Case C-102/05

Skatteverket

v

A and B

(Reference for a preliminary ruling from the Regeringsrätten)

(First subparagraph of Article 104(3) of the Rules of Procedure – Free movement of capital – Freedom of establishment – Taxation – Dividends paid in respect of shares distributed by a ‘close company’ – ‘Wage rules’ – Taxation of those dividends as income from assets – Calculation of a flat-rate yield – Percentage of capital invested and fraction of salaries – Branch established in a non-member country – Failure to take into account employees’ wages at that branch)

Order of the Court (Fourth Chamber), 10 May 2007

Summary of the Order

Freedom of movement for persons – Freedom of establishment – Provisions of the Treaty – Scope

(Arts 43 EC and 56 EC)

A national measure which, within the framework of taxation on share dividends as income from assets up to a flat-rate yield calculated by applying a specific percentage to a base including, in addition to the capital invested by the shareholder, a fraction of the remuneration paid to employees of the company issuing the dividends, does not permit the taking into account of the salaries of workers employed in a branch of that company, or by a subsidiary of it, in a non-member country, fundamentally affects freedom of establishment within the meaning of Article 43 EC et seq.

If such a measure were to have restrictive effects on the free movement of capital, such effects would be the unavoidable consequence of the restriction on freedom of establishment and do not justify an examination of that measure in the light of Articles 56 EC and 58 EC.

Article 43 EC et seq. may not be relied upon in a situation involving the establishment of a company of a Member State in a non-member country. The chapter of the Treaty relating to freedom of establishment does not include any provision which extends the scope of its provisions to such a situation.

(see paras 27, 29-30, operative part)

ORDER OF THE COURT (Fourth Chamber)

10 May 2007 ( * )

(First subparagraph of Article 104(3) of the Rules of Procedure – Free movement of capital – Freedom of establishment – Taxation – Dividends paid in respect of shares distributed by a ‘close company’ – ‘Wage rules’ – Taxation of those dividends as income from assets – Calculation of a flat-rate yield – Percentage of capital invested and fraction of salaries – Branch established in a non-member country – Failure to take into account employees’ wages at that branch)

In Case C-102/05,

REFERENCE for a preliminary ruling under Article 234 EC, by the Regeringsrätten (Supreme Administrative Court) (Sweden), made by decision of 13 October 2004, received at the Court on 28 February 2005, in the proceedings

Skatteverket

v

A and B,

THE COURT (Fourth Chamber),

composed of K. Lenaerts (Rapporteur), President of the Chamber, E. Juhász, R. Silva de Lapuerta, G. Arestis and T. von Danwitz, Judges,

Advocate General: Y. Bot,

Registrar: R. Grass,

The Court, proposing to give its decision by reasoned order in accordance with the first subparagraph of Article 104(3) of its Rules of Procedure,

after hearing the Advocate General,

makes the following

Order

1 The request for a preliminary ruling concerns the interpretation of Articles 56 EC to 58 EC.

2 The reference was made in the course of proceedings between the Skatteverket (Swedish Tax Board) and A and B (together ‘the applicants’), shareholders and salaried employees of X, a company governed by Swedish law, on the issue of whether or not, in the taxation of dividends paid in respect of shares by that company, remuneration paid to employees of the Russian branch of Y, a Swedish subsidiary of X, may be integrated into the calculation basis for the purposes of the application of the Swedish provisions relating to ‘wage rules’ (‘ löneregeln ’).

National legislation

3 The present case concerns the Swedish tax system for dividends paid in respect of shares distributed by close companies (‘ fåmansföretag ’).

4 These are small, limited-liability companies of which more than 50% of the shares are held by fewer than five people who thereby exercise a decisive influence over the management of those companies. Where a number of shareholders of a company hold paid employment in that company, they are, pursuant to Paragraph 3 of Chapter 57 of the Swedish law relating to Income Tax ( inkomstskattelagen , SFS 1999, No 1229, ‘the law’), treated as forming a single person, which allows the company to be considered a close company, despite a high number of shareholders.

5 In Sweden, the tax burden on employment income is higher than the tax burden on income from assets. In order to dissuade shareholders in close companies, who are at the same time employees of that company, from converting income from employment into income from assets, the law provides that the dividends paid in respect of shares distributed by that company are to be taxed as income from assets up to a flat-rate yield, commonly called the ‘maximum amount’, which is supposed to correspond to the normal rate of return on capital invested in that same company. The excess amount from those dividends in relation to the maximum amount is taxed as income from employment.

6 This flat-rate yield is calculated by applying a given percentage to a base comprising essentially the capital that the shareholder has invested in the close company.

7 Pursuant to the wage rules provided for in Paragraph 12 of Chapter 43 of the law, the calculation basis can also entail an amount equal to a fraction of the remuneration paid to the employees of that company, including to those of its subsidiaries and of its branches. In accordance with that provision, that remuneration may, however, only be taken into consideration if it forms part of the basis for calculating social security contributions or income tax under the Swedish legislation.

8 According to the information provided by the Swedish Government, following the accession of the Kingdom of Sweden to the European Union, the wage rules have been extended to cover remuneration paid to close companies’ workers employed in another Member State.

The dispute in the main proceedings and the questions referred for a preliminary ruling

9 The Swedish limited liability company X is a consulting company owned by a number of shareholders, including the applicants, who are paid employees there. Although the number of its shareholders during the relevant period was relatively high (78 in total), X consistently gratified as a ‘close company’ within the meaning of Paragraph 3 of Chapter 57 of the law.

10 When it became operational in 1991, X took over a business that was previously carried on in another form in Sweden as well as by a Russian branch. In 1997, that business was taken on by Y, a Swedish limited‑liability company and a subsidiary of X. At the same time, Y opened another branch in Russia. The first branch had been wound up in 2000.

11 The applicants each hold 1.7% of the shares of X. A became a shareholder of X in 1991, as did B in 1996.

12 They requested a preliminary decision from the Skatterättsnämnden (Revenue Law Commission) on the question of whether, in calculating the tax on dividends paid in respect of shares distributed by X, they could take into account, for the purpose of applying the wage rules, remuneration paid to the employees of the Russian branch of Y, despite the fact that that remuneration does not form part of the basis for calculating the social security contributions owed in Sweden or for Swedish income tax.

13 In a decision issued to the parties concerned on 19 February 2003, the Skatterättsnämnden replied to that question in the affirmative. It considered that the national legislation at issue fell to be examined in the light of Article 56(1) EC, taking the view that Article 43 EC could not be relied upon in this case, since it does not concern establishments situated in non-member countries.

14 It considered that the provisions of the EC Treaty relating to the free movement of capital preclude, in a situation such as the one in which the applicants find themselves, the dividends which they have received from X from being subject to less favourable taxation on the ground that the subsidiary of X was carrying on business in Russia, and not in Sweden.

15 The wage rules date from 1994, so they cannot be considered as an existing restriction on 31 December 1993 within the meaning of Article 57(1) EC. Moreover, the difference in treatment brought about by that rule is not justified by the objective of ensuring the efficiency of tax controls, given the existence of a provision relating to information exchange between the relevant tax authorities in the tax agreement concluded between Sweden and Russia.

16 However, one of the members of the Skatterättsnämnden opined that the wage rules should be considered in the light of Article 43 EC, and not the provisions of the Treaty relating to the free movement of capital. Those rules are such as to restrict the pursuit of an economic activity and not the free movement of capital. However, as Article 43 EC is not applicable to situations involving non-member countries, those rules do not constitute a restriction prohibited by that article.

17 The Riksskatteverket (National Tax Board) challenged the decision of the Skatterättsnämnden before the Regeringsrätten (Supreme Administrative Court) (Sweden).

18 In those circumstances, the Regeringsrätten decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

‘1. Is it contrary to the provisions [of the Treaty] on free movement of capital between the Member States and third countries, in a situation like the present case, for [the applicants] to be taxed less favourably in respect of dividends from X because X’s subsidiary Y conducts business in Russia rather than in Sweden?

2. Does it have any relevance whether [the applicants] acquired their shares in X before or after business in Russia was commenced or modified?’

The questions referred for a preliminary ruling

Costs

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

On those grounds, the Court (Fourth Chamber) hereby rules:

A national measure which, within the framework of taxation on share dividends as income from assets up to a flat-rate yield calculated by applying a specific percentage to a base including, in addition to the capital invested by the shareholder, a fraction of the remuneration paid to employees of the company issuing the dividends, does not permit the taking into account of the salaries of workers employed in a branch of that company, or by a subsidiary of it in a non-member country, fundamentally affects freedom of establishment within the meaning of Article 43 EC et seq.. Those articles may not be relied upon in a situation involving the establishment of a company of a Member State in a non-member country.

[Signatures]

* Language of the case: Swedish.