«(Freedom of establishment – Tax provisions – Corporation tax – Covert distribution of profits – Tax credit – Coherence of the tax system – Tax evasion)»

Freedom of movement for persons – Freedom of establishment – Tax legislation – Tax on company profits – Taxation as disguised dividends of interest paid by a company in return for capital loaned to a major shareholder not in receipt of a tax credit – Provision affecting mainly company shareholders that are foreign parent companies – Not permissible – Whether justifiable – No justification (Art. 43 EC) Article 43 EC is to be interpreted as precluding tax legislation of a Member State, which provides that repayments in respect of loan capital which a company has obtained from a shareholder, such as its parent company, with a substantial holding in its capital must, in certain cases, be regarded as a covert distribution of profits, and which applies only to repayments in respect of capital obtained from a shareholder not entitled to tax credit, where, in the large majority of cases, resident parent companies received a tax credit, whereas, as a general rule, non-resident parent companies do not.Such a difference in treatment between resident subsidiary companies according to the seat of their parent company makes it less attractive for companies established in other Member States to exercise freedom of establishment and they may, in consequence, refrain from acquiring, creating or maintaining a subsidiary in the State which adopts that measure and constitutes an obstacle to freedom of establishment which is, in principle, prohibited by Article 43 EC.That legislation cannot be justified by reasons linked to the risk of tax evasion, where it does not have the specific purpose of preventing wholly artificial arrangements, designed to circumvent national tax legislation, but applies generally to any situation in which the parent company has its seat, for whatever reason, outside the Member State, since such a situation does not, of itself, entail a risk of tax evasion; nor can it be justified by the need to ensure the coherence of a tax system, there being no direct link between the less favourable tax treatment suffered by the subsidiary of a non-resident parent company and any tax advantage to offset such treatment. see paras 27-28, 32, 36-37, 40, 42, 45, operative part

JUDGMENT OF THE COURT (Fifth Chamber) 12 December 2002 (1)

((Freedom of establishment – Tax provisions – Corporation tax – Covert distribution of profits – Tax credit – Coherence of the tax system – Tax evasion))

In Case C-324/00,

REFERENCE to the Court under Article 234 EC by the Finanzgericht Münster (Germany) for a preliminary ruling in the proceedings pending before that court between

and

on the interpretation of Article 43 EC,

THE COURT (Fifth Chamber),,

composed of: M. Wathelet (Rapporteur), President of the Chamber, C.W.A. Timmermans, D.A.O. Edward, P. Jann and A. Rosas, Judges,

Advocate General: J. Mischo,

after considering the written observations submitted on behalf of:

having regard to the Report for the Hearing,

after hearing the oral observations of Lankhorst-Hohorst GmbH, represented by J. Schirmer and J.A. Schirmer, Steuerberater; of the German Government, by W.-D. Plessing and G. Müller-Gatermann, acting as Agent; of the United Kingdom Government, represented by J.E. Collins, assisted by R. Singh; and of the Commission, represented by R. Lyal, assisted by R. Bierwagen, at the hearing on 30 May 2002,

after hearing the Opinion of the Advocate General at the sitting on 26 September 2002,

gives the following

The existence of an obstacle to freedom of establishment

Justification for the obstacle to freedom of establishment

On those grounds,

THE COURT (Fifth Chamber),

in answer to the question referred to it by the Finanzgericht Münster by order of 21 August 2000, hereby rules:

Wathelet

Timmermans

Edward

Jann

Rosas

Delivered in open court in Luxembourg on 12 December 2002.

R. Grass

M. Wathelet

Registrar

President of the Fifth Chamber