Summary
Parties
Grounds
Decision on costs
Operative part
Keywords

1. Approximation of laws ° Common system of taxation applicable in the case of parent companies and subsidiaries of different Member States ° Directive 90/435 ° Exemption, in the Member State of the subsidiary, from withholding tax on the profits distributed to the parent company ° Conditions for granting ° Minimum holding in the capital of the subsidiary ° Option for Member States to make the exemption subject to a holding for a minimum period ° Strict interpretation ° National legislation recognizing a right to exemption, and solely prospectively, only once the minimum period laid down has been completed ° Not permissible ° Incorrect transposition by a Member State ° Whether obligation on the Member State to compensate a parent company for damage incurred ° No obligation

(Council Directive 90/435, Arts 3(2) and 5(1))

2. Approximation of laws ° Common system of taxation applicable in the case of parent companies and subsidiaries of different Member States ° Directive 90/435 ° Article 5(1) and (3) ° Exemption, in the Member State of the subsidiary, from withholding tax on the profits distributed to the parent company ° Clear nature ° Capable of being relied on by a parent company which has complied with the obligation to maintain its holding in the capital of its subsidiary for the period laid down by the Member State concerned

(Council Directive 90/435, Arts 3(2) and 5(1) and (3))

3. Community law ° Breach by a Member State ° Implementation of a directive ° Obligation to compensate individuals for damage incurred ° Conditions ° Sufficiently serious breach ° Concept

Summary

1. By authorizing Member States to grant exemption from withholding tax upon distribution of profits by a subsidiary to its parent company holding at least 25% of the subsidiary' s capital, provided for by Article 5(1) of Directive 90/435 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, only in so far as the parent company maintains that minimum holding for a period which Member States are free to lay down but which cannot exceed two years, Article 3(2) of Directive 90/435 introduces an option to derogate from the obligation to grant the exemption which, as such, must be strictly interpreted. It cannot therefore be interpreted as authorizing a Member State to make that exemption subject to the condition that, at the moment when the profits are distributed, the parent company should have had the required holding in the capital of its subsidiary for a period at least equal to that which the Member State has laid down pursuant to the option which it is recognized as having.

It is for Member States to draw up rules for ensuring compliance with this minimum period, in accordance with the procedures laid down in their domestic law. On no view are those States obliged under the directive to grant the advantage immediately on the basis of a unilateral undertaking by the parent company to observe the minimum holding period.

That being so, Community law does not require a Member State which, when transposing that directive into its national law, stipulated that the minimum holding period set pursuant to Article 3(2) must be completed at the time when the profits that are the subject of the tax advantage afforded by Article 5 are distributed, to compensate the parent company for damage which it may have incurred by reason of the error thus made.

The conditions required for a breach of Community law by a Member State, on the occasion of the legislative activity involving a margin of discretion consisting in the transposition of a directive, to give rise to an obligation on that Member State to compensate individuals for damage which they have incurred are not satisfied in this case. There is, in any event, no sufficiently serious breach of Community law if it appears, inter alia, that the Member State' s interpretation of the directive corresponds to that of almost all the other Member States which have exercised the option to derogate.

2. Article 5(1) of Directive 90/435 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States clearly and unambiguously provides that a parent company holding a minimum of 25% of the capital of its subsidiary is to be exempt from withholding tax.

While it is true that Article 3(2) of the directive gives Member States the option of derogating from that principle where the parent company does not maintain its holding in the subsidiary for a minimum period and gives those States latitude as regards both the duration of that period, which may not exceed two years, and the administrative procedures applicable, this does not make it impossible to determine minimum rights on the basis of the provisions of principle contained in Article 5 of the directive. It follows that, where a Member State has exercised the option provided for in Article 3(2) of the directive, parent companies may, provided that they comply with the obligation to maintain their holding for the period set by that Member State, rely directly on the rights conferred by Article 5(1) and (3) of that directive before national courts.

3. Individuals injured by a breach of Community law attributable to a Member State are recognized as having a right to reparation when three conditions are met: the rule infringed must be intended to confer rights on individuals; the breach must be sufficiently serious; and there must be a direct causal link between the breach of the obligation resting on the State and the damage suffered by the injured parties. Those conditions apply where a Member State incorrectly transposes a Community directive into national law. In this regard, a breach is sufficiently serious if a Community institution or a Member State, in the exercise of its rule-making powers, manifestly and gravely disregards the limits on those powers. One of the factors that may be taken into consideration is the clarity and precision of the rule breached.

Parties

In Joined Cases C-283/94, C-291/94 and C-292/94,

REFERENCES to the Court under Article 177 of the EC Treaty by the Finanzgericht Koeln (Germany) for preliminary rulings in the proceedings pending before that court between

Denkavit Internationaal BV (C-283/94),

VITIC Amsterdam BV (C-291/94) and

Voormeer BV (C-292/94)

and

Bundesamt fuer Finanzen

on the interpretation of Articles 3 and 5 of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ 1990 L 225, p. 6),

THE COURT (Fifth Chamber),

composed of: J.C. Moitinho de Almeida, President of the Chamber, L. Sevón, D.A.O. Edward, P. Jann (Rapporteur) and M. Wathelet, Judges,

Advocate General: F.G. Jacobs,

Registrar: L. Hewlett, Administrator,

after considering the written observations submitted on behalf of:

° Denkavit Internationaal BV, by V. Schiller, Rechtsanwalt, Cologne;

° the Bundesamt fuer Finanzen, by R. Schupp, Regierungsdirektor, acting as Agent;

° the German Government, by E. Roeder, Ministerialrat in the Federal Ministry of Economic Affairs, and G. Thiele, Assessor in that Ministry, acting as Agents;

° the Belgian Government, by J. Devadder, Director of Administration in the Legal Service of the Ministry of Foreign Affairs, acting as Agent;

° the Greek Government, by F. Georgakopoulos, Assistant Legal Adviser to the State Legal Council, K. Grigoriou, Legal Assistant to the State Legal Council, and S. Chala, special scientific assistant in the Special Community Legal Affairs Department of the Ministry of Foreign Affairs, acting as Agents;

° the Italian Government, by U. Leanza, Head of the Community Legal Affairs Department in the Ministry of Foreign Affairs, assisted by M. Fiorilli, Avvocato dello Stato, acting as Agents;

° the Netherlands Government, by A. Bos, Legal Adviser in the Ministry of Foreign Affairs, acting as Agent;

° the Commission of the European Communities, by J. Grunwald, Legal Adviser, and H. Michard, of its Legal Service, acting as Agents,

having regard to the Report for the Hearing,

after hearing the oral observations of Denkavit Internationaal BV, represented by V. Schiller; the German Government, represented by B. Kloke, Oberregierungsrat in the Federal Ministry of Economic Affairs, acting as Agent; the Greek Government, represented by K. Grigoriou and S. Chala; the French Government, represented by G. Mignot, Secretary for Foreign Affairs in the Legal Affairs Directorate of the Ministry of Foreign Affairs, acting as Agent; the Netherlands Government, represented by M. Fierstra, Assistant Legal Adviser in the Ministry of Foreign Affairs, acting as Agent; and the Commission, represented by J. Grunwald, at the hearing on 21 March 1996,

after hearing the Opinion of the Advocate General at the sitting on 2 May 1996,

gives the following

Judgment

Grounds

1 By orders of 19 September 1994, received at the Court on 19 October and 27 October 1994, the Finanzgericht Koeln (Finance Court, Cologne) submitted for preliminary rulings under Article 177 of the EC Treaty a number of questions concerning the interpretation of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ 1990 L 225, p. 6, hereinafter "the Directive"), and in particular Articles 3(2) and 5 thereof.

2 Those questions have arisen in three sets of proceedings brought against the Bundesamt fuer Finanzen (Federal Finance Authority, hereinafter "the Bundesamt") by Denkavit Internationaal BV ("Denkavit"), VITIC Amsterdam BV ("VITIC") and Voormeer BV ("Voormeer"), companies incorporated under Netherlands law and each having a holding in a German company, concerning the taxation of their subsidiaries' profits.

3 Article 3(1)(a) of the Directive provides that the status of parent company is to be attributed to any company of a Member State which fulfils certain conditions set out in Article 2 of the Directive and has a minimum holding of 25% in the capital of a company of another Member State. The second indent of Article 3(2) of the Directive provides each Member State with the option, by way of derogation from paragraph 1, of "not applying this Directive to companies of that Member State which do not maintain for an uninterrupted period of at least two years holdings qualifying them as parent companies or to those of their companies in which a company of another Member State does not maintain such a holding for an uninterrupted period of at least two years".

4 Article 5(1) of the Directive provides that profits which a subsidiary has distributed to its parent company are, where the latter holds a minimum of 25% of the capital of the subsidiary, to be exempt from withholding tax. Article 5(3) of the Directive authorized the Federal Republic of Germany to impose a withholding tax of 5% until mid-1996 at the latest.

5 According to Article 8(1), the Directive was to be transposed into national law before 1 January 1992.

6 In Germany, the Directive was transposed by Paragraph 44d of the Einkommensteuergesetz (Law on Income Tax, hereinafter "the Law"). While Paragraph 44d(1) provides for a reduction of withholding tax to a rate of 5%, in accordance with Article 5(1) and (3) of the Directive, Paragraph 44d(2), which seeks to transpose the second indent of Article 3(2) of the Directive, states that "' Parent company' for the purposes of Paragraph 44d(1) shall mean a company ... which at the moment when liability to investment income tax arises ... can show that it has held directly at least one quarter of the share capital of the [subsidiary] for an uninterrupted period of at least 12 months."

7 In Case C-283/94, Denkavit had, since 1973, a direct holding of 20% in the capital of the German company Denkavit Futtermittel GmbH. On 14 July 1992, following the acquisition of further shares, Denkavit' s holding in its subsidiary increased to 99.4%. With a view, apparently, to making a distribution of its subsidiary' s profits scheduled for 16 October 1992, Denkavit requested the German tax authorities, on 6 October 1992, to reduce the withholding tax in accordance with Paragraph 44d(1) of the Law. In its request, it gave an express undertaking that its holding in its subsidiary would continue to be more than 25% for an uninterrupted period of at least two years from the date of acquisition, which was 14 July 1992.

8 The German tax authorities, however, refused to grant the exemption requested on the ground that the 12-month minimum holding period laid down by Paragraph 44d(2) of the Law had not been complied with.

9 Following an unsuccessful administrative appeal by Denkavit and institution of proceedings before the Finanzgericht Koeln, the tax authorities, on 17 May 1993, amended their decision and authorized withholding tax to be charged at the reduced rate from 15 July 1993 (one year after acquisition of the increased holding) on condition that Denkavit would maintain a sufficient holding until 30 September 1995.

10 Denkavit thereupon limited its action to the period prior to 15 July 1993. Before the referring court, it argued, in particular, that it had a legitimate interest in securing a declaration that the decision of the Bundesamt refusing to grant it a reduction in withholding tax for the period up to 14 July 1993 was illegal, since, owing to that refusal, its subsidiary had decided not to proceed with the distribution of profits originally scheduled for 16 October 1992. That involuntary decision not to proceed had resulted in considerable loss of interest, for which Denkavit intended to seek compensation once the proceedings before the revenue courts had been concluded.

11 In Case C-291/94, VITIC had, since 1987, a direct holding of 19% in the capital of the German company Wesumat GmbH. On 2 January 1992, following acquisition of further shares, that holding was increased to 95%. On 15 October 1991 the subsidiary decided to distribute a dividend, payable on 15 January 1992, calculated by reference to profits declared on 31 December 1990. The dividend due to the parent company was paid after deduction of investment income tax calculated at the normal rate.

12 On 29 June 1992, VITIC, pursuant to Paragraph 44d(1) of the Law, requested reimbursement of the tax charged in so far as it exceeded the reduced rate of 5%.

13 On 16 October 1992, the tax authorities refused to make the reimbursement requested on the ground that the 12-month period laid down by Paragraph 44d(2) of the Law had not been complied with.

14 Following rejection of its administrative appeal, VITIC brought proceedings before the Finanzgericht Koeln.

15 In Case C-292/94, Voormeer acquired 96.13% of the capital of the German company Framode GmbH on 27 February 1992. On 28 April 1992, Framode decided to distribute a dividend, payable on 4 May 1992, for the financial year from 1 March 1991 to 29 February 1992. The dividend due to the parent company was paid after deduction of investment income tax calculated at the normal rate.

16 On 15 October 1992, Voormeer applied for reimbursement of the tax charged, in so far as it exceeded the reduced rate of 5%. Following the refusal of the tax authorities to make the reimbursement requested on the same ground as in the VITIC case, Voormeer lodged an administrative appeal on 22 January 1993. Following rejection of that appeal on 23 February 1993, Voormeer instituted proceedings before the Finanzgericht Koeln.

17 In the main proceedings in the three cases, the Finanzgericht Koeln indicates that, on the basis of national law alone, the actions fall to be dismissed. However, it expresses doubts as to whether Paragraph 44d(2) of the Law is compatible with Article 3(2) of the Directive, which does not appear to require that the minimum period for which the parent company has to maintain its holding in the capital of its subsidiar