C-436/00

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foreign legal person in which the transferor between market value and acquisition or his kin directly or indirectly has a value is taxable if the transfer is to a holding shall be treated as though the asset foreign legal person or to a Swedish com- were disposed of for a consideration equiv- pany in which such a person either directly alent to the market value. The same shall or indirectly has a holding. However, if the apply in the case of a transfer to a Swedish transfer is to a Swedish company with no limited company in which such a foreign foreign ownership there is no immediate legal person either directly or indirectly has taxation. In such cases the amount of the a holding. difference is typically seen as subject to tax when the transferor disposes of his shares in the company to which the holding was transferred. Thus, as a rule taxation is deferred until the holder's property is ultimately disposed of.

owned. The rules were therefore amended 9. In the present case, the request for a so as to cover transfers both to foreign legal preliminary decision concerned the tax persons in which the transferor or his kin implications of the transfer by X and Y of directly or indirectly had a holding and to a their shares in X AB, a Swedish company, Swedish legal person in which such a to Z AB, another Swedish company, which foreign legal person directly or indirectly was in its turn a subsidiary of Y SA, a had a holding. Belgian company.

6. Finally, the national court notes that from the 2002 tax year (income earned in 2001) income tax law 1999:1229 will apply in place of the SIL. That law contains 10. X AB is the parent company in a group provisions identical to those of the SIL that currently owned in equal shares by x and Y are relevant to the present case. and a Maltese company. X and Y have no proprietary interest in this latter company. Y SA is also a parent company owned by the present owners of X AB. On a restruc- turing of the group, x and Y deemed it expedient to transfer certain activities to Y SA.

I I — Facts in the main proceedings and the question referred for a preliminaryruling

12. In its preliminary decision, delivered on 16. It is against that background that the 27 September 1999, the Skatterätts- Regeringsrätten decided to refer the follow- nämnden held that the transfer of shares ing question to the Court for a preliminary in X AB should be treated as a transfer for ruling: consideration equivalent to market value and that X and Y should thus be taxed on a gain equivalent to the difference between the market value of the shares and their acquisition cost. 'In a situation such as that in the present case, do Articles 43, 46, 48, 56 and 58 EC preclude the application of a Member State's legislation which — like the rel- evant Swedish legislation — has the effect that a capital contribution in the form of a 13. The Skatterättsnämnden also held that transfer of shares at undervalue is taxed less freedom of establishment was not at issue advantageously if the contribution is to a and, as regards free movement of capital, legal person which is domiciled in another that the exception in Article 58(1)(a) EC Member State and in which the transferor was applicable. directly or indirectly has a holding or to a domestic limited company in which such a legal person has a holding, than would have been the case if there had been no such foreign proprietorial interests?'

14. X and Y appealed against this decision to the Regeringsrätten (Supreme Adminis- trative Court) claiming, inter alia, that the Regeringsrätten should declare that the transfer should be taxed on the basis of the proposed transfer price. I I I— Assessment

cation to the administration, has not yet Existence of a restriction on freedom of taken place. It adds, however, that since an establishment action is pending before the national court and the Court has at its disposal sufficient information for a preliminary ruling, the question posed should receive an answer. 21. The Riksskatteverket considers that the fundamental freedoms conferred by the Treaty have no bearing on this case since it concerns a situation internal to a Member State and cites the Werner judg- 18.1 share this view. ment 3in support. Thus, it takes the view that the present case concerns an amend- ment of the rules governing the pursuit of an economic activity in Sweden which, after the rules had been amended, con- tinued to be pursued in that country. 19. In fact, the Court has already had occasion, in a similar case, 2to rule on the way in which the preliminary decision procedure followed in the main proceed- ings should be assessed in the light of the criteria laid down in previous decisions 22. However, the fact remains that this concerning the conditions of application of argument does not suffice to preclude the Article 234 EC. On that occasion it held application of the rules of the Treaty in this that the fact that the transaction envisaged particular case. It is clear from the order for by the applicants in the main proceedings reference that the tax treatment of the had not yet taken place did not preclude the transaction in question depends on the existence of a genuine dispute before the existence of an element foreign to Sweden, national court. namely the fact that the parent company or shareholders of the transferee company are established in another Member State. It is therefore apparent that the main proceed- ings cannot be considered to concern a purely domestic situation. 20. The same line of reasoning should be followed in the present case. Far from being called upon to rule on a hypothetical problem, the Court has been invited to interpret rules of Community law that are to be applied to a genuine dispute and it is clear from the documents before the Court 23. However, it is still necessary to deter- that it has sufficient information to give a mine the extent to which the Treaty rules helpful answer to the question submitted to are affected by the national measure at it. issue. According to the order for reference,

24. Any gains generated by such a trans- action are subject to immediate taxation when the transferee company is a foreign legal person or a Swedish limited company 28. I share this view. The case-law 5shows in which that foreign legal person directly or indirectly has a holding. that the provisions of the Treaty concerning freedom of establishment are also appli- cable to national rules that could deter traders from the Member State concerned from establishing themselves in another Member State. The national rule at issue could in fact deter investors such as X and 25. On the other hand, if the transferee is a Y from exercising their right to establish limited Swedish company without such a themselves in another Member State by foreign legal person among its share- acquiring significant holdings in companies holders, then taxation is deferred. Clearly, established there, since the treatment of this has cash-flow advantages for the trans- transfers to such companies is less favour- feror. able than the treatment applicable to com- panies established in Sweden without foreign shareholders.

26. There can therefore be no doubt that, all other things being equal, a transfer to a Swedish limited company is accorded more 29. However, that is not the only restric- favourable tax treatment than one made to tion on freedom of establishment discern- a non-Swedish company or a Swedish ible in this case. As the Commission and the company with foreign shareholders. EFTA surveillance authority also point out, the national measure in question could also restrict the right of establishment in Sweden of a foreign company, such as the Belgian company in the main proceedings.

30. In these circumstances, the EFTA sur- veillance authority is also right to point out 34. The Riksskatteverket argues that the that the differential treatment in question advantage enjoyed by Swedish companies, could deter foreign companies from open- that is to say deferred taxation of the ing a secondary establishment in Sweden. transfer, should be placed in the context of the tax treatment of capital gains. Thus, the granting of the advantage presupposes that the capital on which tax is thus deferred remains taxable in Sweden. If the transfer were made, directly or indirectly, to a foreign company, a subsequent transfer of the same shares by the latter could not be 31. Moreover, the Court has held that a taxed in Sweden. This is why foreign difference in treatment with respect to the companies are not allowed to benefit from moment at which tax becomes payable the deferral of tax. depending on whether or not the com- panies in question are resident in a given Member State is a restriction on freedom of establishment. 6

35. Citing, inter alia, as does the Nether- lands Government, the judgment in Bach- mann, 7 the Riksskatteverket considers that the difference in treatment can be justified, inter alia by the need to ensure the cohesion 32. It follows from the above that, in this of the tax system and effective fiscal con- particular case, we are confronted with trol. In principle, a Member State has the such a restriction. right to expect that sooner or later latent

6 — Judgment of 8 March 2001 in Joined Cases C-397/98 and 7 —Judgment of 28 January 1992 in Case C-204/90 [1992] C-410/98 Metallgeselhchaft andOthers [2001] ECRI-1727. ECR1-249.

38. According to the Netherlands Govern- ment, in the event of transfer to a company 41. For its part, the Riksskatteverket also established abroad or to a Swedish com- argues that, as the difference in treatment pany in which such a company holds under the national measure concerned can shares, this eventual taxation is not guar- be justified on the basis of the provisions of anteed and therefore no temporary exemp- the Treaty relating to the free movement of tion should be granted. The tax debt is guaranteed only for as long as the trans- 8 — Judgment of 28 April 1998 in Case C-118/96 [19981 feror continues to reside in Sweden and is ECR I-1897.

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capital, inter alia Article 58(1) and (2) EC, 45. Nor am I convinced by the argument it follows from the last sentence of the based on the need to prevent the erosion of second subparagraph of Article 43 EC that the tax base or close a tax loophole. The the measure cannot be declared unlawful settled case-law of the Court shows that under Article 43 EC. such economic considerations may not be relied on to justify a restriction on a fundamental freedom of Community law, such as freedom of establishment.

42. What are we to make of these various arguments?

46. In various judgments, 10 the Court has expressly held that 'reduction in such tax revenue cannot be regarded as an overrid- 43. As regards the argument that restric- ing reason in the public interest which may tions on freedom of establishment can be be relied on to justify a measure which is in justified on the basis of the provisions of principle contrary to a fundamental free- the Treaty relating to the free movement of dom'. 11 capital, there can be no escaping the fact that it is inconsistent with the previous decisions of the Court.

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49. However, it follows from the settled 52. I note with some surprise the Rikss- case-law 12 of the Court that, for such katteverkets suggestion that this is a case justification to be upheld, not only should of attempted fraud. I fail to see how the the measure in question be of such a nature mere fact that X and Y resorted to the as to ensure the achievement of its aim, it preliminary decision procedure can be should also not restrict fundamental free- regarded as an indication of an intention doms of Community law any more than is to evade tax, especially as the purpose of necessary for that purpose. such a decision is to enable the taxable person to assess in advance the tax impli- cations of the operation he has in mind.

50. It does not seem to me that this 53. In any event, it would be for the proportionality requirement is met in this national court — which, however, in its particular case. As the Commission also order for reference, makes no allusion to points out, the national rule at issue, which this issue — to rule on this point. treats less favourably any transaction invol- ving a foreign element, is tantamount to presuming evasion or abuse as soon as a transaction involves a company established in another Member State, or even a Swed- ish company with a natural person estab- lished in another Member State as a shareholder. 54. It follows from the explanations pro- vided at the hearing by the Swedish Gov- ernment itself that the purpose of the measure is to prevent the transferor of the shares from evading Swedish tax on the gain by moving abroad. Thus, the measure is clearly disproportionate to its objective.

56. Thus, in my opinion, while the lack of proportionality seems obvious in a case such as this in which both the transferor and the transferee remain in Sweden, it is 60. Moreover, as the EFTA surveillance also present where the transferee company authority pertinently observes, the Swedish is established in another Member State. legislation makes no distinction according to the tax burden of the transferee company in its country of establishment nor accord- ing to whether the transferor is the sole shareholder or a majority or minority shareholder in the foreign transferee com- pany. 57. While it is true that this is not the situation at issue in the main proceedings, such a situation is also covered by the national measure on which the Court has been asked for a preliminary ruling by the referring court, whose task it is to assess both the necessity and the relevance of the question posed. 61. Clearly, the probability, and even the possibility, of evasion or purely artificial arrangements will vary significantly depending on these considerations. Accord- ingly, a proportionate measure should take them into account. 58. I therefore consider it appropriate to make the following observations.

62. Thus, the disproportionate nature of 59. Even if the transferee company is the national measure at issue means that it established in another Member State, the cannot be regarded as justified by the need tax collection problem cited by the Swedish for fiscal control.

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63. It remains to consider the argument pointed out, the economic activity to which based on the need to safeguard the cohesion the transaction relates continues to be of the Swedish tax system. carried out in Sweden, with whose territory the assets contributed, namely shares in a Swedish company, continue to be linked.

65. I am forced to conclude that in reality, in the present case, this concept seems intended to meet the need for fiscal control, 68. Moreover, in Bachmann, a national which I have just examined. legislative provision, to which the Court attached decisive importance, explicitly provided for the non-taxation of sums paid by the insurance company when the con- tributions were non-deductible. In the present case, there is no equivalent provi- 66. Moreover, there is an important dif- sion expressly linking the advantage of ference between the case which forms the deferred payment of tax to cases in which subject of the main proceedings and Bach- it is certain that tax would eventually be mann, which is relied on by the Kingdom of collected. the Netherlands and the Riksskatteverket. In the latter, there was a likelihood of the beneficiary of the insurance payments leav- ing the national territory, thus breaking all links between that territory and the per- formance of the insurance contract, since the insurance company was established in 69. It is also necessary to bear in mind the another Member State. On the other hand, case-law of the Court according to which in the present case, as the Riksskatteverket the cohesion of the tax system does not itself, in another context, has already necessarily have to be ensured within a

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purely national context. Possible double mutandis, that the national measure at taxation agreements should also be taken issue restricts the right of establishment into account. 14 It follows from the infor- beyond what would be justified by the need mation provided during the hearing that to preserve the cohesion of the tax system. the double taxation agreement between the Kingdom of Belgium and the Kingdom of Sweden, which entered into force on 24 February 1993, could be relevant in so far as it divides the taxation of capital gains 72. Accordingly, that argument in favour between the two contracting States. The of the national measure concerned should same is probably true of other agreements also be rejected. of this type between the Kingdom of Sweden and other Member States.

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76. There can be no disputing the fact that 80. Moreover, in any event, Article 58(3) the free movement of capital has been EC states that such national provisions are restricted, since the Swedish law is liable to not to constitute a means of arbitrary deter an investor established in Sweden discrimination or a disguised restriction from contributing shares to a company on the free movement of capital and established in another Member State, as he payments and hence should comply with would then be deprived of the benefit of the principle of proportionality. deferred taxation that he would have were he to make a contribution to a company established in Sweden. Moreover, it is also liable to deter a foreign operator from investing in a Swedish company since that company would then have a shareholder 81. For the reasons mentioned above, it established in another Member State and appears that this condition is not fulfilled in investors established in Sweden might this particular case. therefore be deterred from contributing capital to it.

82. It must therefore be concluded, in the alternative, that the provisions of the 77. There is no doubt that these are Treaty relating to the free movement of movements of capital within the meaning capital preclude legislation such as that at of Community law. issue in this case.

83. In the light of the above, the answer to 78. It is to no avail that the Riksskattever- the question submitted by the Regerings- ket invokes Article 58 EC. rätten should be that:

'In a situation such as that in the present 79. In this respect, it should be noted that, case, Articles 43 EC to 48 EC preclude the by virtue of Declaration No 7 annexed to application of a Member State's legislation the Maastricht final act, national provi- which — like the relevant Swedish legis- sions forming the proper subject of lation — has the effect that a capital con- Article 73d(1) of the EC Treaty (now tribution in the form of a transfer of shares Article 58(1) EC) must have existed at the at undervalue is taxed less advantageously end of 1993, whereas the national measure if the contribution is to a legal person at issue was introduced after that. which is domiciled in another Member

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