Report for the Hearing in Case C-249/89

I — Facts and procedure

A — Facts, legal background and the question referred

By an instrument of 27 June 1975 a company, Trave Schiffahrts-Gesellschaft mbH & Co. KG (hereinafter referred to as Trave) was set up under German law in order to cover the risks assumed by one of its limited partners as a result of a large construction project. Whilst the company assumed the liabilities arising from the construction project, its members undertook to make loans to it. From 1977 to 1983, Trave received interest-free loans from its partners amounting to DM 131 million.

During that period, the company incurred heavy losses.

On 31 December 1983, the proportions of the losses to be borne by the members were set off against their claims against the company. At the same time, it was decided to wind up the company.

By a notice of 7 December 1984, the Finanzamt (Finance Office) Kiel-Nord imposed capital duty of DM 361335 on the transaction consisting in the granting by a member of an interest-free loan to the member's company. The Finanzamt considers that the transaction is covered by Paragraph 2, subparagraph l(4)(c), of the Kapitalverkehrsteuergesetz (Capital Transfer Tax Law), which provides that capital duty is to be imposed on:

The company is challenging the Finanzamt's decision before the German courts. The action before the lower court was unsuccessful and Trave appealed to the Bundesfinanzhof. That court considered that its decision depended on the interpretation 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, hereinafter referred to as the Directive) and, by an order of 28 June 1989, decided to stay the proceedings and to refer the following preliminary question to the Court of Justice pursuant to Article 177 of the Treaty:

In Article 4(2)(b), the Directive authorizes the Member States to impose capital duty on 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 do result in variation in the rights in the company or which may increase the value of the company's shares.

Article 4(2)(c) and (d) provide that capital duty may also be imposed on:

and

Article 5(1 )(d) of the Directive then provides that, in the case of an increase in the assets, as referred to in Article 4(2)(b), the duty is to be charged on the actual value of the services provided, after deduction of the liabilities assumed and the expenses borne by the company as a result of the provision of such services.

In the view of the Bundesfinanzhof, the preliminary question should be answered in the affirmative for the following reasons:

B — Procedure before the Court

The order of the Bundesfinanzhof was received at the Court Registry on 7 August 1989.

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 2 November 1989 by the Government of the Netherlands, represented by B. R. Bot, Secretary-General at the Ministry of Foreign Affairs, and on 30 October 1989 by the Commission, represented by H. 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. However, it decided to put a question to the Netherlands Government, which was answered within the time allowed.

By order of 10 May 1990, the Court decided pursuant to Article 95(1) and (2) of the Rules of Procedure to assign the case to the Fifth Chamber of the Court.

II — Written observations submitted to the Court

In the view of the Netherlands Government, there are several reasons in favour of levying capital duty where a member grants an interest-free loan to his company. Besides allowing a saving of interest and providing a corresponding increase in the overall assets of the company, the grant of the loan increases the company's assets by an amount equivalent to the cash payment arising from the loan less the market value of the repayment obligation without interest on the repayment date. Finally, it increases the economic potential of the company, which, according to the preamble to the Directive, is decisive for its application.

The Commission observes first of all that the granting of interest-free loans to a company by its members is not covered by either Article 4(2)(c) or Article 4(2)(d) of the Directive. Both those provisions concern different cases in which the creditor granting the loan to the company receives consideration consisting in either participation in profits or in a capital share. The basis of assessment for capital duty is then the nominal amount of the loan, in accordance with Article 5(l)(e) of the Directive.

However, the Commission takes the view that the transaction in question in this case meets the criteria laid down in Article 4(2)(b) and is therefore covered by that provision. The interest-free loans are to be regarded as services provided by a member and the resulting saving of interest for the company creates an increase in its assets. From the judgment in Case 161/78 P. Conradsen A/S v Ministeriet for Skatter og Afgifter [1979] ECR 2221, it is clear that an increase in company assets is an operation distinct from an increase in share capital, which must be defined as an objective and material operation not depending on the way in which it appears in the balance sheet. Finally, the granting of interest-free loans entails an alteration in members' rights, if only in the form of participation in the proceeds from the winding-up of the company. At any rate, the operation is such as to increase the value of the company's shares.

Once it is accepted that the granting by a member of interest-free loans to the company must be subject to capital duty, it is necessary to determine the basis on which the duty must be levied. In the Commission's view, for the purposes of Article 5(l)(d) of the Directive, the actual value of the services provided must be taken to mean the interest thus saved by the company, the granting of the loan not entailing any immediate charge or liability. Indeed, such an interpretation would constitute an application of the decision in the Conradsen case, cited above, to the present case; according to that judgment, in the event of a contribution of assets to a company, it is the actual value of those assets and not their book value which must be used as the taxable amount for the purposes of capital duty.

The Commission also observes that the saving of interest arises as and when payments of the sum lent are actually made.

For the reasons set out, the Commission proposes that the answer to the preliminary question should be that Article 4(2)(b) of Directive 69/335 allows the Member States to subject to capital duty an interest-free loan granted to a heavily over-indebted capital company by one of its members on the basis of its utility value (corresponding to the interest saved).

III — Answer to the question put by the Court

In its observations, the Netherlands Government stated:

The Court requested the Netherlands Government to explain the meaning of that remark.

The Netherlands Government gave the following reply:

1 Language of the case: German.