European Court of Justice rules that, in
declining to grant same tax concessions to French company's permanent
establishment in Germany that it grants to its purely domestic corporations,
Germany violated provisions of EC Treaty on right of establishment
Saint-Gobain
ZN is the German branch of Compagnie de Saint-Gobain SA, the latter being a
company incorporated under French law with its seat and business management
located in France. Under German tax law, Saint-Gobain ZN is listed on the
German commercial register and functions as a permanent establishment of
Saint-Gobain SA. Since neither its seat nor its business management are located
in Germany, Saint-Gobain SA is subject to limited tax liability there.
This
limited liability applies both to the domestic income its permanent
establishment earns in Germany and to its assets held there including operating
capital.
During
1988, the Finanzamt (Finance Agency) refused to accord Saint-Gobain SA certain
tax concessions pertaining to dividends from shares in foreign corporations and
restricted these concessions to companies subject in Germany to unlimited tax
liability. Among its foreign share holdings, it held 10.2% of the Certain Teed
Corporation in the United States.
Dissatisfied
with the Agency's ruling, Saint-Gobain ZN (plaintiff) challenged it before the
Finanzgericht (Finance Court) in Cologne. Plaintiff complained of the Agency's
refusal to grant it three tax concessions that would have enabled it to avoid
having to pay German taxes on dividend income already taxed in the United
States and elsewhere.
First,
the Agency had decided that the (then applicable) 1954 Treaty for the Avoidance
of Double Taxation between Germany and the United States [as amended by the
Protocol of September 1965] limited its exemption from German corporate taxes
to German entities subject to unlimited tax liability. The Agency also refused
plaintiff a credit for the corporation tax levied on the profits distributed by
the foreign subsidiaries and sub-subsidiaries of Saint-Gobain SA in the
countries in which they are established because German law also restricts this
concession to companies subject in Germany to unlimited tax liability. Finally,
the Agency failed to allow Saint-Gobain SA the capital tax concession for
"international groups" provided for by the German Law on the
Evaluation of Assets on the theory that this provision applied only to domestic
companies limited by shares.
Invoking
EC law, plaintiff argued that the Agency rulings violated the combined
provisions of former Articles 52 and 58 of the Treaty of Rome when they
excluded a French company's permanent establishment in Germany from the
benefits of the above tax concessions. Both Articles deal with the Right of
Establishment.
Perceiving
crucial issues of EC law, the Finanzgericht sought a preliminary ruling from
the European Court of Justice. The European Court of Justice first points out
that well-settled case law regards Article 52 as a fundamental Treaty provision
(along with Article 58) directly applicable within the legal systems of the
Member States since the end of the transitional period.
The
Court rules for plaintiff on the legal issues. "... [T]he refusal to grant
the tax concessions in question to the permanent establishments in Germany of
non-resident companies makes it less attractive for those companies to have
intercorporate holdings through German branches, since under German law and
double-taxation treaties the tax concessions in question can only be granted to
German subsidiaries which, as legal persons, are subject to unlimited tax
liability, which thus restricts the freedom to choose the most appropriate
legal form for the pursuit of activities in another Member State, which the
second sentence of the first paragraph of Article 52 of the Treaty expressly
confers on economic operators."
"The
difference in treatment to which branches of non-resident companies are subject
in comparison with resident companies as well as the restriction of the freedom
to choose the form of secondary establishment must be regarded as constituting
a single composite infringement of Articles 52 and 58 of the Treaty."
[Paras. 42-43]
The
Court also rejects Germany's argument that the impact of bilateral tax treaties
with non-member countries lies outside the sphere of Community competence. The
Court concedes that, in the absence of unifying or harmonizing measures adopted
at the Community level, the Member States retain their competence to decide on
the criteria for taxing income and wealth so as to get rid of double taxation
by treaty.
"According
to the settled case-law of the Court, although direct taxation is a matter for
the Member States, they must nevertheless exercise their taxation powers
consistently with Community law. In the case of a double-taxation treaty
concluded between a Member State and a non-member country, the national
treatment principle requires the Member State which is party to the treaty to
grant to permanent establishments of non-resident companies the advantages
provided for by that treaty on the same conditions as those which apply to
resident companies." [Paras. 57-58]
Citation: Compagnie de Saint-Gobain v. Finanzamt, Koeln, Case
C-307/97, C-307/99 (September 21, 1999).
