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OPINION OF ADVOCATE GENERAL

SHARPSTON

delivered on 6 November 2008 (1)

Case C-285/07

A.T.

v

Finanzamt Stuttgart-Körperschaften

(Reference for a preliminary ruling from the Bundesfinanzhof (Germany))

(Common system of taxation applicable to exchanges of shares – Accounting for shares at market rather than book value – Taxation of resulting capital gain)





1.        When the assets of one company are transferred to another in the course of a corporate restructuring operation, that can result in a taxable event. The transfer constitute a disposal for the purposes of capital gains tax and, if those assets have increased in value since the transferor originally acquired them a chargeable gain may arise. Some Member States provide relief by allowing deferral of any immediate charge to tax since the assets are not in fact realised. However, relief is rarely granted where the transfer is to a non-resident company, for fear that the payment of tax may be avoided altogether rather than simply being deferred.

2.        The present case concerns a restructuring operation whereby a German company (A.T.) transferred its controlling holding in a German GmbH to a French company in exchange for securities allotted by the French company. National legal provisions in Germany imposed a particular qualifying condition that share exchanges had to meet in order for any charge to capital gains tax to be deferred. The transaction in question did not fulfil that condition. Accordingly, the German authorities sought to tax the perceived capital gain. The referring court asks whether, first, Article 8 (1) and (2) of the Merger Directive (2) and secondly, Articles 43 and 56 EC are to be interpreted as precluding such taxation.


 The Merger Directive

3.        The Merger Directive imposes a common tax system applicable to mergers, divisions, transfers of assets and exchanges of shares between companies in different Member States. It seeks to avoid the imposition of tax in connection with such operations whilst at the same time safeguarding the financial interests of the Member State in which a charge to tax arises. In the context of share exchanges, it does this by providing that the allocation of securities in the acquiring company to a shareholder of the acquired company ‘shall not, of itself, give rise to any taxation of the income, profits or capital gains of that shareholder’, (3) while permitting Member States to tax ‘the gain arising out of the subsequent transfer of securities received in the same way as the gain arising out of the transfer of securities existing before the acquisition’. (4)

4.        The preamble to the Directive includes the following recitals:

‘[1]      [M]ergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States may be necessary in order to create within the Community conditions analogous to those of an internal market and in order thus to ensure the establishment and effective functioning of the common market; … such operations ought not to be hampered by restrictions, disadvantages or distortions arising in particular from the tax provisions of the Member States; … to that end it is necessary to introduce with respect to such operations tax rules which are neutral from the point of view of competition, in order to allow enterprises to adapt to the requirements of the common market, to increase their productivity and to improve their competitive strength at the international level;

[2]      [Some] tax provisions currently disadvantage such operations, in comparison with those concerning companies of the same Member State; … it is necessary to remove such disadvantages;

[3]      [I]t is not possible to attain this objective by an extension at the Community level of the systems presently in force in the Member States, since differences between these systems tend to produce distortions; … only a common tax system is able to provide a satisfactory solution in this respect;

[4]      [T]he common tax system ought to avoid the imposition of tax in connection with mergers, divisions, transfers of assets or exchanges of shares, while at the same time safeguarding the financial interests of the State of the transferring or acquired company.

[5]      [I]n respect of mergers, divisions or transfers of assets, such operations normally result either in the transformation of the transferring company into a permanent establishment of the company receiving the assets or in the assets becoming connected with a permanent establishment of the latter company;

[6]      [T]he system of deferral of the taxation of the capital gains relating to the assets transferred until their actual disposal, applied to such of those assets as are transferred to that permanent establishment, permits exemption from taxation of the corresponding capital gains, while at the same time ensuring their ultimate taxation by the State of the transferring company at the date of their disposal’.

5.        Article 2 contains the following relevant definitions:

‘For the purposes of this Directive:

(a)      “merger” shall mean an operation whereby:

–        one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company in exchange for the issue to their shareholders of securities representing the capital of that other company, and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities,

–        two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, in exchange for the issue to their shareholders of securities representing the capital of that new company, and, if applicable, a cash payment not exceeding 10% of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities,

–        a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities representing its capital;

(b)      “division” shall mean an operation whereby a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to two or more existing or new companies, in exchange for the pro rata issue to its shareholders of securities representing the capital of the companies receiving the assets and liabilities, and, if applicable, a cash payment not exceeding 10% of the nominal value or, in the absence of a nominal value, of the accounting par value of those securities;

(c)      “transfer of assets” shall mean an operation whereby a company transfers without being dissolved all or one or more branches of its activity to another company in exchange for the transfer of securities representing the capital of the company receiving the transfer;

(d)      “exchange of shares” shall mean an operation whereby a company acquires a holding in the capital of another company such that it obtains a majority of the voting rights in that company in exchange for the issue to the shareholders of the latter company, in exchange for their securities, of securities representing the capital of the former company, and, if applicable, a cash payment not exceeding 10% of the nominal value or, in the absence of a nominal value, of the accounting par value of the securities issued in exchange;

(e)      “transferring company” shall mean the company transferring its assets and liabilities or transferring all or one or more branches of its activity;

(f)      “receiving company” shall mean the company receiving the assets and liabilities or all or one or more branches of the activity of the transferring company;

(g)      “acquired company” shall mean the company in which a holding is acquired by another company by means of an exchange of securities;

(h)      “acquiring company” shall mean the company which acquires a holding by means of an exchange of securities.’

6.        The definitions in Article 2 link together in the following way. For a merger, division or transfer of assets ((a), (b) and (c)), there is a transferring company and a receiving company ((e) and (f)), whereas for exchanges of shares ((d)) there is an acquired company and an acquiring company ((g) and (h)).

7.        The first two paragraphs of Article 8 provide:

‘1.   On a merger, division or exchange of shares, the allotment of securities representing the capital of the receiving or acquiring company to a shareholder of the transferring or acquired company in exchange for securities representing the capital of the latter company shall not, of itself, give rise to any taxation of the income, profits or capital gains of that shareholder.

2.     The Member States shall make the application of paragraph 1 conditional upon the shareholder’s not attributing to the securities received a value for tax purposes higher than the securities exchanged had immediately before the merger, division or exchange.

The application of paragraph 1 shall not prevent the Member States from taxing the gain arising out of the subsequent transfer of securities received in the same way as the gain arising out of the transfer of securities existing before the acquisition.

In this paragraph the expression “value for tax purposes” means the amount on the basis of which any gain or loss would be computed for the purposes of tax upon the income, profits or capital gains of a shareholder of the company.’

8.        Article 8(1) and (2) thus concern a shareholder in a transferring company (in the case of mergers and divisions) or in an acquired company (in the case of exchanges of shares).

9.        Article 11(1)(a) provides that a Member State may refuse to apply or withdraw the benefit of all or any part of the Directive where it appears that the operation ‘has as its principal objective or as one of its principal objectives tax evasion or tax avoidance; the fact that one of the operations referred to in Article 1 is not carried out for valid commercial reasons such as the restructuring or rationalisation of the activities of the companies participating in the operation may constitute a presumption that the operation has tax evasion or tax avoidance as its principal objective or as one of its principal objectives’.


 Relevant national law

10.      In the context of domestic share exchanges, Paragraph 20 of the Umwandlungssteuergesetz (Law on taxation of business reorganisations; ‘UmwStG’) (5) provides as follows, in so far as relevant:

‘1.   If the activity of an undertaking … is transferred to a company with share capital … and the transferor receives in consideration new shares in the company (consideration in kind), the assets transferred and the new shares are to be valued in accordance with the following paragraphs. The first sentence also applies to the transfer of shares in a company with share capital if the acquiring company (6)] by virtue of its holding, including the shares received, demonstrably and directly holds a majority of voting rights in the company whose shares have been transferred.

2.     The [acquiring] (7) company may value the transferred assets at their book value or a higher value. Book value may be used even if for commercial law purposes a higher value must be used in the balance sheet. Book value is the value at which the transferor, at the time of the contribution in kind, has valued the transferred assets in accordance with the fiscal provisions concerning the determination of profits. …

…

4.     The value which the [acquiring] company assigns to the transferred assets is regarded, in respect of the transferor as the disposal price and the acquisition cost of the shares.’

11.      Paragraph 23(4) of the UmwStG provides:

‘If shares within the meaning of the second sentence of Paragraph 20(1) in an EU company with share capital are transferred to another EU company with share capital, the [first and second] sentences of Paragraph 20(2) will apply to the valuation of the shares received by the acquiring company, and the first sentence of Paragraph 20(4) will apply reciprocally to the valuation of the new shares received by the transferor from the acquiring company.’

12.      Finally, Germany has implemented Article 11(1)(a) of the Merger Directive by the first sentence of Paragraph 26(2) UmwStG, which provides:

‘Paragraph 23(4) is not applicable if the shares received are disposed of within seven years of the transfer unless the taxpayer proves that the shares received have been the subject of a further contribution in kind at book value on the basis of legal provisions of another Member State of the European Union corresponding to Paragraph 23(4).’

13.      The referring court explains that the first sentence of Paragraph 20(4) UmwStG imposes a ‘double book value carryover’. What is meant by that expression is that on a share exchange involving the transfer of a controlling holding, the transferor may carry over the book value of the shares transferred only if the acquiring company has itself so valued them.

14.      The referring court also notes that the above legislation treats exchanges of shares in the same way whether the acquiring company is a German company or a company from another Member State. (8)


 The facts

15.      A. T., the applicant, is a German company. (9) It had a controlling holding (89.5%) in a German GmbH (which I shall refer to as ‘the GmbH’). Financial markets rules required it to divest itself of that holding. It accordingly transferred its shares in the GmbH during the course of 2000 to a French company, (10) in exchange for new shares amounting to 1.47% of the capital issued by that company.

16.      The French company valued the GmbH shares (the shares in the acquired company) in its trading and tax balance sheets (drawn up in accordance with French law) at the market value ascribed to them in the transfer contract instead of at their lower book value, (11) although it appears that French law would have permitted book value to be used. A.T. sought to value the shares which it had been allotted in the French company at the book value of the GmbH shares for which the French company’s shares had been exchanged. The Finanzamt considered, however, that A.T. was obliged to attribute the market value used by the French company in valuing the GmbH shares, in accordance with Paragraphs 23(4) and 20(4) of the UmwStG 1995. Consequently, the Finanzamt treated the share exchange between A.T. and the French company as giving rise to a taxable capital gain. The Finanzamt therefore sought to tax the difference between the acquisition cost of the GmbH shares and the market value of the shares in the French company (which the German authorities considered as representing the value of the disposal proceeds of the transferred asset (i.e., the GmbH shares)).


 The main proceedings and the questions referred

17.      A.T. successfully challenged the tax assessment notices before the Finanzgericht Baden-Wurtemberg. The Finanzamt has appealed to the Bundesfinanzhof. That court is unsure whether the first sentence of Paragraph 23(4) read in conjunction with the first sentence of Paragraph 20(4) UmwStG and the ‘double book value carryover’ condition applicable under those provisions is contrary to Article 8 (1) and (2) of the Merger Directive and/ to Articles 43 and 56 EC.

18.      It has accordingly referred the following questions:

‘(a)      Does Article 8(1) and (2) of [the Merger Directive] preclude the taxation rules of a Member State under which, on the transfer of shares in one (EU) company limited by shares to another, the [shareholder of the acquired company] may maintain the book value of the shares transferred only if the [acquiring] (12) company has itself valued the shares transferred at their book value (“double book value carryover”)?

(b)      If the answer is in the negative: are the above rules contrary to Articles 43 EC and 56 EC, even though the “double book value carryover” is required also on a transfer of shares in a company limited by shares to one that is subject to unlimited taxation?’

19.      Written observations have been submitted by A.T., the German Government and the Commission, all of whom were represented at the hearing.


 The first question

20.      By its first question, the referring court asks whether Article 8(1) and (2) of the Directive preclude the application of national taxation rules that, following a share exchange, allow the shareholder in the acquired company to use the book value of the shares in the acquired company only if the acquiring company has also valued the shares in the acquired company at their book value (the double book value carryover).

21.      A.T. and the Commission submit that the question posed by the referring court should be answered in the affirmative. The German Government takes the opposite view. Essentially, I agree with the Commission and A.T.


 Analysis

22.      Like the Commission, I consider that the appropriate starting point is the actual wording of the Directive.

23.      The Court has held that the common tax rules laid down in the Directive, which cover different tax advantages, apply without distinction to all mergers, divisions, transfers of assets or exchanges of shares irrespective of the reasons for the operations. (13)

24.      Article 8(1) provides that an exchange of shares falling within its scope is to be treated with unconditional fiscal neutrality. The wording of that provision is unambiguous and mandatory: ‘the allotment … shall not, of itself, give rise to any taxation …’. It is clear from that wording that Member States have no discretion to impose additional conditions that must be satisfied before fiscally neutral treatment is accorded. The Court has stated that a share exchange to which Article 8(1) applies cannot in principle be subject to tax. (14)

25.      The effect of Article 8(1) is that an exchange of shares falling within the Directive’s scope is to be treated as a tax neutral event. In the absence of such a provision, such a transaction would normally give rise to tax consequences. Thus, for example, a capital gain will arise on the difference between the acquisition cost and the disposal consideration of the transferred asset if the latter increases in value after its acquisition. That capital gain might give rise to a charge to tax.

26.      The application of Article 8(1) is subject to the (mandatory) condition in the first paragraph of Article 8(2), namely, ‘the shareholder’s not attributing to the securities received a value for tax purposes higher than the securities exchanged had immediately before the merger, division or exchange’.

27.      ‘The shareholder’ referred to in Article 8(2) can only mean the shareholder in the acquired company (A.T.), because it refers back to Article 8(1), where the identity of the ‘shareholder’ is made clear.

28.      Accordingly, Germany’s alternative contention that Article 8(2) of the Directive concerns the valuation of the shares in the balance sheet of the acquiring (foreign) company is in my view, untenable.

29.      The German Government argues (based upon a literal construction of Article 8(2) by reference to the words ‘the securities received’) that the Directive requires simply that the acquiring company value the shares at their book value. It suggests that this phrase refers to the shares received by the foreign company for which it allotted securities by way of exchange.

30.      However, it is plain from the wording of the Directive that Article 8(1) and (2) is concerned with the tax consequences for the shareholder in the acquired company (A.T.). Only the value attributed to the securities representing the capital of the acquiring company (‘the securities received’) is relevant for the purposes of Article 8(2). That value determines the acquisition cost for the purposes of computing any chargeable gain on a subsequent disposal of the shares by the shareholder of the acquired company. I therefore cannot accept Germany’s contention that the condition in Article 8(2), first subparagraph refers to the value attributed to the shares of the acquired company (the GmbH) received by the French company.

31.      In my opinion Article 8(1) and (2) cannot be read disjunctively, because the second subparagraph of Article 8(2) sets out the consequences that flow from the application of Article 8(1).

32.      If the shareholder of the acquired company were obliged to substitute market value for book value, as Germany contends, a charge to tax would arise in circumstances where the Directive makes explicit provision for tax to be deferred. The Directive achieves tax neutrality by permitting the shareholder of the acquired company (A.T.) to assign the value attributed to the asset that has been disposed of (namely the acquired company) to the securities allotted to it by the acquiring company. This nevertheless also preserves the Member States’ right to charge tax if the securities representing the capital of the acquiring company are subsequently disposed of at a profit.

33.      Germany points out that the share exchange could have remained tax-exempt notwithstanding the provisions of the UmwStG, because French law permits the shares transferred to be valued at book value. If the French company had elected to value the shares which it had received in that way (instead of valuing them, as it did, at market value), no capital gains tax liability would have arisen at that point under German law. At the hearing, Germany argued that it was open to A.T., when negotiating the terms of the share exchange, to make it a condition of the transaction that the French company should value the shares at book value.

34.      I am unconvinced by that argument. It would mean that the tax consequences of any given transaction would be contingent upon (a) the fiscal regime of the Member State of the acquiring company and (b) the specific agreement between the parties (which would be likely to reflect their respective bargaining strengths at the time). It would thus not only be contrary to the wording of the Directive, but it would also undermine the legal certainty which it provides. Moreover, the wording of Article 8(1) is exhaustive and unconditional. It does not make deferral of tax dependent upon the details of the tax regime of the Member State in which the acquiring company is situated or upon the agreement between the parties to the transaction.

35.      The effect of Article 20(4) of the UmwStG is that the shareholder of the acquired company (A.T.) is obliged to use the value that the acquiring company (the French company) attributed to the shares in order to determine the value of the disposal proceeds of the shares in the GmbH. I can find no basis in the wording of Article 8(1), read with Article 8(2), for introducing that additional condition.

36.      The natural reading of Article 8(1) and (2) is supported by consideration of the Directive’s legal base and objectives.

37.      The Merger Directive, as a fiscal provision, is based on Article 100 of the EEC Treaty (now Article 94 EC). Its stated objective is to introduce tax rules which are neutral from the point of view of competition in order to allow businesses to adapt to the requirements of the common market. The fourth to sixth recitals indicate that, whilst one objective of the Directive is to defer the charge to tax on the shareholder of the acquired company where there is an exchange of shares, Member States retain the right to tax capital gains that have accrued, but only when such gains are ultimately realised. Thus, there is no need to depart from the express wording of the Directive by introducing additional conditions in order to protect Member States’ legitimate fiscal interests.

38.      It is, however, clear that the application of Article 20(4) of the UmwStG results in the imposition of a charge to tax in a situation where the Directive provides that the charge to tax should be deferred. Such a result runs counter to the expressed objectives of the Directive and upsets the careful balance that it strikes between the interests of businesses and those of the Member States.

39.      Germany argues that a disposal of shares by the shareholder of the acquired company will not necessarily give rise to any taxable gain. The new shares in the acquiring company, which the shareholder of the acquired company receives in exchange, may depreciate significantly as a result of market fluctuations (as did in fact the shares in the French company in the present case). At the hearing, the Commission disputed the relevance of this argument, pointing out that a potential drop in share value is an investment risk inherent in any share exchange, to which the tax authorities are indirectly exposed. It cannot however justify taxing the shareholder of the acquired company on unrealised reserves.

40.      In my view, Germany’s argument is based upon a misconception. The objective of Article 8(1) of the Directive is simply to defer the charge to tax to a point in time when the asset is realised. It is not to guarantee that there will always be a charge to tax at that point. Whether there is or not will depend upon the value of the asset when it is disposed of.

41.      Finally, the German Government argued that Paragraphs 20(4) and 23(4) of the UmwStG are designed to target a particular type of abuse. The following example was put forward by the Commission to illustrate this concern. Suppose that company X exchanges its holding in a subsidiary for shares in an acquiring company. That is a neutral operation for tax purposes (in accordance with Article 8(1) and (2) of the Directive). Suppose that the acquiring company values the shares which it has acquired at their market value and sells them immediately (by definition, without realising any capital gain). If the proceeds of sale can be paid back to company X free of tax, the effect is to enable company X to realise hidden reserves without paying tax on them.

42.      The Commission acknowledged that in principle a scheme such as that described could be regarded as abusive and hence not deserving of the protection provided by Article 8(1) and (2) of the Directive. However, it drew attention to the fact that the preservation of Member States’ financial interests is further guaranteed by Article 11(1)(a) of the Directive, which provides that where the transaction has as its principal objective or as one of its principal objectives tax evasion or tax avoidance, Member States may refuse to apply or withdraw the benefit of the deferred charge to tax. It is thus clear from the scheme of Articles 8 and 11 that Member States’ interest regarding the right to charge tax when the gain is realised is both taken into account and protected.

43.      In the present case, there is no suggestion that the share transaction was carried out for the purposes of tax evasion or tax avoidance. Rather, A.T. was required to divest itself of the shares by virtue of (mandatory) financial markets rules. Accordingly, there is no question of Article 11(1)(a) applying to this particular case.

44.      Nevertheless, for the sake of completeness, I add that, even where there is evidence of abuse, the Member State’s response must be proportionate and each case must be considered on its own facts. A general rule that automatically excludes certain transactions from provisions that provide tax advantages has been held to go beyond what is permitted by the Directive. (15)


 The second question

45.      By its second question, which arises only if the answer to the first question is in the negative, the referring court asks whether Articles 43 and 56 EC preclude the application of national rules such as those contained in Paragraphs 20 and 23 of the UmwStG, even though the ‘double book value carryover’ is required also on a transfer of shares in a company limited by shares to one that is subject to unlimited taxation.

46.      Since I take the view that the first question referred so clearly falls to be answered in the affirmative, I do not consider it necessary to answer the second question.


 Conclusion

47.      I therefore consider that the first question referred by the Bundesfinanzhof should be answered as follows:

Article 8(1) and (2) of Council Directive 90/434/EC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States preclude the application of a national taxation rule which prescribes that, upon the transfer of shares in one EU company limited by shares to another, the shareholder of the acquired company may maintain the book value of the shares transferred only if the acquiring company has itself valued the shares transferred at their book value.

1 – Original language: English.

2 – Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (OJ 1990 L 225, p. 1). This Directive has subsequently been amended, but the main proceedings are concerned only with the original version to which I refer in this Opinion.

3 – Article 8(1), set out in point 7 below.

4 – The second subparagraph of Article 8(2), ibid.

5 – Law of 28 October 1994, Bundesgesetzblatt 1994, I, p. 3267.

6 – Paragraph 20(1) and Paragraph 23(4) of the UmwStG both refer to an ‘ubernehmende Kapitalgesellschaft’ whilst the usual primary meaning of ‘übernehmen’ is to ‘take over’, the adjective ‘übernehmende’ is used specifically in Article 2(f) of the Directive to mean a ‘receiving’ company – a term that is reserved by the Directive to mergers, divisions and transfers of assets. The German text of Article 2(h) of the Directive uses ‘erwerbende Gesseschaft’ for ‘acquiring company’. Since the present reference concerns taxation of an acquiring company in the context of an exchange of shares (Article 2(d) and (h) of the Directive), I shall for the sake of clarity simply use the term ‘acquiring company’ in this Opinion.

7 – The German Government helpfully added ‘[übernehmende]’ before the noun‘kapitalgesellschaft’ here and in subparagraph (4) when setting out the provisions in its observations.

8 – According to the applicant the German legislation has been amended with effect from 1 January 2007 so that the double book value carryover now applies only in the context of a share exchange between German companies.

9 – The Court has granted the applicant’s request for anonymity in the present proceedings.

10 – Thus, A.T. is the ‘shareholder of the … acquired company’ (Article 8(1) of the Directive). The GmbH is the ‘acquired company’ (Article 2(g), and the French company is the ‘acquiring company’ (Article 2(h)).

11 – Book value is the value at which the transferor at the time of the contribution in kind (the share exchange) has valued the assets in accordance with the fiscal provisions concerning the determination of profits; see point 10 above.

12 –      The question put by the referring court uses the terms ‘receiving company’, and ‘transferring party’. In order to be consistent with the language of the Directive I have used the term ‘acquiring company’ and ‘shareholder of the acquired company’ in this Opinion (see footnote 10).

13 – See Case C-28/95 Leur Bloem [1997] ECR I-4161, paragraph 36; and Case C-321/05 Kofoed [2007] ECR I-5795, paragraph 30.

14 – See Kofoed, cited in footnote 13 above, paragraphs 24 and 35.

15 – See Leur Bloem, cited in footnote 13, paragraphs 43 to 48.