OPINION OF ADVOCATE GENERAL
KOKOTT
delivered on 11 June 2015 (1)
Case C‑386/14
Groupe Steria SCA
v
Ministère des finances et des comptes publics
(Request for a preliminary ruling from the Cour administrative d’appel de Versailles (France))
(Tax legislation — Freedom of establishment — Article 4(2) of Directive 90/435/EEC — Cross-border distributions of profits — National corporation tax — Group taxation (French ‘intégration fiscale’) — Tax exemption for revenue from holdings — Non-deductible charges relating to the holding — Distributions of profits from non-resident subsidiaries)
I – Introduction
1. The Court has dealt with the group taxation regimes of Member States on several occasions in the past, (2) including one case concerning the French regime, (3) which is the subject of this request for a preliminary ruling.
2. French legislation on corporation tax stipulates that distributions of profits from a subsidiary to a parent company are not, in principle, taxed at the parent. Excluded from this, however, is a 5% proportion, which represents the charges incurred by the parent company in connection with its holding in the subsidiary. These charges are not to be deductible because they serve the realisation of non-taxable income by the parent company, namely the distribution of profits from its subsidiaries.
3. This effectively partial taxation of profit distributions does not occur, however, if the parent company and the subsidiary are taxed jointly under a regime known as intégration fiscale. Since foreign companies are not allowed to take part in this form of group taxation, the Court has been asked to examine whether such a regime is consistent with the freedom of establishment and the corporation tax legislation of the European Union.
II – Legal framework
A – EU law
4. The relevant legislation on the freedom of establishment for the period to which the main proceedings refer is Article 43 EC (now Article 49 TFEU):
‘Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.
Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.’
5. Article 48 EC (now Article 54 TFEU) broadens the scope of application of the freedom of establishment as follows:
‘Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.
“Companies or firms” means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making.’
6. According to Article 1(1) of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (4) (‘Parent-Subsidiary Directive’), that directive, which is relevant to the main proceedings, is to be applied to certain cross-border distributions of profits. According to its third recital, it serves to eliminate the tax disadvantage faced by cross-border groups as compared to domestic ones. Its Article 4(1) in the version of Directive 2003/123/EC (5) contains the following provision to this end:
‘(1) Where a parent company or its permanent establishment, by virtue of the association of the parent company with its subsidiary, receives distributed profits, the State of the parent company and the State of its permanent establishment shall, except when the subsidiary is liquidated, either:
– refrain from taxing such profits, or
– tax such profits while authorising the parent company and the permanent establishment to deduct from the amount of tax due that fraction of the corporation tax related to those profits and paid by the subsidiary and any lower-tier subsidiary … up to the limit of the amount of the corresponding tax due.’
7. Article 4(2) of the Parent-Subsidiary Directive adds:
‘However, each Member State shall retain the option of providing that any charges relating to the holding … may not be deducted from the taxable profits of the parent company. Where the management costs relating to the holding in such a case are fixed as a flat rate, the fixed amount may not exceed 5% of the profits distributed by the subsidiary.’
B – National law
8. The French Republic charges corporation tax on the income of companies, a regime which is governed by the Code général des impôts (French General Tax Code, ‘the CGI’).
9. Article 216 of the CGI contains the following general provision governing income from holdings and their costs:
‘1. Net revenues from holdings giving entitlement to application of the tax regime for parent companies … may be deducted from the net total profits of that company, after deduction of a proportion of costs and expenses. The proportion of costs and expenses … is fixed in every case at 5% of the gross revenue from the holdings, including tax credits.’
10. Article 223 A of the CGI contains a special provision for the joint taxation of groups under certain conditions:
‘A company … can render itself the sole party liable for corporation tax due on the overall profits of the group formed by it and the companies of which it is the holder, continuously throughout the financial year, directly or indirectly through companies in the group, of at least 95% of the capital …
Only those companies … whose results are subject to corporation tax under the conditions of the general law may be members of the group …’
11. The group’s overall profit is determined according to Article 223 B of the CGI:
‘The overall profit is to be determined by the parent company through the algebraic sum of the results of each of the companies in the group, determined under the conditions of the general law ...
As regards the determination of the profits for financial years beginning on or before 1 January 1993, or ending after 31 December 1998, the overall profit shall be reduced by the proportion of costs and expenses which a group company has included in its results by virtue of its holding in another group company …’
III – Main proceedings
12. The main proceedings concern the corporation tax of the French company Groupe Steria SCA (‘Groupe Steria’) from 2005 to 2008. Groupe Steria is the parent company of a group subject to the special rules governing group taxation.
13. Groupe Steria is seeking to deduct the 5% proportion for costs and expenses (‘5% proportion’), which is non-deductible under point 1 of Article 216 of the CGI, in respect of revenue that one of its French subsidiaries received from its holdings in companies established in other EU Member States. The French authorities refuse this deduction because it is only possible under paragraph 2 of Article 223 B of the CGI if the holdings’ revenue originates from a member of the tax group. Under paragraph 2 of Article 223 A of the CGI, however, companies resident abroad may not be members of a tax group.
14. Groupe Steria does in fact accept the exclusion of foreign companies from group taxation. However, it takes the view that the French legislation is inconsistent with the freedom of establishment in so far as it refuses to allow deduction of the 5% proportion in respect of holdings that could be part of the tax group were they not resident abroad.
IV – Proceedings before the Court
15. The Cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles), which is now dealing with the main proceedings, referred the following question to the Court on 13 August 2014 for a preliminary ruling pursuant to Article 267 TFEU:
Does Article 43 EC preclude the rules governing French group taxation which enable the parent company of a group to neutralise the add-back of the proportion of costs and expenses, fixed at 5% of the net amount only of those dividends received by it from resident companies included within the tax group, when such a right is refused to it under those rules as regards the dividends distributed to it from its subsidiaries established in another Member State which, had they been resident, would have been eligible in practice, if they so elected?
16. In the proceedings before the Court, Groupe Steria, the Federal Republic of Germany, the French Republic, the Kingdom of the Netherlands, the United Kingdom of Great Britain and Northern Ireland, and the European Commission all submitted written observations. Groupe Steria, the French Republic and the Commission also made submissions at the hearing held on 13 May 2015.
V – Legal assessment
17. To answer the question referred for a preliminary ruling it is necessary to examine whether a regime such as the French one is consistent with the freedom of establishment.
A – Restriction of freedom of establishment
18. Under Article 43(1) EC in conjunction with Article 48 EC, restrictions on the freedom of establishment of companies of a Member State in the territory of another Member State are prohibited. This prohibition applies not only to the host State but also the company’s State of origin. (6)
19. The freedom of establishment of a parent company is restricted whenever the State of origin puts at a disadvantage a domestic parent company with a foreign subsidiary compared to one with a domestic subsidiary. (7) The same applies even if only an indirect subsidiary (sub-subsidiary) is at issue. (8) As the Court previously found in its judgment in Papillon, a restriction on the freedom of establishment is given specifically in the case of disadvantages suffered by the parent company under French group taxation as a result of having subsidiaries resident in another Member State. (9)
20. The French law at issue here is in effect more advantageous for parent companies that have a direct or indirect holding of at least 95% in a domestic company than for those with the same holding in a company resident in another Member State.
21. Under the general provision set out in point 1 of Article 216 of the CGI, in both of these situations up to 95% of the revenue from holdings is indeed exempt from taxation at the parent. This is achieved by re-deducting from a company’s profits the revenue it receives from its holdings, except for a 5% proportion. This proportion is intended to serve as a fixed amount to account for the business expenses of the holding company incurred in respect of its holding (‘charges relating to the holding’). Such charges might take the form, for example, of interest on a loan taken out by a company to purchase a holding. The charges relating to the holding should not reduce the company’s earnings.
22. However, under the special rule in paragraph 2 of Article 223 B of the CGI the 5% proportion may also be deducted from the profits if both the holding company and the company in which the holding is held are taxed jointly as part of a single tax group. However, since foreign companies do not have the option of belonging to a single tax group, the effect is that it is possible to receive revenue from holdings 100% exempt under group taxation only in the case of holdings in domestic companies.
23. As the parent company of a jointly taxed group, Groupe Steria has indirect holdings in companies that could be integrated into its tax group were they not resident in another Member State. Consequently, Groupe Steria’s tax group does not have the option under French legislation to receive revenue from these indirect holdings not only 95% exempt, but fully exempt, and this is solely because the holdings are in companies resident in another Member State.
24. In the case at hand, the freedom of establishment is restricted because of this disadvantageous treatment of a parent company with holdings in companies resident in another Member State compared to a parent company with holdings in domestic companies.
B – Justification of the restriction
25. None the less, a restriction of the freedom of establishment may be justified by overriding reasons in the public interest. (10)
1. Prohibition of the deduction pursuant to Article 4(2) of the Parent-Subsidiary Directive
26. The Federal Republic of Germany appears to identify a justification for this restriction in the provision set out in Article 4(2) of the Parent-Subsidiary Directive. This allows each Member State to retain the option of providing that any charges relating to the holding of a parent company resident in that country resulting from a subsidiary resident in another Member State may not be deducted from the profits of the parent company up to a fixed amount of 5% of the profits distributed by that subsidiary. It submits that it is precisely this provision in EU law that the French Republic had invoked in the present case. This right accorded to the Member States under Article 4(2) of the Parent-Subsidiary Directive should not be taken from them again via the indirect route of freedom of establishment.
27. However, the Court has already held on several occasions that Member States may exercise the possibility provided for in Article 4(2) of the Parent-Subsidiary Directive only in compliance with the requirements of the freedom of establishment. (11) The Parent-Subsidiary Directive therefore does not allow a treatment of cross-border distributions of profits contrary to the fundamental freedoms under any circumstances. (12)
28. It follows from this that the French Republic too may prohibit the deduction of charges relating to a holding pursuant to Article 4(2) of the Parent-Subsidiary Directive only in such a way that is not contrary to the freedom of establishment. Therefore a justification of the present restriction cannot be based on Article 4(2) of the Parent-Subsidiary Directive.
2. Allocation of taxing powers between Member States
29. A justification might be found alternatively, however, in the preservation of the allocation of taxing powers between Member States, which is recognised as a justifying ground by the Court in its settled case-law. (13)
30. It was on this basis that the Court recognised in its judgment in X Holding the right of one Member State to exclude subsidiaries resident in another Member State from its group taxation, reasoning that the profits of the non-resident subsidiary are not subject to taxation in that Member State. (14)
31. A number of parties to the proceedings have tried to conclude from this judgment that Member States are entitled to exclude foreign companies from their group taxation regimes with regard to all the consequences entailed by group taxation. This would also include the rule at issue in the present case allowing the deduction of the 5% proportion under French group taxation.
32. However, under no circumstances has the Court granted Member States carte blanche to exclude non-resident subsidiaries from group taxation with regard to all its related consequences. In its judgment in X Holding, the Court examined solely whether it is justified not to allow a parent company to offset losses with a non-resident subsidiary as part of group taxation. (15) The other consequences of an exclusion of non-resident subsidiaries from group taxation were not dealt with by the Court in that judgment. (16)
33. Furthermore, in its judgment in SCA Group Holding the Court recently found that the right to exclude non-resident companies from group taxation does not itself automatically justify the exclusion of resident companies whose relationship to the group derives solely from a non-resident company. (17) For example, a parent company should not be refused the advantage of including sub-subsidiaries in its group taxation solely because it was not allowed to integrate its foreign subsidiary into its group taxation. (18)
34. Consequently, a separate assessment of each tax advantage granted under group taxation must be made to determine whether it can be justifiably refused by Member States in cross-border situations. (19) A tax advantage restricted to resident group structures may not therefore be justified solely on the basis that it is granted as part of a special provision on group taxation under which non-resident companies may be excluded for the purposes of offsetting losses.
35. The disputed advantage in the present case of the deduction of the 5% proportion as a fixed amount for the charges relating to the holding shows no link as such with the allocation of taxing powers between Member States. This is because the charges relating to the holding are incurred solely by the resident parent company. The fiscal jurisdiction of another Member State is not therefore affected.
36. The restriction in the present case is thus not justified to preserve the allocation of taxing powers between Member States.
3. Tax coherence
37. It might none the less be possible to base a justification on the power of Member States to preserve the coherence of their tax systems. (20)
38. In that regard a direct link would have to be established between the tax advantage and the offsetting of that advantage by a particular tax levy. (21) The direct nature of the link between the advantage and the levy must be examined in the light of the objective pursued by the tax scheme in question. (22) Where this set of circumstances is found, a person entitled to a fundamental freedom may be refused the tax advantage in the event that he is not subject to the levy that the tax system of a Member State inextricably links with the tax advantage being sought.
39. In its judgment in Papillon, the Court has already held in relation to French group taxation that such a direct link exists between the advantage of consolidating the results of all group companies and the tax levy neutralising certain transactions within the group, which is aimed at preventing the use of losses twice. (23)
40. However, in the case at hand neither is the aim to prevent losses being used twice nor does the tax advantage in question concern a consolidation of results within the group. Rather, the tax advantage lies in the deduction of the 5% proportion of the charges relating to the holding within the tax group. Therefore, it must still be examined whether this tax advantage conferred under group taxation is linked directly to a specific levy.
a) Neutralisation of transactions internal to the group
41. The French Republic has argued, first, on this point that the overall purpose of group taxation is that transactions internal to the group should be neutralised for tax purposes. This neutralisation includes the rule on the deduction of the 5% proportion at issue in this case.
42. The Court has indeed already found in its Papillon judgment that the general aim of the French group taxation regime is to treat, as far as possible, a group constituted by a parent company and other dependent companies in the same way as an undertaking with a number of permanent establishments. (24) In light of this aim, it must be recognised in principle that the neutralisation of transactions internal to the group may have both negative and positive effects and that these may be directly linked.
43. The disputed advantage in this case, however, is not ultimately an internal group transaction that has to be neutralised. The advantage brought by the deduction of the 5% proportion does indeed have the consequence in effect that an internal group transaction, in this case the distribution of profit, is 100% exempt from taxation and neutralised as a result. However, the 5% proportion is the amount fixed for the non-deductible charges relating to the holding. (25) In the current set of circumstances this also results directly from Article 4(2) of the Parent-Subsidiary Directive, since only on that basis may the exemption afforded cross-border distributions of profits pursuant to Article 4(1) of the Parent-Subsidiary Directive be restricted. The disputed advantage thus consists in the possibility of deducting in the group the charges relating to the holding. However, the charges relating to the holding are incurred solely by the parent company and generally do not arise from transactions between companies belonging to a tax group. That is why the possibility of deducting these charges under group taxation is not linked to the neutralisation of transactions internal to the group.
44. The advantage of deducting the charges relating to the holding as granted under group taxation at most shows a certain degree of linkage to the neutralisation of transactions within the group. This is because the existing prohibition on deducting charges relating to the holding is justified in terms of the taxation system — as indeed argued during the proceedings — on the grounds that normally expenses linked to exempt income are not deductible. If all transactions within a tax group are now treated as non-existent for tax purposes, profits distributed between group companies do not have to be exempt from taxation either. There would consequently also be no reason for prohibiting the deduction of charges relating to the holding since they would not be linked to exempt income.
45. However, it is not possible to identify any tax levy based on this circumstance that would allow a direct link to be drawn between it and the disputed advantage at issue here of deduction of the 5% proportion. This advantage would really just be the consequence of not including distributions of profits within a tax group, which should be regarded not so much a levy as an actual advantage itself.
46. Furthermore, the French regulations on group taxation as explained by the national court appear not to provide for the complete neutralisation of internal group transactions in any case. Rather, under paragraph 1 of Article 223 B of the CGI in group taxation too the results of group companies are initially calculated in accordance with the general provisions and only then offset at the parent company level. That explains why even profits distributed within a tax group are exempt from tax only under the general rule in point 1 of Article 216 of the CGI. Consequently, purely from a taxation point of view, the charges relating to the holding are linked to exempt income even within a tax group.
47. The advantage of the 5% deduction of the charges relating to the holding thus shows no direct link to a tax levy in the context of the neutralisation of transactions internal to the group.
b) Overall relationship between all advantages and disadvantages
48. At the hearing, the French Republic submitted, moreover, that all the advantages and disadvantages of the special rules on group taxation are directly linked to one another. The disputed advantage in this case of the deduction of the 5% proportion is, it submits, therefore directly linked to the totality of disadvantages that result for group companies from group taxation.
49. However, such an analysis exceeds the boundaries of any possible justification based on preserving tax coherence.
50. It would amount to allowing Member States to grant tax advantages at their discretion under a special rule available only to resident tax payers and also tied to certain levies. The argument of the French Republic would, for example, also make it possible to grant domestic group companies a generous tax-free allowance for their income solely on the grounds that the special rules on group taxation also entail tax disadvantages.
51. Under case-law, a justification based on preserving the coherence of the tax system of a Member State requires that there be a link between advantage and levy as regards the aim pursued by the tax provision. (26) However, such a link is not possible without identifying a specific tax levy and its individual purpose.
52. Nor can the provision at issue here therefore be justified on the grounds that the tax advantage afforded by the 5% deduction of the charges relating to the holding shows a direct link to all the tax levies existing by virtue of the special rule on group taxation.
c) Interim conclusion
53. Therefore, in the case at hand it is not possible to establish a direct link between the disputed tax advantage and a tax levy.
54. The restriction on the freedom of establishment at issue here is thus not justified in order to preserve the coherence of the tax system either.
C – Conclusion
55. A regulation such as that disputed in the main proceedings is therefore contrary to the freedom of establishment under Article 43(1) EC and Article 48 EC.
VI – Conclusion
56. I therefore propose to the Court that the question referred by the Cour administrative d’appel de Versailles should be answered as follows:
The freedom of establishment under Article 43(1) EC and Article 48 EC precludes legislation of a Member State which under a special rule on group taxation available only to domestic companies allows group companies to deduct the charges relating to holdings in other group companies when this deduction is otherwise excluded.