Opinion of the Advocate-General
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My Lords,
1. In this case, the Bundesfinanzhof has referred a question on the interpretation of Article 4 of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (OJ, English Special Edition, 1969 (II), p. 412; hereafter "the directive"). However, as we shall see, the case also raises a question on the interpretation of Article 6 of the directive. The question referred by the Bundesfinanzhof is the following:
"Does Article 4 of Directive 69/335/EEC allow Member States to subject to capital duty the conversion of part of a Komplementaeranteil [general partner share] into a Kommanditanteil [limited partner share] within a pre-existing GmbH & Co. KG [a limited partnership in which one of the general partners is a limited liability company]?"
The question has been referred in the course of an appeal by the defendant Finanzamt against a judgment of the Hessisches Finanzgericht, which held that capital duty was not payable on a particular transfer of part of a shareholding in the respondent partnership.
The provisions of the directive
2. The directive has the aim of promoting the free movement of capital by harmonizing the taxation payable on the contribution of capital to companies and firms ("capital duty") and by abolishing certain other taxes. Article 3 of the directive specifies the companies, firms, associations and persons in respect of which capital duty is payable, which are referred to in the directive as "capital companies". By Article 3(1)(c), such companies include in particular:
"any company, firm, association or legal person operating for profit, whose members have the right to dispose of their shares to third parties without prior authorization and are only responsible for the debts of the company, firm, association or legal person to the extent of their shares".
Although companies and firms which have members with unlimited liability are therefore not necessarily capital companies, Article 3(2) provides that:
"For the purposes of the application of this Directive, any other company, firm, association or legal person operating for profit shall be deemed to be a capital company. However, a Member State shall have the right not to consider it as such for the purpose of charging capital duty."
It appears that, pursuant to that provision, German law treats a limited partnership as a capital company, even where it has partners with unlimited liability ("general partners"), as long as one of those partners is itself a capital company: see Case 270/81 Felicitas v Finanzamt fuer Verkehrsteuern [1982] ECR 2771, at paragraph 3 of the judgment, and see also Case C-49/91 Weber Haus v Finanzamt Freiburg-Land [1992] ECR I-5207. That is so, in particular, where one of the general partners is a limited company of the form "GmbH"; in such a case the entity in question is called a "GmbH & Co. KG".
3. Article 4 of the directive specifies the transactions which may attract capital duty. By Article 4(1) of the directive:
"The following transactions shall be subject to capital duty:
...
(c) an increase in the capital of a capital company by contribution of assets of any kind;
... ."
By Article 4(2):
"The following transactions may be subject to capital duty:
(a) an increase in the capital of a capital company by capitalization of profits or of permanent or temporary reserves;
... ."
Article 5 deals with the basis upon which the duty is assessed. According to Article 6:
"1. Each Member State may exclude from the basis of assessment, as determined in accordance with Article 5, the amount of the capital contributed by a member with unlimited liability for the obligations of a capital company as well as the share of such a member in the company' s assets.
2. Where a Member State exercises the power provided for in paragraph 1, the following shall be subject to capital duty:
° ...
° ...
° any transaction as a result of which the liability of a member is limited to his share in the company' s capital, in particular when the limitation of liability results from the conversion of a capital company into a different type of capital company.
Capital duty shall be charged in all such cases on the value of the share in the company' s assets belonging to members with unlimited liability for the company' s obligations."
4. By Article 3(2) of the directive, therefore, a Member State has the option of exempting from the payment of capital duty limited partnerships which have among their members persons with unlimited liability for the debts of the partnership. Alternatively, a Member State may include such partnerships within the scope of the tax. In that case, the Member State still has the option of exempting from capital duty the capital contributed by such a member: see Article 6(1). If however the share of a general partner is converted into a limited partner share, by the liability of the partner becoming limited, capital duty becomes payable on the value of the shareholding so converted: see Article 6(2). It is clear that the latter provision is necessary to prevent the avoidance of tax; for otherwise a company could raise capital from contributions made by members with unlimited liability, and then subsequently allow such members to limit their liability to the amount of their shareholding, thereby avoiding capital duty.
5. The directive was implemented in Germany by the Kapitalverkehrsteuergesetz 1972 (BGBl. I p. 2129), hereafter "KVStG". As we have already seen, limited partnerships of the form "GmbH & Co. KG" are regarded as capital companies for the purposes of that implementation (see Article 5(2)(3) of the KVStG). However, by Article 6(1)(1) of the KVStG, the shares held by a general partner of such a partnership are not regarded as rights in the company for the purposes of capital duty. It appears therefore that contributions of capital made by such a partner are not liable to duty under the provisions of the KVStG, and that the German Government has accordingly exercised the option given to it by Article 6(1) of the directive.
The background to the case
6. The material facts of the case are set out only in part in the order for reference. Although a fuller account can be gleaned from the documents contained in the national file lodged at the Court, and in particular from the judgment at first instance of the Finanzgericht, it would have been preferable if a summary of all the relevant facts had been included in the order for reference. It is to be noted, in particular, that it is only the order for reference itself, and not any of the documents in the national file, which is transmitted to the Member States and the Commission (and where appropriate to the Council) pursuant to Article 20 of the Statute of the Court. A concise statement of all the relevant facts is accordingly necessary in order that those notified can decide whether to submit written observations, and what issues to address, as well as for the Court' s own purposes.
7. From the documents contained in the national file, it appears that the applicant in the main proceedings (and respondent in the appeal to the Bundesfinanzhof) is a limited partnership formed by an agreement dated 1 March 1971. The original partners in the respondent were Dr Hans Viessmann ("V") and the Viessmann Elementa-Produktions-, Vertriebs- und Verwaltungsgesellschaft mbH ("V-GmbH"). V was originally a limited partner with a shareholding of DM 1 800 000; V-GmbH was a partner with unlimited liability, and had made a capital contribution of DM 50 000. In the course of 1972 and 1973, V increased his shareholding by DM 3 000 000, bringing his total shareholding to DM 4 800 000.
8. On 15 August 1973 the firm Viessmann KG of Basle ("VKG-B") became a limited partner in the respondent, with a shareholding of DM 5 000 000. On 27 February 1974 capital duty was paid in respect of the DM 9 800 000 contributed by the two limited partners (namely the DM 5 000 000 contributed by VKG-B and the DM 4 800 000 contributed by V). However, pursuant to a members' resolution dated 14 September 1976, V subsequently transferred DM 2 000 000 of his shareholding to VKG-B, and V' s remaining interest was converted from a limited to a general shareholding. Thus, V now became a member with unlimited liability for the debts of the respondent.
9. Pursuant to an agreement dated 4 July 1983, VKG-B transferred its entire shareholding in the respondent to Dr Hermann Schultheiss ("S") and to V, who were both members of VKG-B. As a result of that transaction, S became a limited partner with a shareholding of DM 700 000, and the shareholding of V was increased to DM 9 100 000. By an agreement dated 8/11 July 1983, V transferred a portion of his shareholding to his wife, and further portions to each of his five children. After those transfers, V was left with a shareholding in the respondent amounting to DM 4 641 000. Finally, by an agreement dated 19/21 December 1983, S transferred his shareholding in the respondent to V, his wife and five children. It appears that the purpose of those transactions was to transfer VKG-B' s entire shareholding in the respondent to V and his family. It seems that the transfer of the shareholding from VKG-B to the six family members could not be made directly, but had to be effected by means of a prior transfer to V and S as members of VKG-B. On 22 December 1983, the respondent made a declaration, for the purposes of the commercial register, that VKG-B had ceased to be a member of the respondent and had divided its shareholding between V and the members of his family.
10. For what follows, it is important to note that paragraph II.2 of the agreement of 8/11 July 1983 specifies that, on receiving the shares which are to be transferred to them, the six family members become members of the respondent with limited liability ("Kommanditisten"). It is also to be observed that, both before and after that transfer, V remained a member of the respondent with unlimited liability ("Komplementaer"). It appears that, under German law, when the shareholding of a limited partner is transferred to a general partner, the latter remains a partner with unlimited liability. On the other hand, when a shareholding is transferred from a general partner to a limited partner, the latter may remain a limited partner if the partnership agreement so provides: see Baumbach/Duden/Hopt, Handelsgesetzbuch (28th edition; Munich 1989), Article 124 Note 2 A.
Consideration of the question referred
11. The transaction at issue in the present proceedings is the acquisition of shares in the respondent by the six family members, pursuant to the agreement of 8/11 July 1983. It will be recalled that those shares were acquired by way of a transfer of part of the shareholding of a general partner, by virtue of which the shares were converted from general partner shares to limited partner shares.
12. The defendant Finanzamt decided that the transaction was liable to capital duty under Article 2(1)(1) of the KVStG. The respondent challenged that decision on the ground, inter alia, that no further capital had been raised by the respondent after 1974, when capital duty had been paid in respect of the contributions made by V and by VKG-B (see paragraph 8 above). Thus duty had already been paid in respect of the entire shareholdings acquired by V and VKG-B. The respondent argued that the subsequent acquisition of shares by the six family members resulted from transfers of parts of those original holdings and was not the result of any fresh contribution of capital on the part of the family members.
13. In its judgment at first instance the Finanzgericht held that no capital duty was chargeable on the transfer of shares to the six family members. In reaching that conclusion, the Finanzgericht took into account the provisions of both Article 4 and Article 6 of the directive in interpreting the KVStG. As we have seen, however, the Bundesfinanzhof has referred a question on Article 4 of the directive only.
14. In answering a question referred for preliminary ruling, the Court is not of course limited to considering the specific provisions of Community law which are mentioned in the order for reference, but may furnish the national court with all the elements of Community law it might require in order to decide the case. It seems to me that the Finanzgericht was correct, in the present instance, to take into consideration both Article 4 and Article 6 of the directive when interpreting the national implementing provisions. As we have seen, although Article 4 contains an exhaustive list of the categories of transaction which may give rise to a liability to capital duty, Article 6(2) adds a further category which is applicable where a Member State has exercised its power under Article 6(1) to exclude certain contributions of capital from liability to the tax.
15. It is clear, in my view, that the transaction at issue in the present proceedings does not fall within any of the categories specified in Article 4. In particular, the conversion of part of the shareholding of a general partner of a limited partnership into a limited shareholding cannot be regarded as "an increase in the capital of a capital company by contribution of assets of any kind" for the purposes of Article 4(1)(c), in so far as that conversion does not entail any further contribution of assets to the company. Nor can such a conversion be regarded as a capitalization of profits or reserves for the purposes of Article 4(2)(a), since neither the accumulated profits nor the reserves of the company are affected by such a transformation. No other category of transaction mentioned in Article 4 would appear to be even remotely relevant to the transaction at issue.
16. In contrast, the third indent of Article 6(2) of the directive deals expressly with the case in which the shareholding of a member with unlimited liability is converted into a limited shareholding. Accordingly, in its written observations, the Commission suggests that Article 6(2) may be applicable in circumstances such as those of the present case. The Commission points out that the German Government has exercised its power under Article 6(1) of the directive to exclude capital contributed by members with unlimited liability, and shares held by such members, from the basis of assessment for capital duty. It follows, in the Commission' s view, that duty must be charged on a transaction whereby part of the shareholding of a general partner in a limited partnership of the form "GmbH & Co. KG" is converted into limited partner shares in the same partnership.
17. It seems to me that, where a Member State has exercised its power to exempt from capital duty the contribution made by a general partner of a capital company, a charge to capital duty must arise whenever all or part of the shareholding thereby acquired is converted into shares held by limited partners of the company. As the Commission points out, the scheme of Article 6 of the directive is clear. A charge to capital duty normally arises where a shareholding in a capital company is first acquired by a member of the company. Under Article 6(1) of the directive, however, such an acquisition can be exempted from liability to duty where that member has unlimited liability for the obligations of the company. Where, on the other hand, that condition ceases to be satisfied, a charge must be imposed pursuant to Article 6(2). Such a charge arises, in particular, where the shareholding of a member with unlimited liability is converted into a limited partner share.
18. It is true that, in the present case, the conversion of shares from general partner to limited partner shares took place by virtue of a transfer between partners, rather than by means of the limitation of liability of the original partner. Thus, when V transferred a part of his shareholding to the members of his family, he continued as a partner with unlimited liability. However, it does not seem to me that the scope of the third indent of Article 6(2) can be restricted to the case where, without any transfer of shares, a general partner becomes a limited partner. That provision must also extend to the case where a shareholding is transferred from a general partner to another person and by virtue of that transfer becomes a limited partner share. It is to be noted that someone who receives a general partner share might, depending upon the rules of national law and the terms of the transfer, himself become a general partner. Where however the terms of the transfer are such that he instead becomes or remains a limited partner, a transaction has taken place whereby what would otherwise have been an unlimited liability has become a limited one. That, in my view, is sufficient to bring the transaction within the wording of the third indent of Article 6(2). It is moreover to be observed that, if Article 6(2) were to be more narrowly construed, capital duty could be avoided by the simple device of raising capital from a general partner and subsequently transferring the shareholding thereby acquired to a limited partner.
19. Thus a "transaction as a result of which the liability of a member is limited to his share in the company' s capital" must in my view be taken to include a transaction whereby the shareholding of a general partner is transferred to another person and becomes converted into a limited shareholding in the latter' s hands; the "transaction as a result of which the liability of a member is limited" is then the operation whereby the unlimited shareholding received by the transferee is converted into a limited shareholding. In such a case, it is the conversion of the shares from general to limited partner shares in the hands of the transferee which gives rise to a charge under Article 6(2), rather than a limitation of the liability of the transferor. Accordingly, such a charge must also arise where, as in the present case, part only of the general partner' s shareholding is transferred. Thus, it is sufficient if the portion transferred is converted, on transfer, into a limited shareholding; and it follows that the company' s liability to the charge is unaffected by the circumstance that the transferor continues as a partner with unlimited liability. In such a case, the basis for assessment of the duty must be the value of that part of the shareholding which has been converted into a limited partner share, rather than the value of the entire shareholding.
20. However, even where the Member State concerned exempts contributions of capital made by general partners from liability to capital duty, pursuant to Article 6(1) of the directive, it seems to me that the conversion of a general partner share into a limited partner share need not always give rise to a charge under Article 6(2). As we have seen, the object of Article 6(2) is to ensure that a charge arises where a shareholding has previously been acquired without any liability to capital duty, but where the condition required for that exemption is no longer fulfilled. It would appear to follow, therefore, that a charge only arises under Article 6(2) where the capital contributed, or the share acquired, has actually been excluded from the basis of assessment for capital duty. Where, on the other hand, duty has already been paid in respect of such a shareholding, it does not seem to me that a second charge can be imposed.
21. It will be recalled that, in the present case, capital duty has been paid in respect of the entire shareholding of the general partner, since all the shares acquired by V were originally limited partner shares. The shares subsequently became general partner shares, either by virtue of a members' resolution converting V from a limited to a general partner or by virtue of a subsequent transfer to V of shares held by a limited partner (see paragraphs 8 and 9 above). It seems to me that in such a case the Member State cannot be regarded as having exercised its power, under Article 6(1), to exclude the acquisition of a shareholding by a general partner from liability to capital duty, since duty has in fact been charged and paid in respect of the shareholding in question. It follows that a charge cannot arise under Article 6(2) of the directive.
Conclusion
22. I am accordingly of the opinion that the question referred by the Bundesfinanzhof should be answered as follows:
Article 6(2) of Council Directive 69/335/EEC must be interpreted as meaning that, where part of the shareholding of a general partner of a limited partnership is transferred to another person and by virtue of that transfer becomes a limited partner share, a charge to capital duty arises, provided that capital duty has not previously been charged in respect of the shareholding transferred.
(*) Original language: English.
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