C-58/01

OPINION OF MR TIZZANO — CASE C-58/01

OPINION OF ADVOCATE GENERAL TIZZANO delivered on 23 January 2003 1

1. By order of 12 February 2001 the I — Legislative background presiding Special Commissioner for the special purposes of the United Kingdom Income Tax Acts (the 'Special Commis- sioner') referred to the Court of Justice for a preliminary ruling a question on the interpretation of Council Directive 90/435/EEC of 23 July 1990 on the com- mon system of taxation applicable in the case of parent companies and subsidiaries of different Member States ('Directive 90/435' or 'the Directive'). 2 Essentially, the Special Commissioner is asking the Court whether the 5% charge provided for by Article 10(3)(a) of the Convention A — Community legislation between the United Kingdom of Great Britain and Northern Ireland and the Kingdom of the Netherlands for the Avoid- ance of Double Taxation and the Preven- tion of Fiscal Evasion with respect to Taxes on Income and Capital Gains concluded in the Hague on 7 November 1980 and subsequently amended by the Protocol adopted in London on 12 July 1983 ('the double taxation convention' or 'DTC') is compatible with the Directive. 2. Directive 90/435 sets up a common system of taxation applicable to parent companies and subsidiaries of different Member States, laying down minimum rules for the coordination of national tax systems. As is clear from the first three recitals of the preamble, this was in order to ensure the fiscal neutrality of cross- border distributions of dividends and thus to prevent cooperation between companies in different Member States from being disadvantaged in comparison with that 1 — Original language: Italian. between companies in the same Member 2 — OJ 1990 L 225, p. 6. State.

B — The national legislation

'Profits which a subsidiary distributed to its parent company shall, at least where the 6. The national legislative framework, latter holds a minimum of 2 5 % of the which is fully explained in the order for capital of the subsidiary, be exempt from reference, is rather complicated: it is suffi- withholding tax.' cient here to sketch its main features.

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7. According to the order for reference, resident there for tax purposes was entitled, under the English legislation in force at the on receipt of dividends from a British material time, and, in particular, under the company, to a tax credit equal to the Income and Corporation Taxes Act 1988 amount of the ACT paid by the company ('ICTA'), a company resident in the United which distributed the dividends. The com- Kingdom, or trading there through a pany in receipt of dividends set off that branch or agency, was chargeable to cor- credit against its own corporation tax debt, poration tax, a tax on profits charged on while the dividends received by it were the basis of an accounting period of 12 excluded from its basis of assessment for months. corporation tax. Where the recipient was an individual, he was liable to income tax on the dividend received, but could then set off the tax credit against income tax he owed.

14. Finally, Article 22(2)(c) of the DTC provides: 12. Article 10(3)(a)(ii) of the DTC pro- vides:

'... the Netherlands shall allow a deduction from the Netherlands tax so computed for the items of income which according to [Article 10(3)] of this Convention may be 'Where a [company] resident of the Nether- taxed in the United Kingdom to the extent lands is entitled to a tax credit in respect of that these items are included in the basis such a dividend under subparagraph (c) of referred to in sub-paragraph (a) of this this paragraph tax may also be charged in paragraph. The amount of this deduction the United Kingdom, and according to the shall be equal to the tax paid in the United laws of the United Kingdom, on the Kingdom on these items of income, but aggregate of the amount or value of that shall not exceed the amount of the reduc- dividend and the amount of that tax credit- tion which would be allowed if the items of at a rate not exceeding 5%.' income so included were the sole items of income which are exempt from Nether- lands tax under the provisions of Nether- lands law for the avoidance of double taxation.'

13. Article 10(3)(c) of the DTC then pro- vides:

II — Facts, procedure and questions referred '... a company which is a resident of the Netherlands and receives dividends from a company which is a resident of the United Kingdom shall,... provided it is the benefi- 15. Océ van der Grinten NV ('Océ NV' or cial owner of the dividends, be entitled to a 'Océ'), is a company resident in the Nether-

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3. If the 5 % charge is preserved only as a consequence of Article 7(2) of the 17. As it considered that the tax imposed Directive, is Article 7(2) invalid for on it pursuant to Article 10(3)(a) of the want of reasoning or failure to consult D T C was contrary to Article 5(1) of the ESC and the European Parliament, Directive 90/435, as a withholding tax on with the result that it does not have the the dividends paid by its subsidiary, Océ effect of preserving the right of the NV appealed against the decision of the United Kingdom to charge the 5 % tax?

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18. In addition to the parties to the main holding tax within the meaning of the proceedings, the United Kingdom and Ita- Directive. It seems to me, as it does to all lian Governments, the Commission and the the interveners, that that classification is Council intervened in these proceedings the only one which is consistent with the before the Court of Justice. case-law of the Court.

I I I— The questions referred 21. In the past, when called upon to inter- pret Article 5(1) of the Directive, the Court has held that a 'withholding tax' within the meaning of the directive is any tax on income levied in the State in which divi- dends are paid and 'for which the charge- able event is the payment of dividends or of A — The first question any other income from shares' and if 'the taxable amount is the income from the shares and that the taxable person is the holder of the shares' 3irrespective of its classification under national law. 4 19. As regards the first question, I consider that the nature of the 5% charge applied under Article 10(3)(a) of the DTC in so far as it is applied to dividends and its nature in so far as it is applied to the tax credit must be defined separately.

26. However, I take the view that, in so far as it is applied to the income tax credit 24. As the Court made clear in its judgment granted by the UK Inland Revenue to the in Athinaïki,5 withholding tax is essentially Dutch parent company, that charge does a neutral fiscal instrument if the parent not constitute a withholding tax. company is established in the State in which the subsidiary is established, since the tax authorities take account, on tax- ation of the profits of the parent company, of the tax already withheld. However, withholding tax gives rise to 'economic' double taxation where the company in receipt of the reduced dividend is resident 27. The opposite view taken by Océ is in a different State, because in that other based on the argument that a tax credit granted on the distribution of dividends is a capital gain absolutely comparable to a 5 — Athinaïki, cited above, paragraph 7. 'profit' derived from a shareholding in a I-9818

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31. As regards the first point, I must point 29. The purpose of that provision, as I out that, far from representing a gain from pointed out above, is the elimination or its holding in the capital of the company, the tax credit which the UK Inland Revenue grants to the parent company in receipt of 6 — According to the appellant in the main proceedings, that the dividend on the basis of the payment of conclusion is essentially upheld by the Court in its judgment in Epson Europe, cited above, paragraph 23, and by the ACT by the subsidiary represents a monet- Opinion of Advocate General Cosmas in that case, point 48. ary bonus falling within the English system

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35. It follows that the charging to tax of the tax credit does not entail economic double taxation and, therefore, is not inconsistent with the prohibition on with- holding tax laid down by the Directive. 33. I now turn to the second point, that is to say the assessment of the effects of taxation of the tax bonus. To establish whether such effects are inconsistent with the prohibition on withholding tax under 36. That conclusion is confirmed, more- the Directive we must bear in mind first over, by the consideration that, in the that the prohibition is intended to prevent the dividend from being charged to tax in the State in which it is paid, given that it 7 — Note that, in the present case, in respect of an ACT payment will serve to increase the tax debt of the of approximately GBP 4 348 000 which Océ UK paid to the recipient in the State in which it is resident UK Inland Revenue, the Revenue granted to Océ NV a tax credit of approximately GBP 1 400 000, with the contested (see above, point 24). In other words, the 5% charge deducted. The group's tax burden resulting from British corporation tax was thus reduced by approximately function of the prohibition is to ensure the one third.

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40. In support of its argument Ocė first 38. In conclusion, I believe that the Court's contends that the charge in question does answer to the first question should be that not meet the requirements of any of the t h e 5 % c h a r g e p r o v i d e d f o r by derogations provided for by other provi­ Article 10(3)(a)(ii) of the DTC constitutes sions of the directive, nor, so far as a withholding tax on profits distributed by m a t e r i a l , can it be justified u n d e r a subsidiary to a parent company within Article 7(2). As Advocate General Alber the meaning of Article 5(1) of Directive pointed out in his O p i n i o n in Case 90/435, in so far as it is applied to divi­ C-294/99 (cited above, point 41), that dends, whereas it does not constitute such a article does not seek to preserve all provi­ tax in so far as it is applied to the tax credit. sions of double taxation agreements, but

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only those provisions actually intended to a reading, Océ concludes, would, more- avoid double taxation. In the present case, over, be consistent with the requirement to however, the 5% charge, imposing an interpret Article 7 strictly which emerges additional withholding tax on the amount from the case-law of the Court. 8 of the dividend and the tax credit, is calculated to impose or increase double taxation.

43. As I have said, the United Kingdom, the Commission and the Italian Government take the opposite view. In their opinion, the levying of a withholding tax pursuant to Article 10(3)(a)(ii) of the DTC falls within 41. Moreover, Océ goes on to argue, even the derogation provided for by Article 7(2) if the effect of that charge were neutral, in of the Directive, essentially because it must so far it is possible to deduct payment of not be considered in isolation but as an that British tax from the income tax owed essential part of a system which, as a to the Netherlands tax authorities pursuant whole, pursues the same objective as the to Article 22 of the DTC, we could not then Directive. say that Article 10(3)(a) of the DTC in itself pursues the objective of preventing double taxation. Thus, the provision cannot be justified under Article 7 of the Directive from that point of view either.

46. In particular, in my view one must consider together the wording of subpara- graph (c), which provides for the tax credit vis-à-vis the UK Inland Revenue, and that of subparagraph (a), which lays down its 48. Wc can also assume, disregarding the amount, reducing it by 5%. Only in that provisions of Article 22 of the DTC, that way can we fully understand a system, such the lessening of double taxation would be as that established by the convention, more marked if the 5% charge were not which grants a tax credit to a foreign applied. However, even if we wanted to company which otherwise would have no pursue that argument, we would have to right to it on the basis of the common rules. acknowledge, as the United Kingdom and A system, therefore, which, as is fully the Italian Government point out, that the consistent with the objectives pursued by Directive does not require either complete the Directive at Community level, has abolition of double taxation nor its reduc- precisely the aim of lessening the effects tion to an agreed minimum level, so that of economic double taxation resulting from the limitation of the positive effects of the the coexistence, in the two contracting tax credit cannot be said to be contrary to States, of different tax systems. the Directive.

49. I would add, finally, that an interpre- 47. Moreover, Article 10(3) of the DTC tation like that upheld by Océ would itself must in turn not be read in isolation ultimately deprive Article 7(2) of all sig- but in the light of Article 22(2)(c) of the nificance. There would be no sense in convention. As we saw above (points 14 'preserving' the provisions of conventions and 36), that provision requires the Nether- which seek to reduce double taxation only lands tax authorities to grant a tax credit, if they are fully consistent with the relevant in favour of the British parent company, provisions of the Directive: on that inter- corresponding to that paid pursuant to pretation, Article 7(2) would be a wholly Article 10(3)(a) of the DTC. Therefore, and superfluous provision.

54. On its second point, Océ argues that, in C — The third question its original formulation, Article 7 of the Directive contained only provisions relating to the consolidation of profits and that in the final version of the Article those provisions were deleted. The opinion of the Parliament and the Economic and Social Committee was obtained only on 5 1 . By its third question, which is, of the original and not on the final version. course, put in the alternative, the referring That represents a breach of essential pro- court asks whether Directive 90/435 is cedural rules because the differences vitiated by breach of essential procedural between the two versions were not negli- rules and therefore invalid, in so far as, gible and therefore called for a second under Article 7(2), it may exempt national opinion from the two bodies. taxes which are in principle unlawful from the prohibition on withholding tax in its Article 5(1).

52. All the parties propose that that ques- 55. I must say at the outset that I do not tion should be answered in the negative, consider that the Directive is vitiated by apart from Océ, which maintains that the breach of essential procedural rules, neither Directive must be considered invalid, in as regards the reasons stated, nor as regards that respect, for want of reasoning and the consultation of the European Parlia- failure to consult the Economic and Social ment and the Economic and Social Com- Committee and the European Parliament. mittee.

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59. Like the Commission, the Council and the United Kingdom Government, how- ever, I, too, think that the effect of the introduction of Article 7(2) was not to change the 'essence' of the Directive, but only to make a technical adjustment to its 57. In the present case, it seems to me that structure, allowing specific national rules the United Kingdom, the Commission and to be preserved provided they are consistent the Council are right to point out that the with the objective of the Directive. Thus, in statement of reasons in the Directive clearly the light, too, of the answers I proposed to indicates its general objective, that is to say, the previous questions, it seems to me that I fiscal neutrality of cross-border distribution can say that such an amendment did not of profits, and that that is sufficient to require a second opinion of the Parliament cover the clause preserving the provisions and the Economic and Social Committee. of the convention which pursue the same objective, that is to say, Article 7(2) of the Directive.

60. In conclusion, I consider that the 58. As regards the failure to consult the examination of the third question did not European Parliament and the Economic disclose formal and procedural defects and Social Committee, it is true that, liable to call into question the validity of Article 7(2) of the Directive.

9 — Case C-150/94 United Kingdom v Council [1998] ECR I-7235, paragraphs 25 and 26, and Case C-168/98 Lux- 10 — Inter alia. Case C-392/95 Parliament v Council [1997] embourg v Parliament and Council [2000] ECR I-9131, ECR I-3213, paragraph 15, and Case C-408/95 Eurotun- paragraph 62. nel 11997] ECR I-6315, paragraph 46.

(3) Examination of the third question did not disclose formal and procedural defects liable to call into question the validity of Article 7(2) of the Directive.

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