e. from the company); how­ second system, unlike the final tax system, ever, in certain cases where tax cannot be investment income is taken into account in withheld, the Law provides that tax shall his overall assessment to tax, with the be recovered 'by voluntary payment of an result that a higher rate of tax will probably amount equivalent to the tax on investment apply to his aggregate income. income to the person liable to pay the dividends'. 4

(b) The taxation of foreign investment income

3 — Paragraph 93(1) of the Law cited above. 4 — Paragraph 97(2) of the Law cited above. 10. Mr Schmid resides in Austria. In 1997, 5 — Paragraph 37 of the Law cited above. his income consisted essentially of divi-

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dends from companies that had their seat in and referred the following questions to the Germany, in particular dividends from Court of Justice for a preliminary ruling: MAN AG.

11. The tax rate applicable to Mr Schmid's '1 . Does Article 73b(1) in conjunction income for that year was calculated by the with Article 73d(1)(a) and (b) and (3) tax authority on the basis of his aggregate of the EC Treaty (now Article 56(1) in income from Austrian sources, investment conjunction with Article 58(1)(a) and income and income from foreign sources. (b) and (3) EC) preclude a provision The rate, after deductions, was set at such as Paragraph 97 of the Einkom- 27.17% and the whole of his income from mensteuer-gesetz ("EStG"; Law on the German shares was also taxed at that Income Tax) of 1988 (BGBl. 1988/400; rate. as amended, BGBl. 1996/797), which provides (pursuant to Paragraph 1(1)(1)(c)ofthe Endbesteuerungsgesetz (Law on Final Taxation), BGBl. 1993/11) that final taxation of divi­ dends, interest and other earnings from foreign shares is excluded, and thus the 12. On 3 December 1998, Mr Schmid rate of taxation in respect of domestic lodged an appeal with the Appeal Chamber shares is 25 %, whereas the rate of against the notice of assessment for 1997, taxation in respect of foreign shares claiming in particular that the dividends on may be up to 50%? ordinary shares in MAN AG ought to have been taxed at 50% of the ordinary rate.

14. In the subsequent procedure before the 16. Before considering the substance of the Court of Justice, the Republic of Austria, questions referred for preliminary ruling, it the French Republic and the Commission must be determined whether the Appeal submitted observations. The first two took Chamber is a court or tribunal for the the view that the national provisions are purposes of Article 234 EC and thus compatible with the relevant Community whether the Court has jurisdiction to give provisions but the Commission took the a preliminary ruling on the questions. Both opposite view, holding that the provisions the Commission and the Austrian Govern­ in question are contrary to the provisions ment expressed some doubts on the subject, on free movement of capital contained in although both ultimately concluded that the Treaty. the body in question is a court or tribunal. But the Appeal Chamber itself appeared to be aware of the problem, in that it took the precaution of setting out in the order for reference the reasons why, in its view, it ought to be recognised as a court or tribunal for the purposes of Article 234.

15. To obtain clarification on certain points and details of the complex Austrian provisions on the taxation of investment income, the Court, by letter of 5 June 17. I should add that the doubts do not 2001, put certain questions to the Appeal relate to all the factors that the Court Chamber in accordance with Article 104(5) usually takes into account in this connec­ of its Rules of Procedure. By letter of tion. As we know, it is settled case-law that 27 June 2001 , the Appeal Chamber 'in order to determine whether a body answered the questions put by the Court, making a reference is a court or tribunal for providing full and detailed explanations the purposes of Article 177 of the Treaty, which enabled a clearer idea to be gained of which is a question governed by Commu­ the legal framework described in brief nity law alone, the Court takes account of a above. number of factors, such as whether the

18. The doubts expressed in the present case as to whether appeal chambers act as a — there is a constitutional provision third party arise from the fact that, as the (Paragraph 271(1) of the Bundes­ Commission and the Austrian Government abgabenordnung ('BAO'; Federal point out, they are called upon to rule on Order on Taxes) to the effect that decisions of tax authorities to which they members of appeal chambers are not themselves belong. It is clear from the order bound by any directions in the exercise for reference that appeal chambers are of their functions; organs of the regional tax authorities and that in principle the presidents of the authorities in question assume the presi­ dency of the appeal chambers unless they decide to nominate a tax official to serve in their stead. To be precise, appeal commis­ — they are required to swear on their sions are established within the regional tax honour that their decisions will be authorities, consisting partly of members impartial (Paragraph 271(2) BAO); elected by professional organisations and partly of members appointed by the Federal Finance Minister or the presidents of the regional tax authorities; the presidents of

— the law specifies cases of incompatibil­ 6 — Case C-17/00 De Coster [2001] ECR I-9445 paragraph 10. ity in which members of appeal

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chambers are required to abstain and do not assume the presidency of appeal the parties may challenge them (Para­ chambers in person and, on the other, graphs 76 and 283 BAO); officials who are members of those chambers have no say in matters or pro­ cedures they deal with in the normal course of their duties. In the light of that normal practice and the provisions on incompati­ bility, the Austrian Government argues that there are reasons to believe that appeal — most members of appeal chambers are chambers are courts or tribunals for the members elected by professional purposes of Article 234 EC. organisations, not tax officials;

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the power conferred on the presidents of before appeal chambers is sufficient guar­ the regional authorities to challenge antee that the procedure is inter partes. The decisions of the appeal chambers, the fact that the tax authorities are not for­ Commission considers that the procedure mally represented in procedures conducted in question may nevertheless be deemed to by one of their own organs may at most be inter partes, especially since, according raise doubts, as I shall shortly point out, as to the case-law of the Court, 'the require­ to whether the adjudicating body is in fact ment that the procedure be inter partes is acting as a third party, but it does not seem 7 not an absolute criterion'. to me to be sufficient to preclude the proposition that the procedure is inter partes.

Assessment

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12 des Contributions did not act as a third taxpayers [contested] before them'. party, since 'being at the head of the However, the Court did not consider that Direction des Contributions Directes et that organisational link with the Ministry des Accises (Direct Taxes and Excise Duties of Finance was sufficient to preclude the Directorate), he [had] a clear organisa- referring body from acting as a third party, tional link with the departments which since the Spanish legislation guaranteed 'a [had] made the disputed tax assessment, separation of functions between.

10 proceedings'. tion from the tax authority'. In its judg ment in that case, therefore, the Court did not attach significance so much to the fact that the referring body and the departments that had adopted the contested decision were both part of the same administrative authority but instead to the fact that a clear separation of functions was guaranteed in 13 that instance. 27. Similarly, in its judgment in Gabalfrisa, the Court considered that it was necessary to determine whether the Spanish Tribu nales Económico-Administrativos had 'the character of a third party in relation to the departments which [had] adopted the decision forming the subject-matter of the 28. That having been said, and while there complaint and the independence necessary is no need to rule in this circumstance on for them to be regarded as courts or the consistency of earlier decisions and the tribunals for the purposes of Article 177

recovery'. With reference to that aspect, I think it is also helpful to point out that in its judgment in De Coster, cited above, the Court recognised the independence and impar tiality of the Collège juridictionnel de la Région de Bruxelles-Capitale on the ground inter alia that members 9—Judgment in Case C-24/92 Corbiau [1993] ECR I-1277, of that Collège juridictionnel may not be members of a paragraph 15. municipal council or of the staff of a municipal authority 10 — Paragraph 16, my emphasis. responsible for decisions that may be challenged before it 11 — Judgment cited above, paragraph 40. (paragraph 19 of the judgment).

30. Thus, not only is there in the present ' case the 'clear organisational link with the 29. In that connection, I note, first, that Tax Authority that led to the conclusion in appeal chambers are organs of the regional Corbiau that the Directeur des Contribu­ tax authorities, that is to say the authorities tions was not a court or tribunal, but also responsible for adopting the decisions on the members of appeal chambers appointed which those chambers are required to rule. by the tax authorities (including the presi­ Moreover, as the Austrian Government has dent) are not subject to the kind of 'separ­ pointed out, that structural link with the ation of functions' that would nevertheless tax authorities is further strengthened: ensure that the adjudicating body was acting as a third party, as laid down in the judgment in Gabalfrisa. Moreover, these fundamental objections cannot be met, as the Austrian Government suggests, by an appeal to normal practice, whereby, on the one hand, presidents of regional tax authorities do not assume the presidency of (i) by the particular role assigned to the appeal chambers in person and, on the presidents of the regional authorities, other, officials who are members of those who are heads of those authorities and chambers have no say in matters or pro­ also (at least in principle) assume the cedures with which they deal in the normal presidency of the appeal chambers and course of their duties. The issue of whether have a part in establishing them, with the referring body is a court or tribunal discretion to select the members of the must clearly be assessed on the basis of the appeal commissions who are to serve in 15 legislation in force in the Member States, the various chambers; not of purely domestic practices which may be changed at will by those concerned in a way which is difficult for the Court to 14 — On this question, I would simply point out here that the criteria employed in the judgment in Gabalfrisa were verify. openly and strongly criticised by Advocate General Ruiz-Jarabo Colomer in points 26-28 of the Opinion in Case C-17/00 De Coster, delivered on 28 June 2001. 15 — The presidents of the regional authorities may at their discretion establish appeal chambers and select members of such chambers from the numerous members of the appeal commissions, the only condition being that the prescribed ratio between tax officials and members appointed by professional organisations must be main­ tained. The discretionary powers of the presidents of the regional authorities appear to be further enhanced by the fact that the appeal chambers are apparently not estab­ lished for a definite period but are formed ad hoc to deal 31. Two other factors seem to me to with the various cases. confirm the view that appeal chambers do

not act as a third party in relation to the tax istrative appeals, allowing taxpayers an authorities that are the source of the opportunity to have the tax authorities' contested decisions. In the first place, those decisions reviewed by bodies established departments are not parties to proceedings for the purpose by the authorities them­ before the appeal chambers, which are selves (albeit with some outside members) attended only by the taxpayers challenging and granted special independent status. I the tax authorities' decisions. The fact that should add that, in the absence of a clear the departments responsible for the con­ functional separation from the departments tested decision do not take part in the responsible for the contested decisions, the proceedings contradicts the proposition mere fact that the members of those that the appeal chambers act as a third administrative bodies are not subject to party in relation to two opposing parties supervision and orders from their line and appears, on the contrary, to imply that managers does not of itself guarantee that the chambers themselves defend the auth­ the bodies in question act as a third 17 orities' interests on such occasions. In the party. second place, the point I have just made seems to me to be confirmed by the fact that, as the Commission has pointed out, the appeal chambers appear as defendants in appeals against their decisions before the Administrative Court. In my view, it is difficult to reconcile the right to defend one's own decisions before an adminis­ trative court and to appear as a party in proceedings in this connection with the capacity to act as a third party which must be a distinctive feature of the judicial 33. In the light of the foregoing consider­ function. This is clear, moreover, from the ations, I therefore take the view that appeal judgment in Corbiau, where the Court held chambers do not act as a third party in that the Directeur des Contributions did relation to the taxpayers that bring appeals, not act as a third party and that this was on the one hand, and the tax authorities 'confirmed... by the fact that, if the matter that adopted the contested decisions, on the were to come before the Conseil d'État, the other. It follows that they cannot be Directeur des Contributions would be a recognised as courts or tribunals for the 16 purposes of Article 234 EC and thus the party to the proceedings'. Court does not have jurisdiction to give preliminary rulings on questions referred by them. It is scarcely necessary to point out that there is no danger of this con­ clusion affecting the uniform application of Community law, since the appeal cham-

bers' decisions may be challenged before in receipt of domestic investment income, I the Administrative Court , which is consider that it is essential to examine both undoubtedly a court or tribunal for the systems together in order to determine purposes of Article 234 EC. whether the provisions as a whole are compatible with Community law. There­ fore, I consider it essential to determine whether it is consistent with the provisions on free movement of capital contained in the Treaty to give those in receipt of domestic investment income an opportun­ ity to choose between the two systems of Substance taxation described above, while foreign investment income is subject to ordinary income tax at the full rate, without any reduction. 34. In view of the conclusions I have reached as to the admissibility of the present reference for a preliminary ruling, I shall consider the questions referred to the Court only in the alternative.

37. To that end, it must first be established whether provisions of the kind under con­ sideration may constitute a restriction on the movement of capital within the mean­ 35. I note in this connection that, by its ing of Article 73b of the Treaty and, if so, first question, the Appeal Chamber essen­ whether they may be justified under tially seeks to ascertain whether a national Article 73d. provision, under which the special final tax described above applies only to domestic investment income, is compatible with Community law and in particular with the provisions on free movement of capital contained in the Treaty. By its second question, on the contrary, it seeks to ascertain whether a national provision, The nature of the restrictive provisions under which the reduction of 50% in ordinary income tax applies only to domestic investment income is compatible with Community law.

— 'also has a restrictive effect as regards companies established in other Member States: it constitutes an obstacle to the raising of capital [in 40. It is moreover quite clear from the the Member State concerned] since the circumstances that gave rise to the action in dividends which such companies pay to the main proceedings that the Austrian residents [in that State] receive less provisions accord preferential treatment to favourable tax treatment than divid­ domestic as opposed to foreign investment ends distributed by a company estab­ income. lished [in that State], so that their shares are less attractive to investors residing [in the State in question] than

18 — Judgment in Case C-478/98 Commission v Belgium [2000] 41. The investment income received by Mr ECR I-7587, paragraph 18; see also, to the same effect, judgments in Case C-484/93 Svensson and Gustavsson Schmid from the German company was [1995] ECR I-3955, paragraph 10, Case C-222/97 taken into account in his assessment to Trummer and Mayer [1999] ECR I-1661, paragraph 26, and Case C-439/97 Sandoz [1999] ECR I-7041, paragraph 19. 19 — Judgment in Case C-35/98 Verkooijen [2000] ECR I-4071, paragraph 36. 20 —Judgment in Verkooijen, paragraphs 34 and 35.

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42. It must therefore be concluded that, by according preferential treatment to domestic as opposed to foreign investment 44. In this connection, I must first point out income, the provisions under consideration that, inasmuch as those provisions auth­ constitute a restriction on the movement of orise a derogation from the fundamental 22 capital prohibited in principle by principle of free movement of capital, Article 73b of the Treaty. they must be interpreted strictly and cannot therefore justify national provisions or measures which constitute 'a means of arbitrary discrimination' or 'a disguised restriction on the free movement of capi­ tal... as defined in Article 73b' (Ar­ ticle 73d(3) of the Treaty). It follows that Justification of the provisions under restrictions arising from provisions of the Article 73 d kind under consideration may be allowed under Article 73d(1) only if the different treatment accorded to domestic and foreign investment income is objectively justified

43. As already explained, however, the fact 21 — Article73d(1)(a) and (b). that national provisions of the kind under 22 — Judgment in Case C-54/99 Association Eglise de Sciento- logie de Paris and Scientology International Reserves Trust consideration constitute a restriction on the (2000] ECR I-1335, paragraph 17.

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23 — It seems to me that this is the correct interpretation of the judgment in Verkooijen in which, with reference to 47. That argument does not, it seems to Article 73d(l)(a), the Court cited case-law according to me, carry conviction. While it is true that which 'before the entry into force of [that article], national tax provisions of the kind to which that article refers, in so there must be an agent in Austria if the tax far as they establish certain distinctions based, in par­ ticular, on the residence of taxpayers, could be compatible is to be withheld in that country, it is not with Community law provided that they applied to equally true that the final tax necessarily situations which were not objectively comparable (see, in particular, Case C-279/93 Schumacher [1995) ECR I-225) involves withholding at source. In my view, or could he justified by overriding reasons in the general interest, in particular in relation to the cohesion of the tax system (Case C-204/90 Bachmann v Belgian State (19921 various technical arrangements could have ECR I-249 and Case C-300/90 Commission v Belgium been made to collect tax of the kind under [1992] ECR I-305)' (paragraph 43). consideration (that is, tax at a fixed final 24 — Judgment in Case C-478/98 Commission v Belgium [20001 ECR I-7587, paragraph 41. rate of 25%), arrangements that could also 25 — Judgment in Joined Cases C-163/94, C-165/94 and C-250/94 Sanz de Lera and others [1995] ECR I-4821, apply without problems to income from paragraph 23. investments in foreign companies.

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51.1 too consider that the need cited in the judgments in Bachmann and Commission v 49. Second, the Austrian and French Gov­ Belgium cannot legitimately be invoked in ernments argue that the 50% reduction in the present case. I note that in those cases 'a the rate applicable to domestic investment direct link existed, in the case of one and income subject to ordinary income tax is the same taxpayer, between the grant of a necessary in order to safeguard the cohe- tax advantage and the offsetting of that siveness of the Austrian tax system and, to advantage by a fiscal levy, both of which that end, in accordance with the judgments related to the same tax. In those cases, there in Bachmann and Commission v Bel- was a link between the deductibility of 27 gium, it may 'justify rules liable to contributions and the taxation of sums 28 restrict fundamental freedoms'. They payable by insurers under old-age insur­ argue that the provisions under consider­ ance and life assurance policies, which it ation are justified, in particular, by the fact was necessary to preserve in order to that the revenue of companies established safeguard the cohesion of the tax system 29 in Austria is already subject in that country at issue'. In the present case, on the to a fixed tax of 34% and that it would contrary, there is no direct link between the therefore be incongruous to tax the same corporation tax and the application of revenue again when it is distributed to income tax with a reduction of 50% since, shareholders by making all dividends sub­ as in Verkooijen, '[t]hey are two separate ject to income tax. taxes levied on different taxpayers' (com­ 30 panies and shareholders). Consequently, in accordance with the principle established 26 — Paragraph 97(2) of the Law cited above. 27 — Judgments in Case C-204/90 Bachmann [1992] ECR I-249 and Case C-300/90 Commission v Belgium [1992] ECR I-305. 29 — Judgment in Verkooijen, paragraph 57; my emphasis. 28 — Judgment in Verkooijen, paragraph 56. 30 — Judgment in Verkooijen, paragraph SS.

53. However, that argument too is easily 55. In my view, that argument is without rebutted in the light of the judgment in foundation. It is clear that the provisions Verkooijen. To meet a similar argument under consideration in no way guarantee advanced in that case by the Netherlands, the efficacy of the fiscal controls, since the 'based on a possible tax advantage for less favourable treatment accorded to taxpayers receiving [in that country] divid­ foreign investment income does not in fact ends from companies with their seat in enable the authorities to ascertain whether another Member State', the Court deemed such income has been duly declared to the it sufficient to say that 'it is clear from Austrian tax authorities for assessment to settled case-law that unfavourable tax ordinary income tax. treatment contrary to a fundamental free­ dom cannot be justified by the existence of other tax advantages, even supposing that 31 such advantages exist'.

54. Lastly, the French Government argues that if the final tax or the reduced rate were 56. It follows that the factors mentioned by the Austrian and French Governments cannot justify, within the meaning of 31 — Judgment in Verkooijen, paragraph 61. Article 73d(1) of the Treaty, the restric-

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tions on the movement of capital arising domestic investment income between tax­ from the tax provisions under examination. ation at a special final fixed rate or at the It must therefore be concluded that ordinary income tax rate with a reduction Article 73b(1) of the Treaty precludes of 50%, while foreign investment income is provisions such as those under consider­ subject to ordinary income tax at the full ation, which offer a choice in respect of rate without any reduction.