The Court upholds the Commission's decision
The German Income Tax Act ("the EStG") allows natural persons residing in Germany and legal persons having their registered office in Germany the benefit of a deduction of any profit from the sale of company shares on, in particular, the purchase of new shares in capital companies.
The 1996 annual Tax Act extended the opportunity to make that deduction to the financial years 1996, 1997 and 1998; it provides that up to 100% of the gain may be set off against increases in capital or the setting-up of new capital companies having their registered office and their central administration in one of the new Länder or in West Berlin and having no more than 250 employees.
By decision of 21 January 1998 the Commission found that that tax concession constituted State aid incompatible with the common market and that Germany must ensure that the aid unlawfully granted should be repaid.
Germany is seeking the annulment of the Commission's decision before the Court.
The Court of Justice today rejects that application
The Court notes that the contested decision classifies the tax concession as State aid only in so far as, through the investments which it encourages, it favours certain undertakings situated in the new Lander or West Berlin, which prevents it from being a general measure of tax or economic policy.
The Court notes that measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without therefore being subsidies in the strict sense of the word, are similar in character and have the same effect are considered to constitute aid. The Court finds that the origin of the advantage indirectly conferred on the undertakings is the renunciation by the Member State of the tax revenue which it would normally have received, inasmuch as it is this renunciation which has enabled investors to take up holdings in those undertakings on conditions which are in tax terms more advantageous. The Commission was therefore right, according to the Court, to consider that the tax concession entailed a transfer of State resources.
As regards the risk of distortion of competition, the Court finds that the German Government has not demonstrated that the Commission erred in its assessment: the effect of the German legislation is indeed to reduce the costs of certain financing charges for the undertakings in question. In principle, operating aid which is intended to release an undertaking from costs which it would normally have had to bear in its day-to-day management or normal activities distorts the conditions of competition.
As regards the effects of the provision in question on trade between Member States, the Court has consistently held that the relatively small amount of aid or the relatively small size of the undertaking which receives it does not as such exclude the possibility that intra-Community trade might be affected.
The German Government has claimed that even if Paragraph 52(8) of the EStG does constitute State aid it would fall within the scope of the derogation provided for by the Treaty, which provides that `The following shall be compatible with the common market ... aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division.' The German Government maintains that the EStG fulfils those conditions inasmuch as that provision is necessary in order to make good the economic disadvantages borne by small and medium-sized undertakings in the former East Germany as a result of the division of Germany.
The Court observes that since it constitutes a derogation from the general principle that State aid is incompatible with the common market, that derogating provision must be construed narrowly. Its application is conceivable only on the same conditions as those applicable in the old Länder during the period preceding the date of that reunification. The phrase `division of Germany' refers historically to the establishment of the dividing line between the two occupied zones in 1948. Therefore, the `economic disadvantages caused by that division' can only mean the economic disadvantages caused in certain areas of Germany by the isolation which the establishment of that physical frontier entailed, such as the breaking of communication links or the loss of markets as a result of the breaking off of commercial relations between the two parts of German territory.
By contrast, the German Government's argument that that derogation permits full compensation for the undeniable economic underdevelopment suffered by the new Länder, disregards both the nature of that provision as a derogation and its context and aims. The economic disadvantages suffered by the new Länder as a whole have not been directly caused by the geographical division of Germany. The differences in development between the original and the new Länder are explained by causes other than the geographical rift caused by the division of Germany and in particular by the different politico-economic systems set up in each part of Germany.
Since the German Government has not established that the contested measure was necessary in order to make good an economic disadvantage caused by the physical division of Germany, the derogation is not applicable.
This press release is an unofficial document for media use which does not bind the Court of Justice. Languages available: French, German and English
For the full text of the judgment please consult our Internet site www.curia.eu.int at approximately 15.00 hrs today.
For further information, please contact Fionnuala Connolly, tel: (00352) 4303 3355; fax: (00352) 4303 2731