Opinion of the Advocate-General
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My Lords,
1. In this case, the Hoge Raad of the Netherlands has referred for a preliminary ruling two questions on the interpretation of Article 7(1) of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (Official Journal, English Special Edition 1969 (II), p. 412; hereafter "the directive"). The aim of the directive is the harmonization of such taxes, and in particular the harmonization of the duty chargeable on the contribution of capital to companies and firms ("capital duty"). The directive was amended by Council Directive 73/79/EEC of 9 April 1973 (Official Journal 1973 L 103, p. 13), by Council Directive 73/80/EEC of 9 April 1973 (Official Journal 1973 L 103, p. 15), and by Council Directive 74/553/EEC of 7 November 1974 (Official Journal 1974 L 303, p. 9). Subsequent amendments made by Council Directive 85/303/EEC of 10 June 1985 (Official Journal 1985 L 156, p. 23) are not relevant to the present case, which concerns transactions taking place in 1979.
2. Article 4(1) of the directive specifies the transactions which shall be subject to capital duty, which include the formation of a capital company (Article 4(1)(a) ), and an increase in capital by contribution of assets of any kind (Article 4(1)(c) ). The expression "capital company" is defined by Article 3(1) by reference, inter alia, to companies in various forms prescribed by national law, and Article 3(2) provides in addition that any other company, firm, association or legal person operating for profit shall be deemed to be a capital company, although a Member State has the right not to consider it as such for the purpose of charging capital duty. It is common ground that the taxpayer company in the main proceedings, which is a "BV" or "besloten vennootschap" (private company), is to be treated as a capital company for the purpose of charging capital duty.
3. Article 7(1)(a) of the directive lays down the standard rate of capital duty, but points (b) and (bb) of Article 7(1) provide for a reduction of the rate in certain circumstances. The reduction provided for in point (b) is mandatory, but Member States have the option whether or not to implement the reduction provided for in point (bb), which was inserted by Council Directive 73/79. By Council Directive 73/80, with effect from 1 January 1976 the standard rate of capital duty is 1%, and the reduced rate provided for in points (b) and (bb) of Article 7(1) may be any rate between 0% and 0.5%.
4. The mandatory reduction provided for in point (b) of Article 7(1) applies where
"... one or more capital companies transfer all their assets and liabilities, or one or more parts of their business to one or more capital companies which are in the process of being formed or which are already in existence"
provided that the consideration for the contributions of capital consists exclusively of the allocation of shares in the acquiring companies, or (at the Member State' s option) of the allocation of such shares together with a cash payment not exceeding 10% of their nominal value.
5. The optional reduction provided for in point (bb) applies, on the other hand,
"... where a capital company which is in the process of being formed or which is already in existence acquires shares representing at least 75% of the issued share capital of another capital company"
provided that the consideration for the shares acquired consists exclusively of the allocation of shares in the acquiring company, or (at the Member State' s option) of the allocation of such shares together with a cash payment not exceeding 10% of their nominal value.
6. Article 5 of the directive deals with the basis upon which duty is charged. By Article 5(1)(a), in the case of the formation of a capital company or of an increase in its capital or assets, the duty is charged on the actual value of assets contributed or to be contributed by the members, after deduction of liabilities assumed and expenses borne by the company. By Article 5(2), as amended by Council Directive 74/553, in such cases the Member State may instead take, as a basis for charging capital duty, the actual value of the shares allotted or belonging to each member, unless contributions are made only in cash. The amount on which duty is charged may not however be less than the nominal value of those shares.
7. The circumstances referred to in points (b) and (bb) of Article 7(1) describe two distinct kinds of company acquisition. In the former case, shares in the acquiring company are exchanged, either for the whole of the assets and liabilities of the acquired company or for a part of its business. In the latter kind of acquisition, shares are exchanged for shares: the acquiring company acquires a controlling interest in the acquired company in exchange for its own shares. The latter kind of operation is sometimes known as a "share swap" or "exchange of shares". The Community legislator intended that the first kind of operation should always benefit from the reduced rate of duty, whereas in the case of the second kind it was content to allow each Member State to decide whether or not a reduction should be granted.
8. Thus, the Netherlands was under an obligation to implement the mandatory reduction in duty provided for in Article 7(1)(b). As regards the optional reduction of Article 7(1)(bb), it appears that the option has been exercised in the Netherlands in respect of some but not all kinds of transaction. The Dutch legislation draws a distinction between "internal reorganizations" and "mergers", that is to say between the acquisition of a company belonging to the same group as the acquirer, and the acquisition of a company belonging to a different group. Only in the case of the latter kind of operation is the reduction in duty provided for in Article 7(1)(bb) applicable in the Netherlands: see Articles 11 and 12 of the Implementing Order (Taxation of Legal Transactions), of 22 June 1971. It is common ground that the transaction at issue in the main proceedings is an internal reorganization, and not a merger. Accordingly, the question which arises is of the applicability of Article 7(1)(b) to the transaction.
9. The transaction at issue in the main proceedings was one step in an operation whereby a Dutch construction company, Van der Vorm Beheer BV ("Van der Vorm") proposed to acquire the business of various subsidiaries of another construction company, Nederhorst Beheer BV ("Nederhorst"). I shall refer to the Nederhorst subsidiaries as the "target companies".
10. Van der Vorm contracted to acquire the target companies by an agreement dated 11 September 1979. The agreement allowed Van de Vorm to make the acquisitions either by itself purchasing the assets and assuming the liabilities of the target companies, or by causing companies set up by itself to do so. In the event, Van der Vorm opted for the latter alternative, and accordingly on 2 October 1979 set up four new companies to be used as instruments for that purpose ("the instrument companies"):
(A) Nedu, (B) Multi ontwerp, (C) Muwi Geleen and (D) Muwi Rotterdam.
The instrument companies had an issued share capital of, respectively:
(A) HFL 50 000, (B) HFL 100 000, (C) HFL 6 500 000, and (D) HFL 3 200 000.
Van der Vorm undertook to contribute the share capital of companies (A), (B) and (D) in cash, and, in the case of (C), by transferring all the shares in (A) and paying up the rest in cash. The four instrument companies accordingly represented a total asset value of HFL 9 800 000, representing cash which could be used to acquire from Nederhorst the businesses of the target companies.
11. In order to bring those businesses, once they were acquired, into a single operating unit, on 2 October 1979 Van der Vorm also set up a company which was initially named "Van der Vorm' s Muwi Beheer BV", but which was subsequently renamed "Muwi Bouwgroep BV" (hereafter "Muwi"). Muwi is the appellant taxpayer in the main proceedings. Van der Vorm undertook to pay up the entire issued share capital of Muwi, amounting to HFL 10 000 000, by transferring all its shares in the instrument companies and paying up the remaining Muwi shares in cash; and the shares in the instrument companies were duly transferred on 30 October 1979. It should be noted that it was not until the next day, 31 October 1979, that the assets and liabilities of the target companies were taken over by the instrument companies, which had meanwhile become subsidiaries of Muwi.
12. The question at issue in the main proceedings is the amount of capital duty payable on the above contribution of capital, namely the transfer to Muwi of shares to the value of HFL 9 800 000 and the payment of HFL 200 000 in cash.
13. It will be recalled that if the contribution of capital falls within point (b) of Article 7(1) of the directive, Muwi will be liable to a reduced amount of capital duty. If, on the other hand, the transaction falls within point (bb) of Article 7(1), the full amount of duty will be charged, since the exchange of shares in the instrument companies for shares in Muwi is regarded as an "internal reorganization", in respect of which the Netherlands has chosen not to implement Article 7(1)(bb) of the directive.
14. It is to be noted that, where the Dutch legislation makes provision for a reduced amount of duty, the reduction is effected by means of a diminution in the assessment basis rather than by means of a lower rate of taxation. Thus, at the relevant time, the rate of capital duty in the Netherlands was a uniform 1%. The reduction in the assessment basis was provided by Article 35(4) of the Law on the Taxation of Legal Transactions, of 24 December 1970. From that provision, read in the light of the calculation given on page 5 of the Order for Reference, it appears that, where a transaction falls within Article 7(1)(b) of the directive, the duty is levied on the difference between (A) the nominal value of the shares allocated by the acquiring company, and (B) the ratio of the assets contributed to the total assets of the company making the contribution, expressed as a proportion of the nominal share capital of the latter company. In its written observations submitted to the Court, the Netherlands Government indicates that its legislation is intended to produce a nil rate of tax where no reserves of the contributing company are converted into nominal capital of the acquiring company. Where, on the other hand, reserves are so converted, the assessment basis is limited to the difference in the nominal values arrived at under (A) and (B) respectively. Thus, a charge arises under Article 35(4) to the extent that the assets contributed are represented by reserves of the contributing company. From the calculation in the Order for Reference, it appears that the assets contributed in the present case have indeed been treated as represented in part by reserves of Van de Vorm for the purpose of applying that provision.
15. The Hoge Raad has referred the following two questions to the Court:
1. Where the assets and liabilities of a capital company include a parcel of shares which constitutes a 100% share in another capital company, may that parcel of shares be regarded as a "part of the business" of the company which holds them within the meaning of Article 7(1)(b) of Directive 69/335/EEC of 17 July 1969, even if the assets of the subsidiary consist at the time solely of liquid assets?
2. If so, does it follow from the directive that in this case capital duty may not exceed 0.5% of HFL 10 000 000 - that is, HFL 50 000 - or may the company nevertheless be charged HFL 84 849.84 on the ground that the rules laid down in Article 35(4) of the Wet op Belastingen van Rechtsverkeer (Law on the Taxation of Legal Transactions) in conjunction with Article 12(1) of the Uitvoeringsbesluit Belastingen van Rechtsverkeer (Implementing Order (Taxation of Legal Transactions) ) are, taken as a whole, in conformity with the directive?
In what follows, I shall consider the two questions in turn.
The first question
16. The reduced rate of Article 7(1)(b) applies to two kinds of acquisition: (1) where the acquiring company obtains all the assets and liabilities of the acquired company, and (2) where the acquiring company obtains one or more parts of the business of the acquired company. In the former case, the entire business of the acquired company is transferred; in the latter, part only is transferred. It is I think clear from the wording of the provision that a "part of a business" cannot mean simply one or more of the assets of the business; for otherwise the provision could have simply referred to "all or some of the assets" of the companies in question. What is transferred must make up a relatively autonomous branch of the acquired company' s business activity, and the French version of the provision accordingly uses the words "branches de leur activité". Both the Commission and the Netherlands Government refer in this context to the definition of "branch of activity" (in the French version, "branche d' activité") in Article 2(i) of Council Directive 90/434/EEC of 23 July 1990, on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (Official Journal 1990 L 225, p. 1). In that provision, "branch of activity" is defined as follows:
"' branch of activity' shall mean all the assets and liabilities of a division of a company which from an organizational point of view constitute an independent business, that is to say an entity capable of functioning by its own means."
17. It seems to me that the Commission and the Netherlands Government are correct in suggesting that the same concept of "part of a business" or "branch of activity" is implicit in Directive 69/335. A transfer of a part of a business, for the purposes of Article 7(1)(b) of the directive, is the transfer of a part of the transferor company' s organization, and one which in my view must itself be capable of carrying on a business of its own.
18. It seems to me, therefore, that a company with assets consisting only in cash cannot amount to part of the business of its parent company. Thus, when Van der Vorm agreed to contribute capital to Muwi by transferring to the latter its shares in the instrument companies, it was agreeing to transfer, not a part of its business, but merely assets which could be used to obtain the target companies. Nor is it relevant, in my opinion, that the instrument companies were set up, and provided with liquid resources, specifically for that purpose. An asset does not become a "part" of a business merely because it is intended to use it to acquire a business. In my view, therefore, there is no doubt that the operation in question falls within point (bb) rather than point (b) of Article 7(1).
19. It is true that the problem would have taken on a slightly different aspect if the same events had occurred in a different sequence. Thus, if Van der Vorm had first used the assets of the instrument companies to purchase the businesses of the target companies, and had only then transferred the shares in the instrument companies to Muwi, the question would arise whether those companies could be regarded as relatively autonomous parts of the Van der Vorm organization, and hence as parts of its business. According to both the Commission and the Netherlands Government, as well as the Danish Government, such a transaction should still be regarded as a share exchange, falling within point (bb), rather than as the transfer of a part of a business, falling within point (b). Thus, the Commission and the Netherlands and Danish Governments all take the view that a company cannot be said to carry on a part of its business, for the purposes of Article 7(1)(b) of the directive, when the business is carried on through the medium of a subsidiary it controls. Again, it seems to me that that submission is correct. Article 7(1)(bb) was added by Directive 73/79 precisely because Article 7(1) of the directive as originally adopted made no provision for a reduction in duty in the case of share exchanges. Accordingly, as the second recital to the amending directive makes clear, it was decided to permit the extension of the reduced rate to include transactions involving the exchange of shares as well as the transfer of assets other than shares. As the same recital explains, from an economic point of view the two types of transaction can be regarded in the same light. It remains the case however that from a legal point of view the transactions are different, and for that reason it was considered necessary to make separate legal provision for the two cases.
20. In order to answer the question which has been referred, it is unnecessary to decide the more general question of whether or not a company can be said to carry on a part of its business through the medium of a subsidiary it controls; in either case, the Hoge Raad' s first question is in my view to be answered in the negative. It seems to me, none the less, that the answer need not be restricted to situations where the assets of the subsidiary consist solely of liquid assets. Thus, even if the subsidiary is capable of carrying on a business of its own, the transfer of its shares to another company is not to be regarded as the transfer of a part of the business of the parent company for the purposes of Article 7(1)(b) of the directive.
The second question
21. Given the answer I have proposed to the first question, it is unnecessary to answer the second of the two questions referred. I shall nevertheless consider how the second question should be answered if the first question were answered differently. The second question can be understood as asking what the maximum amount of capital duty is in a case where the contribution of capital falls within point (b) of Article 7(1) of the directive, and in particular where that contribution consists in the transfer of shares with a nominal value of HFL 9 800 000 representing assets of the same value, together with cash amounting to HFL 200 000, in exchange for shares with a nominal and actual value of HFL 10 000 000.
22. I shall first consider whether the relevant provisions of the directive have direct effect, that is to say whether they are sufficiently precise and unconditional for individuals to rely upon them before the national courts in order to prevent the application of any inconsistent national provisions: see Case C-188/89 Foster v British Gas [1990] ECR I-3313, paragraph 16 of the judgment. I note that a different provision of the directive, namely Article 4(2)(b), was held to have direct effect in Case C-38/88 Siegen v Finanzamt Hagen [1990] ECR I-1447 (see paragraph 8 of the judgment).
23. The provisions of the directive relevant to the calculation of the amount of duty in the present instance are Article 5(1)(a) and (2), which determine the basis for assessment of the duty, and Article 7(1)(a) and (b), which determine the rates at which the duty is charged.
24. It should be noted that each of those provisions allows the Member States a certain degree of freedom in implementing the directive. Thus, although Article 5(1)(a) specifies that the basis for assessment shall be the actual value of assets contributed, less liabilities and expenses, Article 5(2) permits Member States to take the actual value of shares allocated as the basis, or the nominal value where that is higher. Similarly, in the case of transactions falling within Article 7(1)(b), Member States are permitted to fix the rate of duty charged at any amount between 0% and 0.5%. The question therefore is whether those limited areas of discretion are sufficient to prevent the provisions being unconditional for the purposes of direct effect.
25. Although, as the Court has recently emphasized, a provision is unconditional when it does not leave to the Member States any margin of appraisal (see Joined Cases C-100/89 and C-101/89 Kaefer and Procacci [1990] ECR I-4647, paragraph 26 of the judgment), a certain margin of discretion left to the Member States as to the result to be achieved does not necessarily prevent a directive from having direct effect. Thus, in Case 88/79 Ministère Public v Grunert [1980] ECR 1827, the Court held that certain provisions of directives relating to the use and marketing of additives in foodstuffs had direct effect, even though the directives in question left to the Member States a large measure of freedom. The directives allowed the Member States to authorize or prohibit, at their discretion, the use of certain additives, as long as they did not totally exclude their marketing or use. The Court held, in paragraph 14 of its judgment, that
"The prohibition against the introduction or maintenance of legislative or regulatory provisions to that effect by the Member States is unconditional and sufficiently precise to enable an individual to rely on it before a national court..."
Similarly, in Case 51/76 Nederlandse Ondernemingen v Inspecteur der Invoerrechten [1977] ECR 113, the Court stated that it was the duty of the national court to determine whether national measures fell outside the margin of discretion permitted by a directive, and to take the provisions of the directive into account in so far as the measures fell outside those limits: see paragraphs 29-30 of the judgment.
26. It is clear, therefore, that a provision of a directive is sufficiently unconditional for the purposes of direct effect, as long as the limits of the discretion it leaves Member States are themselves unconditional and sufficiently precise. Thus, where a provision leaves to the Member States a choice of rates of duty, but lays down the limits of the range within which that choice may be exercised, the upper limit of the range may be relied upon by the taxpayer before a national court. Similarly, where a provision allows Member States to choose one of a number of bases for the assessment of duty, a taxpayer may rely upon that provision in order to prevent a national provision being applied which would lead to the payment of tax assessed on a basis larger than any of those permitted by the directive.
27. In the present case, it appears that the applicable national legislation would charge duty on an assessment basis which is actually smaller than any permitted by the directive. As we have already seen, that circumstance arises from the fact that the Netherlands chose to implement Article 7(1)(b) by means of a reduction in the assessment basis, rather than by means of a reduction in the rate of duty. The question therefore arises whether a taxpayer can rely upon the national provisions to obtain a reduced assessment basis, and rely at the same time upon Article 7(1)(b) in order to obtain a reduced rate of duty. (I note that it does not in fact appear from the Order for Reference that the taxpayer is attempting to rely upon the reduced assessment basis as well as upon the reduced rate of duty.)
28. It is clear that, where an individual does not seek to rely upon Article 7(1)(b), the national authorities cannot themselves claim the benefit of the directive in order to charge duty on an assessment basis larger than the one laid down in national legislation. That much follows from the clearly established principle that national authorities may not rely upon a directive against an individual before a national court: see Case 80/86 Kolpinghuis Nijmegen [1987] ECR 3969, paragraphs 9 to 10 of the judgment. On the other hand, where an individual does rely upon provisions of a directive in order to claim a reduced rate of duty, it might be thought that the provisions of the same directive determining the assessment basis for the duty should also be applied. For in such a case, it seems to me that the two sets of provisions cannot properly be separated: each specifies one of the two parameters which must necessarily be taken into account before the amount of duty can be calculated. That view also has the advantage that it leads to a result consistent with the directive; the other view would not. Thus, if Muwi is able to rely upon the directive before the national court, it should in my view be subject to both of the provisions which, taken together, determine the amount of capital duty which can be charged. It follows that, if Muwi is to benefit from the maximum rate of duty specified in Article 7(1)(b) of the directive, the maximum assessment basis to be applied must be the one which follows from Article 5(1)(a) and (2) of the directive, rather than the reduced basis made available by the national legislation.
29. I turn therefore to consider how the directive is to be applied to a transaction consisting in the contribution of capital amounting to HFL 200 000 in cash together with shares to the value of HFL 9 800 000, in consideration for the allocation of shares with an actual and nominal value of HFL 10 000 000. For the purpose of answering the question referred, it must be assumed that the contribution consisting in shares to the value of HFL 9 800 000 is to be regarded as the transfer of part of a business, within the meaning of Article 7(1)(b) (although, as we have seen, I do not regard that assumption as correct). On the other hand, it does not seem to me that the same assumption can apply to the contribution consisting in cash, which is clearly separate from the assets of the instrument companies. The cash contribution must therefore be charged at the full rate of 1%, resulting in an amount of HFL 2 000. The contribution of capital consisting in shares, on the other hand, is to be taxed at a maximum of 0.5% of their value, namely HFL 49 000. The maximum amount of duty chargeable is therefore HFL 51 000 if the assessment basis of Article 5(1)(a) of the directive is applied.
30. It is to be noted that the same maximum figure would result if the alternative basis of assessment in Article 5(2) of the directive were to be chosen. Thus, a part of the allocation of shares, to a value of HFL 200 000, must be taken to be the consideration for the contribution in cash, and therefore taxed at 1%, and the remaining allocation of shares, to a value of HFL 9 800 000, represents the consideration for the transfer of part of a business, and is therefore taxed at a maximum of 0.5%.
31. It appears from the Order for Reference that the application of the relevant national provisions would lead to a charge to capital duty of an amount greater than the above maximum sum, namely HFL 84 849.84. In its written observations submitted to the Court, the Netherlands Government appears to suggest that the result arrived at by its national legislation is in conformity with Articles 4(2)(a) and 5(1)(c) of the directive, which refer to an amount of capital duty to be charged in the case of capitalization of reserves. As we have already seen, in paragraph 14 above, Article 35(4) of the Law on the Taxation of Legal Transactions gives rise to a charge to capital duty to the extent that the assets contributed are represented by reserves of the contributing company. Thus, it appears that the Dutch legislation would treat the contribution of capital by Van de Vorm to Muwi, in exchange for shares in the latter company, in part as a capitalization of reserves within the meaning of Article 4(2)(a). In my view, however, Article 4(2)(a) of the directive does not apply to such a transaction. That provision is concerned with the capitalization of a company' s profits or reserves by means of the issue of the company' s own shares, rather than with the exchange of assets represented by reserves for shares in a different company. Thus, it does not seem to me to be relevant that assets contributed by Van de Vorm can be regarded as represented by that company' s reserves. In the present case, therefore, no charge to capital duty arises under Article 5(1)(c) of the directive.
32. If Article 7(1)(b) were applicable, therefore, it would follow, in view of the direct effect of the provisions in question, that the national court must ignore any provisions of Dutch law which would result in a charge to capital duty of an amount greater than the amount permitted by the directive. To the extent therefore that an application of the relevant national legislation would lead to a charge greater than HFL 51 000, that legislation should not be applied by the national court. The second question referred would then have to be answered as follows:
Article 7(1)(a) and (b) of Council Directive 69/335/EEC may be relied upon by a taxpayer before a national court. Accordingly, the capital duty payable on a transaction falling within those provisions may not exceed the maximum amount resulting from the application of the rates specified therein to the maximum assessment basis permitted by Article 5(1)(a) and (2) of the directive.
However, on the view I take, a ruling is necessary only on the first question.
Conclusion
33. I am accordingly of the opinion that the Court should answer the questions referred by the Hoge Raad as follows:
The transfer of assets and liabilities of a capital company consisting in a shareholding in a second capital company is not to be regarded as the transfer of one or more parts of the business of the first company for the purposes of Article 7(1)(b) of Council Directive 69/335/EEC of 17 July 1969.
(*) Original language: English.
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