JUDGMENT OF THE COURT

8 July 1999 (1)

(Internal taxation — Tax deduction — Expenditure on research — Proprietarymedicinal products)

In Case C-254/97,

REFERENCE to the Court under Article 234 EC (ex Article 177) by the Conseild'État (France) for a preliminary ruling in the proceedings pending before thatcourt between

Société Baxter,

B. Braun Médical SA,

Société Fresenius France,

Laboratoires Bristol-Myers-Squibb SA

and

Premier Ministre,

Ministère du Travail et des Affaires Sociales,

Ministère de l'Économie et des Finances,

Ministère de l'Agriculture, de la Pêche et de l'Alimentation,

on the interpretation of Articles 52 of the EC Treaty (now, after amendment,Article 43 EC), 48 EC (ex Article 58), 92 and 95 of the EC Treaty (now, afteramendment, Articles 87 EC and 90 EC),

THE COURT,

composed of: G.C. Rodríguez Iglesias, President, P.J.G. Kapteyn, G. Hirsch andP. Jann (Presidents of Chambers), C. Gulmann (Rapporteur), J.L. Murray,D.A.O. Edward, H. Ragnemalm and L. Sevón, Judges,

Advocate General: A. Saggio,

Registrar: D. Louterman-Hubeau, Principal Administrator,

after considering the written observations submitted on behalf of:

—    Société Baxter, B. Braun Médical SA and Société Fresenius France, byAlexandre Carnelutti, of the Paris Bar,

—    Laboratoires Bristol-Myers-Squibb SA, by Alain Monod, of the Paris Bar,

—    the French Government, by Kareen Rispal-Bellanger, Head of theSubdirectorate for International Economic Law and Community Law in theLegal Affairs Directorate of the Ministry of Foreign Affairs, and Jean-MarcBelorgey, Chargé de Mission in the same Directorate, acting as Agents,

—    the Commission of the European Communities, by Gérard Rozet, LegalAdviser, and Hélène Michard, of its Legal Service, acting as Agents,

having regard to the Report for the Hearing,

after hearing the oral observations of Société Baxter, B. Braun Médical SA andSociété Fresenius France, represented by Alexandre Carnelutti, of LaboratoiresBristol-Myers-Squibb SA, represented by Alain Monod, of the French Government,represented by Kareen Rispal-Bellanger and Frédérik Million, Chargé de Missionin the Legal Affairs Directorate of the Ministry of Foreign Affairs, acting as Agent,and of the Commission, represented by Gérard Rozet and Hélène Michard, at thehearing on 16 June 1998,

after hearing the Opinion of the Advocate General at the sitting on 1 December1998,

gives the following

Judgment

1.

    By decision of 28 March 1997, received at the Court on 14 July 1997, the Conseild'État (Council of State) referred to the Court for a preliminary ruling underArticle 234 EC (ex Article 177) three questions on the interpretation of Articles 52of the EC Treaty (now, after amendment, Article 43 EC), 48 EC (ex Article 58),92 and 95 of the EC Treaty (now, after amendment, Articles 87 EC and 90 EC).

2.

    Those questions have been raised in actions brought before the Conseil d'État bySociété Baxter ('Baxter‘) and other companies exploiting proprietary medicinalproducts by which they seek annulment, on the ground of ultra vires, of Article 12of Ordonnance No 96-51 du 24 janvier 1996 relative aux mesures urgentes tendantau rétablissement de l'équilibre financier de la sécurité sociale (Order of 24 January1996 on urgent measures for restoring financial stability in the social securitysystem) (Journal Officiel de la République Française of 25 January 1996, p. 1230),for infringement of, in particular, Articles 52 of the Treaty, 48 EC, 88(3) EC (exArticle 93(3)) and 95 of the same treaty.

3.

    Article 12 of that Order subjects undertakings exploiting one or more proprietarymedicinal products in France to three special levies. In particular, that provisionimposes on such undertakings a special levy whose basis of assessment consists ofthe pre-tax turnover achieved in France between 1 January 1995 and 31 December1995 in reimbursable proprietary medicinal products and medicinal productsapproved for use by public authorities, after deduction of the costs accounted forduring the same period corresponding to expenditure on scientific and technicalresearch carried out in France.

4.

    Baxter and the other applicants in the main proceedings, which are subsidiaries ofparent companies established in other Member States, argued before the Conseild'État that the mechanism for deducting expenditure on scientific and technicalresearch from the amount of special levy payable caused discrimination betweenFrench laboratories carrying out research mainly in France and foreign laboratorieswhich have their principal research units outside France.

5.

    Since it considered that that argument raised serious questions concerning theinterpretation of Community law, the Conseil d'État decided to stay proceedingsand to refer the following questions to the Court for a preliminary ruling:

'1.    Do Articles 52 and 58 of the Treaty of 25 March 1957 establishing theEuropean Community preclude domestic legislation, enacted in 1996, whichfor that year imposes a special levy, the rate of which is to be fixed between

1.5% and 2%, on the pre-tax turnover achieved in the State of taxationbetween 1 January 1995 and 31 December 1995 by undertakings exploitingproprietary medicinal products, in reimburseable proprietary medicinalproducts and medicinal products approved for use by public authorities, andunder which costs accounted for during that same period only in respect ofexpenditure on research carried out in the State of taxation may bededucted from the taxable amount?

2.    Does Article 95 of the Treaty establishing the European Communitypreclude such legislation?

3.    In the event that either of the previous two questions is answered in thenegative, is the deduction which is allowed for expenditure on researchcarried out in the State of taxation to be considered aid within the meaningof Article 92 of the Treaty establishing the European Community?‘

The first question

6.

    By its first question, the national court is asking whether Articles 52 of the Treatyand 48 EC (ex Article 58) preclude a Member State's legislation under whichundertakings established in that State and exploiting proprietary medicinal productsthere are charged a special levy on their pre-tax turnover in certain of thoseproprietary medicinal products during the last tax year before the enactment of thatlegislation and are allowed to deduct from the amount payable only expenditureincurred during the same tax year on research carried out in the levying State,when it applies to Community undertakings operating in that State through asecondary place of business.

7.

    According to the applicants in the main proceedings and the Commission, that levy,in allowing only expenditure on research carried out in France to be deducted, issuch as to put the secondary places of business established on French territory ofpharmaceutical companies whose headquarters are located in another MemberState at a disadvantage in relation to pharmaceutical undertakings whose principalplaces of business are located in France, by virtue of the fact that, in the majorityof cases, research units are located in the same Member State as the undertaking'sprincipal place of business. Such a result is, it is claimed, contrary to Articles 52 ofthe Treaty and 48 EC.

8.

    The French Government submits that, in areas such as the pharmaceutical industry,where it is common for a research laboratory having its principal place of businessin France to become a secondary place of business of an undertaking having itsheadquarters in another Member State or, conversely, for such a secondary placeof business to be taken over by an undertaking having its headquarters in France,the place where the research expenditure of the pharmaceutical laboratories isincurred will then be independent of the location of their headquarters, centraladministration or principal place of business. According to the French Government,

since the levy in question is exceptional and unique, and since it is based on pastactivities, it would be contrary to Articles 52 of the Treaty and 48 EC only if itappeared, taking account of the economic data for the year of reference, that, infact, generally and by its very nature, it puts undertakings having theirheadquarters, central administration or principal place of business in a MemberState other than that in which the levy is charged at a disadvantage in relation toundertakings for which those places are located in the levying Member State.

9.

    It should be observed first of all that the freedom of establishment conferred byArticle 52 of the Treaty on the nationals of a Member State, giving them the rightto take up activities as self-employed persons and pursue them on the sameconditions as those laid down by the law of the Member State of establishment forits own nationals, comprises, pursuant to Article 48 EC, for companies constitutedin accordance with the law of a Member State and having their registered office,central administration or principal place of business within the Community, theright to carry on business in the Member State concerned through a branch, agencyor subsidiary (see Case C-1/93 Halliburton Services v Staatssecretaris van Financiën[1994] ECR I-1137, paragraph 14).

10.

    Next, it follows from the case-law of the Court (see Case C-330/91 The Queen vInland Revenue Commissioners, ex parte Commerzbank [1993] ECR I-4017,paragraph 14) that the rules regarding equality of treatment prohibit not only overtdiscrimination by reason of nationality or, in the case of a company, its seat, but allcovert forms of discrimination which, by the application of other criteria ofdifferentiation, lead in fact to the same result.

11.

    Finally, it must also be borne in mind that, as the Court has repeatedly stated (see,in particular, Halliburton Services, paragraph 16), since the end of the transitionalperiod Article 52 of the Treaty has been directly applicable notwithstanding theabsence, in a particular area, of the directives provided for in Articles 54(2) and57(1) of the EC Treaty (now, after amendment, Articles 44(1) EC and 47(1) EC).

12.

    The point at issue in the main proceedings is the possibility for taxable persons todeduct expenditure on research carried out in France during 1995 from theturnover liable to the special levy. It is alleged, in substance, that that allowance,even if it does not create direct discrimination against undertakings having theirprincipal place of business in other Member States and operating in Francethrough a secondary place of business, none the less puts those undertakings at adisadvantage by virtue of the fact that they generally carry out their researchactivities outside France, while undertakings established in that Member Stategenerally carry out their research activities there.

13.

    In that regard, it should be observed that, although there certainly exist Frenchundertakings which incur research expenditure outside France and foreignundertakings which incur such expenditure within that Member State, it remains the

case that the tax allowance in question seems likely to work more particularly tothe detriment of undertakings having their principal place of business in otherMember States and operating in France through secondary places of business. Itis, typically, those undertakings which, in most cases, have developed their researchactivity outside the territory of the Member State levying the tax.

14.

    That finding is not affected by the fact that the special levy in question was, as theFrench Government submits, exceptional in nature and based on activities relatingto an earlier tax year.

15.

    In those circumstances, the question is whether, in the light of the provisions of theTreaty on freedom of establishment, there is any justification for the unequaltreatment found in paragraph 13 above

16.

    In that regard, the French Government submits that the special levy made itpossible to tax one of the factors which had contributed to the financial imbalancein the social security system, which was the sale of proprietary medicinal products,and that it allowed a factor contributing to the reduction of expenditure on health,namely expenditure on research relating to proprietary medicinal products, to bededucted. In that context, the restriction of the deductibility of research costs toexpenditure relating only to research carried out in the levying Member State was,it submits, essential so that the tax authorities of that State could ascertain thenature and genuineness of the research expenditure incurred.

17.

    The Commission and, in substance, the applicants in the main proceedings claimthat the information in the accounts of parent companies which have their seat inanother Member State, prepared pursuant to the Fourth Council Directive(78/660/EEC) of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annualaccounts of certain types of companies (OJ 1978 L 222, p. 11) and the SeventhCouncil Directive (83/349/EEC) of 13 June 1983 based on Article 54(3)(g) of theTreaty on consolidated accounts (OJ 1983 L 193, p. 1), constitute a basis fromwhich the tax authorities can proceed in their supervision of research expenditure.The Commission also points out that, as far as the specific needs of fiscalsupervision are concerned, the competent authorities have the power to requireproduction of supplementary information, subject to the principle ofproportionality.

18.

    The Court has repeatedly held that effectiveness of fiscal supervision constitutes anoverriding requirement of general interest capable of justifying a restriction on theexercise of fundamental freedoms guaranteed by the Treaty (see, inter alia, CaseC-250/95 Futura Participations and Singer v Administration des Contributions [1997]ECR I-2471, paragraph 31). A Member State may therefore apply measures whichenable the amount of costs deductible in that State as research expenditure to beascertained clearly and precisely.

19.

    However, national legislation which absolutely prevents the taxpayer fromsubmitting evidence that expenditure relating to research carried out in otherMember States has actually been incurred cannot be justified in the name ofeffectiveness of fiscal supervision.

20.

    The taxpayer should not be excluded a priori from providing relevant documentaryevidence enabling the tax authorities of the Member State imposing the levy toascertain, clearly and precisely, the nature and genuineness of the researchexpenditure incurred in other Member States.

21.

    Consequently, the answer to be given to the first question must be that Articles 52of the Treaty and 48 EC preclude a Member State's legislation under whichundertakings established in that State and exploiting proprietary medicinal productsthere are charged a special levy on their pre-tax turnover in certain of thoseproprietary medicinal products during the last tax year before the enactment of thatlegislation and are allowed to deduct from the amount payable only expenditureincurred during the same tax year on research carried out in the levying State,when it applies to Community undertakings operating in that State through asecondary place of business.

Second and third questions

22.

    In the light of the answer given to the first question, it is not necessary to answerthe second and third questions.

Costs

23.

    The costs incurred by the French Government and by the Commission, which havesubmitted observations to the Court, are not recoverable. Since these proceedingsare, for the parties to the main proceedings, a step in the proceedings pendingbefore the national court, the decision on costs is a matter for that court.

On those grounds,

THE COURT,

in answer to the questions referred to it by the Conseil d'État by decision of 28March 1997, hereby rules:

Articles 52 of the EC Treaty (now, after amendment, Article 43 EC) and 48 EC (exArticle 58) preclude a Member State's legislation under which undertakingsestablished in that State and exploiting proprietary medicinal products there are

charged a special levy on their pre-tax turnover in certain of those proprietarymedicinal products during the last tax year before the enactment of that legislationand are allowed to deduct from the amount payable only expenditure incurredduring the same tax year on research carried out in the levying State, when itapplies to Community undertakings operating in that State through a secondaryplace of business.

Rodríguez IglesiasKapteyn Hirsch Jann Gulmann Murray Edward Ragnemalm Sevón

Delivered in open court in Luxembourg on 8 July 1999.

R. Grass

G.C. Rodríguez Iglesias

Registrar

President

1: Language of the case: French.