Language of document : ECLI:EU:C:2006:774

Case C-446/04

Test Claimants in the FII Group Litigation

v

Commissioners of Inland Revenue

(Reference for a preliminary ruling from the High Court of Justice of England and Wales, Chancery Division

(Freedom of establishment – Free movement of capital – Directive 90/435/EEC – Corporation tax – Payment of dividends – Prevention or mitigation of a series of charges to tax – Exemption – Dividends received from companies resident in another Member State or a non‑member country – Tax credit – Advance corporation tax – Equal treatment – Claim for repayment or claim for damages)

Summary of the Judgment

1.        Freedom of movement for persons – Freedom of establishment – Free movement of capital – Tax legislation

(Arts 43 EC and 56 EC)

2.        Freedom of movement for persons – Freedom of establishment – Free movement of capital – Tax legislation

(Arts 43 EC and 56 EC)

3.        Free movement of capital – Restrictions – Tax legislation

(Art. 56 EC)

4.        Freedom of movement for persons – Freedom of establishment – Free movement of capital – Tax legislation

(Arts 43 EC and 56 EC)

5.        Freedom of movement for persons – Freedom of establishment – Free movement of capital – Tax legislation

(Arts 43 EC and 56 EC)

6.        Freedom of movement for persons – Freedom of establishment – Tax legislation

(Art. 43 EC)

7.        Freedom of movement for persons – Freedom of establishment – Free movement of capital – Tax legislation

(Arts 43 EC and 56 EC)

8.        Free movement of capital – Restriction on capital movements to or from non-member countries

(Arts 56 EC and 57(1) EC)

9.        Community law – Rights conferred on individuals – Infringement by a Member State – Obligation to make good damage caused to individuals

10.      Community law – Rights conferred on individuals – Infringement by a Member State – Obligation to make good damage caused to individuals

1.        Articles 43 EC and 56 EC must be interpreted as meaning that, where a Member State has a system for preventing or mitigating the imposition of a series of charges to tax or economic double taxation as regards dividends paid to residents by resident companies, it must treat dividends paid to residents by non-resident companies in the same way.

(see para. 72, operative part 1)

2.        Articles 43 EC and 56 EC do not preclude legislation of a Member State which exempts from corporation tax dividends which a resident company receives from another resident company, when that State imposes corporation tax on dividends which a resident company receives from a non-resident company in which the resident company holds at least 10% of the voting rights, while at the same time granting a tax credit in the latter case for the tax actually paid by the company making the distribution in the Member State in which it is resident, provided that the rate of tax applied to foreign-sourced dividends is no higher than the rate of tax applied to nationally-sourced dividends and that the tax credit is at least equal to the amount paid in the Member State of the company making the distribution, up to the limit of the amount of the tax charged in the Member State of the company receiving the distribution.

The mere fact that, compared with an exemption system, an imputation system imposes additional administrative burdens on taxpayers, with evidence being required as to the amount of tax actually paid in the State in which the company making the distribution is resident, cannot be regarded as a difference in treatment which is contrary to freedom of establishment or free movement of capital, since particular administrative burdens imposed on resident companies receiving foreign-sourced dividends are an intrinsic part of the operation of a tax credit system.

(see paras 53, 60, 73, operative part 1)

3.        Article 56 EC precludes legislation of a Member State which exempts from corporation tax dividends which a resident company receives from another resident company, where that State levies corporation tax on dividends which a resident company receives from a non-resident company in which it holds less than 10% of the voting rights, without granting the company receiving the dividends a tax credit for the tax actually paid by the company making the distribution in the State in which the latter is resident.

Such a difference in treatment constitutes a restriction on free movement of capital in that it has the effect of discouraging companies resident in the Member State concerned from investing their capital in companies established in another Member State. In addition, it also has a restrictive effect as regards companies established in other Member States in that it constitutes an obstacle to their raising of capital in the Member State concerned.

Irrespective of the fact that a Member State may, in any event, choose between a number of systems in order to prevent or mitigate the imposition of a series of charges to tax on distributed profits, the difficulties that may arise in determining the tax actually paid in another Member State cannot justify a restriction on the free movement of capital such as that which arises under the legislation at issue.

(see paras 64-65, 70, 74, operative part 1)

4.        Articles 43 EC and 56 EC preclude legislation of a Member State which allows a resident company receiving dividends from another resident company to deduct from the amount which the former company is liable to pay by way of advance corporation tax the amount of that tax paid by the latter company, whereas no such deduction is permitted in the case of a resident company receiving dividends from a non‑resident company as regards the corresponding tax on distributed profits paid by the latter company in the State in which it is resident.

That system leads, in practice, to a company receiving foreign-sourced dividends being less favourably treated than a company receiving nationally‑sourced dividends. On a subsequent payment of dividends, the former is obliged to account for advance corporation tax in full, whereas the latter has to pay the tax only to the extent to which the distribution paid to its own shareholders exceeds that which the company has itself received.

The fact of not having to pay advance corporation tax represents a cash‑flow advantage, in so far as the company concerned may retain the sums which it would otherwise have had to pay by way of advance corporation tax until corporation tax is payable.

Nor can such a difference in treatment be justified by the need to preserve the cohesion of the tax system in place in the Member State concerned on the basis of a direct link between the tax advantage made available, namely the tax credit granted to a resident company receiving dividends from another resident company, and the corresponding tax liability, namely the advance corporation tax paid by the latter when it makes the distribution. The need for such a direct link must in fact lead to the same tax advantage being granted to companies receiving dividends from non‑resident companies, since those companies are also obliged to pay corporation tax on distributed profits in the State in which they are resident.

(see paras 84, 86, 93, 112, operative part 2)

5.        Articles 43 EC and 56 EC do not preclude legislation of a Member State which provides that any relief for tax paid abroad made available to a resident company which has received foreign‑sourced dividends is to reduce the amount of corporation tax against which that company may offset advance corporation tax when a subsequent distribution of dividends is made to its own shareholders.

The fact that a company receiving foreign‑sourced dividends which is entitled to relief for foreign tax has to suffer a reduction as regards the amount of corporation tax against which surplus advance corporation tax may be offset will give rise to discrimination as between such a company and a company receiving nationally-sourced dividends only where the former company does not, in fact, have the same ability as the latter to offset the surplus advance corporation tax against the amount of corporation tax for which it is liable.

(see paras 120, 125, 138, operative part 3)

6.        Article 43 EC precludes legislation of a Member State which allows a resident company to surrender to resident subsidiaries the amount of advance corporation tax paid which cannot be offset against the liability of that company to corporation tax for the current accounting period or previous or subsequent accounting periods, so that those subsidiaries may offset it against their liability to corporation tax, but does not allow a resident company to surrender such an amount to non-resident subsidiaries where the latter are taxable in that Member State on the profits which they made there.

(see para. 139, operative part 3)

7.        Articles 43 EC and 56 EC preclude legislation of a Member State which, while exempting from advance corporation tax resident companies paying dividends to their shareholders which have their origin in nationally-sourced dividends received by them, allows resident companies distributing dividends to their shareholders which have their origin in foreign-sourced dividends received by them to elect to be taxed under a regime which permits them to recover the advance corporation tax paid but, first, obliges those companies to pay that advance corporation tax and subsequently to claim repayment and, secondly, does not provide a tax credit for their shareholders, whereas those shareholders would have received such a tax credit in the case of a distribution made by a resident company which had its origin in nationally-sourced dividends.

While it is true that a Member State must be allowed some time to take into account, in determining the amount ultimately due by way of corporation tax, all of the taxes already levied on the profits distributed, this cannot justify legislation which refuses completely to allow a resident company receiving a payment of foreign-sourced dividends to offset the tax charged on profits distributed abroad against the amount due in respect of advance corporation tax, whereas, for nationally‑sourced dividends, that amount is automatically deducted from the tax paid, albeit only in advance, by a resident company making a distribution.

As regards the fact that shareholders of resident companies distributing foreign-sourced dividends are not entitled to a tax credit under such legislation, the risk of economic double taxation arises not only in the case of dividends paid by a resident company subject to an obligation to account for advance corporation tax on dividends distributed by it, but also in the case of dividends paid by a non-resident company, the profits of which are also subject to corporation tax in the State in which it is resident, at the rates and according to the rules applying there.

(see paras 156, 158-159, 172-173, operative part 4)

8.        Article 57(1) EC is to be interpreted as meaning that where, before 31 December 1993, a Member State has adopted legislation which contains restrictions on capital movements to or from non-member countries which are prohibited by Article 56 EC and, after that date, adopts measures which, while also constituting a restriction on such movements, are essentially identical to the previous legislation or do no more than restrict or abolish an obstacle to the exercise of the Community rights and freedoms arising under that previous legislation, Article 56 EC does not preclude the application of those measures to non-member countries when they apply to capital movements involving direct investment, including investment in real estate, establishment, the provision of financial services or the admission of securities to capital markets. Holdings in a company which are not acquired with a view to the establishment or maintenance of lasting and direct economic links between the shareholder and that company and do not allow the shareholder to participate effectively in the management of that company or in its control cannot, in this connection, be regarded as direct investments.

(see para. 196, operative part 5)

9.        In the absence of Community legislation, it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, including the classification of claims brought by injured parties before the national courts and tribunals. Those courts and tribunals are, however, obliged to ensure that individuals should have an effective legal remedy enabling them to obtain reimbursement of the tax unlawfully levied on them and the amounts paid to that Member State or withheld by it directly against that tax.

As regards other loss or damage which a person may have sustained by reason of a breach of Community law for which a Member State is liable, the latter is obligated to make reparation for the loss or damage caused to individuals in the conditions set out in the case‑law of the Court, namely that the rule of law infringed must be intended to confer rights on individuals, that the breach must be sufficiently serious, and that there must be a direct causal link between the breach of the obligation resting on the State and the loss or damage sustained by those affected, but that does not preclude the state from being liable under less restrictive conditions.

Subject to the right of reparation which flows directly from Community law where the conditions referred to in the case-law are satisfied, it is on the basis of the rules of national law on liability that the State must make reparation for the consequences of the loss and damage caused, provided that the conditions for reparation of loss and damage laid down by national law are not less favourable than those relating to similar domestic claims and are not so framed as to make it, in practice, impossible or excessively difficult to obtain reparation.

(see paras 209, 219-220, operative part 6)

10.      In order to determine whether a breach of Community law is sufficiently serious, capable of rendering a Member State liable for harm caused to individuals it is necessary to take account of all the factors which characterise the situation brought before the national court. Those factors include, in particular, the clarity and precision of the rule infringed, whether the infringement and the damage caused were intentional or involuntary, whether any error of law was excusable or inexcusable, and the fact that the position taken by a Community institution may have contributed towards the adoption or maintenance of national measures or practices contrary to Community law.

On any view, a breach of Community law will clearly be sufficiently serious if it has persisted despite a judgment finding the infringement in question to be established, or a preliminary ruling or settled case-law of the Court on the matter from which it is clear that the conduct in question constituted an infringement.

In an area such as direct taxation the national court should assess the matters referred to above, in particular the clarity and precision of the rules infringed and whether any errors of law were excusable or inexcusable, in the light of the fact that the consequences arising from the freedoms of movement guaranteed by the Treaty have been only gradually made clear, in particular by the principles identified by the Court.

(see paras 204, 213-215, 217)