Keywords
Summary

Keywords

Free movement of capital – Restrictions – Tax legislation – Corporation tax

(Art. 56 EC)

Summary

Where a resident capital company has a holding of less than 10% in another capital company, and suffers a reduction in profit resulting from the partial write-down of its holding in that other company, Article 56 EC must be interpreted as precluding a prohibition on the deduction of reductions in profit in connection with such a holding which enters into force earlier with regard to a holding in a non-resident company than with regard to a holding in a resident company.

Such a difference in treatment, depending on where capital was invested, is liable to discourage a shareholder from investing in a company established in another Member State and also to have a restrictive effect in relation to companies established in other States, representing, as far as the latter are concerned, an obstacle to the raising of capital in the Member State concerned. In addition, the knowledge that the possibility of reducing the amount of taxable profit by partial write-downs will expire sooner in respect of a holding in a non-resident company than in respect of a holding in a resident company is liable to discourage the company concerned from maintaining its holdings in a non-resident company and to encourage it to divest itself more quickly than it would otherwise have done of holdings in resident companies. It is insignificant, in that regard, that the difference in treatment existed only for a limited period of time, since that fact alone does not preclude the difference in treatment from having significant effects or, therefore, from giving rise to a genuine restriction on the free movement of capital.

As regards the possibility of a resident company deducting from its taxable revenue reductions in profit resulting from a partial write-down of its holdings, depending on whether they are held in a resident or non-resident company, the difference in treatment is not based on an objective difference in situations.

Such a difference in treatment is not justified by the margin of discretion granted to the Member States for the setting-up of a transitional system in order to bring the national corporation tax system into line with Community law and to remove any possible discrimination. That margin of discretion must always be limited by the respect of the fundamental freedoms including, in particular, the free movement of capital. Even if such a transitional system can be justified by a legitimate concern to ensure a seamless transition from the earlier system to its replacement, and even though there are arguments which explain why the new rules were introduced later for companies holding shares in resident companies, those arguments cannot justify that difference in treatment to the detriment of companies holding shares in non-resident companies.

Nor is that difference in treatment justified by the need to ensure the coherence of the tax system, since the fact that it is possible, subsequently, to obtain an exemption for capital gains realised on a disposal, assuming that a sufficient level of profit is achieved, does not constitute a consideration based on fiscal coherence which is capable of justifying a refusal to allow an immediate deduction in respect of losses incurred by companies holdings shares in non-resident companies.

As regards the need to ensure the effectiveness of fiscal controls, such an overriding reason in the general interest is, in any event, of no relevance where the depreciation in the value of holdings in non-resident companies is the result of a fall in the stock market.

(see paras 27-29, 35, 49-50, 54-56, operative part)