Report for the Hearing delivered in Case C-38/88

I — Facts and procedure

In 1971 Waldrich Siegen Werkzeugmaschinen GmbH (hereinafter referred to as Siegen) concluded with its sole shareholder, Ingersoll Maschinen und Werk-, zeuge GmbH (hereinafter Ingersoll) an integration agreement entailing the transfer of profits and losses (Organschafts- und Ergebnisabführungsvertrag).

With regard to the integration of the two companies, Articles 1 and 2 of the agreement provide that Siegen is to act on behalf and under the management of Ingersoll. With regard to the transfer of profits or losses, Article 3 provides that Ingersoll, as the parent company (Organträger), is to take over the results shown on Siegen's balance sheet. In practice, that means that Ingersoll undertakes to absorb Siegen's debts and that Siegen undertakes to transfer its profits to Ingersoll.

Initially, until the 1978/1979 financial year, Siegen realized profits. Thereafter it incurred losses for four consecutive financial years (1979/1980 to 1982/1983). By decision of 24 April 1984, the Finanzamt (Finance Office) Hagen (hereinafter the Finanzamt) required Siegen to pay it capital duty at 1 % on each of the four losses transferred.

In support of its demand, the Finanzamt relied on Paragraph 2 of the Kapitalverkehrsteuergesetz (Capital Transaction Tax Law, hereinafter referred to as the Law). Under Paragraph 2(1) (2) of the Law, any contribution made by a shareholder of a capital company pursuant to an obligation arising from the relationship with the company is subject to capital duty. Under Paragraph 2(2)(1), the absorption by the parent company of the losses of its subsidiary, pursuant to an agreement for the transfer of profits or losses, must be considered a contribution of that nature.

Siegen commenced proceedings before the Finanzgericht (Finance Court) Münster, seeking the annulment of the Finanzamt's decision of 24 April 1984. It did not deny the applicability, in the circumstances of the case, of Paragraph 2 of the Law.

It claims that the provisions of Paragraph 2 are contrary to Article 4(2)(b) 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, hereinafter referred to as the directive). Under Article 4(2) one of the transactions which may be subject to capital duty is an increase in the assets of a capital company through the provision of services by a member which do not entail an increase in the company's capital, but which ... may increase the value of the company's shares. According to Siegen, the mere absorption of losses does not increase the value of the company's assets.

The Finanzamt took the view that it was bound by the provisions of Paragraph 2 of the Law even if they conflicted with Article 4(2)(b) of the directive.

In those circumstances the Finanzgericht Münster decided to stay the proceedings and to submit for a preliminary ruling two questions on the interpretation of Article 4 of the directive. Those questions are worded as follows:

In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the European Communities, written observations were submitted on 5 April 1988 by the Finanzamt Hagen, the defendant in the main proceedings, represented by Dr Weiß, and on 6 May 1988 by the Commission of the European Communities, represented by its Legal Adviser Henri Etienne, acting as Agent.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General the Court decided to open the oral procedure without any preparatory inquiry.

II — Written observations submitted to the Court

First qtwstion (direct effect of Article 4 of the directive)

The Finanzamt observes that Germany has taken no measures to comply with the directive within the period laid down in Article 13 thereof (1 January 1972). As a result, taxable persons cannot avail themselves of Article 4 of the directive.

The Commission states that Article 4 of the directive prohibits Member States from levying capital duty on any operation which does not increase the assets of the capital company in question. By its very nature, that prohibition does not require any national implementing measures and is sufficiently precise to allow a taxable person to avail himself of it in proceedings before the national courts. A taxable person may therefore rely on the prohibition in Article 4 of the directive even if the national authorities plead a conflicting provision of national law.

Second question (compatibility of Paragraph 2 of the Law with Article 4 of the directive)

According to the Finanzamt, Paragraph 2 of the Law is compatible with Article 4 of the directive. It accepts that pursuant to Article 4 of the directive only members' contributions which increase the value of the company's assets are subject to capital duty. However, when the parent company undertakes, under an agreement for the transfer of profits and losses, to absorb the losses of the subsidiary, the resultant contribution does increase the value of the latter's assets. Paragraph 2 of the Law, which provides that such a contribution is subject to capital duty, is therefore in conformity with Article 4 of the directive.

The Finanzamt further submits that the absorption of losses increases the value of Siegen's assets even if, in previous years, Siegen transferred its profits to the parent company. In particular, it would be wrong to regard the losses absorbed as offsetting the profits received previously and to conclude that those losses do no more than bring the value of the subsidiary's assets up to their original level, without increasing them. Capital duty is levied strictly by reference to each financial year, viewed in isolation.

The Commission first observes that the interpretation of the phrase increase in the assets in Article 4 of the directive cannot be left to the discretion of each Member State. In that connection the Commission refers to the judgment of the Court of 15 July 1982 in Case 270/81 Felicitas v Finanzamt für Verkehrsteuern [1982] ECR 2771, in which the Court ruled that the harmonization of capital duty on the raising of capital implies that the basis of assessment is determined in each Member State on the basis of objective criteria having a uniform scope within the Community.

The Commission goes on to observe that the absorption of losses does not necessarily increase the assets of the affiliated company. A distinction must be drawn between the absorption of losses pursuant to a contractual undertaking entered into before the losses were incurred, on the one hand, and absorption pursuant to a contractual undertaking entered into after they have been incurred, on the other. Only in the second instance does absorption increase the assets of the company in question. That is so because in such a case there are two separate capital movements: first, the incurring of the loss, which lowers the value of the assets, and then the absorption of that loss, which raises that value. By contrast, where a parent company undertakes in advance to absorb any losses of the subsidiary the subsequent incurring of those losses and their absorption are inseparable from one another and, accordingly, the losses have no effect on the value of the assets of the subsidiary.

The Commission proposes that the Court should rule, in reply to the question referred to it by the national court, that the transfer, pursuant to a contract for the transfer of profits and losses concluded with the sole shareholder, of the annual losses of a subsidiary which actually realizes both profits and losses is not a transaction falling within Article 4(2)(b) of Directive 69/335.

1 Language of the case: German.