OPINION OF ADVOCATE GENERAL
MENGOZZI
delivered on 5 June 2018 (1)
Case C‑135/17
X-GmbH
v
Finanzamt Stuttgart — Körperschaften
(Request for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany))
(Reference for a preliminary ruling — Free movement of capital — Articles 56 and 57 EC — Movement of capital between Member States and third countries — Restrictions — Standstill clause — Direct investment — Legislation of a Member State providing for the taxation of income from companies which have their registered office abroad — Justification — Prevention of wholly artificial arrangements — Balanced allocation of the power to impose taxes — Preservation of the effectiveness of fiscal supervision)
I. Introduction
1. By its request for a preliminary ruling, the Bundesfinanzhof (Federal Finance Court, Germany) seeks from the Court an interpretation of Articles 56 and 57 EC (now Articles 63 and 64 TFEU, respectively), in order to ascertain, in essence, whether the German system applicable to ‘holdings in controlled foreign companies’ (2) gives rise to a restriction on the free movement of capital with regard to third countries, a restriction which, if it is not covered by the standstill clause laid down in Article 57(1) EC, may be justified by overriding reasons in the public interest, in particular the prevention of wholly artificial arrangements.
2. That request was made in the context of a dispute between a company incorporated under German law, X, and the Finanzamt Stuttgart-Körperschaften (Tax Office in Stuttgart — Legal Persons Department, Germany) concerning the incorporation of income earned in 2005 and 2006 by Y — a company incorporated under Swiss law which is 30% owned by X — into X’s tax base, under the Gesetz über die Besteuerung bei Auslandsbeziehungen (Aussensteuergesetz) (Foreign transaction tax law) of 8 September 1972, (3) as amended by the Missbrauchsbekämpfungs- und Steuerbereinigungsgesetz (4) (the Law on combating abuse and harmonising taxation) of 21 December 1993 and the Gesetz zur Fortentwicklung des Unternehmenssteuerrechts (Law on developing the taxation of undertakings), of 20 December 2001 (5) (‘the UntStFG 2001’) (‘the AStG’).
3. It is clear from the request for a preliminary ruling that, pursuant to Paragraph 7(6) and (6a) and Paragraph 8 of the AStG, the income of a foreign company in whose capital a taxable person resident in Germany has a holding of not less than 1% is taxable in the hands of that taxable person where such income constitutes ‘controlled-company income from invested capital’, that is to say income which is subject abroad to a rate of taxation of profits of less than 25% and is not derived from what are known as ‘active’ economic activities.
4. In the main proceedings, it is common ground that Y was regarded by the German tax authorities as a controlled foreign company for the purposes of ‘controlled-company income from invested capital’, within the meaning of Paragraph 7(6) and (6a) of the AStG. For the tax years at issue, the German tax authorities considered that the debts which Y had purchased, from a German company and partially by means of a loan granted by X, entitled Y to a share of the sports income of four German sports clubs, in particular by way of the profits earned by those clubs from media rights. The income received by Y thus had to be regarded as controlled-company income from invested capital and incorporated into X’s tax base for the two tax years at issue in the main proceedings.
5. Having unsuccessfully challenged the decisions of the German tax authorities, X brought the case before the Bundesfinanzhof (Federal Finance Court).
6. The Bundesfinanzhof (Federal Finance Court) notes that the rules laid down in Paragraph 7(6) and (6a) of the AStG on incorporating controlled‑company income from invested capital into the tax base of a shareholder, a party with unlimited liability to tax in Germany, exclusively target shareholdings in foreign companies. In that regard, it considers that the German legislation at issue may, in principle, constitute a prohibited restriction on the free movement of capital for the purposes of Article 56(1) EC.
7. However, the Bundesfinanzhof (Federal Finance Court) seeks to ascertain whether that national legislation is permissible under EU law in the light of the standstill clause laid down in Article 57(1) EC, according to which the provisions of Article 56 EC are to be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national law adopted in respect of the movement of capital to or from third countries involving, inter alia, direct investment. While recalling the case-law of the Court according to which it is, in principle, for the national court to determine the content of the legislation which ‘existed’ on 31 December 1993, that court considers that clarification by the Court concerning the German legislation at issue is needed, in particular in connection with two issues.
8. In the first place, according to the explanations provided by the Bundesfinanzhof (Federal Finance Court), the rules on incorporating ‘controlled-company income from invested capital’ into the tax base of a shareholder, a party with unlimited liability to tax in Germany, in force on 31 December 1993 were amended by the Gesetz zur Senkung der Steuersätze und zur Reform der Unternehmensbesteuerung (Steuersenkungsgesetz) (Law on reduction of tax rates and on reform of taxation of undertakings), of 23 October 2000 (‘the StSenkG 2000’). (6) That court notes that, although it is true that the StSenkG 2000 significantly altered the rules applicable on 31 December 1993, the amendments which that legislation was to make to the AStG were themselves repealed by the UntStFG 2001, even before they could be applied for the first time to such income in a particular case.
9. In that regard, the Bundesfinanzhof (Federal Finance Court) considers that there is some uncertainty as to whether, under Article 57(1) EC, the protected maintenance of a restriction on the free movement of capital existing on 31 December 1993 to be maintained can lapse solely as result of the formal normative effect of the amending legislation or whether the amendment must also have been implemented in practice.
10. In the second place, with respect to the rules on incorporating controlled-company income from invested capital into the tax base of a shareholder, a party with unlimited liability to tax in Germany, the UntStFG 2001 re-established the legal consequences which existed on 31 December 1993, with one exception. The UntStFG 2001, in particular, reduced to 1% from the previous 10% the minimum shareholding in the controlled foreign company required for such incorporation. Moreover, in certain circumstances, such income was to be incorporated even in the case of holdings of less than 1%. However, although that extension of the scope of those rules to investment holdings of less than 10% represents, according to the Bundesfinanzhof (Federal Finance Court), a substantial amendment which significantly extends the restriction on cross-border movements of capital, that amendment is concerned not with direct investment within the meaning of Article 57(1) EC but only with portfolio holdings. Accordingly, the Bundesfinanzhof (Federal Finance Court) considers that the standstill clause could be applicable in the present case, since the rules applicable to the particular situation of X, whose 30% shareholding in Y constitutes a direct investment, have not been affected by the amendment introduced by the UntStFG 2001 concerning portfolio holdings.
11. In the event that the national legislation at issue was not covered by the standstill clause on the basis of either of those two issues, the Bundesfinanzhof (Federal Finance Court) seeks to ascertain whether or not such legislation constitutes a prohibited restriction on the free movement of capital which, where appropriate, may be justified by overriding reasons in the public interest. The Bundesfinanzhof (Federal Finance Court) recalls, in that regard, that the Court has analysed the issue of the taxation of the income of controlled companies in the case which gave rise to the judgment of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas (C‑196/04, EU:C:2006:544), but that that case arose in the context of the freedom of establishment applicable in relations between Member States and not in the context of the free movement of capital, which is applicable also in relations between Member States and third countries. If that case-law were to be extended to a situation such as that of the case in the main proceedings, the Bundesfinanzhof (Federal Finance Court) expresses doubts as to whether the national legislation is justified.
12. It was in those circumstances that the Bundesfinanzhof (Federal Finance Court) decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:
‘(1) Is Article 57(1) EC (now Article 64(1) TFEU) to be interpreted as meaning that a restriction in a Member State which existed on 31 December 1993 in respect of the movement of capital to and from third countries involving direct investments is not affected by Article 56 EC (now Article 63 TFEU) if the national law in force at the relevant date restricting the movement of capital to and from third countries essentially applied only to direct investments, but was extended after that date to cover also portfolio holdings in foreign companies below the threshold of 10%?
(2) If the first question is to be answered in the affirmative: Is Article 57(1) EC [now Article 64(1) TFEU] to be interpreted as meaning that a provision of national law restricting the movement of capital to or from third countries involving direct investments, existing on the relevant date of 31 December 1993, is to be regarded as applicable by reason of the fact that a later provision of national law that is essentially identical to the restriction in force at the relevant date is applicable, but where the restriction existing at the relevant date was substantially amended after that date and for a short period by legislation which formally entered into force but was in practice never applied due to the fact that it was replaced, before it could be applied to a specific case for the first time, by the provision that is now applicable?
(3) If either of the first two questions is to be answered in the negative: Does Article 56 EC [now Article 63 TFEU] preclude legislation of a Member State under which the basis of assessment to tax of a taxable person resident in that Member State, which holds at least 1% of the shares in a company established in another State (in the present case, Switzerland), includes, pro rata to the percentage of the shareholding, positive income earned by that company from invested capital, where such income is taxed at a lower rate than in the Member State?’
13. Written observations on those questions were submitted by the applicant in the main proceedings, the German, French and Swedish Governments and the European Commission. Those interested parties presented oral argument at the hearing on 5 March 2018, with the exception of the French and Swedish Governments, which were not represented.
II. Analysis
14. While the first two questions submitted by the referring court concern the interpretation of the standstill clause laid down in Article 57(1) EC, the application of which presupposes that the legislation at issue in the main proceedings is classified as a restriction on the free movement of capital contrary to Article 56(1) EC, the third question is specifically concerned with that classification and with whether such a restriction is justified.
15. Accordingly, the analysis below will not follow the order of the questions submitted by the referring court. I shall first examine whether the German system applicable to ‘holdings in controlled foreign companies’ at issue in the main proceedings constitutes a restriction within the meaning of Article 56(1) EC, which in my view, is not in doubt (Section A). Secondly, it will be necessary to determine whether that restriction may nevertheless be maintained on the ground that it is covered by the standstill clause laid down in Article 57(1) EC (Section B). In that regard, I would already state that the legislation at issue in the main proceedings satisfies, in my view, the temporal and substantive criteria laid down in that article. Therefore, it is only in the alternative, in the event that the Court does not concur with my analysis concerning the applicability of the standstill clause, that I shall examine, thirdly, whether the restriction on the free movement of capital contained in the legislation at issue in the main proceedings is capable of being justified by an overriding reason in the public interest (Section C).
A. The existence of a restriction on the free movement of capital for the purposes of Article 56(1) EC
1. The applicability of the free movement of capital
16. It is, first of all, important to bear in mind that the AStG applies to any taxable person residing in Germany who has a holding in a company of a third country where, according to the AStG, the profits of that company are subject to a ‘low’ rate of taxation, and it is not necessary that the holding of the German taxable person should enable the holder to exert a definite influence on a company’s decisions and to determine its activities. During the tax years at issue in the main proceedings, Paragraph 7 of the AStG provided, with regard to any shareholding of at least 1% in a third country company, that the income received by that third country company was automatically subject to incorporation into the tax base of that company’s shareholder, a party with unlimited liability to tax in Germany, irrespective of whether any profits were distributed.
17. It should be pointed out that none of the interested parties has disputed the applicability in the main proceedings of the free movement of capital, provided for in Article 56(1) EC, and the referring court itself has correctly ruled out the applicability of the freedom of establishment to the tax legislation at issue in the main proceedings.
18. By analogy with the case-law resulting from the judgment of 13 November 2012, Test Claimants in the FII Group Litigation (C‑35/11, EU:C:2012:707, paragraphs 98 to 100 and 104), it is undoubtedly in the light of Article 56(1) EC that it is necessary to assess such legislation, which, on the one hand, is not intended to apply exclusively to the shareholdings of a company of a Member State which enable the holder to exert a definite influence on the third country company concerned and, on the other hand, concerns only the tax treatment of the income of a company of a Member State which is derived from investments made in a company established in a third country. (7)
19. In such a context, an examination of the purpose of the national legislation alone is sufficient to assess whether the tax treatment at issue falls within the scope of the free movement of capital. (8) There is therefore no need, in any event, to take into account the specific circumstances of the case in the main proceedings, that is to say, in this case, a 30% shareholding in the company Y in Switzerland. Irrespective of whether such a shareholding could confer on X a decisive influence over Y’s decisions (which, in itself, is not self-evident since Y has only one other owner of its share capital), those circumstances cannot, in relations with third countries and taking into account the purpose of the provisions of the AStG at issue, have the effect of excluding the applicability of the free movement of capital in favour of the freedom of establishment, which, as we know, does not extend to relations with third countries. (9)
20. If the applicability of the free movement of capital were to yield to freedom of establishment solely on the basis of those circumstances, the prohibition provided for in Article 56(1) EC would, as I already explained in my Opinion in Emerging Markets Series of DFA Investment Trust Company (C‑190/12, EU:C:2013:710, point 20), be rendered ineffective in situations in which the risk of circumventing freedom of establishment is, however, non-existent.
2. The restrictive nature of Paragraph 7 of the AStG on movements of capital with regard to third countries
21. There does not appear to me to be any room for doubt as to the answer to the question whether a provision of tax legislation such as Paragraph 7 of the AStG constitutes a restriction on the free movement of capital between Member States and third countries.
22. In that regard, it should be recalled that, according to settled case-law, the measures prohibited under Article 56(1) EC, as restrictions on the movement of capital, include those which are such as to discourage residents of a Member State from making investments in other States. (10)
23. In the present case, it follows from the explanations provided by the referring court that the purpose of the incorporation rules is to prevent or neutralise the transfer of (passive) income of persons with full tax liability in Germany to States having, according to German law, a low rate of taxation of profits. The purpose of the incorporation rules is therefore to attribute to a German shareholder having at least a 1% stake in a third country company the ‘passive’ income generated by that company irrespective of whether any profits are distributed. Such rules are intended to apply, by definition, only in cross-border situations.
24. As the referring court, the Swedish Government and the Commission highlighted, in particular, a German shareholder, a party with unlimited liability to tax in Germany, having a shareholding of an equivalent level in a company established in Germany would never be required to incorporate the income of that company into its taxable earnings. The German Government itself has also conceded in its written observations that such incorporation rules treat shareholdings in foreign companies less favourably than shareholdings in companies established in Germany, since the income of the latter companies is never attributed to their shareholders before the distribution of profits.
25. Such a difference in treatment is therefore undeniably such as to discourage a German taxpayer from making investments in third countries.
26. Accordingly, I consider that a provision such as Paragraph 7 of the AStG constitutes a restriction on the movement of capital between Member States and third countries which is prohibited, in principle, by Article 56 EC.
B. The applicability of Article 57(1) EC
27. As I have already noted, by its first two questions, the referring court seeks to ascertain whether the restriction on the movement of capital between Member States and third countries which has just been described may nonetheless be neutralised by the application of the standstill clause laid down in Article 57(1) EC.
28. I would recall that, according to that article, ‘the provisions of Article 56 [EC] shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment …’. (11)
29. The restrictions provided for by the legislation of a Member State will therefore fall within the scope of Article 57(1) EC if, in addition to being applicable to a third country (which is not in doubt regarding, as in the main proceedings, the Swiss Confederation), they satisfy the temporal and substantive criteria laid down by that article. (12)
1. The temporal scope of Article 57(1) EC
30. As regards the temporal scope of Article 57(1) EC, it must be noted that the version of the AStG at issue in the present case is subsequent to 31 December 1993.
31. However, the Court has already held that any national measure adopted after that date is not, by that fact alone, automatically excluded from the derogation laid down in EU law. That derogation will cover a provision which is, in substance, identical to the previous legislation, or which is limited to reducing or eliminating an obstacle to the exercise of EU rights and freedoms in the earlier legislation. (13)
32. In that situation, it follows from the case-law that the option open to a Member State to rely on the exception provided for in Article 57(1) EC presupposes, first, that the restriction on the movement of capital has formed part of the legal order of that Member State continuously since 31 December 1993 (14) and, secondly, that that restriction is not contained in legislation based on a logic which differs from that of the previous law in force on 31 December 1993 and establishes new procedures. (15)
33. In the present case, unlike the other interested parties, the applicant in the main proceedings submits, in essence, that the version of the AStG prior to 31 December 1993 was repealed by the StSenkG 2000, which would mean that the contested provisions of the AStG at issue in the main proceedings, which are subsequent to 31 December 1993, cannot benefit from the application of the standstill clause laid down in Article 57(1) EC, since they have not continuously formed part of the legal order of Germany.
34. That argument does not convince me.
35. Admittedly, as the referring court notes, in adopting the StSenkG 2000, the German legislature decided to make extensive amendments to the incorporation rules provided for by the AStG in force on 31 December 1993. However, as also follows from the explanations provided by the referring court, although the StSenkG 2000 entered into force, the German legislature also chose to postpone its application until the tax year starting on 1 January 2002. It is also common ground that, even before the StSenkG 2000 applied to the tax year beginning on 1 January 2002, that law was itself repealed by the UntStFG 2001, a measure which was applicable from 1 January 2002 and to the tax years at issue in the main proceedings, and which, in substance, reproduced unchanged the incorporation rules of the AStG which on 31 December 1993 were applicable to direct investment.
36. It follows that, as regards the tax years up until 31 December 2001, German taxable persons placed in a similar situation to X continued to be subject to the incorporation rules of the AStG, as amended by the Law on combating abuse and harmonising taxation of 21 December 1993, and that, as from the tax year beginning on 1 January 2002, they had to comply with the substantially identical incorporation rules of the UntStFG 2001, as amended by the AStG.
37. It follows that the restriction existing on 31 December 1993 complained of by the applicant in the main proceedings has not ceased to apply in its relations with third countries since that date and has continued to form part of the legal order of the Member State concerned since that date. In fact, any German taxable persons who had obtained income similar to that of the applicant in the main proceedings in connection with an identical direct investment in Switzerland, both in the tax year ending on 31 December 1993 and in the tax years subsequent to that date, would have been continuously subject to the same rules for incorporation of that income into the basis of assessment of the tax which they would have been liable to pay in Germany for those tax years.
38. Under Article 57(1) EC, which, I repeat, provides that ‘the provisions of Article 56 [EC] shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993’, (16) what matters is not whether legislation has been formally repealed or extensively amended but that the restriction provided for therein, which existed on 31 December 1993, continues to produce its effects and therefore to apply, without interruption, after that date in relations with third countries. This is indeed the position in the present case because, as I have pointed out above, German taxable persons placed in a situation analogous to that of the applicant in the main proceedings continued, both before and after 31 December 1993, to be subject to the rules for the incorporation of income from direct investment in third country companies, provided for in Paragraph 7 of the AStG, irrespective of whether the version of that measure was the one prior or subsequent to 31 December 1993.
39. That interpretation of Article 57(1) EC, based on the ‘application’ of any restrictions which exist on 31 December 1993 and the ‘effect’ of the national legislation, is supported by the judgment of 15 February 2017, X (C‑317/15, EU:C:2017:119, paragraph 21), according to which ‘the applicability of Article 64(1) TFEU [former Article 57(1) EC] depends, not on the purpose of the national legislation containing such restrictions, but on its effect’.
40. The approach which I have just proposed is not contradicted by the need to interpret the exception provided for in Article 57(1) EC strictly, (17) since that approach is based on the very wording of that article, as is also indicated in the judgment of 15 February 2017, X (C‑317/15, EU:C:2017:119, paragraph 21).
41. Nor is it contrary to the judgments of 18 December 2007, A (C‑101/05, EU:C:2007:804, paragraph 49), and of 24 November 2016, SECIL (C‑464/14, EU:C:2016:896, paragraph 87), in which the Court held that ‘Article 64(1) TFEU [former Article 57(1) EC] does not cover provisions which, whilst in substance identical to legislation which existed on 31 December 1993, have reintroduced an obstacle to the free movement of capital which, following the repeal of the earlier legislation, no longer existed’. (18)
42. In paragraphs 49 and 88 of those judgments, the Court was in all likelihood referring to situations which could be described as ‘traditional’, in which the repeal of national legislation immediately entails the disappearance of the restriction on the free movement of capital and, consequently, the effects of that legislation do not persist after its formal repeal.
43. Moreover, I consider that, for its part, the judgment of 18 December 2007, A (C‑101/05, EU:C:2007:804) rather confirms the interpretation which follows from the wording of Article 57(1) EC and which I propose be adopted.
44. It is important to note that, in that case, the provisions of Swedish tax legislation which granted a tax advantage solely to companies established in Sweden were repealed after 31 December 1993 and then reintroduced in 1995. However, contrary to the Advocate General’s analysis, (19) the Court held that, in spite of the formal and temporary abolition of those provisions, the Kingdom of Sweden was entitled to rely on the exception provided for in Article 57(1) EC in so far as the ‘benefit’ of that advantage (that is the exemption for dividends paid by companies established in Sweden) had been excluded, continuously, at the very least with effect from 1992, for companies established in a third country which were not party to the Agreement on the European Economic Area and had not concluded a convention providing for the exchange of information with the Kingdom of Sweden. (20)
45. For the purposes of the application of Article 57(1) EC, the Court was therefore concerned with the effect of the restriction on the free movement of capital, namely the continuous exclusion of the exemption for the companies from the third countries concerned, rather than with the formal and temporary abolition of the national provisions granting such an exemption to Swedish companies.
46. Similarly, in the case in the main proceedings, and as I have already stated, far from having been abolished, the obstacle to the free movement of capital with regard to third countries continued to apply after 31 December 1993, because the effects of the AStG were maintained until the entry into force of the UntStFG 2001, (21) which, as from that date, reproduced unchanged, in substance, the incorporation rules which were applicable on 31 December 1993 to direct investment.
47. I therefore consider that the temporal criterion of Article 57(1) EC is satisfied in the case in the main proceedings.
48. It is next necessary to examine the objections of the applicant in the main proceedings relating to whether the substantive criterion of that provision is satisfied, it being understood that the other interested parties take the view that that criterion is indeed satisfied in the case in the main proceedings.
2. The substantive scope of Article 57(1) EC
49. According to the applicant in the main proceedings, the UntStFG 2001 substantially amended the AStG, in the version prior to 31 December 1993, with the result that, since it no longer applied exclusively to direct investment but also applied to ‘portfolio’ investments in third countries, that measure, in its version subsequent to 31 December 1993, was no longer covered by the exception provided for in Article 57(1) EC.
50. I do not share that view for the following reasons.
51. As I have already pointed out in point 32 of this Opinion, according to the case-law, national legislation subsequent to 31 December 1993 which alters the logic on which the legislation prior to that date was based and establishes new procedures cannot be covered by the standstill clause in Article 57(1) EC.
52. That is not the case, in my view, with respect to the amendment made to the AStG after 31 December 1993 by the UntStFG 2001, in which, as the referring court points out, the German legislature lowered only the threshold for applicability of the rules for the incorporation of income provided for by the AStG, which now encompass holdings of less than 10% of the share capital of the company of the third country concerned, all other things being equal.
53. Admittedly, it is common ground that, in the version prior to 31 December 1993, the relevant provisions of the AStG required German taxable persons to incorporate income from holdings in third country companies amounting to at least 10% of the share capital of those companies.
54. As the referring court has highlighted and as the applicant in the main proceedings also acknowledges, the AStG, in the version prior to 31 December 1993, applied exclusively to direct investment within the meaning of the Articles 56 and 57 EC.
55. It is clear from the case-law that the concept of ‘direct investment’ concerns investments of any kind undertaken by natural or legal persons and which serve to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity. As regards shareholdings in new or existing undertakings, constituted as companies limited by shares, the objective of establishing or maintaining lasting economic links presupposes that the shares held by the shareholder enable him, either pursuant to the provisions of the national laws relating to companies limited by shares or in some other way, to participate effectively in the management of that company or in its control. (22) That concept also covers income arising from such direct investments.(23)
56. A minimum shareholding of 10% in the share capital of a company, as provided for by the AStG in the version prior to 31 December 1993, was therefore concerned in principle with direct investment because such a level of shareholding, in the event that it fails to provide an opportunity to control that company, certainly provides an opportunity to participate effectively in its management. (24)
57. It is also true that, contrary to Article 56 EC, the substantive scope of Article 57 EC does not extend to ‘portfolio’ investments and cannot therefore be used to maintain the application of restrictions on the movement of capital to or from third countries involving such investments. I would recall, in that regard, that, according to the case-law, the concept of ‘portfolio investments’ refers to the acquisition of securities on capital markets solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking. (25)
58. The lowering of the shareholding threshold from 10% to 1% by the amendment made to the AStG by the UntStFG 2001 undoubtedly resulted in the inclusion of portfolio investments within the scope of that law. (26)
59. However, as the referring court is inclined to accept, such a consequence, affecting a category of investments which in any event falls outside the scope of Article 57(1) EC, has no effect, in my view, on the applicability of that article in situations involving only direct investments.
60. Legislation of a Member State which restricts without distinction portfolio investments and direct investment in or from third countries (27) may fall within the scope of Article 57(1) EC, in so far as that legislation applies to the latter form of investment.
61. That is what the Court implicitly accepted in the judgment of 18 December 2007, A (C‑101/05, EU:C:2007:804, paragraph 52), in holding that the preclusion from the exemption from tax on dividends at issue in that case was, in the light of the circumstances of the case, capable of falling within Article 57(1) EC ‘at the very least where such dividends relate to direct investment in the distributing company’, it being left to the referring court to verify whether that was the case.
62. That approach was explicitly confirmed in the judgment of 15 February 2017, X (C‑317/15, EU:C:2017:119, paragraphs 21, 24 and 25). In that judgment, the Court explained that national legislation imposing a restriction on free movement of capital which may also apply to categories of capital movements other than those exhaustively listed in Article 64(1) TFEU (former Article 57(1) EC) is not such as to preclude Article 64(1) TFEU from being applicable in the circumstances which that article covers.
63. Consequently, a Member State whose national legislation restricts, in relation to third countries, without distinction, first, direct investment, which falls within the scope of Article 57(1) EC, and, secondly, portfolio investments, which fall outside the scope of that provision, is entitled to rely on the standstill clause in that article, in so far as that national legislation applies to direct investment. (28)
64. In the main proceedings, and in accordance with the case-law which has just been cited, in so far as direct investment is concerned, since the UntStFG 2001 neither altered the approach of the AStG, in the version applicable on 31 December 1993, nor established new procedures, I can see no obstacle to the Federal Republic of Germany being permitted to rely on the application of Article 57(1) EC. In other words, Article 57(1) EC may be relied on in so far as, in the circumstances of the present case, the shareholdings in the company of the third country concerned provide the German shareholder, a party with unlimited liability to tax in Germany, with an opportunity to participate effectively in the management or control of that company, that is to say that they constitute a direct investment within the meaning of that article.
65. In general, it is for the referring court in each case to ascertain, for the purposes of the application of the standstill clause in Article 57(1) EC, whether the restriction on the movement of capital with regard to the third countries in question relates to the categories set out in that article, in particular direct investment.
66. In the case in the main proceedings, although the referring court has not expressly described as a direct investment the 30% holding of X in the share capital of the Swiss company Y, that is in fact the premiss on the basis of which the first question has been referred, failing which that question would have little meaning. In any event, such a level of shareholding provides its holder with the opportunity to obtain, if not shared control of the company concerned, at least effective participation in its management. (29) Moreover, as the Commission argued in its written observations, it appears that the amendment made by the UntStFG 2001 to the threshold for triggering the rules for the incorporation of income provided for by the AStG had no effect on the situation of X, in the light of the level of its holding in Y’s share capital. In fact, both before and after 31 December 1993, a German company placed in a situation strictly identical to that of X would have had to incorporate the income from such a shareholding into the basis of assessment of the tax which it had to pay in Germany. (30)
67. In those circumstances, I consider that the Federal Republic of Germany is entitled to rely on Article 57(1) EC, in so far as the situation at issue in the main proceedings concerns a restriction on the movement of capital which existed on 31 December 1993 involving direct investment, and the amendments made after that date to the legislation laying down that restriction have neither altered the logic on which the legislation prior to 31 December 1993 was based nor established new procedures.
68. In the event that the Court concurs with that analysis, the answer to the third question submitted by the referring court, concerning whether or not the restriction on the free movement of capital is justified, becomes devoid of purpose. It is therefore only in the alternative that I shall examine that question.
C. Considerations set out in the alternative, concerning the justification for the restriction on the free movement of capital
69. In accordance with Article 58(1) EC, if national legislation, which is not covered by Article 57(1) EC, is to be regarded as compatible with the provisions of the EC Treaty on the free movement of capital, the difference in treatment which it prescribes must concern situations which are not objectively comparable or be justified by an overriding reason in the public interest. (31)
1. The objective comparability of the situations
70. The German Government claims that the difference in treatment described in point 24 of this Opinion concerns situations which are not objectively comparable. According to that government, the rules for the incorporation of income from a controlled foreign company, provided for by the AStG in the version applicable to the facts of the dispute in the main proceedings, concern only companies which have their registered office in a third country and are subject to a low tax rate. The absence of tax powers of the Federal Republic of Germany with respect to income from investments in a foreign company represents a substantial difference from the situation of income deriving from equivalent investments in the share capital of a German company. The German Government adds that, in the judgment of 17 December 2015, Timac Agro Deutschland (C‑388/14, EU:C:2015:829, paragraph 65), the Court has already held that the situation of a taxable person having a permanent establishment in Germany is not comparable with the situation of a taxable person having an establishment situated abroad.
71. I cannot concur with the arguments of the German Government. The very purpose of Paragraph 7 of the AStG, irrespective of the version on which the analysis is based, is specifically to ensure that the Federal Republic of Germany exercises its tax powers over the income received by a resident company which has invested capital in a company of a third country in which the tax rate is ‘low’ according to German tax law. The purpose of that provision is therefore, in so far as possible, to treat the situation of such companies in the same way as the situations of resident companies which have invested their capital in another company resident in Germany, with a view to neutralising as far as possible the tax advantages which the former could obtain from investing capital abroad.
72. The purpose of Paragraph 7 of the AStG and the situation in which that provision places a resident company that has invested in a company of a third country with a ‘low’ tax rate bring to mind the circumstances giving rise to the judgment of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas (C‑196/04, EU:C:2006:544), concerning the United Kingdom legislation on controlled foreign companies (CFCs). That legislation attributed to a resident parent company the profits made by the CFC where that CFC was subject to a lower level of taxation, within the meaning of that legislation, in the State in which the CFC was established.
73. With regard to the comparability between such a situation and a domestic situation, the Court found that a ‘difference in treatment’ created ‘a tax disadvantage’ for the resident company to which the legislation on CFCs was applicable, on the ground that that resident company was taxed on profits of another legal person, unlike a resident company having a subsidiary which was taxed in the United Kingdom. (32)
74. That is also the situation of a German company subject to the application of Paragraph 7 of the AStG, like X, which has invested capital in a company established in Switzerland, such as Y.
75. In my view, those considerations are not invalidated by the judgment of 17 December 2015, Timac Agro Deutschland (C‑388/14, EU:C:2015:829, paragraph 65), on which the German Government relies. Although it is true that, in that paragraph of that judgment, the Court stated that ‘the situation of a permanent establishment situated in Austria is not comparable to that of a permanent establishment situated in Germany in relation to measures laid down by the Federal Republic of Germany in order to prevent or mitigate the double taxation of a resident company’s profits’, this was because, for the tax year in question in that part of the judgment, the Federal Republic of Germany had ceased to exercise its ‘tax powers over the profits of such a permanent establishment, the deduction of its losses no longer being permitted in Germany’. (33)
76. As I have just pointed out, in the present case Paragraph 7 of the AStG specifically confers on the Federal Republic of Germany tax powers over income from a controlled foreign company established in a third country, in this case Y, since such income is incorporated into the basis of assessment for tax of another legal person resident in Germany, that is to say, in the main proceedings, X. Moreover, it is clear from the account of the facts in the dispute in the main proceedings that such tax powers are exercised, with respect to the company resident in Germany, over both the profits made by the controlled company and the losses it incurs, which are, respectively, incorporated into or taken into account in the basis of assessment for tax of the company resident in Germany.
77. Although the tax system applicable to the company resident in Germany which has acquired holdings in a company established in a third country with a ‘low’ tax rate is certainly different from that applicable to a resident company which has invested capital in another company resident in Germany, the Court has already held, as noted by the referring court, that the mere fact of the application of different taxation systems to resident companies depending on whether they have holdings in resident or non-resident companies cannot be a valid criterion for assessing the objective comparability of their situations and, therefore, for identifying an objective difference between them. (34) It is the application of different taxation systems that is responsible for the difference in treatment, even though, in both situations, the Member State concerned exercises its tax powers over the income of those resident companies.
78. In my view, it follows that, if it is not permitted under Article 57(1) EC, the justification for the restriction on the free movement of capital can be found only on the basis of an overriding reason in the public interest.
2. The existence of an overriding reason in the public interest
79. Although, in the grounds of its request for a preliminary ruling, the referring court rejects the idea that the restriction on the free movement of capital with regard to third countries which derives from Paragraph 7 of the AStG may be justified by the need to safeguard tax revenue, it raises the issue of the possibility of a justification based on the objective of thwarting wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned, as that ground of justification was accepted in principle in the judgment of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas (C‑196/04, EU:C:2006:544). Nevertheless, the referring court expresses doubts, first, concerning the applicability of that case-law, which was developed in the context of freedom of establishment, and, secondly, in the event that that case-law is fully applicable in a situation such as that in the main proceedings, concerning the proportionality of the incorporation rules provided for by the AStG. In that regard, the referring court points out that those rules apply not only in the case of wholly artificial arrangements but regardless of the economic function of the controlled company established in the third country concerned, and do not provide the taxable person resident in Germany with an opportunity to show that his investment serves economic purposes.
80. The German Government submits, for its part, that the incorporation rules provided for by the provisions of the AStG are justified by overriding reasons in the public interest, namely the balanced allocation of the power to impose taxes (35) and the prevention of tax avoidance, (36) on the basis of which it refers to the need to prevent wholly artificial arrangements. In its written observations, the French Government adds that the incorporation rules may also be justified by the aim of ensuring the effectiveness of fiscal supervision. (37)
81. For my part, first, I unreservedly concur with the analysis carried out by the referring court, according to which a Member State cannot justify a restriction on the free movement of capital to third countries on the ground of safeguarding the collection of tax revenue. In fact, that purely economic ground has already been rejected by the Court in situations involving movements of capital with regard to third countries. (38) There is nothing in the present case to justify departing from such a solution. Moreover, the German Government has not even attempted to rely on such a ground before the Court.
82. Secondly, as regards the objective relating to the need to thwart wholly artificial arrangements, I note that the Court has held that such an objective was capable of justifying a restriction of a fundamental freedom of movement between Member States, sometimes in the context of its connection with other overriding reasons in the public interest, such as the prevention of abusive practices, (39) the prevention of tax evasion or tax avoidance (40) and, in combination with either of those reasons, the balanced allocation of the power to impose taxes between the Member States, (41) and sometimes, it would seem, as an autonomous public interest objective. (42)
83. Contrary to what the referring court states, the legitimacy of pursuing such an objective was recognised not only in the context of the application of freedom of establishment but also with regard to restrictions on free movement of capital between Member States (43) and between them and third countries. (44)
84. On the latter point, I would note that in the judgment of 24 November 2016, SECIL (C‑464/14, EU:C:2016:896, paragraphs 59 to 62), the Court examined whether a difference in the tax treatment of companies resident in Portugal, according to whether they received dividends distributed by companies resident in that Member State or companies established in third countries (Tunisia and Lebanon) (a difference classified as a restriction on the free movement of capital), was, nevertheless, capable of being justified by the need to prevent tax evasion and tax avoidance. At the end of that examination, the Court concluded that the tax legislation at issue in that case ‘exclude[d] in general terms the possibility of avoiding or mitigating the economic double taxation of dividends, where such dividends [were] distributed by companies established in non-member States, and does not seek specifically to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due or to obtain a tax advantage’. (45) It therefore inferred from this that the restriction on the free movement of capital could not be justified on grounds relating to the need to prevent tax fraud and the evasion of taxes.
85. Two conclusions can be drawn from that judgment. First, that judgment shows that a Member State is entitled to rely on the objective of preventing wholly artificial arrangements with a view to escaping the tax normally due in order to justify a restriction on the free movement of capital to or from third countries. Moreover, I do not see the logic of denying a Member State the opportunity to rely on such a ground of justification solely in the context of its relations with third countries. Secondly, that judgment confirms that the scope of such an objective is the same as when it is relied on in relations between Member States. In particular, the tax legislation at issue must seek specifically to prevent conduct involving the creation of wholly artificial arrangements.
86. Indeed, it is from that point of view that the incorporation rules provided for by the AStG go beyond what is necessary to attain the objective of the prevention of wholly artificial arrangements having the sole aim of escaping the tax normally due, irrespective of whether that objective must be examined as an autonomous overriding reason in the public interest (as the referring court suggests) or in the context of the overriding reason in the public interest relating to the prevention of tax avoidance (as the German Government argues).
87. Those rules do not specifically cover wholly artificial arrangements but apply generally, on the basis of an irrebuttable presumption of tax avoidance, (46) to any party with unlimited liability to tax in Germany who has a holding of at least 1% in a company established in a third country which the German tax legislation unilaterally regards as having a ‘low’ tax rate.
88. In view of their general scope, the AStG’s incorporation rules therefore do not seek specifically to prevent conduct involving the creation of wholly artificial arrangements, which do not reflect economic reality and the sole purpose of which is to escape the tax normally due. (47)
89. Consequently, I consider that the incorporation rules provided for by the AStG cannot be justified on grounds relating to the prevention of tax avoidance and the prevention of wholly artificial arrangements.
90. It follows that there is no need to rule on the invitation made by the French Government in its written observations, to the effect that the Court should hold that, with regard to third countries, Member States are permitted to maintain their national legislation designed to thwart wholly artificial arrangements having the essential but not exclusive aim of escaping the tax normally due. (48) In any event, it is clear from the judgments of 10 February 2011, Haribo Lakritzen Hans Riegel and Österreichische Salinen (C‑436/08 and C‑437/08, EU:C:2011:61, paragraph 165), and of 24 November 2016, SECIL (C‑464/14, EU:C:2016:896, paragraph 59), that, including in relations with third countries, a particular transaction constitutes a wholly artificial arrangement where its only purpose is to escape the tax normally due or to obtain a tax advantage.
91. Thirdly, the answer to the question whether the incorporation rules provided for by the AStG are capable of being justified by the need to preserve the allocation of the power to impose taxes between States and the safeguarding of the effectiveness of fiscal supervision, considered together, is, in my view, more difficult.
92. As a matter of principle, I note that the Court has already examined together those two overriding reasons in the public interest (49) and has already accepted that those reasons could be relied on by the Member States to justify restrictions on the free movement of capital to or from third countries. (50)
93. As regards the need to safeguard the Member States’ power to tax, that reason may be accepted where the system in question is designed to prevent conduct capable of jeopardising the right of a Member State to exercise its powers of taxation in relation to activities carried out in its territory. (51)
94. In my view, there is no doubt that the incorporation rules provided for by the AStG are capable of achieving the objective of countering such conduct since they seek to prevent, in the case in the main proceedings, the activities of the German sports clubs from being excluded from the tax powers of the Federal Republic of Germany by assigning the management of participation in those clubs’ profits to a company established in a third country. Thus, the income received by that company from the activity of managing participation in the German sports clubs’ profits is incorporated into the tax base of its German shareholder, the company X, with the aim of avoiding the erosion of the latter’s tax base in Germany.
95. Certain aspects of that national measure also seem to me to be appropriate. First of all, the incorporation rules provided for by the AStG apply only to the so‑called ‘passive’ activities of controlled companies established in third countries which impose a rate of taxation of profits of less than 25%. Next, although it is true that the incorporation rules apply irrespective of whether any profits are distributed, as the referring court has pointed out, the actual distributions made by the controlled company for the benefit of its German shareholders are exempt in the Federal Republic of Germany. Finally, the withholding tax levied in the third country concerned on the amount of the distribution may be offset against the tax on the amount to be incorporated into the German shareholder’s tax base or deducted from that tax under the AStG.
96. However, according the AStG, the German shareholder of a controlled company established in a third country cannot avoid application of the incorporation rules by providing evidence that, despite the ‘passive’ nature of the activity carried out by that controlled company, that activity is dictated by real commercial or economic reasons, thereby ensuring that the income of the controlled company is not taxed in the hands of that shareholder.
97. It is true that, while in relations between Member States of the European Union, it cannot be excluded, a priori, that a taxpayer may be able to provide relevant documentary evidence enabling the tax authorities of the Member State of taxation to verify that he fulfils the conditions for entitlement to a tax advantage, the Court has consistently held that that case-law cannot be transposed in its entirety to movements of capital between Member States and non-member countries, which take place in a different legal context. (52)
98. In relations with third countries, transposition of the case-law which is applicable between EU Member States requires that the competent authorities of the Member State in question and those of the third country concerned enter into an undertaking of mutual assistance equivalent to the framework for cooperation established, within the European Union, by Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation. (53)
99. In a context such as that of the present case, such a framework for cooperation and mutual assistance in tax matters could provide the authorities of the Member State concerned with the opportunity to verify, inter alia, whether the company established in the third country in question, despite the ‘passive’ nature of its activity, carries on an authentic or genuine economic activity supported by staff, equipment, assets or premises, and does not, in particular, constitute a mere ‘letterbox’ company.
100. However, by failing to distinguish between third countries on the basis of whether or not a framework for cooperation and the exchange of information equivalent to Directive 77/799 has been entered into between those third countries and the Federal Republic of Germany, the incorporation rules provided for by the AStG appear, in my view, to go beyond what is necessary to achieve the objectives of preserving the power of the Member State in question to impose taxes and of ensuring the effectiveness of fiscal supervision. Application of the incorporation rules provided for by the AStG in the case of a German taxpayer having a shareholding in a company which is established in a third country and has actually been found to be engaged in a genuine economic activity — on the basis, inter alia, of a framework set out in an agreement on the mutual exchange of information on tax matters between that country and the Federal Republic of Germany — impinges on the power to impose taxes of the State in which the company has its registered office and suggests, in my view, that the AStG incorporation rules are ultimately aimed at generating revenue for the German tax authorities. (54)
101. That said, subject to more extensive checks by the referring court, such a finding may have no practical effect in the case in the main proceedings.
102. In that regard, although the referring court provides the Court with no information on the existence of a framework for cooperation and mutual assistance in tax matters between the Federal Republic of Germany and the Swiss Confederation, it is not possible entirely to fail to mention that such a framework for cooperation has been established between those two States since the entry into force, on 1 January 2017, in the Swiss Confederation, of the Convention drawn up by the Organisation for Economic Cooperation and Development (OECD) and the Council of Europe, signed in Strasbourg on 25 January 1988, on Mutual Administrative Assistance in Tax Matters. (55) Article 4 of that convention provides that the contracting parties are to exchange any information that is foreseeably relevant for the administration or enforcement of their domestic laws concerning the taxes covered by that convention, which include, according to Article 2 thereof, taxes on income and profits.
103. However, in accordance with Article 30 of the convention, entitled ‘Reservations’, the Swiss Confederation, at the time of deposit of the instrument of ratification, specified that it ‘does not provide assistance in respect of tax claims which are in existence at the date of entry into force of the Convention’ in respect of that Contracting Party, that is to say before 1 January 2017.
104. It follows that, as regards the tax years at issue in the main proceedings, which, I would recall, concern 2005 and 2006, the referring court is likely to have to find that the Convention on Mutual Administrative Assistance in Tax Matters does not allow the German tax authorities to verify with their Swiss counterparts that the activity of the controlled company Y, established in Switzerland, is genuine.
105. Consequently, having regard to the circumstances of the case in the main proceedings, and unless there exists a bilateral framework for the exchange of information on tax matters between the Federal Republic of Germany and the Swiss Confederation that is applicable to the facts in the dispute in the main proceedings, which it is for the referring court to verify, I consider that the application of the incorporation rules provided for by the AStG may be justified by the objective of preserving the power to impose taxes and the effectiveness of the fiscal supervision of the Member State concerned.
III. Conclusion
106. In the light of the considerations set out above by way of principal argument, I propose that the Court answer as follows the questions referred by the Bundesfinanzhof (Federal Finance Court, Germany):
Article 57(1) EC must be interpreted as meaning that the scope of that article covers national legislation which, on 31 December 1993, provided, with respect to the taxpayer of a Member State, for the taxation of direct investment in a foreign company established in a third country above a shareholding threshold of 10%, the effects of which persisted after 31 December 1993, before that legislation was replaced by another piece of national legislation, which, with regard to direct investment, is essentially identical to the legislation which existed on 31 December 1993.