DELIVERED ON 29 MAY 1979 (*1)

Mr President,

Members of the Court,

This procedure was in accordance with Consolidated Law No 255 of 10 May 1973 concerning the valuation for tax purposes of stock and the like (‘Varelagerlov’), since this law allows part of the depreciation in the value of assets to be shown in the books for the financial year in which this loss probably occurred. According to Articles 1 (1) and (4) of the said Law, when persons engaged in industry or trade, including companies, calculate their taxable income and capital, they may elect to value the goods in stock at the end of their financial year at the current market price, or at the purchase price or at the cost of manufacture and to reduce the figure so ascertained by not more than 30 %. The undertaking concerned may effect this writing down at its discretion and is also free to decide to what extent, within the upper limits permitted by the Consolidated Law, it shall be applied. Furthermore Articles 3 to 5 inclusive of this Law allow deductions to be made from the value of goods which have been bought pursuant to binding contracts entered into before the end of the relevant financial year for delivery during the following financial year. The permitted deduction was also initially 30 % but later on was replaced by a degressive rate which was 25 % in 1973 and dropped to zero in 1976 owing to difficulties in assessing the value of the binding contracts.

In all the Member States operations whereby capital is transferred or raised are subject to a duty on this capital payable by the recipients thereof. This capital duty was by virtue of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (Official Journal, English Special Edition 1969 (II), p. 412) harmonized in the original Member States. The aim of that directive was to see to it that eventually the rate of capital duty was the same in every Member State. Article 7. (1) thereof provided that until the Council fixes common rates the rate of capital duty may not exceed 2 % or be less than 1 %. Article 13 of the directive provided that the Member States had until 1 January 1972 to bring into force such provisions by way of law, regulation or administrative action as may be necessary to comply with the provisions of this directive.

The directive, which at the date of the accession of the Kingdom of Denmark on 1 January 1973 formed part of the ‘acquis communautaire’ [all the regulations, decisions, directives, etc. adopted under the Treaties, and all decisions taken since the Communities were established], was adopted in the Act of Accession but with this difference that the date by which the Member States had to bring into force such provisions by way of law, regulation or administrative action as may be necessary to comply with the provisions of the directive, namely 15 January 1972, was postponed until 1 July 1973 (Annex XI to the Act of Accession, Section VI. Taxation, paragraph 3).

The taxation laws of the Kingdom of Denmark which before the accession of that country provided for duty on securities but not for any capital duty was amended in accordance with Directive 69/335/EEC by means of two Laws of 23 May 1973 which entered into force on 1 July 1973. Law No 283 abolished duty on securities which was contrary to the directive. Pursuant to Article 3 (2) of the directive the Danish Government in Law No 284 exercised the right, for the purposes of charging capital duty, not to consider as capital companies other kinds of companies operating for profit. Consequently according to Article 1 of that Law limited partnerships are not subject to any duty, but under Article 4 (1) the conversion of a company which is not liable to duty into one which is liable is treated as the formation of the latter company, so that capital duty is payable in accordance with the provisions relating to the formation of a capital company. The following rules for levying capital duty in these circumstances are laid down in Article 6(1) thereof:

‘On formation … and on an increase in the capital of a company a duty shall be levied at the rate of 2 % on the assets of any kind contributed by the members after the deduction of liabilities assumed and expenses borne by the company as a result of each contribution’.

Pursuant to Council Directive 73/79 of 9 April 1973 varying the field of application of the reduced rate of capital duty provided for in respect of certain company reconstruction operations by Article 7 (1) (b) of the directive concerning indirect taxes on the raising of capital, and pursuant to Council Directive 73/80 of 9 April 1973 fixing common rates of capital duty (Official Journal L 103 of 18 April 1973, p. 13 and p. 15) the rate of duty was reduced by the Danish Law No 583 of 26 November 1975 to 1 % as from 1 January 1976.

When the Amtsskatteinspektorat (the intermediate tax authority) received the assessment made by Conradsen it made an additional assessment, based on a correction of the amount declared by the company, to include the sums by which the value of the goods in stock and the goods ordered under binding contracts had been written down, Dkr 1927740 (1177740+ 750000), in the amount liable to capital duty.

After objecting to no avail Conradsen brought an action before the Byret, Copenhagen. This court dismissed the action on 7 December 1976. The company appealed against this decision to the Østre Landsret which by an order of 30 June 1978 referred the following questions to the Court for a preliminary ruling:

‘1. Must the provisions of Article 5 (1) (a) of the Council Directive of 17 July 1969 concerning indirect taxes on the raising of capital (69/335/ EEC) be interpreted to mean that those provisions prevent a Member State, in assessing the liability to duty on the raising of the capital of a newly-formed limited company A, whose share capital was created by contributions from an existing undertaking belonging to a person B, from refusing a deduction for any tax on an untaxed reserve which is regarded as an asset in the assessment of duty and which was created when B contributed to A the undertaking's goods in stock and goods on order?

My comments on these questions are as follows:

Article 5 (1) (a) of Directive 69/335/EEC which the Court is asked to interpret reads as follows:

‘1. The duty shall be charged:

in the case of formation of a capital company or of an increase in its capital or assets, as referred to in Article 4 (1) (a), (c) and (d): on the actual value of assets of any kind contributed or to be contributed by the members, after the deduction of liabilities assumed and of expenses borne by the company as a result of each contribution. Member States may postpone the charging of capital duty until the contributions have been effected’.

There seems in the first place to be no doubt that by using the expression ‘actual value’ the draftsman of the directive did not intend to refer to ‘book’ value. The legislator in tax matters is familiar with this expression; if he did not use it there was a very good reason.

Even the plaintiff in the main action concedes that if, and only if, its writing down for tax purposes quite clearly relates to an actual untaxed reserve, should the amount by which that reserve has been reduced for tax purposes be included in the basic taxable amount. It goes on to say that, as far as it is concerned, this tax liability materialized at the end of the company's financial year expiring on 31 May 1975 in accordance with Law No 255 of 10 May 1973. The published accounts for the years 1974/1975 and 1975/1976 in fact disclose that the written down values for tax purposes which were transferred on the formation of Conradsen were included in the profits of the company at the end of its first financial year.

The plaintiff therefore suggests that the deduction made in the calculation of capital duty be fixed at about one half of the amount of tax which the company would have had to pay on disposal of the untaxed reserves — and this would in fact convert them into income of the company — which is equivalent to the 20 % flat rate tax on untaxed reserves fixed by the Netherlands law.

However I do not believe that this interpretation would accord with the intention of the Community legislature. Liabilities assumed and expenses borne by the company within the meaning of the directive can only be liabilities and expenses which are certain and definitive and which were incurred by the natural and legal person making the contribution at the latest at the time of his so doing or which in any case are established both as to the basis and the amount thereof. In this connexion the liabilities and expenses in question are those which have been transferred to the newly-formed company. They also include the costs as well as the other sums payable by the newly-formed company relating to the assets contributed. But, as the Commission rightly points out, such debts must always be ascertained and payable at the time of, or as a result of the contribution.

The directive introduces a set of rules which favours a founder member of a new company by exempting his income connected with its formation from being taxed. They are fiscal rules which reduce or abolish most of the taxes usually payable on the winding up of a company in order to encourage arrangements and reconstructions of companies and the accompanying surrender of capital or assets in one company in exchange for the right to be given a proportion of the assets and profits of the other company. The contributor of assets can have the stock and the goods on order under a binding contract entered in the balance sheet at cost and create a reserve for losses on the sale of goods or for periods when sales are slack and similar occurrences. Under these circumstances he can be certain that the amount by which the values were written down when he transferred his assets will be immediately deducted. Such a procedure moreover seems preferable because third parties can readily see what has been done; it appears that it can be adopted under Danish law as well as under the laws of the other Member States.

However the contributor of assets can also reduce the valuation of his stock and write down the goods he has ordered under binding contracts, but, if he does, he must then abide by this election. It is not permissible to carry forward the written down value of stocks allowed in the context of taxation of industrial and commercial profits to the assessment of the harmonized capital duty which must focus on the position of an undertaking at the time at which the circumstances giving rise to a charge to tax materialized, that is to say at the time at which the assets were contributed.

In the context of capital duty a merely contingent change to corporation tax or a tax on commercial revenue cannot be established. When the newly-formed company takes over the increase in value, the taxation of which had been deferred in the case of the company taken over it must step into that company's shoes. Otherwise a debt, which has not been ascertained and which can only arise and be quantified through the commercial conduct of another legal person, would be treated as a debt which had been ascertained. The Danish Government points out with good reason that the reduced valuation of taxable income is not affected if the level of the new company's stock remains constant and that company only makes a similar reduction at the end of each of its financial years; by means of repeatedly carrying forward the relative item this may lead to the ‘potential’ tax never being assessed. If the undertaking continues to adopt its writing down policy and the level of stocks remains the same, the reductions made never lead to any increase in taxable profits. If the undertaking, during the five years subsequent to the year in which the effect of a loss was in fact that there was no charge to tax in respect of any writing down of stocks after their inclusion in its income, continues to make a loss, the potential tax liability will be regarded as having been finally extinguished.

Furthermore the provisions relating to writing down permit goods bought pursuant to certain contracts but not yet delivered to be added to the stock. If the company resorts to a greater extent to taking deduction from the value of its stock it can offset in inclusion in its income of the amount resulting from the deduction from the value of goods on order. Since the maximum deduction from the value of the goods on order is less than the maximum deduction from the value of stock, the company may even arrive at a negative income. In that case the tax liability can only arise after the date on which the capital was contributed and the company was formed.

What we are therefore concerned with is an option, which was available to the old company as constituted at that time but which cannot simply be transferred so as to be exercisable in relation to capital duty for which the new company, into which the assets and liabilities were brought, is liable. Fortuitous circumstances of the kind described cannot be taken into account in the case of a tax which is levied once only at one specific point of time for payment on the value of the assets brought in. In the case of the formation of a capital company the only exception provided by Article 5 (1) (a) of Directive 69/335/EEC is that ‘Member States may postpone the charging of capital duty until the contributions have been effected’.

The construction of the disputed provision seems to me to be clear. The meaning of the words ‘… after the deduction of liabilities assumed and of expenses borne by the company as a result of each contribution’ must on no account depend on the commercial policy of the newly-formed company in relation to the contributions to it.

3.The plaintiff's objections to this argument do not appear to me to be convincing. It submits that it is unreasonable when assessing capital duty to proceed on the basis that capital has been transferred to the newly-formed company. But the raising of capital and charging duty on it is exactly what is at issue. A comparison cannot be drawn between that duty and Capital Transfer Tax on death, because when the assets and liabilities were contributed a legal person stepped into the shoes of another natural or legal person and because the nature of the tax has changed.

The plaintiff in the main action also states that, if the partnership had been sold to a third party or wound up, the value of the stock and of the goods on order pursuant to binding contracts would have been reduced by a certain percentage which would have been very similar to that used for accounting purposes. However it overlooks the fact that in that case the duty on transfers and assignments, to which other rules apply, and not capital duty on the capital raised would be chargeable.

The plaintiff also refers to the fact that the nature of the charge supposed to arise out of the assets contributed is acknowledged in Netherlands legislation, which, referring to ‘good commercial practice’, has fixed the reduction at a flat rate, the rate of duty being 20 % of the amount of the reserves. Indeed the Netherlands Government itself concedes that the amount of the reduction depends on the tax laws in force in each of the Member States. It is just this reasoning which in my view provides grounds for not allowing such a reduction, because the directive, which is based particularly on Articles 99 and 100 of the Treaty, aims at a complete harmonization.

In this connexion I draw attention to the fact that, as far as the expression ‘capital goods’ is concerned, the Court in paragraphs 10 and 11 of the judgment of 1 February 1957 Case 51/76, Verbond van Nederlandse Ondememingen v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 113 at pp. 124 and 125, has ruled:

‘It should be noted, in the first place, that the expression at issue forms part of a provision of Community law which does not refer to the law of the Member States for the determining of its meaning and its scope. It follows that the interpretation, in general terms, of the expression cannot be left to the discretion of each Member State’.

In my view these considerations are applicable to the expressions ‘actual value’ and ‘liabilities assumed and expenses borne by the company as a result of each contribution’; they too can only be interpreted in accordance with Community law.

4.The fact that Article 9 of the Fourth Council Directive 78/660/EEC of 25 July 1978, based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, (Official Journal L 222 of 14 August 1978, p. 11) lays down that provisions for taxation be entered under liabilities has no relevance to our case. That directive seeks to attain an objective which differs from the aim of the Directive of 17 July 1969 which is material in this case; it ranks as one of the measures by means of which, pursuant to Article 54 (3) (g) of the EEC Treaty, ‘the safeguards, which, for the protection of the interests of members and others, are required by Member States of companies or firms within the meaning of the second paragraph of Article 58 with a view to making such safeguards equivalent throughout the Community’ are to be co-ordinated; national legal provisions must be amended by 30 July 1980 at the latest, There would be nothing to stop the newly-formed company, in reliance on this directive from showing a provision under liabilities for losses on stock or for writing down; but it must then enter these stocks or the goods on order pursuant to binding contracts at cost on the other side of the balance sheet.

5.It is true that a conflict may arise between, on the one hand, the provisions relating to writing down, by means of which a ‘tax credit’ is intended to be granted to the taxpayer and a set-off is to be allowed against his profits, varying according to fluctuations for each of his financial years and, on the other hand, the provisions relating to capital duty. To date only the latter provisions have been harmonized; consequently the possibility that the directive left to Member States the power to define more accurately the meaning of the expression ‘deduction’ in connexion with capital duty can be ruled out. Only the Council is entitled to amend the provisions of the directive with a view to taking such considerations into account, perhaps, to be more precise, in the context of a harmonization of corporation tax or the tax on profits, gains or income from commercial and industrial operations.

Finally it must not be forgotten that a harmonized capital duty was introduced and at the same time all other indirect taxes, in particular stamp duty on certain operations relating to securities, were abolished. The interpretation put forward by the plaintiff in the main action runs counter to the third recital in the preamble to Directive 69/335/EEC which reads ‘The harmonization of such taxes on the raising of capital must be arranged in such a way as to minimize the budgetary repercussions for Member States’.

If there are differences in the valuation of stock for tax purposes, there is a risk of considerable distortion of competition between undertakings of the Community. Consequently the introduction of a set of rules, for which no kind of justification can be found in the directive and which nevertheless would lead to discrimination between Member States and in extreme cases would amount to a form of aid for undertakings of certain Member States, would be bound to cause concern.

I therefore submit that the questions referred to the Court be answered as follows:

Article 5 (1) (a) of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital is to be interpreted as meaning that the actual value of the goods contributed as assets is their market value at the date on which they were contributed. Only those expenses and liabilities, which at the time the assets were contributed are ascertained or at least are established both as to the basis and the amount thereof, and also the expenses and other sums due as a result of the contributions may be deducted from that value.

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Translated from the German.