Case C‑135/17

X GmbH

v

Finanzamt Stuttgart — Körperschaften

(Request for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany))

Judgment of the Court (Grand Chamber), 26 February 2019

(Reference for a preliminary ruling — Free movement of capital — Movement of capital between Member States and third countries — Standstill clause — National legislation of a Member State regarding controlled companies established in third countries — Amendment of that legislation, followed by the reintroduction of the earlier legislation — Income of a company established in a third country derived from the holding of debts owed by a company established in a Member State — Incorporation of that income into the tax base of a taxable person resident for tax purposes in a Member State — Restriction on the free movement of capital — Justification)

1. Free movement of capital and freedom of payments — Restrictions on movement of capital to and from third countries — Restrictions on movement of capital involving direct investment which exist on 31 December 1993 — Lawfulness — Restriction extended after that date to shareholdings which do not involve direct investment — Irrelevant

   (Art. 63(1) TFEU and Art. 64(1) TFEU)

   (see paragraphs 28, 30-34, operative part 1)

2. Free movement of capital and freedom of payments — Restrictions on movement of capital to and from third countries — Restrictions on movement of capital involving direct investment which exist on 31 December 1993 — Definition of restriction which exists on 31 December 1993 — Subsequent amendment of the national legislation laying down that restriction, followed by the restoration of the earlier legislation before the application of that amendment in practice — Excluded, other than in the event of the deferral of the applicability of that amendment, which made it inapplicable to the cross-border movement of capital before the repeal thereof — To be determined by the referring court

   (Art. 63(1) TFEU and Art. 64(1) TFEU)

   (see paragraphs 39-41, 46, 47, 47, 51, operative part 2)

3. Free movement of capital and freedom of payments — Restrictions — Tax legislation — Corporation tax — Income of a company established in a third country derived from the holding of debts owed by a company established in a Member State — Incorporation of that income into the tax base of a taxable person resident for tax purposes in a Member State — Unlawful — Justification — Combating tax evasion and avoidance — Condition — Absence of treaty obligations for the exchange of information between the Member State and the third country

   (Art. 63(1) TFEU)

   (see paragraphs 55, 58, 64, 68, 69, 75, 78, 87, 88, 90-92, 95, 96, operative part 3)

Résumé

In the judgment X (Controlled companies established in third countries) (C‑135/17), delivered on 26 February 2019, the Grand Chamber of the Court held that Article 63(1) TFEU on the free movement of capital does not preclude legislation of a Member State under which income obtained by a company established in a third country and which does not come from an activity of that company, such as income classified as ‘controlled-company income from invested capital’ within the meaning of that legislation, is incorporated, pro rata to the amount of the shareholding, into the tax base of a taxable person residing in that Member State where that taxable person holds at least 1% of the shares in that company and that income is taxed, in that third country, at a lower rate than the rate prevailing in the Member State concerned, unless there is a legal framework providing, in particular, treaty obligations that empower the national tax authorities of that Member State to verify, if necessary, the accuracy of information provided in respect of that company with a view to demonstrating that that taxable person’s shareholding in that company is not the result of an artificial scheme.

Stating that that legislation applies only to cross-border situations, the Court held, first, that that legislation is such as to discourage investors with unlimited tax liability in the Member State concerned from investing in companies established in certain third countries and therefore constitutes a restriction on the free movement of capital, which is prohibited, in principle, by Article 63(1) TFEU.

Next, the Court examined whether that restriction can be justified in the light of Article 65 TFEU, under which a difference in tax treatment may be considered compatible with the free movement of capital when it concerns situations which are not objectively comparable. In that regard, the Court stated that the purpose of the legislation at issue in the main proceedings is, so far as possible, to treat the situation of resident companies which have invested capital in a company established in a third country with a ‘low’ tax rate in the same way as that of resident companies which have invested their capital in another company resident in the Member State concerned, with a view, inter alia, to offsetting any tax advantages which the former might obtain from investing their capital in a third country, which is why the difference in treatment at issue is not justified by an objective difference in circumstances.

The Court examined whether, in those circumstances, the difference in tax treatment can be justified by an overriding reason in the public interest. Stating that the objective of that national legislation is the prevention of tax evasion and avoidance, the Court held that that legislation is suitable for securing the attainment of that objective. By providing that the income of a company established in a third country with a ‘low’ tax rate is to be incorporated into the tax base of a company with unlimited tax liability in the Member State, the legislation at issue in the main proceedings is such as to offset the effects of any artificial transfer of income to such a third country.

However, according to the Court, that legislation, in that it presumes that conduct is artificial on the sole ground that the conditions laid down by that legislation are met, while affording the taxable person concerned no opportunity whatsoever to rebut that presumption, goes, in principle, beyond what is necessary in order to attain its objective.

Pointing out, nonetheless, that the legislation at issue in the main proceedings relates not to Member States but to third countries, the Court stated that a Member State’s obligation to give a taxable person the opportunity to produce evidence demonstrating any commercial justification for its shareholding in a company established in a third country must be assessed according to the availability of administrative and legislative measures permitting, if necessary, the accuracy of such evidence to be verified. It is therefore for the national court to examine whether there are, in particular, treaty obligations between the Member State and the third country at issue, establishing a legal framework of cooperation and procedures for the exchange of information between the national authorities concerned, which are genuinely such as to empower the tax authorities of that Member State to verify, if necessary, the accuracy of the information provided on the company established in the third country in order to demonstrate that that taxable person’s shareholding in that company is not the result of an artificial scheme.

The referring court had also submitted preliminary questions to the Court on the scope of application of the standstill clause provided for in Article 64(1) TFEU, under which a Member State, in its relations with third countries, may apply restrictions on movements of capital including, inter alia, direct investments, even though those restrictions contravene the principle of the free movement of capital laid down under Article 63(1) TFEU, provided that those restrictions already existed on 31 December 1993. In the case in the main proceedings, the tax legislation laying down the restriction at issue in the main proceedings had been substantially amended after 31 December 1993, on account of the adoption of a law which entered into force but was replaced, before ever being applied in practice, by legislation essentially identical to that applicable on 31 December 1993. The Court held that, in such a situation, the prohibition in Article 63(1) TFEU is applicable, unless the applicability of that amendment was deferred in accordance with national law, so that, despite its entry into force, that amendment was not applicable to cross-border movements of capital that are covered by Article 64(1) TFEU, which it is for the referring court to determine.