Opinion of the Advocate-General

1 This case raises the question whether a duty imposed on the capitalisation of undistributed, but previously taxed, profits of a capital company constitutes a capital duty prohibited by Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (hereinafter `the Directive'), (1) as amended in particular by Council Directive 85/303/EEC of 10 June 1985 concerning indirect taxes on the raising of capital. (2) If the impugned duty constitutes such a capital duty, the question also is raised whether the Directive confers on Greece a specific entitlement to introduce it even subsequent to its implementation of the Directive.

I - The legal and factual context

A - The facts and national proceedings

2 Pursuant to a resolution of the general meeting of its shareholders on 31 August 1995, Henkel Hellas ABEE (hereinafter `the plaintiff'), a Greek public limited company, capitalised the undistributed profits taxed in its name in respect of the financial years 1972 and 1973 as well as 1981 to 1989, which amounted in gross to a total of GRD 407 317 245 but to only GRD 215 066 276 after deduction of the corporation tax already lawfully paid when the profits in question were realised. The plaintiff submitted to the defendant tax authority various (eleven) declarations for payment, under protest, of the duty due under Article 42(6) of Law 2065/1992 (hereinafter `the 1992 Law'), which provides for a 3% tax on the capitalisation of undistributed profits. The taxable amount on which the duty due was calculated was determined, in accordance with the relevant circular of the Ministry of Finance (POL 1135/23.7.1992), on the conversion of the net profits of GRD 215 066 276 into the gross profits by adding back the corporation tax already paid.

3 The plaintiff included a qualification in each declaration to the effect, first, that, in accordance with Articles 4 and 10 of the Directive, the capitalised profits should not be subject to the contested duty of 3% and, secondly, that the duty payable should be calculated on the basis of the amount of its net profits rather than its gross profits. If the latter, the plaintiff contended that the effective rate of taxation amounted to 5.68%. It subsequently brought an action contending that the imposition of the duty was incompatible with the Directive.

4 The Diikitiko Protodikio (Administrative Court of First Instance), Piraeus (hereinafter `the national court') has taken the view that Article 42(6) of the 1992 Law, in providing `that undistributed profits are subject to a duty at a rate of 3% if they are capitalised, contains a provision which in principle diverges from Directive 69/335, in particular Articles 4 and 10 thereof'. However, it queries whether the fact, recognised by Directive 85/303, that `no capital duty existed in Greece on 1 July 1984' makes a difference. Consequently, it has decided to refer the following questions to the Court of Justice:

`1. Is the duty charged by the Greek State pursuant to Article 42(6) of Law 2065/1992 equivalent to the capital duty laid down by Article 4 of Council Directive 69/335/EEC of 17 July 1969, as subsequently amended, taking into account that on 1 July 1984 no such capital duty existed in Greece?

2. If so, taking account of Greece's special fiscal situation, may the rate of that duty exceed the rate of 1% in the abovementioned directive?'

B - The relevant Community and national law

5 In order to consider these questions, I shall refer to the main provisions of Community law and the relevant provisions of Greek law, bearing in mind that the transaction at issue is the capitalisation of undistributed (but already taxed) profits. The Directive is a harmonising measure aimed, in particular, at `the elimination of tax obstacles which interfere with the free movement of capital'. (3) Article 4(1) lists the transactions, not including that in question, that Member States are in principle obliged to subject to capital duty. Article 4(2), as amended by Article 1(1) of Directive 85/303, prescribes the transactions which may, `to the extent that they were taxed at the rate of 1% as at 1 July 1984, continue to be subject to capital duty'. Those transactions include, under Article 4(2)(a), `an increase in the capital of a capital company by capitalisation of profits or of permanent or temporary reserves'. Article 1(1) of Directive 85/303 also adds the following subparagraph, which is specific to Greece, to Article 4(2): `However, the Hellenic Republic shall determine which of the transactions listed in [Article 4(2)] it will subject to capital duty'. Article 3 of Directive 85/303 provided that Member States were to `take the measures necessary to comply with [it] no later than 1 January 1986', and that they were to inform the Commission of those measures.

6 Article 7 of the Directive, as replaced by Article 1(2) of Directive 85/303, deals with the rate of duty chargeable. The first two sentences of Article 7(1) impose an obligation on Member States to exempt with effect from 1 January 1986 at the latest those transactions which they subjected to capital duty at a rate of no more than 0.5%, or exempted, on 1 July 1984, subject to the conditions of application which they applied at that date. The final sentence contains a further special provision for Greece which mirrors that added to Article 4(2) under which `the Hellenic Republic [is obliged to] determine which transactions it shall exempt from capital duty'. Article 7(2) is worded as follows: `Member States may either exempt from capital duty all transactions other than those referred to in paragraph 1 or charge duty on them at a single rate not exceeding 1%'. In its original 1969 version, Article 7(1) had provided that the rate of duty might `not exceed 2% or be less than 1%'. This maximum was reduced to 1%, with effect from 1 January 1976, by Article 1 of Council Directive 73/80/EEC. (4)

7 Finally, it should be noted that Article 10 provides that:

`Apart from capital duty, Member States shall not charge with regard to companies, firms, associations or legal persons operating for profit, any taxes whatsoever:

(a) in respect of the transactions referred to in Article 4 ... .'

8 The Directive was transposed into Greek law by Law 1676/1986, under Article 21 of which the rate of capital duty is fixed at 1%. However, Article 22(2)(b) of that Law expressly exempts from capital duty any increases in capital by way of capitalisation of profits or reserves. Corporate taxation, conversely, is governed primarily by Decree-Law 3843/1958, under which tax at the rate of 40% is applied to undistributed profits. However, the 1992 Law introduced a transitional regime which amended the system applicable under the 1958 legislation. Article 42(6) of the 1992 Law provides that the distribution or capitalisation of profits by companies is to be subject to taxation at a rate of 3%. It does not apparently provide for the taxation of undistributed profits which are retained in the reserves of a company. It would appear from the observations submitted by the plaintiff that the rate has actually been increased to 5% by Article 13(6) of Law 2459/1997.

II - Observations

9 Written observations have been submitted by the plaintiff, the Hellenic Republic and the Commission. Both Greece and the Commission also submitted oral observations.

III - Analysis

10 The national court has found as a matter of fact that, pursuant to the 1995 shareholders' resolution, the plaintiff's undistributed profits generated in respect of the relevant earlier fiscal years were capitalised. I confess straightaway to finding persuasive the Commission's succinct submission that it is clear from the wording alone of Article 4(2)(a) of the Directive (`an increase in the capital of a capital company by capitalisation of profits or of permanent or temporary reserves') that any taxation of such a transaction amounts to the imposition of capital duty. Greece, on the other hand, contends that the Law at issue merely imposes a second stage of corporation tax, which, although normally falling due on the distribution of dividends, has in this case been imposed on the occasion of their capitalisation; that is to say that it constitutes direct taxation. (5) The plaintiff, however, submits that the capitalisation of profits does not possess the essential characteristics of taxable revenue and may not be equated with a distribution of profits by way of a dividend. Such treatment, if permitted, would constitute a serious gap in the scope and operation of the Directive.

11 This issue is not to be resolved by reference to the treatment of the transaction under national law. The Court has consistently held that `the nature of a tax, duty or charge is to be determined by the Court under Community law, according to the objective characteristics by which it is levied, irrespective of its classification under national law ...'. (6)

12 The Court has had occasion expressly to consider the effect of Article 4(2)(a) of the Directive in Dansk Sparinvest. (7) That case concerned a Danish investment company which, for legal reasons, had been obliged to amend its shareholders' share certificates, and which took advantage of the occasion thus offered to double the number of their nominal shares, whose effect was simply to halve the previous market value of each share. The capital available to the company was not increased. The Danish authorities, none the less, took the view that the increase in the nominal capital consti