C-168/01

1 — Original language: German. 3 — Cf. both the first and the third recitals in the preamble to the 2 — OJ 1990 L 225, p. 6. directive.

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OPINION OF MR ALBER — CASE C-168/01

p a n i e s a n d s u b s i d i a r i e s of different holding tax levied by the Member State Member States vary appreciably from one in which the subsidiary is resident, Member State to another and are generally pursuant to the derogations provided less advantageous than those applicable to for in Article 5, up to the limit of the parent companies and subsidiaries of the amount of the corresponding domestic same Member State; whereas cooperation tax. between companies of different Member States is thereby disadvantaged in compari- son with cooperation between companies of the same Member State; whereas it is necessary to eliminate this disadvantage by the introduction of a common system in 2. However, each M e m b e r State shall order to facilitate the grouping together of retain the option of providing that any companies'. charges relating to the holding and any losses resulting from the distribution of the profits of the subsidiary may not be deducted from the taxable profits of the parent company. Where the management costs relating to the holding in such a case 4. Article 4 of the Parent-Subsidiary Direc- are fixed as a flat rate, the fixed amount tive reads: may not exceed 5 % of the profits dis- tributed by the subsidiary'.

' 1 . Where a parent company, by virtue of its association with its subsidiary, receives distributed profits, the State of the parent company shall, except when the latter is B — National law liquidated, either:

6. Bosal Holding BV, appellant in the main action (hereinafter: Bosal), is a limited company established in the Netherlands and owner of holdings in various Nether- lands and foreign companies, the latter IV — Reference for a preliminary ruling being established both inside and outside the European Union. Those holdings range from 50 to 100 per cent of the capital share. Bosal's business consists in holding, 9. The Hoge Raad, before which the appeal financing and licensing activities. in cassation has been brought, has referred the following questions to the Court for a preliminary ruling:

7. In 1993 Bosal incurred interest charges of NLG 3 969 339 in connection with the '1. Does Article 52 of the EC Treaty, read financing of its holdings in companies in conjunction with Article 58 thereof established outside the Netherlands but (now, after amendment, Article 43 EC, inside the European Union. By an appli- read in conjunction with Article 48 cation to the competent Netherlands tax thereof), or any other rule of EC law, authority, Bosal sought a deduction of that preclude a Member State from granting amount from its taxable profit on the a parent company subject to tax in that ground that, inasmuch as only those costs Member State a deduction on costs relating to such holdings which are indi- relating to a holding owned by it only if

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the relevant subsidiary makes profits the Netherlands Wet op de Vennootschaps- which are subject to tax in the Member belasting does not infringe Community State in which the parent company is law, either because the provision contains established? absolutely no restriction on freedom of establishment or because any such restric- tion is justified.

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BOSAL

14. Bosal maintains that the Netherlands taxable profit of the subsidiary so acquired. adopted the rules in question simply for Subsidiaries which made profits in the fear of diminution of tax revenue and Netherlands and those which did not could abuse. For justification on the basis of the not be compared. principle of cohesion there must be a direct link between deductibility of the holding costs accruing to the parent company and the taxable profit of the subsidiary, which did not exist in this case because a parent 17. Double taxation was prevented both company and a subsidiary do not form one nationally and internationally by virtue of fiscal entity. Furthermore, the cohesion the exemption relating to holdings. Thai- principle was not applied in a uniform exemption was in conformity with the manner within the Netherlands system. fiscal principle of territoriality. The aim of the rules was to approximate the tax arrangements governing subsidiaries to those which govern branches.

15. The Netherlands Government con- siders that the rules in question impose 18. The Netherlands Government further absolutely no restriction on freedom of maintains that freedom of establishment is establishment. This was apparent from the not restricted by the Netherlands tax sys- very fact that they were in conformity with tem but, rather, by the fact that the State in Article 4(2) of the Parent-Subsidiary Direc- which the subsidiary is established does not tive as the Member States were even allow deduction of the holding costs granted the option in that provision of incurred by the parent company. Differ- declaring that absolutely no holding-related ences in the national legal systems did not, charges may be deducted. however, constitute a restriction on free- dom of establishment.

2 3 . The Commission adopts a different approach, proceeding from the premise that the Netherlands rules on the taxation of parent companies are, in principle, compatible with freedom of establishment. Technically, there was no discrimination 2 1 . In addition, revenue from taxation in because costs relating to holdings in either the Netherlands had been significantly resident or non-resident subsidiaries were reduced as a result of permitting deducti- always deductible provided that the taxable bility in general of holding costs, hence the profits concerned were generated in the reason for no other Member State intro- Netherlands. In practical terms however, ducing such rules without imposing a fiscal foreign subsidiaries as a rule did not levy elsewhere. generate profit in the Netherlands, and that condition could as a result operate as a restriction. Nevertheless, deduction of charges relating to holdings in respect of foreign subsidiaries was not entirely pre- cluded under the Netherlands rules because costs could, for example, be deducted 2 2 . The United Kingdom Government where the subsidiary for its part operated takes the view that the Netherlands rules a permanent establishment in the Nether- are justified by the principles of cohesion lands. The Commission takes the overall and territoriality. It maintains that the view that freedom of establishment has provision in question establishes a clear been restricted. link between the deductibility of costs and the levying of tax on profits in the Nether- lands. This was a classic case of the principle of cohesion developed by the Court in its judgment in Bachmann.4 Dispensing with the exemption relating to holdings would result in substantial double taxation. The Netherlands rules were in 24. However, interest expenses of any kind incurred in connection with financing activities had to be deductible for the 4 — Case C-204/90 Bachmann [1992] ECR I-249. purpose of determining the correct basis

26. Against that background, the Nether- lands model was permissible in the Com- 29. It will be examined below whether that mission's view. It was consistent with the view is in conformity with freedom of principle of territoriality and formed the establishment and with the previous logical conclusion to the 'profit country' decisions of the Court in that regard. approach. It therefore corresponded to the Although direct taxation is a matter for first option, laid down in the Parent-Sub- the Member States, they must nevertheless sidiary Directive, of providing that charges exercise their direct taxation powers con- relating to holdings categorically may not sistently with Community law and must be deducted, and, as a result, such charges therefore refrain from applying any form of had to be deducted in the State in which the overt or covert discrimination by reason of

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nationality or location of the corporate Bosal owns holdings ranging from 50 to seat. 5 100 per cent in the capital of companies, it exercises a proportionate influence on such companies. Freedom of establishment is consequently created.

3 1 . Under the second paragraph of Article 43 EC, freedom of establishment is subject to the exercise of freedom of movement for capital. It is evident from the wording of the second paragraph of 33. The principle of freedom of establish- Article 43 EC that the right to manage ment laid down in Article 43 EC above all undertakings is the determining criterion. precludes all direct and indirect discrimi- When assessing whether or not manage- nation on grounds of nationality. Com- ment of the undertaking concerned is con- panies or firms formed in accordance with nected with a holding, one particular con- the law of a Member State and having their sideration is the size of the holding con- registered office, central administration or cerned. Control can in any event be implied principal place of business within the in the case of a substantial holding. 7 Since Community are, in accordance with Article 48 EC, treated in the same way as natural persons who are nationals of 5 — Case C-55/00 Gottardo [2002] ECR I-413, paragraph 32, Member States. Case C-264/96 ICI [1998] ECR I-4695, paragraph 19, and Case C-279/93 Schumacker [1995] ECR I-225, paragraph 21. 6 — Joined Cases C-397/98 and C-410/98 Metallgesellschaft and 8 — Baars (cited in footnote 7, at paragraph 28), Case C-200/98 Hoechst [2001] ECR I-1727, paragraph 41. X AB and Y AB [1999] ECR I-8261, paragraph 26, and 7 — Case C-251/98 Baars [2000] ECR I-2787, paragraphs 20 to Case 81/87 Daily Mail and General Trust [1988] ECR 5483, paragraph 16.

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BOSAL

39. A terminology issue arises at this point on account of the Court's case-law, an issue which has implications in practice too. 36. Nevertheless, discrimination on Many judgments delivered by the Court grounds of nationality or seat does not with regard to taxation contain the follow- ing formula: 'It is settled law that discrimi- nation arises through the application of 9 — Case C-307/97 Compagnie de Saint-Cobain [1999] ECR I-6161, paragraph 36, Case C-264/96 ÍC1 (cited in different rules to comparable situations or footnote 5, at paragraph 20), and Case 270/83 Commission v France [1986] ECR 273, paragraph 18. 10 — Case C-279/93 Schumacher (cited in footnote 5, at paragraph 26), Case C-330/91 Commerzbank [1993] 11 — Case C-55/94 Cebhard [1995] ECR I-4165, paragraph 37, ECR I-4017, paragraph 14, and Case 152/73 Sotgiu a n d C a s e C - 1 9 / 9 2 Kraus [ 1 9 9 3 ] ECR I - 1 6 6 3 , [1974] ECR 153, paragraph 11. paragraph 32.

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the application of the same rule to different other grounds may, like other obstacles, be situations.' 12 justified by imperative requirements in the general interest.

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BOSAI

profit that is taxable in the Netherlands. In sidiary can generate profit that is taxable in positive terms, parent companies covered the Netherlands only if it has its scat or at by the above derogation obtain a tax least a permanent establishment in the benefit by having their basis of assessment Netherlands. Under the principle of terri- reduced as a result of their being permitted toriality, profits are taxed only in the State to deduct holding costs. However, the where the company has its seat. Fur- granting of that tax advantage renders less thermore, profits which have already been attractive the exercise of freedom of estab- taxed in other Member States as they lishment through the acquisition of sub- accrued there to resident subsidiaries and sidiaries which make their profit exclus- are then transferred to the parent company ively abroad, and consequently parent in the Netherlands on the basis of the companies may be deterred from such relevant agreement arc exempt from further acquisition in favour of acquiring holdings taxation in the Netherlands pursuant to the in the Netherlands. first indent of Article 4(1) of the Parent- Subsidiary Directive. The costs involved in owning holdings in subsidiaries resident in other Member States therefore cannot, in principle, be indirectly instrumental in 4 5 . The Court held in Asscher15 and making profits that are taxable in the Baars16 that a refusal to grant a single Netherlands. tax advantage may also constitute a restric- tion on freedom of establishment.

50. In support of the difference in treat- within the context of freedom of establish- ment, the Netherlands Government argues ment: that the respective situations of resident and non-resident subsidiaries cannot be compared in practical terms. However, as already established above, the location of subsidiaries is irrelevant in this case because it is parent companies, not sub- sidiaries, that are subject to the Nether- lands tax legislation at issue. The respective situations of parent companies can be compared in practical terms in that they are subject to tax in the Netherlands upon 'The legislation in question in the main acquisition of a holding, irrespective of proceedings does not allow Swedish com- whether the company acquired has its seat panies which have used their right to free in the Netherlands or in another Member establishment to form subsidiaries in other State. Member States to receive certain tax con- cessions upon a type C intra-group transfer. Thus, such legislation entails a difference of treatment between various types of intra- group transfers on the basis of the criterion of the subsidiaries' seat. In the absence of 5 1 . In Metallgesellschaft and Hoechst, 17 justification, that difference of treatment is taking as its basis circumstances which are contrary to the provisions of the Treaty the very opposite of those arising in this concerning freedom of establishment...'. case, where the subsidiary is subject to tax in the United Kingdom and its parent company is resident either in the United Kingdom or elsewhere, the Court in those circumstances ruled that the place of resi- dence of the parent company may not lead to a difference in tax treatment for the subsidiary.

54. Since Member States are entitled under 56. A central issue in the directive is the the Parent-Subsidiary Directive categori- non-taxation of profits distributed from cally to disallow deduction of holding subsidiaries to parent companies. This is costs, some of the parties take the view clear from the fact that that measure is not that that provision in itself justifies the only contained in the first indent of Netherlands rules. Cases where Member Article 4(1) but is also mentioned as early States disallow deductibility only to a as in the fourth recital in the preamble to certain degree are considered by those the directive. To compensate somewhat for parties to be somewhat of a disadvantage. the requirement imposed by that provision It is necessary to examine whether that that Member States forgo the revenue from view is in conformity with the substance, taxation, in Article 4(2) the Community spirit and purpose of the Parent-Subsidiary legislature conferred on the Member States Directive. the right in general to disallow deduction of holding costs for tax purposes, which constitutes unfavourable tax treatment for companies.

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However, if it did lay down a derogation to the same taxpayer, between the grant of a that effect, it would then be necessary to tax advantage and the offsetting of that examine whether or not the directive itself advantage by a fiscal levy, both of which offended against the principle of freedom of related to the same tax...'. establishment, a principle enshrined in primary legislation within the Treaty.

62. Also in Baars 22, the Court pointed out 59. The Netherlands rules are therefore that there was no direct link or purpose of inconsistent with Article 4(2) of the direc- safeguarding cohesion where 'different tax- tive. payers' were concerned.

60. The principle of cohesion of the tax 63. The Netherlands rules establish a link system was raised as a further essential between a tax advantage benefiting the ground to justify the difference in tax parent company, in the form of deductibil- treatment. In its judgments in Bachmann 19 ity of holding costs, and the option of and Commission v Belgium 20 and in its levying tax on the subsidiary. As far as the more recent decisions the Court has con- Netherlands Government and the United sistently held that such cohesion presup- Kingdom Government are concerned, that poses a direct link between the grant of a link creates the cohesion of the system. tax advantage and the offsetting of that advantage by a fiscal levy, both of which relate to the same tax.

liable for its permanent establishment, it has made in that State. However, under whereas a parent company is not required the Netherlands system, deductibility of in the same way to assume liability for the holding costs in the levying of tax on one losses incurred by its subsidiary. person is subject to another person, that is to say the subsidiary which is to be distin- guished from the parent company, making profit in the Netherlands. It is none the less impossible to deduce from the territoriality 65. Thus, the criterion, required by the principle that the profits and losses Court, that there should be a direct link accruing to different taxpayers can be offset where the same tax is concerned, is not against each other. met. The linking of costs incurred by one taxpayer with the fiscal levy imposed on a different taxpayer cannot create a cohesive system. 68. The cohesion of the system is, in actual fact, safeguarded by the provisions of the Parent-Subsidiary Directive. Article 4( 1 ) of the directive, under which the levying of tax a second time on profits transferred 66. Furthermore, the fiscal principle of from subsidiaries may be dispensed with, territoriality, to which the Court referred establishes a tax advantage for parent in Futura Participations and Singer, 23 can- c o m p a n i e s . T o offset t h a t m e a s u r e , not be relied on in this case to substantiate Article 4(2) of the directive introduces, in cohesion of the system. The facts forming the form of a tax burden on parent com- the basis of that judgment cannot be panies, the option of non-dcductibility in compared with the facts of this case. Futura respect of holding costs which have led to Participations and Singer involved a per- such profits. manent establishment of a foreign company which was located in Luxembourg and subject to tax there. Under the Luxembourg rules, the carrying forward of losses upon taxation in Luxembourg was subject to the condition that those losses should be 69. As a result of the measure contained in related to the profit made by the permanent Article 4 of the directive, double taxation is establishment itself. prevented and, unlike under the Nether- lands a r r a n g e m e n t , parent companies which have subsidiaries abroad arc not placed at a disadvantage in terms of deductibility of costs. In Article 13 of the Wet op de Vennootschapsbelasting lhe 67. That condition is consistent with the Netherlands legislature prevents double principle of territoriality under which, on taxation by introducing exemptions for levying tax on a taxpayer who carries on an holdings, a measure consistent with the economic activity within a State, account is fundamental objective of Article 4 of the (can be) taken only of the profits and losses directive. Under that exemption, neither the profits nor the costs of a holding arc taken into account in determining the profit 23 — C a s e C-250/98 Futura Participations and Singer | 1 9 9 7 | ECR I-247], paragraph 22. of the parent company. However, the other

provisions, which grant preferential treat- 72. It is consequently established that equal ment exclusively to parent companies that treatment as between undertakings of the have resident subsidiaries, have no bearing same State and undertakings of different on prevention of double taxation. States is the prerequisite for a set of rules laid down by the Netherlands legislature that is consistent with Community law. Whether the legislature in that respect specifies whether or not the holding charges can be deducted, in a uniform manner, from the profit of the parent company is a 70. Moreover, the Netherlands Govern- matter that Article 4(2) of the Parent-Sub- ment argues that the rules are justified by sidiary Directive fails to address. their objective to maintain the level of tax revenue. On the one hand, the Court has on a number of occasions already held in this regard that diminution of tax revenue is not one of the grounds of justification listed in Article 46 EC and cannot be regarded as a matter of overriding general interest that may be relied upon in order to justify 73. I should like to emphasise once more unequal treatment which is, in principle, that the Community legislature in this incompatible with Article 43 EC. 24 respect deals with situations where holding costs are not taken into consideration when it comes to taxing either the parent com- pany or the subsidiary. This is apparent from the fact that the directive expressly permits the Member States to preclude deduction from the profits of parent com- 71. On the other hand, however, this case panies but does not provide that the costs specifically concerns a provision that intro- accruing can in that event be charged to the duces a disadvantage in that it reduces the subsidiary. tax burden only for certain individuals, and this cannot be justified by the objective of maintaining tax revenue. The Netherlands retain the right to disallow in all cases the deduction of holding costs from taxable profits pursuant to Article 4(2) of the Parent-Subsidiary Directive. In those cir- 74. The answer to the first question cumstances tax revenue is increased rather referred should therefore be that, on a than diminished. As the Commission proper construction, Article 43 EC, in explained in its written answer of 14 June conjunction with Article 48 EC, precludes 2002 to the question raised by the Court, national rules which provide that a Austria for example applies such an Member State may grant a parent company arrangement. subject to tax in that Member State a deduction on costs relating to a holding owned by it provided that the relevant 24 — Metallgesellschaft and Hoechst (cited in footnote 6, at subsidiary makes profits that are subject to paragraph 59), Compagnie de Saint-Gobain (cited in tax in the Member State in which the footnote 9, at paragraph 51) and ICI (cited in footnote 5, at paragraph 28). parent company is established. I - 9426

76. The Netherlands Government con- siders that the second question is irrelevant because in this case it is a parent company, not a subsidiary, that is seeking deduction of costs from its profit. It claims that the 79. It has been established with regard to first and second questions referred should the first question that the situation under- be answered separately because the circum- lying the Netherlands rules, namely the stances forming the basis of each question refusal in general to allow deduction of are not comparable. The Netherlands could holding costs, constitutes a coherent set of not, in its view, be held responsible for rules which is also compatible with the preventing every case of double taxation as, Parent-Subsidiary Directive. The deroga- in the situation described in question 2, it is tion laid down in the provision, that a tax for the State in which the foreign parent advantage is to be granted to parent com- company is established to ensure such panies having subsidiaries that make profits prevention. The problem arose out of the in the Netherlands, is the only measure that disparity between the tax systems and the undermines the cohesion of the system by fact that harmonisation, albeit desirable, placing parent companies that have foreign had not as yet been achieved. subsidiaries at a disadvantage.

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82. Where it is considered necessary for the holding costs to be deductible at all, rules under which such costs must be deducted from the profits of subsidiaries could be no more than a supplement to the system under the Parent-Subsidiary Directive. In that case, however, it would be necessary, 84. The answer to the second question for the purpose of equal treatment, to referred should therefore be that it makes facilitate the uniform application of that no difference to the answer to Question 1 measure across the Community. According whether, where the subsidiary is subject to tax based on its profits in the Member State concerned but the parent company is not, 25 — Verkooijen (cited in footnote 21, at paragraph 61), Com- the relevant Member State takes account of pagnie de Saint-Gobain (cited in Footnote 9, at the abovementioned costs in levying tax on paragraph 54), Commission v France (cited in footnote 9, at paragraph 21). the subsidiary.

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VI — Conclusion

85. In the light of the foregoing considerations, I propose that the Court should answer the questions referred by the national court as follows:

(1) On a proper construction, Article 43 EC, in conjunction with Article 48 EC, precludes national rules which provide that a Member State may grant a parent company subject to tax in that Member State a deduction on costs relating to a holding owned by it provided that the relevant subsidiary makes profits which are subject to tax in the Member State in which the parent company is established.