Heinrich Bauer Verlag BeteiligungsGmbH v Finanzamt fürgroßunternehmen in Hamburg - PDF

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Opinion of Advocate General Trstenjak, 10 January Case C-360/06 Heinrich Bauer Verlag BeteiligungsGmbH v Finanzamt fürgroßunternehmen in Hamburg I Introduction 1. In proceedings between Heinrich

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Opinion of Advocate General Trstenjak, 10 January Case C-360/06 Heinrich Bauer Verlag BeteiligungsGmbH v Finanzamt fürgroßunternehmen in Hamburg I Introduction 1. In proceedings between Heinrich Bauer Verlag Beteiligungs GmbH ( HBV ) and Finanzamt für Groβunternehmen in Hamburg ( the Finanzamt ) in connection with the determination of the value of HBV s holdings in two partnerships, one established in Spain and the other in Austria, during the financial year 1988, the Finanzgericht Hamburg (Finance Court, Hamburg) (Germany) asks the Court of Justice whether national provisions under which a holding in a partnership in another Member State is given a higher value that a holding in a partnership established in Germany are compatible with the freedom of establishment. II Legal background A Community legislation 2. Article 52 of the EEC Treaty (which became, after amendment, Article 43 EC) provided: Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be abolished by progressive stages Such progressive abolition shall also apply to restrictions on the setting up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 58, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the chapter relating to capital. 3. Article 58 of the EEC Treaty (which became, after amendment, Article 48 EC) provided: 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 Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States. Companies or firms means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making. B National legislation 4. It is apparent from the order for reference that, in a valuation of the shares of unquoted companies for the purpose of assessing wealth tax liability, the holdings of those companies in national partnerships are simply given their net asset value, whereas interests in foreign partnerships are given their market value. If the market value cannot be ascertained from sales which have occurred less than one year beforehand, it is estimated on the basis of the net asset value and prospective earnings of the partnership concerned. 5. More specifically, the referring court explains that Paragraph 11(2) of the Bewertungsgesetz (Law on valuation) ( the BewG ) 2 provides that shares in unlisted companies are to be valued at market value ( gemeine Wert ). If the market value cannot be taken from sales which have occurred less than one year before, it is to be estimated having regard to the company s assets and earnings prospects (second sentence of paragraph 11(2) of the BewG). 6. When valuing holdings in national companies, the tax authorities assess the market value of holdings in unlisted companies according to the principles of the Stuttgart procedure. 3 The starting point for the assessment of the net asset value is the uniformly-assessed value of the business assets (Paragraph 109(2) of the BewG). This provides that holdings in partnerships which form part of an undertaking s assets are to be given the uniformly-assessed value fixed in accordance with Paragraph 19(3)(2) of the BewG. 7. With regard, specifically, to the valuation of holdings in foreign undertakings, Paragraph 31 of the BewG provides that the provisions of Part One of the BewG, in particular Paragraph 9 (market value) are to apply to the valuation of foreign business assets. Under Paragraph 9(2) of the BewG, market value is to be determined by reference to the price which would be achieved on disposal, that is, the commercial value. 1. Original language: French. 2. Bewertungsgesetz of 30 May 1985 (Bundesgesetzblatt, Teil I, p. 845). 3. In accordance with Article 76 et seq. of the VStR (Vermögenssteuerrichtlinie) 1986. III The main proceedings and the question referred for a preliminary ruling 8. HBV is an unlisted limited company (Gesellschaft mit beschränkter Haftung) (a GmbH ), which has its registered office in Germany. All of its shares are held by its parent company, the limited partnership Heinrich Bauer Verlag KG, which has been granted leave to intervene in the main proceedings ( the intervener ). 9. In the course of a valuation of shares in HBV in order to assess the wealth tax for which the intervener is liable as holder of those shares, a dispute has arisen between HBV and the Finanzamt Hamburg as to the value of the applicant s holdings in two limited partnerships: the Spanish Bauer Ediciones Sociedad en Comandita ( HBE ), in which HBV is a partner and which is regarded under German tax law as a partnership, and the Austrian partnership Basar Zeitungs- und Verlagsgesellschaft GmbH und Co. KG ( WBC ), in which HBV holds all the shares. 10. More specifically, the parties to the main proceedings are in dispute as to the determination of the value of HBV s holdings in HBE and WBC during the year at issue, that is to say, The Finanzamt had determined the value of HBV s holding in HBE at DEM and of its holding in WBC at DEM The applicant values its holding in HBE at DEM and in WBC at DEM That difference is due to the fact that each of the parties uses a different basis for assessing the value of interests in foreign partnerships. Whereas the Finanzamt takes account, for the purposes of the valuation, not only of the net asset value, that is, the intrinsic value of those partnerships, but also of their prospective earnings, the applicant considers that only their net asset value should be taken into account 12. Since the applicant s challenge to the Finanzamt s valuation was rejected, the applicant contested the decision of the Finanzamt before the Finanzgericht Hamburg (Finance Court Hamburg), which has referred a question to the Court of Justice for a preliminary ruling. 13. As regards HBV s holding in HBE, the national court states that the different methods of valuing a holding in a national partnership and a foreign partnership lead to different values being determined. The amount at which the holdings are valued has a direct effect on HBV s wealth tax liability. The right to freedom of establishment might be restricted owing to the fact that the foreign holding is given a higher value than a holding in a national partnership. Such a restriction is permissible only if it pursues a legitimate objective compatible with the EC Treaty. The national court sees no justification for a possible restriction of that freedom, either on the basis of difficulties in ascertaining the facts or on the basis of cohesion. 14. As regards HBV s holding in WBC, the national court considers that neither the right to freedom of establishment under Article 52 of the Treaty nor the corresponding provisions of the Agreement on the European Economic Area of 2 May ( the EEA Agreement ) are applicable in relation to 1988, since the Republic of Austria acceded to the European Union only on 1 January 1995 and the EEA Agreement did not come into force until 1 January Finally, the national court rules out, a priori, an infringement of the free movement of capital, since the provisions in force at the material time did not preclude differences of valuation between a holding in a national partnership and one resident in another Member State or in a third country. 16. The Finanzgericht Hamburg therefore decided to stay the proceedings until the Court of Justice gave a ruling on the following question: Is it compatible with Article 52 in conjunction with Article 58 of the EEC Treaty (now Article 43 in conjunction with Article 48 EC) that, when unlisted shares in a company are valued, a holding in a German partnership is given a lower value than a holding in a partnership established in another Member State? IV Observations submitted to the Court 17. HBV states that it is the sole owner of holdings in a number of partnerships established in other Member States. Those holdings enable it to control and manage the partnership and, accordingly, allow it to exercise its right of establishment. 18. The German legislation which provides that, for the purposes of wealth tax, foreign assets are given a higher value than comparable national assets, constitutes a restriction on freedom of establishment. Such a restriction is permissible only if it pursues a legitimate objective compatible with the Treaty and is justified by overriding reasons in the public interest, which are not present in this case. 19. As regards the maintenance of effective control in taxation matters, the competent authorities may, in accordance with Council Directive 77/799/EEC, 5 approach the competent authorities of another Member State in order to obtain any information that may enable them to effect a correct assessment of the tax payable by a taxpayer. Furthermore, the applicable tax conventions concluded for the avoidance of double taxation contain provisions concerning the exchange of information regarding wealth tax. 20. Moreover, the legislation at issue, under which, for the purposes of wealth tax, foreign assets are given a higher value than comparable national assets, constitutes an unjustified restriction on the free movement of capital. 4. Agreement on the European Economic Area Final Act Joint Declarations Declarations by the Governments of the Member States of the Community and the EFTA States Arrangements Agreed Minutes Declarations by one or several of the Contracting Parties of the Agreement on the European Economic Area (OJ 1994 L 1, p. 3). 5. Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation (OJ 1977 L 336, p. 15), in force in 1988. 21. HBV proposes that the Court should reply as follows to the question referred for a preliminary ruling: Articles 52 and 58 of the EC Treaty (now, after amendment, Articles 43 EC and Article 48 EC) preclude tax legislation which, when unlisted shares in a capital company are valued gives, in the absence of any other relevant factors, a holding in a foreign partnership a higher value than a holding in a national partnership. Moreover, Articles 73B and 73D of the EC Treaty (now Articles 56 EC and 58 EC) also preclude a higher valuation and, consequently, a higher taxation assessment, on holdings in foreign partnerships than on holdings in national partnerships. 22. The Finanzamt maintains that the tax treatment afforded to the applicant does not place it at a disadvantage vis-à-vis comparable undertakings with holdings in national partnerships. On the contrary, the result obtained for valuation purposes is the same in both groups. 23. As regards the valuation of the Spanish partnership, effected, in accordance with Paragraph 11(2) of the BewG, on the basis of the Stuttgart procedure, it is true that its prospective earnings were included in the determination of its net asset value, but, technically, the valuation of holdings in national partnerships is not fundamentally different. Where a company has a holding in a national partnership, the income of the partnership is treated as income of the company and therefore has a direct effect on the earnings value. 24. The difference between the value determined by the defendant of DEM 17.1 million, and the value assessed by the applicant of DEM 0.9 million, does not lie in the different methods used for the purpose of assessing a value. On the contrary, it is explained by the depreciation for the applicant s losses on the acquisition costs of the partnership during the first three years following its constitution. Such losses (which are atypical and are linked to the starting-up of the firm) cannot properly be taken into account in assessing the market value without distorting it unjustifiably. The founder of a company therefore attributes to its holdings, for a certain time, a value equivalent to the costs of setting up the firm. 25. If the Court were to decide that a restriction exists on the freedom of establishment or the free movement of capital, such a restriction is justified. Under the tax system, it is necessary to determine HBE s net asset value by including its prospective earnings in order to ensure that situations which are factually comparable are taxed in the same way. If prospective earnings are not included in the valuation of the applicant s holdings, holdings in foreign partnerships would be favoured. When a valuation is made, the income of national partnerships is always taken into account, being directly attributed to the income of the company which has a holding in it. 26. The Finanzamt requests that the question referred be worded differently, since the question referred by the Finanzgericht Hamburg is based on the assumption that a holding in a German partnership will be determined at a lower value than a holding in a foreign partnership established in another Member State. The question should be worded as follows: Is it incompatible with Article 52 in conjunction with Article 58 of the EEC Treaty/EC Treaty, now Article 43 in conjunction with Article 48 EC, when unlisted shares in a company are valued, to include in the valuation of a holding in a foreign partnership established in another Member State the prospective earnings of that partnership? 27. The Finanzamt suggests the following reply: The reply to the question referred to the Court is that it is not incompatible with Article 52 in conjunction with Article 58 of the EEC Treaty/EC Treaty, now Article 43 in conjunction with Article 48 EC, for unlisted shares in a company to be valued so as to include in the valuation of a holding in a foreign partnership established in another Member State the prospective earnings of that partnership. 28. The German Government also maintains that, although different provisions govern the valuation of holdings in national and foreign partnerships, overall the uniformly assessed value which has to be determined in the valuation of a national partnership is broadly the same to the market value for a holding in foreign partnerships. Ultimately, the procedure for valuing holdings in national partnerships tends, by means of specific adjustments to the different balance sheet positions, to produce a value which is comparable to the market value. 29. As regards the holding in WBC, the fundamental freedoms cannot be invoked because the Republic of Austria did not become a Member of the European Communities until 1995 and the EEA Agreement did not come into force until As regards the holding in HBE, the freedom of establishment does not enter into consideration in this case, since the applicant s investments in Spain should not be seen as representing the exercise of that freedom, but rather as being a pure investment of capital in the context of the free movement of capital. By participating in HBE as a limited partner, the applicant does not have a definite influence on the activities of the Spanish firm but, on the contrary, is excluded from its decision-making process and has no right to hold itself out as representing the firm as regards third parties. The German Government contends that, in accordance with the case-law of the Court, freedom of establishment cannot be at issue unless nationals of the Member State concerned have holdings in the capital of a company or firm established in another Member State, giving them definite influence on the company s decisions and allowing them to determine its activities. 31. The German Government, after stating that, in its view, there is no actual discrimination since the rules for assessing the value of holdings in national and foreign partnerships do not differ fundamentally, adds, in the alternative, that in any event such discrimination would be justified. In assessing the value of holdings in foreign partnerships, the specific provisions applicable to national business assets cannot be applied, because the corresponding methods of evaluation, such as going concern values or uniformly-assessed values, are not available. The market value of the holdings is taken instead. 32. The German Government considers that the answer to be given to the question referred for a preliminary ruling must be: It is not incompatible with Article 52 in conjunction with Article 58 of the EEC Treaty or with Article 67 of the EEC Treaty, when unlisted shares in a company are valued, to give a lower value to a holding in a national partnership than to a holding in a partnership established in another Member State. 33. The Commission of the European Communities states, with regard to HBV s holding in HBE, that, in accordance with the case-law, freedom of establishment applies only where the economic operator concerned holds an interest which gives it a definite influence over the decisions of the other company or firm and accordingly allows it to determine its activities. The order for reference merely states that HBV is a limited partner in HBE and does not make it possible to know with certainty whether the applicant is able to determine HBE s activities. However, the Commission submits that there are factors which support that hypothesis, on which it bases its arguments, in the absence of evidence to the contrary. 34. The Commission refers, as regards the nature of the German legislative provisions falling within the scope of Article 52 of the Treaty, to the case-law according to which that provision is not only directed to ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State, but also prohibits the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation. The exercise of that freedom is hindered where an establishment in another Member State is subject to less favourable tax conditions than a similar establishment in Germany, since that is likely to discourage the economic operator concerned from creating an establishment in another Member State. That is in fact the situation in this case. The shares held in the applicant s capital are treated differently for the purposes of wealth tax according to whether the applicant itself has a holding in a partnership in Germany or in another Member State, since the tax burden is higher in the latter case than in the former. 35. Moreover, the restriction of freedom of establishment is not justified by a legitimate objective compatible with the Treaty. It is necessary to confirm to the national court that the two grounds which it has itself examined, namely the cohesion of the tax system and practical difficulties of an administrative nature, are not valid. 36. As regards the question of the compatibility of the legislation at issue with the free movement of capital, the Commission considers that it was compatible, at the relevant time, with the applicable provisions of Community law. 37. As regards HBV s holding in WBC, the Commission states that since, during the financial year 1988, the Republic of Austria was not yet a member of the Community, and the EEA Agreement had not yet been signed, neither the freedom of establishment under Article 52 of the EEC Treaty nor the corresponding provision of Article 31 of the EEA Agreement were appli
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