Proceedings brought by

(Reference for a preliminary ruling from the Korkein hallinto-oikeus)

(Income tax – Tax credit for dividends paid by Finnish companies – Articles 56 EC and 58 EC – Cohesion of the tax system)

Summary of the Judgment

Free movement of capital – Restrictions – Tax credit granted to taxpayers in respect of dividends paid by limited liability companies – Restriction to national companies – Not permissible – Justification – None

(Arts 56 EC and 58 EC)

Articles 56 EC and 58 EC preclude national legislation whereby the entitlement of a fully-taxable person in a Member State to a tax credit on dividends paid to him by limited companies, which offsets the corporation tax due by those companies against the tax due from the shareholder by way of income tax on revenue from capital, is excluded where those companies are not established in that State.

Such tax legislation constitutes a restriction on the free movement of capital in that it has the effect of deterring fully-taxable persons in the Member State concerned from investing their capital in companies established in another Member State. It also has a restrictive effect as regards companies established in other Member States in that it constitutes an obstacle to their raising capital in the Member State concerned.

That legislation cannot be justified by an objective difference in situation capable of giving rise to a difference in tax treatment in accordance with Article 58(1)(a) EC. In the face of a tax rule which aims to prevent double taxation of the profits distributed by the company in which the investment is made – corporation tax and then income tax – shareholders who are fully taxable in the Member State concerned find themselves in a comparable situation, whether they receive dividends from a company established in that Member State or from a company established in another Member State, since in both cases the dividends are, apart from the tax credit, capable of being subjected to double taxation.

Nor can that legislation be regarded as an emanation of the principle of territoriality, since that principle does not preclude the granting of a tax credit in respect of dividends paid by companies established in other Member States. In any event, having regard to Article 58(1)(a) EC, the principle of territoriality cannot justify different treatment of dividends distributed by companies established in the Member State concerned and those paid by companies established in other Member States, if the categories of dividends concerned by that difference in treatment share the same objective situation.

Furthermore, even if that tax legislation is based on a link between the tax advantage and the offsetting tax levy, in providing that the tax credit granted to the shareholder fully taxable in the Member State concerned is to be calculated by reference to the corporation tax due from the company established in that Member State on the profits which it distributes, such legislation does not appear to be necessary in order to preserve the cohesion of the national tax system. Having regard to the objective of preventing double taxation, the granting to a shareholder who holds shares in a company established in one Member State of a tax credit calculated by reference to the corporation tax owed by that company in that Member State would not threaten the cohesion of the national tax system and would constitute a measure less restrictive of the free movement of capital.

As for the reduction in tax receipts in relation to dividends paid by companies established in other Member States, this cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is contrary to a fundamental freedom.

(see paras 20, 22-24, 32-36, 38-39, 44-46, 49, 55, operative part)

JUDGMENT OF THE COURT (Grand Chamber) 7 September 2004 (1)

(Income tax – Tax credit for dividends paid by Finnish companies – Articles 56 EC and 58 EC – Coherence of the tax system)

In Case C-319/02, Reference for a preliminary ruling under Article 234 EC, by the Korkein hallinto-oikeus (Finland), by order of 10 September 2002, which arrived at the Court on 12 September 2002, in the proceedings brought by

Petri Manninen,

THE COURT (Grand Chamber),

composed of V. Skouris, President, P. Jann, C.W.A. Timmermans, C. Gulmann, J.-P. Puissochet and J.N. Cunha Rodrigues, Presidents of Chambers, R. Schintgen, F. Macken, N. Colneric, S. von Bahr and K. Lenaerts (Rapporteur), Judges,

Advocate General: J. Kokott, Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 17 February 2004, after considering the observations submitted on behalf of:

– Waltham Abbey Residents Association, by J. Devlin, Senior Counsel, J. Kenny, Barrister-at-Law, and D. Healy, Solicitor,

– An Bord Pleanála, by B. Foley, Senior Counsel, A. Carroll, Barrister-at-Law, and P. Reilly, Solicitor,

– Ireland, by M. Browne, Chief State Solicitor, S. Finnegan, K. Hoare and A. Joyce, acting as Agents, and by D. McGrath, Senior Counsel, F. Valentine, Senior Counsel, and E. O’Callaghan, Barrister-at-Law,

– the European Commission, by M. Noll-Ehlers and N. Ruiz García, acting as Agents,

having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,

gives the following

This request for a preliminary ruling concerns the interpretation of Directive 2011/92/EU of the European Parliament and of the Council of 13 December 2011 on the assessment of the effects of certain public and private projects on the environment (OJ 2012 L 26, p. 1), as amended by Directive 2014/52/EU of the European Parliament and of the Council of 16 April 2014 (OJ 2014 L 124, p. 1) (‘Directive 2011/92’).

The request has been made in proceedings between, on the one hand, Waltham Abbey Residents Association and, on the other hand, An Bord Pleanála (Planning Board, Ireland; ‘the Board’), Ireland and the Attorney General (Ireland), concerning authorisation granted by the Board for a strategic residential housing development.

Legal context

European Union law

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.

Annex III to that directive sets out the ‘criteria to determine whether the projects listed in Annex II should be subject to an environmental impact assessment’.

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 questions referred

18In its questions, which may be examined together, the national court is asking in essence whether Articles 56 EC and 58 EC preclude legislation, such as that at issue in the main proceedings, whereby the right of a fully-taxable person in a Member State to the benefit of a tax credit on dividends paid to him by limited companies is excluded where those companies are not established in that State.

19The first point to be made is that, although direct taxation falls within their competence, the Member States must none the less exercise that competence consistently with Community law (Case C-80/94 Wielockx [1995] ECR I-2493, paragraph 16; Case C-264/96 ICI [1998] ECR I-4695, paragraph 19; and Case C-311/97 Royal Bank of Scotland [1999] ECR I-2651, paragraph 19).

20As for whether tax legislation such as that at issue in the main proceedings involves a restriction on the free movement of capital within the meaning of Article 56 EC, it should be noted that the tax credit under Finnish tax legislation is designed to prevent the double taxation of company profits distributed to shareholders by setting off the corporation tax due from the company distributing dividends against the tax due from the shareholder by way of income tax on revenue from capital. The end result of such a system is that dividends are no longer taxed in the hands of the shareholder. Since the tax credit applies solely in favour of dividends paid by companies established in Finland, that legislation disadvantages fully taxable persons in Finland who receive dividends from companies established in other Member States, who, for their part, are taxed at the rate of 29% by way of income tax on revenue from capital.

21It is undisputed that the tax convention concluded between the States of the Nordic Council for the prevention of double taxation is not capable of eliminating that unfavourable treatment. That convention does not provide for any system for setting off corporation tax against income tax due on revenue from capital. It merely seeks to attenuate the effects of double taxation in the hands of the shareholder in relation to that latter tax.

22It follows that the Finnish tax legislation has the effect of deterring fully taxable persons in Finland from investing their capital in companies established in another Member State.

23Such a provision also has a restrictive effect as regards companies established in other Member States, in that it constitutes an obstacle to their raising capital in Finland. Since revenue from capital of non-Finnish origin receives less favourable tax treatment than dividends distributed by companies established in Finland, the shares of companies established in other Member States are less attractive to investors residing in Finland than shares in companies which have their seat in that Member State (Case C-35/98 Verkooijen [2000] ECR I-4071, paragraph 35; Case C-334/02 Commission v France [2004] ECR I-0000, paragraph 24).

24It 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 56 EC.

25It must, however, be examined whether that restriction on the free movement of capital is capable of being justified having regard to the provisions of the EC Treaty.

26It should be recalled in that respect that, in accordance with Article 58(1)(a) EC, ‘… Article 56 shall be without prejudice to the right of 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 … the place where their capital is invested’.

27According to the Finnish, French and United Kingdom Governments, that provision clearly shows that Member States are entitled to reserve the benefit of the tax credit for dividends paid by companies established in their territory.

28In that respect, it should be noted that Article 58(1)(a) of the 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 the place where they invest their capital is automatically compatible with the Treaty. The derogation in Article 58(1)(a) EC is itself limited by Article 58(3) EC, which provides that the national provisions referred to in Article 58(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 56’.

29A distinction must therefore be made between unequal treatment which is permitted under Article 58(1)(a) EC and arbitrary discrimination which is prohibited by Article 58(3). In that respect, the case-law shows that, for national tax legislation like that at issue, which, in relation to a fully taxable person in the Member State concerned makes a distinction between revenue from national dividends and that from foreign dividends, to be capable of being 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 (Verkooijen, paragraph 43). In order to be justified, moreover, the difference in treatment between different categories of dividends must not go beyond what is necessary in order to attain the objective of the legislation.

30The Finnish, French and United Kingdom Governments begin by arguing that the dividends paid are fundamentally different in character according to whether they come from Finnish or non-Finnish companies. Unlike profits distributed by non-Finnish companies, those paid in the form of dividends by companies established in Finland are subject to corporation tax in that Member State, conferring entitlement on the part of a shareholder who is fully taxable in Finland to the tax credit. The difference in treatment between dividends paid by companies established in that State and those paid by companies which do not satisfy that condition is therefore justified, they argue, in the light of Article 58(1)(a) EC.

31The French Government further argues that the Finnish tax legislation conforms to the principle of territoriality and cannot therefore be regarded as contrary to the Treaty provisions on the free movement of capital (Case C-250/95 Futura Participations and Singer [1997] ECR I‑2471, paragraphs 18 to 22).

32In that regard, it needs to be examined whether, in accordance with Article 58(1)(a) EC, the difference in treatment of a shareholder fully taxable in Finland according to whether he receives dividends from companies established in that Member State or from companies established in other Member States relates to situations which are not objectively comparable.

33It should be noted that the Finnish tax legislation is designed to prevent double taxation of company profits by granting to a shareholder who receives dividends a tax advantage linked to the taking into account of the corporation tax due from the company distributing the dividends.

34It is true that, in relation to such legislation, the situation of persons fully taxable in Finland might differ according to the place where they invested their capital. That would be the case in particular where the tax legislation of the Member State in which the investments were made already eliminated the risk of double taxation of company profits distributed in the form of dividends, by, for example, subjecting to corporation tax only such profits by the company concerned as were not distributed.

35That is not the case here, however. As the order for reference shows, both dividends distributed by a company established in Finland and those paid by a company established in Sweden are, apart from the tax credit, capable of being subjected to double taxation. In both cases, the revenue is first subject to corporation tax and then – in so far as it is distributed in the form of dividends – to income tax in the hands of the beneficiaries.

36Where a person fully taxable in Finland invests capital in a company established in Sweden, there is thus no way of escaping double taxation of the profits distributed by the company in which the investment is made. In the face of a tax rule which takes account of the corporation tax owed by a company in order to prevent double taxation of the profits distributed, shareholders who are fully taxable in Finland find themselves in a comparable situation, whether they receive dividends from a company established in that Member State or from a company established in Sweden.

37It follows that the Finnish tax legislation makes the grant of the tax credit subject to the condition that the dividends be distributed by companies established in Finland, while shareholders fully taxable in Finland find themselves in a comparable situation, whether they receive dividends from companies established in that Member State or from companies established in other Member States (see, to that effect, Case C-107/94 Asscher [1996] ECR I‑3089, paragraphs 41 to 49, and Case C-234/01 Gerritse [2003] ECR I-5933, paragraphs 47 to 54).

38Moreover, unlike the legislation at issue in Futura Participations and Singer, the Finnish tax legislation cannot be regarded as an emanation of the principle of territoriality. As the Advocate General has pointed out in paragraph 42 of her Opinion, that principle does not preclude the granting of a tax credit to a person fully taxable in Finland in respect of dividends paid by companies established in other Member States (Futura Participations and Singer, paragraphs 18 to 22).

39In any event, having regard to Article 58(1)(a) EC, the principle of territoriality cannot justify different treatment of dividends distributed by companies established in Finland and those paid by companies established in other Member States, if the categories of dividends concerned by that difference in treatment share the same objective situation.

40Secondly, the Finnish, French and United Kingdom Governments maintain that the Finnish tax legislation is objectively justified by the need to ensure the cohesion of the national tax system (Case C-204/90 Bachmann [1992] ECR I-249; Case C-300/90 Commission v Belgium [1992] ECR I‑305). In particular, they argue that, unlike in the case of the tax system examined in Verkooijen, there is in this case a direct link between the taxation of the company’s profits and the tax credit granted to the shareholder receiving the dividends. They point out that the tax credit is granted to the latter only on condition that that company has actually paid the tax on its profits. If that tax does not cover the minimum tax on the dividends to be distributed, that company is required to pay an additional tax.

41The Finnish Government adds that, if a tax credit were to be granted to the recipients of dividends paid by a Swedish company to shareholders who were fully taxable in Finland, the authorities of that Member State would be obliged to grant a tax advantage in relation to corporation tax that was not levied by that State, thereby threatening the cohesion of the national tax system.

42In that respect, it should be noted that, in paragraphs 28 and 21 respectively of the judgments in Bachmann and Commission v Belgium, the Court of Justice acknowledged that the need to preserve the cohesion of a tax system might justify a restriction on the exercise of the fundamental freedoms guaranteed by the Treaty. However, for an argument based on such justification to succeed, a direct link had to be established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy (see, to that effect, Case C-484/93 Svensson and Gustavsson [1995] ECR I‑3955, paragraph 18; Asscher, paragraph 58; ICI, paragraph 29; Case C-55/98 Vestergaard [1999] ECR I‑7641, paragraph 24; Case C-436/00 X and Y [2002] ECR I-10829, paragraph 52). As is shown by paragraphs 21 to 23 of the judgment in Bachmann and paragraphs 14 to 16 of the judgment in Commission v Belgium, those judgments are based on the finding that, in Belgian law, there was a direct link, in relation to the same taxpayer liable to income tax, between the ability to deduct insurance contributions from taxable income and the subsequent taxation of sums paid by the insurers.

43The case-law further shows that an argument based on the need to safeguard the cohesion of a tax system must be examined in the light of the objective pursued by the tax legislation in question (Case C-9/02 De Lasteyrie du Saillant [2004] ECR I-0000, paragraph 67).

As has already been noted in paragraph 33 of this judgment, the Finnish tax legislation is designed to prevent double taxation of company profits distributed to shareholders. The objective pursued is achieved by granting the taxpayer a tax credit calculated by reference to the rate of taxation of company profits by way of corporation tax (see paragraph 8 of this judgment). Having regard to the identical rate of tax on company profits and on revenue from capital, namely 29%, that tax system finally results in taxing, solely in the hands of companies established in Finland, the profits distributed by them to taxpayers who are fully taxable in Finland, the latter being simply exonerated from tax on the dividends received. Should the tax paid by a Finnish company which pays dividends turn out to be less than the amount of the tax credit, the difference is charged to that company by means of an additional tax.

45Even if that tax legislation is thus based on a link between the tax advantage and the offsetting tax levy, in providing that the tax credit granted to the shareholder fully taxable in Finland is to be calculated by reference to the corporation tax due from the company established in that Member State on the profits which it distributes, such legislation does not appear to be necessary in order to preserve the cohesion of the Finnish tax system.

Having regard to the objective pursued by the Finnish tax legislation, the cohesion of that tax system is assured as long as the correlation between the tax advantage granted in favour of the shareholder and the tax due by way of corporation tax is maintained. Therefore, in a case such as that at issue in the main proceedings, the granting to a shareholder who is fully taxable in Finland and who holds shares in a company established in Sweden of a tax credit calculated by reference to the corporation tax owed by that company in Sweden would not threaten the cohesion of the Finnish tax system and would constitute a measure less restrictive of the free movement of capital than that laid down by the Finnish tax legislation.

It should be noted furthermore that, in Bachmann and Commission v Belgium, the purpose of the tax provisions in question was also to avoid double taxation. The possibility which Belgian legislation gave to physical persons to deduct payments made under life assurance contracts from their taxable income – with the end result of not taxing the income used to pay those contributions – was based on the justification that the capital constituted by means of those contributions would subsequently be taxed in the hands of its holders. In such a system, double taxation was avoided by postponing the sole taxation due until the time when the capital constituted by means of the exonerated contributions was paid. Coherence of the tax system necessarily required that, if the Belgian tax authorities were to allow the deductibility of life assurance contributions from taxable income, they had to be certain that the capital paid by the assurance company at the expiry of the contract would in fact subsequently be taxed. It is in that precise context that the Court of Justice then took the view that there were no less restrictive measures than those forming the subject-matter of Bachmann and Commission v Belgium, which were capable of safeguarding the coherence of the tax system in question.

In the case at issue in the main proceedings here, however, the factual context is different. At the time when the shareholder fully taxable in Finland receives dividends, the profits thus distributed have already been subject to taxation by way of corporation tax, irrespective of whether those dividends come from Finnish or from Swedish companies. The objective pursued by the Finnish tax legislation, which is to eliminate the double taxation of profits distributed in the form of dividends, may be achieved by also granting the tax credit in favour of profits distributed in that way by Swedish companies to persons fully taxable in Finland.

Whilst, for the Republic of Finland, granting a tax credit in relation to corporation tax due in another Member State would entail a reduction in its tax receipts in relation to dividends paid by companies in other Member States, it has been consistently held in the case-law that reduction in tax revenue cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is in principle contrary to a fundamental freedom (Verkooijen, paragraph 59; Case C-136/00 Danner [2002] ECR I-8147, paragraph 56; X and Y, paragraph 50).

At the hearing, the Finnish and United Kingdom Governments referred to various practical obstacles which, in their submission, preclude a shareholder fully taxable in Finland from being granted a tax credit corresponding to the corporation tax due from a company established in another Member State. They argued that the Treaty rules on the free movement of capital apply not only to movements of capital between Member States but also to movements of capital between Member States and non-member countries. According to those governments, bearing in mind the diversity of the tax systems in force, it is impossible in practice to determine exactly the amount of tax, by way of corporation tax, which has affected dividends paid by a company established in another Member State or in a non-member country. They argue that such impossibility is due in particular to the fact that the basis of assessment for corporation tax varies from one country to another and that rates of tax may vary from one year to the next. They further argue that dividends paid by a company do not necessarily arise from the profits of a given accounting year.

In that respect, it should first be noted that the case in the main proceedings does not in any way concern the free movement of capital between Member States and non-member countries. This case concerns the refusal by the tax authorities of a Member State to grant a tax advantage to a person fully taxable in that State where that person has received dividends from a company established in another Member State.

Moreover, the order for reference shows that, in Finland, the tax credit allowed to the shareholder is equal to 29/71ths of the dividends paid by the company established in that Member State. For the purposes of calculating the tax credit, the numerator of the fraction to be applied is thus equal to the rate of taxation of company profits by way of corporation tax, and the denominator is equal to the result obtained by deducting that same rate of taxation from the base of 100.

Finally, it should also be noted that in Finnish law the tax credit always corresponds to the amount of the tax actually paid by way of corporation tax by the company which distributes the dividends. Should the tax paid by way of corporation tax turn out to be less than the amount of the tax credit, the difference is charged to the company making the distribution by means of an additional tax.

In those circumstances, the calculation of a tax credit granted to a shareholder fully taxable in Finland, who has received dividends from a company established in Sweden, must take account of the tax actually paid by the company established in that other Member State, as such tax arises from the general rules on calculating the basis of assessment and from the rate of corporation tax in that latter Member State. Possible difficulties in determining the tax actually paid cannot, in any event, justify an obstacle to the free movement of capital such as that which arises from the legislation at issue in the main proceedings (Commission v France, paragraph 29).

In the light of the above considerations, the answer to the questions referred must be that Articles 56 EC and 58 EC preclude legislation whereby the entitlement of a person fully taxable in one Member State to a tax credit in relation to dividends paid to him by limited companies is excluded where those companies are not established in that State.

Costs

56Since these proceedings are, for the parties to the main proceedings, a step in the proceedings pending before the national court, the decision on costs is a matter for that court. The costs incurred in submitting observations to the Court, other than those of the said parties, are not recoverable.

On those grounds,

THE COURT (Grand Chamber) hereby rules:

Articles 56 EC and 58 EC preclude legislation whereby the entitlement of a person fully taxable in one Member State to a tax credit in relation to dividends paid to him by limited companies is excluded where those companies are not established in that State.

Signatures.

Language of the case: Finnish.