(Reference for a preliminary ruling from the Bundesfinanzhof)

(Free movement of capital – Corporation tax – Exemption of rental income – Residence qualification – Charitable foundation governed by private law)

Summary of the Judgment

Free movement of capital – Restrictions

(EC Treaty, Arts 73b and 73d (now Arts 56 EC and 58 EC))

Article 73b of the Treaty (now Article 56 EC), in conjunction with Article 73d of the Treaty (now Article 58 EC), must be interpreted as precluding a Member State which exempts from corporation tax rental income received in its territory by charitable foundations which, in principle, have unlimited tax liability if they are established in that Member State, from refusing to grant the same exemption in respect of similar income to a charitable foundation established under private law solely on the ground that, as it is established in another Member State, that foundation has only limited tax liability in its territory.

It is not a requirement under Community law for Member States automatically to confer on foreign foundations recognised as having charitable status in their Member State of origin the same status in their own territory. However, where a foundation recognised as having charitable status in one Member State also satisfies the requirements imposed for that purpose by the law of another Member State and where its object is to promote the very same interests of the general public, which it is a matter for the national authorities of that other State, including its courts, to determine, the authorities of that Member State cannot deny that foundation the right to equal treatment solely on the ground that it is not established in its territory.

Such a difference in treatment cannot be justified by the pursuit of objects connected with the promotion at national level of culture and high-level training where the national legislation in question is not based on the premiss that the activities pursued by charitable foundations must benefit the national general public.

Moreover, such legislation cannot be justified by the need to ensure effective fiscal supervision. Admittedly, before granting a foundation a tax exemption, a Member State is authorised to apply measures enabling it to ascertain in a clear and precise manner whether the foundation meets the conditions imposed by national law in order to be entitled to the exemption and to monitor its effective management. However, while it may prove more difficult to carry out the necessary checks where foundations are established in other Member States, these are disadvantages of a purely administrative nature which are not sufficient to justify a refusal on the part of the authorities of the State concerned to grant such foundations the same tax exemptions as are granted to foundations of the same kind, which, in principle, have unlimited tax liability in that State.

Furthermore, where there is no direct link between a tax advantage consisting of exemption from tax of rental income and the offsetting of that advantage by a particular tax levy, the restriction in question cannot be justified by the need to protect the cohesion of the tax system.

The same applies with regard to the need to protect the basis of tax revenue, since reduction in tax revenue cannot be regarded an overriding reason in the public interest which would justify a measure which is, in principle, contrary to a fundamental freedom.

As regards the fight against crime, the fact that a foundation is established in another Member State cannot give rise to a general assumption of criminal activity. Moreover, to preclude such foundations from entitlement to a tax exemption when a number of measures are available to monitor their accounts and activities may be considered to be a measure which goes beyond what is necessary to combat crime.

(see paras 39-40, 45, 47-48, 55-56, 58-62, operative part)

14 September 2006 (*)

(Free movement of capital – Corporation tax – Exemption of rental income – Residence qualification – Charitable foundation governed by private law)

In Case C-386/04,

REFERENCE for a preliminary ruling under Article 234 EC, from the Bundesfinanzhof (Germany), made by decision of 14 July 2004, received at the Court on 8 September 2004, in the proceedings

Finanzamt München für Körperschaften,

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, J. Malenovský, S. von Bahr, A. Borg Barthet and U. Lõhmus (Rapporteur), Judges,

Advocate General: C. Stix-Hackl,

Registrar: M. Ferreira, Principal Administrator,

having regard to the written procedure and further to the hearing on 13 October 2005,

after considering the observations submitted on behalf of:

– the Centro di Musicologia Walter Stauffer, by O. Thömmes, Rechtsanwalt,

– the Finanzamt München für Körperschaften, by C. Anneser and K. Schmid, acting as Agents,

– the German Government, by A. Tiemann and U. Forsthoff, acting as Agents,

– Ireland, by D. O’Hagan, acting as Agent, D. Moloney, BL, and K. Maguire, BL,

– the Italian Government, by I.M. Braguglia, acting as Agent, and P. Gentili, avvocato dello Stato,

– the United Kingdom Government, by C. White, acting as Agent, and R. Hill, barrister,

– the Commission of the European Communities, by K. Gross and R. Lyal, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 15 December 2005,

gives the following

This reference for a preliminary ruling concerns the interpretation of Article 52 of the EC Treaty (now, after amendment, Article 43 EC), Article 58 of the EC Treaty (now Article 48 EC), Article 59 of the EC Treaty (now, after amendment, Article 49 EC), Article 66 of the EC Treaty (now Article 55 EC) and Article 73b of the EC Treaty (now Article 56 EC).

The reference arose in proceedings between the Centro di Musicologia Walter Stauffer, a foundation established under Italian law (‘the foundation’), and the Finanzamt München für Körperschaften (Munich Corporation Tax Office) (‘the Finanzamt’), concerning the liability of certain income to corporation tax for the 1997 tax year.

Legal context

Community legislation

Directive 2011/92

Recitals 7 to 9 of Directive 2011/92 state:

‘(7) Development consent for public and private projects which are likely to have significant effects on the environment should be granted only after an assessment of the likely significant environmental effects of those projects has been carried out. …

(8) Projects belonging to certain types have significant effects on the environment and those projects should, as a rule, be subject to a systematic assessment.

(9) Projects of other types may not have significant effects on the environment in every case and those projects should be assessed where the Member States consider that they are likely to have significant effects on the environment.’

Article 2(1) of that directive provides:

‘Member States shall adopt all measures necessary to ensure that, before development consent is given, projects likely to have significant effects on the environment by virtue, inter alia, of their nature, size or location are made subject to a requirement for development consent and an assessment with regard to their effects on the environment. Those projects are defined in Article 4.’

Under Article 3(1) of that directive:

‘The environmental impact assessment shall identify, describe and assess in an appropriate manner, in the light of each individual case, the direct and indirect significant effects of a project on the following factors:

…

(b) biodiversity, with particular attention to species and habitats protected under [Council Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora (OJ 1992 L 206, p. 7), as amended by Council Directive 2013/17/EU of 13 May 2013 (OJ 2013 L 158, p. 193) (“Directive 92/43”)] and Directive 2009/147/EC [of the European Parliament and of the Council of 30 November 2009 on the conservation of wild birds (OJ 2010 L 20, p. 7)];

…’

Article 4 of Directive 2011/92 provides:

‘1. Subject to Article 2(4), projects listed in Annex I shall be made subject to an assessment in accordance with Articles 5 to 10.

(a) a case-by-case examination;

(b) thresholds or criteria set by the Member State.

Member States may decide to apply both procedures referred to in points (a) and (b).

Where a case-by-case examination is carried out or thresholds or criteria are set for the purpose of paragraph 2, the relevant selection criteria set out in Annex III shall be taken into account. Member States may set thresholds or criteria to determine when projects need not undergo either the determination under paragraphs 4 and 5 or an environmental impact assessment, and/or thresholds or criteria to determine when projects shall in any case be made subject to an environmental impact assessment without undergoing a determination set out under paragraphs 4 and 5.

Where Member States decide to require a determination for projects listed in Annex II, the developer shall provide information on the characteristics of the project and its likely significant effects on the environment. The detailed list of information to be provided is specified in Annex IIA. The developer shall take into account, where relevant, the available results of other relevant assessments of the effects on the environment carried out pursuant to Union legislation other than this Directive. The developer may also provide a description of any features of the project and/or measures envisaged to avoid or prevent what might otherwise have been significant adverse effects on the environment.

The competent authority shall make its determination, on the basis of the information provided by the developer in accordance with paragraph 4 taking into account, where relevant, the results of preliminary verifications or assessments of the effects on the environment carried out pursuant to Union legislation other than this Directive. The determination shall made available to the public and:

(a) where it is decided that an environmental impact assessment is required, state the main reasons for requiring such assessment with reference to the relevant criteria listed in Annex III; or

(b) where it is decided that an environmental impact assessment is not required, state the main reasons for not requiring such assessment with reference to the relevant criteria listed in Annex III, and, where proposed by the developer, state any features of the project and/or measures envisaged to avoid or prevent what might otherwise have been significant adverse effects on the environment.

Member States shall ensure that the competent authority makes its determination as soon as possible and within a period of time not exceeding 90 days from the date on which the developer has submitted all the information required pursuant to paragraph 4. In exceptional cases, for instance relating to the nature, complexity, location or size of the project, the competent authority may extend that deadline to make its determination; in that event, the competent authority shall inform the developer in writing of the reasons justifying the extension and of the date when its determination is expected.’

Annex II.A of that directive contains the list of ‘information to be provided by the developer on the projects listed in Annex II’. That list reads as follows:

‘1. A description of the project, including in particular:

(a) a description of the physical characteristics of the whole project and, where relevant, of demolition works;

(b) a description of the location of the project, with particular regard to the environmental sensitivity of geographical areas likely to be affected.

(a) the expected residues and emissions and the production of waste, where relevant;

(b) the use of natural resources, in particular soil, land, water and biodiversity.

The criteria of Annex III shall be taken into account, where relevant, when compiling the information in accordance with points 1 to 3.’

Directive 2014/52

Recitals 11 and 29 of Directive 2014/52 state:

‘(11) The measures taken to avoid, prevent, reduce and, if possible, offset significant adverse effects on the environment, in particular on species and habitats protected under [Directive 92/43] and Directive 2009/147 …, should contribute to avoiding any deterioration in the quality of the environment and any net loss of biodiversity, in accordance with the [European] Union’s commitments in the context of the [United Nations Convention on Biological Diversity, signed in Rio de Janeiro on 5 June 1992,] and the objectives and actions of the Union Biodiversity Strategy up to 2020 laid down in the [Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions] of 3 May 2011 entitled ‘Our life insurance, our natural capital: an EU biodiversity strategy to 2020’ [(COM(2011) 244 final)]

…

(29) When determining whether significant effects on the environment are likely to be caused by a project, the competent authorities should identify the most relevant criteria to be considered and should take into account information that could be available following other assessments required by Union legislation in order to apply the screening procedure effectively and transparently. In this regard, it is appropriate to specify the content of the screening determination, in particular where no environmental impact assessment is required. Moreover, taking into account unsolicited comments that might have been received from other sources, such as members of the public or public authorities, even though no formal consultation is required at the screening stage, constitutes good administrative practice.’

Directive 92/43

Article 6(3) of Directive 92/43 provides:

‘Any plan or project not directly connected with or necessary to the management of the site but likely to have a significant effect thereon, either individually or in combination with other plans or projects, shall be subject to appropriate assessment of its implications for the site in view of the site’s conservation objectives. In the light of the conclusions of the assessment of the implications for the site and subject to the provisions of paragraph 4, the competent national authorities shall agree to the plan or project only after having ascertained that it will not adversely affect the integrity of the site concerned and, if appropriate, after having obtained the opinion of the general public.’

Article 12(1) of that directive provides:

‘Member States shall take the requisite measures to establish a system of strict protection for the animal species listed in Annex IV(a) in their natural range, prohibiting:

(a) all forms of deliberate capture or killing of specimens of these species in the wild;

(b) deliberate disturbance of these species, particularly during the period of breeding, rearing, hibernation and migration;

(c) deliberate destruction or taking of eggs from the wild;

(d) deterioration or destruction of breeding sites or resting places.’

Point (a) of Annex IV to that directive mentions ‘all species’ of bats belonging to the suborder of ‘microchiroptera’.

Irish law

The information provided by the national court shows that, during the tax year at issue, the foundation pursued charitable objects within the meaning of Paragraphs 51 to 68 of the AO. According to that court, Article 52 of the AO does not require promotion of the interests of the general public to be undertaken for the benefit of German nationals. Accordingly, the foundation is, in principle, exempt from corporation tax under the first sentence of Paragraph 5(1)(9) of the KStG, and it is not liable to tax on its income under the second and third sentences of that provision either, since the letting of the property did not extend beyond asset management and did not constitute a commercial business activity within the meaning of Paragraph 14(1) of the AO.

11However, since the foundation’s seat and management are in Italy, the rental income it receives in Germany is subject to limited tax liability. Accordingly, therefore, Paragraph 5(2)(3) of the KStG must be applicable. Under that provision, the tax exemption, which applies, inter alia, to corporations pursuing exclusively and directly charitable objects, does not apply to taxable persons with limited tax liability. As a result, the foundation was assessed to corporation tax on the rental income it received in Germany from the letting of the commercial property.

12The foundation entered an objection against the 1997 tax assessment on the ground that, as it is a charitable foundation, it should have been exempt from tax. That objection was rejected. It then lodged an appeal with the Finanzgericht München (Finance Court, Munich), which was unsuccessful. Subsequently, the foundation lodged an appeal on a point of law with the Bundesfinanzhof (Federal Finance Court), which has doubts as to whether the exclusion of corporations from the tax exemption provided for by Paragraph 5(2)(3) of the KStG is compatible with the requirements of Community law.

13In those circumstances, the Bundesfinanzhof decided to stay the proceedings and to refer the following question to the Court for a preliminary ruling:

Is it contrary to Article 52 EC, in conjunction with Article 58 of the EC Treaty, Article 59 of the EC Treaty, in conjunction with Articles 66 of the EC Treaty and 58 of the EC Treaty and Article 73b of the EC Treaty, for a charitable foundation established under private law in another Member State, with limited liability to tax on its rental income in Germany, unlike a charitable foundation established in Germany, with unlimited liability to tax and receiving similar income, not to be entitled to exemption from corporation tax?

The question referred for a preliminary ruling

14By its question, the Bundesfinanzhof asks, in essence, whether the provisions of the EC Treaty relating to the right of establishment, the freedom to provide services and/or the free movement of capital preclude a Member State, which exempts from corporation tax rental income received in its territory by charitable foundations with, in principle, unlimited liability to tax if they are established in that Member State, from refusing to grant the same exemption to a charitable foundation governed by private law in respect of similar income on the basis that, as it is established in another Member State, it has only limited liability to tax in its territory.

15As a preliminary point, it should be noted that, although direct taxation falls within the competence of the Member States, the latter must none the less exercise that competence consistently with Community law (see, inter alia, Case C-80/94 Wielockx [1995] ECR I-2493, paragraph 16, Case C-39/04 Laboratoires Fournier [2005] ECR I-2057, paragraph 14, and Case C‑513/03 Van Hilten-van der Heijden [2006] ECR I-0000, paragraph 36).

16It is then necessary to examine whether, in the light of the facts of the case, the foundation may rely on the rules relating to the right of establishment, the rules on freedom to provide services and/or the rules governing free movement of capital.

17Freedom of establishment, which Article 52 of the EC Treaty confers on Community nationals and which includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, under the conditions laid down for its own nationals by the law of the Member State where such establishment is effected, entails, in accordance with Article 58 of the EC Treaty, for companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Community, the right to exercise their activity in the Member State concerned through a subsidiary, a branch or an agency (Case C‑307/97 Saint Gobain [1999] ECR I-6161, paragraph 35, Case C-446/03 Marks & Spencer [2005] ECR I-10837, paragraph 30, and Case C‑471/04 Keller Holding [2006] ECR I-0000, paragraph 29).

18According to the case-law of the Court, the concept of establishment within the meaning of the Treaty is a very broad one, allowing a Community national to participate, on a stable and continuous basis, in the economic life of a Member State other than his State of origin and to profit therefrom, so contributing to economic and social interpenetration within the Community in the sphere of activities as self-employed persons (see, to that effect, Case 2/74 Reyners [1974] ECR 631, paragraph 21, and Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 25).

19However, in order for the provisions relating to freedom of establishment to apply, it is generally necessary to have secured a permanent presence in the host Member State and, where immovable property is purchased and held, that property should be actively managed. It is clear from the account provided by the national court that the foundation does not have any premises in Germany for the purposes of pursuing its activities and that the services ancillary to the letting of the property are provided by a German property management agent.

20It must therefore be concluded that the provisions governing freedom of establishment are not applicable in circumstances such as those in the dispute in the main proceedings.

21It then falls to be determined whether the foundation may rely on the provisions in Articles 73b of the EC Treaty and 73g of the EC Treaty concerning the free movement of capital.

22The Treaty does not define the notions of ‘capital movements’ or ‘payments’. However, it is established case-law that, in as much as Article 73b of the EC Treaty substantially reproduces the contents of Article 1 of Directive 88/361, and even though that directive was adopted on the basis of Articles 69 and 70(1) of the EEC Treaty (Articles 67 to 73 of the EEC Treaty having been replaced by Articles 73b to 73g of the EC Treaty, now Articles 56 EC to 60 EC), the nomenclature in respect of ‘movements of capital’ annexed to Directive 88/361 still has the same indicative value, for the purposes of defining the notion of capital movements, as it did before the entry into force of those provisions, subject to the qualification, contained in the introduction to the nomenclature, that the list set out therein is not exhaustive (see, inter alia, Case C-222/97 Trummer and Mayer [1999] ECR I‑1661, paragraph 21, Joined Cases C-515/99, C-519/99 to C‑524/99 and C‑526/99 to C-540/99 Reisch and Others [2002] ECR I-2157, paragraph 30, and Van Hilten-van der Heijden, paragraph 39).

23It is not disputed that the foundation, whose seat is in Italy, has commercial property in Munich which it lets. Among the capital movements listed in Annex I to Directive 88/361, under heading II entitled ‘Investments in real estate’, are investments in real estate on national territory by non-residents.

24It follows that free movement of capital covers both the ownership and administration of such property and it is not therefore necessary to consider whether the foundation acts as a provider of services.

25Under Article 73b of the EC Treaty, any restriction on capital movements between Member States is forbidden.

26In order to determine whether national legislation such as that at issue in the main proceedings involves a restriction on the free movement of capital within the meaning of Article 73b of the EC Treaty, it is necessary to examine whether the application of that article has a restrictive effect on charitable foundations established in other Member States in so far as rental income received in national territory does not qualify for the exemption enjoyed by other foundations of the same kind which have unlimited tax liability in that territory.

27The fact that tax exemption for rental income applies only to charitable foundations which, in principle, have unlimited tax liability in Germany places foundations whose seats are in another Member State at a disadvantage and may constitute an obstacle to the free movement of capital and payments.

28It follows from the above that legislation such as that at issue in the main proceedings constitutes a restriction on the free movement of capital which is, in principle, prohibited by Article 73b of the EC Treaty.

29It is necessary, however, to consider whether such a restriction may be justified in the light of the provisions of the Treaty.

30In accordance with Article 73d(1)(a) of the EC Treaty, Article 73b takes effect without prejudice to the right available to Member States to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested.

31However, Article 73d(1)(a) of the EC Treaty, which, as a derogation from the fundamental principle of the free movement of capital, must be interpreted strictly, cannot be interpreted as meaning that any tax legislation making a distinction between taxpayers by reference to their place of residence or the Member State in which their capital is invested is automatically compatible with the Treaty. The derogation in Article 73d(1)(a) of the EC Treaty is itself limited by Article 73d(3) of the EC Treaty, which provides that the national provisions referred to in Article 73d(1) ‘shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 73b’ (see Case C-319/02 Manninen [2004] ECR I‑7477, paragraph 28).

32Unequal treatment permitted under Article 73d(1)(a) of the EC Treaty must therefore be distinguished from arbitrary discrimination or disguised restrictions prohibited under Article 73d(3) of the EC Treaty. According to the case-law, for national tax legislation such as that at issue in the main proceedings, which distinguishes between foundations with unlimited tax liability and those with limited liability, to be regarded as compatible with the Treaty provisions on the free movement of capital, the difference in treatment must concern situations which are not objectively comparable or be justified by overriding reasons in the general interest, such as the need to safeguard the coherence of the tax system or effective fiscal supervision (see, to that effect, Case C-35/98 Verkooijen [2000] ECR I‑4071, paragraph 43, and Manninen, paragraph 29). In order to be justified, moreover, the difference in treatment between charitable foundations with unlimited tax liability in Germany and foundations of the same kind established in other Member States must not go beyond what is necessary in order to attain the objective of the legislation in question.

33The Finanzamt, together with the German and United Kingdom Governments, maintain that a charitable foundation with unlimited tax liability and the applicant, which has limited tax liability on account of the fact that it is non-resident, are not in a comparable situation.

34The former plays an active role in German society and performs duties which would otherwise have to be carried out by local or national authorities, which would be a burden on the State budget, whereas the charitable activities of the latter – both actual and those provided for in their statutes – concern only the Italian Republic and the Swiss Confederation.

35Moreover, the conditions under which Member States confer charitable status on a foundation, which entails the grant of tax benefits and other privileges, varies from one Member State to the other, according to each State’s conception of public utility and the scope given by it to the concept of ‘charitable purposes’. It follows that a foundation which meets the requirement imposed by Italian law may not be in a comparable situation to a foundation which meets the requirements imposed by German law since it is highly likely that the requirements applicable in each Member State concerning the conferring of charitable status are different.

36None of those arguments can be upheld.

37Firstly, whilst Member States are entitled to require a sufficiently close link between foundations upon which they confer charitable status for the purposes of granting certain tax benefits and the activities pursued by those foundations, it is clear from the order for reference that it is irrelevant, for the purposes of the decision in the case in the main proceedings, whether such a link exists.

38Paragraph 52 of the AO provides that a corporation pursues charitable objects where its activities are directed at the promotion of the interests of the general public in a manner other than for profit but does not, however, make a distinction as to whether those activities are carried out in national territory or abroad. The national court states that the promotion of the interests of the general public within the meaning of that provision does not mean that such measures must benefit nationals of the Federal Republic of Germany or its inhabitants.

39Secondly, as the Advocate General observed at point 94 of her Opinion, it is the case that it is not a requirement under Community law for Member States automatically to confer on foreign foundations recognised as having charitable status in their Member State of origin the same status in their own territory. Member States have a discretion in this regard that they must exercise in accordance with Community law (see, to that effect, Case C-415/04 Kinderopvang Enschede