OPINION OF ADVOCATE GENERAL
Poiares Maduro
delivered on 14 July 2005 (1)
Case C-494/03
Senior Engineering Investments BV
v
Staatssecretaris van Financiën
(Reference for a preliminary ruling from the Hoge Raad der Nederlanden (Netherlands))
(Directive 69/335/EC – Indirect taxes on the raising of capital – Capital duty – Direct contribution by a parent company to its sub-subsidiary)
1. In this case the Court is asked two questions by the Hoge Raad der Nederlanden (Supreme Court of the Netherlands) concerning the levying of capital duty in relation to a direct informal capital contribution by a parent company established in the United Kingdom to its sub-subsidiary established in Germany. At issue in the main proceedings is whether the Netherlands tax authorities are allowed to levy capital duty on the subsidiary, which is established in the Netherlands. Firstly, the referring court requests an interpretation of Article 4(2)(b) of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital. (2) Referring to the Court’s judgment in ESTAG, (3) the Hoge Raad asks, in particular, if the subsidiary must be regarded as the real recipient of the capital contribution. By its second question the Hoge Raad seeks an assessment in light of the right to freedom of establishment.
I – Legal framework
A – The relevant Community legislation
2. The aim of Directive 69/335, according to the first recital in its preamble, is to promote the free movement of capital. It is stated in the sixth recital in the preamble that it is inherent in this objective that duty on the raising of capital within the common market by a company or firm should be charged only once at a level which is the same in all the Member States.
3. Pursuant to Article 2(1) of the directive ‘[t]ransactions subject to capital duty shall only be taxable in the Member State in whose territory the effective centre of management of a capital company is situated at the time when such transactions take place’.
4. The chargeable transactions are set out in Article 4 of the directive. Article 4(1) provides, in so far as relevant here:
‘The following transactions shall be subject to capital duty:
…
(c) an increase in the capital of a capital company by contribution of assets of any kind;
…’
5. Article 4(2) of the directive provides, in so far as relevant:
‘The following transactions may, to the extent that they were taxed at the rate of 1% as at 1 July 1984, continue to be subject to capital duty:
…
(b) an increase in the assets of a capital company through the provision of services by a member which do not entail an increase in the company’s capital, but which do result in variation in the rights in the company or which may increase the value of the company’s shares;
…’
6. Article 7(2) of Directive 69/335 provides:
‘Member States may either exempt from capital duty all transactions other than those referred to in paragraph 1 or charge duty on them at a single rate not exceeding 1%.’
B – The relevant national rules
7. In the Netherlands capital duty is levied pursuant to the Wet op belastingen van rechtsverkeer (Law on the taxation of legal transactions; hereinafter ‘WBR’). (4) According to Article 32(1) WBR capital duty shall be levied in respect of the acquisition of share capital in entities established in the Netherlands.
8. According to Article 34(c) WBR the acquisition of share capital includes ‘the raising of capital against the issue of profit‑sharing certificates, founders’ certificates and the like, which give entitlement to a share in the profit or in the proceeds of liquidation’.
9. Article 63 of the Algemene wet inzake rijksbelastingen (General Tax Act; hereinafter ‘AWR’) contains a general hardship clause on the basis of which the Minister or the State Secretary of Finance may in certain cases or categories of cases grant relief where unreasonable hardship arises in the application of the tax law.
10. From the order for reference and the written submissions of the Netherlands Government it appears that, in order to avoid double taxation, the tax authorities applied at the material time a general policy based on the hardship clause with regard to informal capital contributions within vertical groups. Where a capital contribution was made by a parent company directly to its sub‑subsidiary, capital duty would be levied only on the sub-subsidiary. However, this policy applied only when the subsidiary and the sub-subsidiary were established in the Netherlands. It is stated in the order for reference that if the sub‑subsidiary was not established in the Netherlands, but the subsidiary was, capital duty was levied on the subsidiary. According to the referring court, the policy drew no distinction between situations in which the sub-subsidiary’s State of establishment had levied capital duty in respect of the direct informal capital contribution to the sub-subsidiary and where it had not. The Netherlands Government asserts in its written submissions that with regard to contributions made to sub-subsidiaries established outside the Netherlands, there was no general policy; it was decided on a case-by-case basis whether the levying of capital duty to the subsidiary would amount to an unreasonable hardship. Nonetheless, the levying of capital duty on the subsidiary in the Netherlands would not be considered to be unreasonable hardship if the sub-subsidiary was established in a State that did not levy capital duty.
II – Facts and the questions referred for a preliminary ruling
11. Senior Engineering Investments BV (hereinafter: ‘SEI’) is a private limited company incorporated under Netherlands law and established in the Netherlands. All of its shares are held by Senior Engineering Investment Ltd (hereinafter: ‘the parent company’), which is established in the United Kingdom. SEI is the holder of all shares in Senior Engineering Trading Gesellschaft für Autolieferteile mbH (hereinafter: ‘the sub-subsidiary’), which is established in Germany.
12. On 8 December 1997 the parent company made a capital contribution of DEM 10 071 000 (or NLG 11 359 000) ‘to the share premium account’ of the sub-subsidiary. In Germany no capital duty was levied in respect of the capital contribution made to the sub-subsidiary.
13. The Netherlands tax authorities levied an amount of NLG 113 490 as capital duty on SEI in connection with the contribution in question. SEI raised an objection to this amount with the Inspector of Taxes and requested repayment. This request was refused by a ruling of the Inspector. SEI brought an appeal against this ruling before the Gerechtshof te’s-Gravenhage (Hague Regional Court of Appeal). In its judgment of 18 January 2001 the Gerechtshof upheld the ruling of the Inspector. SEI subsequently appealed against this judgment before the Hoge Raad der Nederlanden.
14. By order of 21 November 2003 the Hoge Raad has requested the Court for a preliminary ruling. It appears from the order that the Hoge Raad queries the bearing on the present case of the judgment of the Court in ESTAG. In that case, which concerned Article 4(1)(c) of the directive, a company was held liable to capital duty on the sum of contributions that were made to its subsidiaries, since it was clear from the circumstances that the company was the real recipient of those contributions. (5)
15. In addition, the Hoge Raad doubts whether the policy pursued by the tax authorities to exempt the subsidiary from capital duty, provided that that company and the sub-subsidiary are both established in the Netherlands, must be regarded as a restriction on the freedom of establishment prohibited by Article 43 EC. In particular, since Germany has levied no capital duty on the sub-subsidiary, the Hoge Raad is unsure whether there is an obstacle to establishment in another Member State in a case such as the present in which overall no more capital duty is levied on the group than would have been the case had both the subsidiary and the sub-subsidiary been established in the Netherlands.
16. The Hoge Raad has therefore requested the Court to give a preliminary ruling on the following questions:
‘(1) Does Article 4(2)(b) of Council Directive 69/335/EEC of 17 July 1969, as amended by Council Directive 85/303/EEC of 10 June 1985, permit capital duty to be levied on a company in respect of a direct informal capital contribution made by the parent of that company to a subsidiary of that company and, if so, what circumstances are of relevance in that respect; in particular is it relevant whether or not that company must be regarded, from an economic point of view, as the real recipient of that direct informal capital contribution?
(2) Does the freedom of establishment laid down in Article 52 of the EC Treaty (now, after amendment, Article 43 EC), in conjunction with Article 58 of the EC Treaty (now Article 48 EC), prohibit the tax authorities of a Member State from pursuing a policy whereby no capital duty is levied on a company in respect of a direct informal capital contribution made by the parent of that company to a subsidiary of that company, provided that that subsidiary is established in that Member State, and is it relevant in this respect ─ on the assumption that the directive permits capital duty to be levied both on that company and on its subsidiary in a case such as the present ─ whether or not more capital duty has been levied at group level than would have been the case had both that company and its subsidiary been established in the Netherlands?’
17. The Netherlands Government, SEI and the Commission have submitted written observations to the Court and oral argument at the hearing, which was held on 26 May 2005.
III – Assessment
18. By its first question the referring court requests an interpretation of Article 4(2)(b) of Directive 69/335.
19. The Netherlands Government argues in its written observations that by increasing the capital of the sub-subsidiary the parent has increased the assets of SEI and thus increased the value of SEI’s shares. The increase in the value of SEI’s shares would consequently be subject to capital duty under Article 4(2)(b). Capital duty may as a result be levied both on the sub-subsidiary and on SEI. According to the Netherlands Government this would be in line with economic reality, since both companies have increased their economic potential.
20. SEI and the Commission have argued that the position of the Netherlands is founded on an incorrect reading of the directive. According to them, capital duty cannot be chargeable twice on account of the same transaction. In this respect, SEI points out that the viewpoint of the Netherlands implies that, if there had been more intermediate companies in the chain, capital duty would have become chargeable on each company.
21. It seems to me that, in effect, the Netherlands perceive the contribution to the sub-subsidiary as two transactions instead of one. However, at the heart of that perception lies confusion between what constitutes a transaction and what must merely be considered the effect of that transaction. The economic effect on SEI of the contribution to the sub-subsidiary evidently does not constitute a transaction in its own right.
22. The view that one transaction can amount to taxable events simultaneously in different Member States must, in my opinion, also be rejected. The directive, which seeks to encourage the free movement of capital, departs from the principle that capital duty should be charged only once. (6) To that end, the directive defines the taxable transaction in Article 4 and determines, in Article 2, the Member State in which that transaction is chargeable. Article 2 expressly states that the transaction ‘shall only be taxable’ in one Member State. The scheme and purpose of the directive therefore confirm that where a transaction falls under Article 4 and thus gives rise to a claim for capital duty in one Member State, the same transaction cannot simultaneously give rise to a claim for capital duty in another Member State.
23. The fact that the German tax authorities did not actually raise capital duty on the transaction at issue does not affect the question whether capital duty may be levied on SEI. Germany has availed itself of the possibility, provided by Article 7(2) of the directive, not to levy capital duty within its jurisdiction. The circumstance that a Member State has used the option to exempt transactions from capital duty is irrelevant to the question in which Member State the transaction constitutes a taxable event pursuant to Article 2 of the directive.
24. Since a single transaction cannot amount to taxable events in different Member States, the question that remains is essentially whether, under the directive, the transaction currently at issue must be deemed a taxable event in Germany or in the Netherlands.
25. Arguably, the Netherlands may be in a position to levy capital duty – to the exclusion of Germany – if the contribution to the sub-subsidiary must in fact be conceived as a service provided by a member to SEI. (7) In that event, the transaction would come within the scope of Article 4(2)(b) of the directive, and SEI would be considered the real recipient of the service instead of the sub-subsidiary. The Commission is against such an interpretation. It points out that the contribution has increased the capital of the sub-subsidiary and therefore falls under Article 4(1)(c). It argues that once a transaction falls under Article 4(1)(c), it becomes irrelevant whether it could fall under Article 4(2)(b). Effectively, the Commission construes the second paragraph of Article 4 as subordinate to the first paragraph of Article 4.
26. I do not agree with the Commission’s approach. Admittedly, it would provide a solution to the problem confronting the Hoge Raad that is in line with the requirement that capital duty cannot be charged twice in different Member States on account of the same transaction. However, even though the first and second paragraph in Article 4 cannot apply concurrently, I am not fully convinced that there is a clear hierarchy between the two. (8)
27. Moreover, in the course of the proceedings before the Court doubts have been raised as to whether, at the level of the sub-subsidiary, the contribution under discussion indeed resulted in an increase of capital within the meaning of Article 4(1)(c) of the directive, as the Commission and the referring court assume. The Netherlands Government argued at the hearing that Article 4(1)(c) applies only when there is an issue of shares. (9) In the present case there was no issue of shares. (10) Hence, the Netherlands Government believes that the contribution did not result in an increase in the capital of the sub-subsidiary, but in an increase in its assets within the meaning of Article 4(2)(b).
28. To my mind, the outcome of the discussion whether the transaction resulted, for the sub-subsidiary, in an increase in capital within the meaning of Article 4(1)(c) or an increase in assets within the meaning of Article 4(2)(b) does not affect the reply to be given to the Hoge Raad.
29. The Hoge Raad asks its first question mainly with reference to the judgment of the Court in ESTAG. The idea that capital duty could be levied on SEI would have to be based on the argument that there is an analogy between the present case and ESTAG, to the extent that SEI must be considered the real recipient instead of the sub-subsidiary. However, that argument must be rejected.
30. As a general rule, capital duty must be charged on the company that is the direct recipient of the contribution – in this case the sub-subsidiary. By way of exception, when it is clear from the circumstances of the case that the real recipient is a different company, capital duty may be levied on the latter. (11) In such circumstances, however, it must be found that the contribution is made by way of consideration, be it in exchange for a shareholding, (12) dividend certificates, (13) or other rights in a capital company. Only when a contribution is made for consideration will it be possible to conclude that the direct recipient is not the real recipient. The circumstances would have to show that the contribution that was made to a capital company (the direct recipient) was necessary in order to acquire rights in another capital company (the real recipient). If the contribution is not made for consideration, identifying the real recipient cannot serve its purpose and recourse should be had to the general rule.
31. Accordingly, SEI could only be identified as the real recipient if the contribution to the sub-subsidiary was made by means of consideration in exchange for rights in SEI. This holds true regardless whether, at the level of the sub-subsidiary, the contribution resulted in an increase in capital within the meaning of Article 4(1)(c) or an increase in assets within the meaning of Article 4(2)(b) of the directive.
32. Although the contribution from the parent to the sub-subsidiary has increased the assets of SEI, it was not made by way of consideration for rights in SEI. Consequently, in line with the general rule, the sub-subsidiary is to be regarded as the recipient of the contribution for the purpose of levying capital duty.
33. On those grounds it must be concluded that the transaction at issue constitutes a taxable event only in Germany. The Netherlands not being in a position to levy capital duty on the subsidiary, there is no need to answer the second question.
IV – Conclusion
34. I am accordingly of the opinion that the Court should rule as follows:
Article 4(2)(b) of Council Directive 69/335/EEC of 17 July 1969, as amended by Council Directive 85/303/EEC of 10 June 1985, does not permit the levying of capital duty on a company in respect of a direct contribution such as the one at issue in the main proceedings, made by the parent of that company to a subsidiary of that company that has its effective centre of management in another Member State.