Royal Bank of Scotland Plc v. Elliniko Dimosio (Greek State) (Case C-311/97) Before the Court of Justice of the European Communities ECJ

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1 Royal Bank of Scotland Plc v. Elliniko Dimosio (Greek State) (Case C-311/97) Before the Court of Justice of the European Communities ECJ (Presiding, Jann, acting P., Moitinho de Almeida, Edward, Sevón and Wathelet (Rapporteur) JJ.) Mr Siegbert Alber, Advocate General. 29 April 1999 Reference to the Court by the Diikitiko Protodikio Peiraios for a preliminary ruling under Article 177 E.C. on the interpretation of Articles 6 and 52 E.C. Taxation--Companies--Companies having their seat outside a Member State-- carrying on business through branch or agency--national tax code introduced two levels of taxation--companies having their seat outside Member State taxed only at higher rate--freedom of establishment--article 58 E.C.--freedom to pursue activities through a branch or agency--no objective difference between two categories of company--legislation contrary to Articles 52 and 58 E.C. Article 109 of the Greek income tax code determined the rate of tax payable by companies and introduced a difference in the calculation of tax on the profits of companies depending on whether they had their seat in Greece or outside that Member State. Two rates of tax were applicable to the profits of companies having their seat in Greece, which could be taxed at either 35 per cent or 40 per cent depending on certain conditions relating to their legal form and the nature of the shares they issued. However, a single rate of tax, that of 40 per cent, applied to the profits taxable in Greece of companies having their seat in another Member State, whatever their legal form and the nature of the shares they issued. RBS was a bank with its seat in the United Kingdom which carried on business in Greece through a branch established in Piraeus. When submitting its income tax declaration for the year, RBS declared its tax on profits as calculated at the rate of 40 per cent under Article 109(1)(a) of the tax code, but added a reservation to the effect that its branch's profits should have been taxed at the rate of 35 per cent applicable to Greek banks. It also invoked the first paragraph of Article 52 E.C. claiming that it was the subject of discriminatory tax treatment.

2 When that reservation was rejected by the tax authorities, RBS brought an action for annulment *974 of that decision, and sought repayment of the sums which it claimed to have overpaid by way of tax. The national court, being unsure as to the compatibility of the national legislation with Community law, stayed proceedings and referred to the Court of Justice for a preliminary ruling the question whether legislation which excluded companies having their seat in one Member State but carrying on business in another Member State through a permanent establishment there, from the possibility of benefiting from a lower rate of tax on profits which was accorded to companies having their seat in that other Member State was compatible with Articles 6 and 52 E.C. Held: (1) Article 58 E.C. accorded to companies the right to pursue their activities through a branch in another Member State Although direct taxation fell within the competence of Member States, they must none the less exercise that competence consistently with Community law and avoid any discrimination on grounds of nationality. Moreover the general prohibition of discrimination on grounds of nationality laid down by Article 6 E.C. had been implemented in the field of self-employment by Article 52 E.C., so that the former provision did not apply in the instant case. The freedom of establishment provided for by Article 52 E.C. also accorded, pursuant to Article 58 E.C., the right for a company having its registered office in one Member State, to pursue its activities in a second Member State through a branch or agency. It would deprive that provision of all meaning if that second Member State could freely apply different treatment to a company solely by reason of the fact that its seat was established elsewhere within the Community. [19]-[23] Schumacker (C-279/93): [1995] E.C.R. I-225; [1996] 2 C.M.L.R. 450; Wielockx ( C-80/94): [1995] E.C.R. I-2493; [1995] All E.R. (E.C.) 769; Asscher ( C-107/94): [1996] E.C.R. I-3089; [1996] 3 C.M.L.R. 61; [1996] All E.R. (E.C.) 757; Future participations and Singer ( C-250/95): [1997] E.C.R. I-2471; [1997] 3 C.M.L.R. 483; E.C. Commission v. Greece ( 305/87): [1989] E.C.R. 1461; [1991] 1 C.M.L.R. 611; Halliburton services ( 1/93): [1994] E.C.R. I-1137; [1994] 3 C.M.L.R. 377; and E.C. Commission v. France ( 270/82): [1986] E.C.R. 273; [1987] 1 C.M.L.R. 401, followed. (2) There was no justifiable distinction between the two companies such as to justify a difference of treatment (a) In order to determine whether a difference in tax treatment, such as that resulting from Article 109 of the Code, was discriminatory, it was necessary to ascertain whether, for the purposes of the taxation of profits earned in Greece, a company having its seat in Greece and a company having its seat in another Member State with a branch established in Greece, were in an objectively comparable situation. In *975 the case of natural persons, the Court had held that the situations of residents and non-residents in a given Member State were

3 not generally comparable. However, in the case of a tax advantage denied to non-residents, a difference in treatment between the two categories of taxpayer might constitute discrimination where there was no objective difference between the two categories of taxpayer. In the instant case, as far as the methods of determining a taxable base was concerned, the national legislation did not establish any distinction between the two categories of companies such as to justify a difference of treatment between them. (b) Articles 52 and 58 E.C. were to be interpreted as precluding such legislation, since it prevented companies having their seat in another Member State from benefiting from the lower rate of tax, and there was no objective difference between the two categories of companies which could justify such a difference in treatment. [24]-[34] Schumacker (C-279/93): [1995] E.C.R. I-225; [1996] 2 C.M.L.R. 450; Wielockx ( C-80/94): [1995] E.C.R. I-2493; [1995] All E.R. (E.C.) 769; Asscher ( C-109/94): [1996] E.C.R. I-3089; [1996] 3 C.M.L.R. 61; [1996] All E.R. (E.C.) 757, followed. Representation K. Papakostopoulos, of the Athens Bar, for the Royal Bank of Scotland plc. V. Kyriazopoulos, legal administrator at the State Law Council, and G. Alexaki, Adviser in the Special Community Legal Service of the Ministry of Foreign Affairs, acting as Agents, for the Greek Government. K. Rispal-Bellanger, Head of the Subdirectorate for International Economic Law and Community Law in the Legal Affairs Directorate of the Ministry of Foreign Affairs, and G. Mignot, Foreign Affairs Secretary in that Directorate, acting as Agents, for the French Government. M. Condou-Durande and H. Michard, of its Legal Service, acting as Agents, for E.C. Commission. Cases referred to in the judgment: 1. Finanzamt Köln-Altstadt v. Schumacker (C-279/93), 14 February 1995: [1995] E.C.R. I-225; [1996] 2 C.M.L.R Wielockx v. Inspecteur der Directe Belastingen (C-80/94), 11 August 1995: [1995] E.C.R. I-2493; [1995] All E.R. (E.C.) Asscher v. Staatssecretaris Van Financiën (C-107/94), 27 June 1996: [1996] E.C.R. I-3089; [1996] 3 C.M.L.R Futura Participations SA and Singer v. Administration des Contributions (C- 250/95), 15 May 1997: [1997] E.C.R. I-2471; [1997] 3 C.M.L.R E.C. Commission v. Greece (305/87), 30 May 1989: [1989] E.C.R. 1461; [1991] 1 C.M.L.R Halliburton Services BV v. Staatssecretaris VanFinanciën (C-1/93), 12 April 1994: [1994] E.C.R. I-1137; [1994] 3 C.M.L.R. 377 * E.C. Commission v. France (270/83), 28 January 1986: [1986] E.C.R. 273; [1987] 1 C.M.L.R Bond Van Adverteerders v. Netherlands (352/85), 26 April 1988: [1988] E.C.R. 2085; [1989] 3 C.M.L.R. 113.

4 9. Stichting Collectieve Antennevoorziening Gouda v. Commissariaat voor de Media (C-288/89), 25 July 1991: [1991] E.C.R. I Further cases referred to by the Advocate General: 10. R. v. Commissioners for Inland Revenue, Ex parte Commerzbank (C- 330/91), 13 July 1993: [1993] E.C.R. I-4017; [1993] 3 C.M.L.R Costa v. Enel (6/64), 15 July 1964: [1964] E.C.R. 585; [1964] C.M.L.R Deutsche Grammophon GmbH v. Metro-SB-Grossmärkte GmbH & Co. KG (78/70), 8 June 1971: [1971] E.C.R. 487; [1971] C.M.L.R Imperial Chemical Industries (ICI) v. Kenneth Hall Colmer (Her Majesty's Inspector for Taxes) (C-264/96), 16 July 1998: [1998] E.C.R. I-4695; [1998] 3 C.M.L.R Opinion of Mr Advocate General Alber A. Introduction 1. This reference for a preliminary ruling raises the question of the compatibility with Community law of a Greek tax provision [FN1] under which foreign companies are always subjected to a tax rate of 40 per cent whereas domestic public limited companies are taxed not at 40 per cent but 35 per cent if they issue registered shares or their bearer shares are quoted on the Athens Stock Exchange. FN1 Article 109(1) of the Greek Income Tax Code (Law No. 2238/1994, Official Journal of Greece, No. 151 Vol A). 2. The plaintiff in the main proceedings, the Royal Bank of Scotland plc (hereinafter "the plaintiff"), is established in Britain and operates a branch in Piraeus (Greece). A dispute has arisen over the taxation of that branch for the financial year 1995 (accounting period 1 October 1994 to 30 September 1995). 3. The tax was calculated in accordance with the Greek Income Tax Code, Part II of which governs the taxation of the income of legal persons. Article 109(1) of the Code lays down the tax rates as follows: 1. Tax shall be calculated on the total taxable income of the legal person liable to tax at tax rates to be determined, according to the category of the taxpayer, as follows: (a) in respect of domestic public limited companies the shares of which, at the end of the accounting period, are bearer shares not quoted on the *977 Athens Stock Exchange, and in respect of foreign companies and organisations operating with a view to profit, forty per cent (40 per cent), (b) in respect of other domestic public limited companies, thirty-five per cent (35 per cent). Where domestic public limited companies have registered and bearer shares not quoted on the Athens Stock Exchange, the tax rate under (a) shall be charged on that part of the profits which corresponds to the number of existing

5 bearer shares. In order to determine that part of the profits, the total net profit shall be apportioned in accordance with the number of registered and bearer shares appearing in the books at the end of the accounting period, (c) in respect of other legal persons referred to in Article 101, thirty-five per cent (35 per cent). 4. The plaintiff was subjected to a tax rate of 40 per cent on the basis of that provision. It added to its 1995 income tax declaration a reservation claiming that it should have been taxed at a rate of only 35 per cent as is the case with Greek banks. In support of its claim it relied, inter alia, on Article 52 of the E.C. Treaty. 5. The reservation was rejected by an administrative decision with reference to the existing legal situation. The plaintiff brought an action against that decision. 6. The referring court, the Diikitiko Protodikio (Administrative Court of First Instance), Piraeus, states that Article 109(1)(a) of the Income Tax Code provides for tax treatment of foreign public limited companies which departs fundamentally from the provisions contained in Articles 7 [FN2] and 52 of the Treaty. That provision introduces differential tax treatment for public limited companies according to (a) whether or not they are quoted on the Athens Stock Exchange, and (b) the type of their shares, whereas all foreign companies are subject, without exception, to heavier taxation at 40 per cent. The special tax treatment of domestic companies results in a reduction in the cost burden on those undertakings and the acquisition by them of competitive advantages over foreign undertakings and thus to a subsequent distortion of competition. FN2 Now Article 6 E.C. 7. The referring court has referred the following question to the Court of Justice for a preliminary ruling: Is Article 109(1)(a) of the Greek Income Tax Code (Law No. 2238/1994, Official Journal of Greece, No. 151A), which in applying a tax rate of 40 per cent to the taxable income of foreign companies imposes on foreign companies a different heavier tax charge than on domestic companies, to which a tax rate of 35 per cent is applied, permissible under Community law and, in particular, is it in conformity with Articles 7 and 52 to the Treaty? In other words, is the Greek State entitled to impose that differential tax treatment on foreign companies? 8. The plaintiff, the Greek and French Governments and the Commission have intervened in the proceedings. I will return to the *978 submissions of the intervening parties when I make my legal assessment. B. Opinion 9. The plaintiff claims that Article 109(1) of the Greek Income Tax Code provides for prohibited unequal treatment between domestic and foreign companies. Whereas domestic public limited companies must be differentiated from one another in accordance with the form of the shares which they issue, and may consequently enjoy the more favourable tax rate if they issue registered shares or bearer shares quoted on the Athens Stock Market, all foreign companies are subjected, under Article 109 of the Greek Income Tax Code, to the higher tax

6 rate, irrespective of the legal form which they have chosen and the type of the shares which they issue. 10. The plaintiff maintains that the unequal treatment in the banking sector is reinforced by the fact that Laws Nos. 2190/1920 and 5076/1931 provide that Greek banks must be constituted in the form of a public limited company issuing registered shares. Therefore, Greek banks are always taxed at 35 per cent and foreign banks are always taxed at 40 per cent. 11. It maintains that it must be assumed from the structure of the provisions that the more favourable taxation of Greek companies is the norm and taxation at 40 per cent the exception. 12. The plaintiff considers that Article 109(1) of the Greek Income Tax Code infringes the general principle of equality contained in Article 6 of the Treaty and Article 52 thereof. That unequal treatment restricts, in a manner that is prohibited, the freedom of establishment exercised in setting up secondary establishments in the form of agencies, branches or subsidiaries. 13. The plaintiff relies on the judgments of the Court of Justice in Case 270/83, E.C. Commission v. France [FN3] and Case C-1/93, Halliburton Services BV. [FN4] FN3 [1986] E.C.R. 273; [1987] 1 C.M.L.R FN4 [1994] E.C.R. I-1137; [1994] 3 C.M.L.R The Greek government refers, first, to the complementary relationship between Articles 48, 52 and 59 of the Treaty, on the one hand, and Article 6 thereof on the other, and submits that, within the scope of Articles 48, 52 and 59, Article 6 is no longer relevant. The Greek government then states that freedom of establishment in accordance with Article 52 of the Treaty, read in conjunction with Article 58, also applies to companies and, in accordance with settled case law, that the seat of the company determines its nationality. It maintains that in those circumstances and having regard to the observations below, the question referred to the Court of Justice should be worded differently. 15. In its view, it must be assumed that the rule is that the basic tax *979 rate for public limited companies is 40 per cent. According to figures provided by the Ministry of Finance, 80 per cent of public limited companies are taxed at that rate. The vast majority of public limited companies do not issue shares quoted on the stock market since an initial capital of 10 million dr is required to set up a public limited company and a public limited company has to have share capital and reserves of 1 billion dr to be quoted on the stock market. The more favourable taxation of public limited companies quoted on the stock exchange is justified by the aim of promoting economic development. Therefore, the question referred for a preliminary ruling should read as follows: The Court of Justice is requested to give judgment on the compatibility with Articles 52 and 58 of the Treaty of Article 109(1)(a) of Law No. 2238/1994 which imposes on foreign public limited companies a rate of taxation of 40 per cent of their taxable income, as it does on domestic public limited companies, which

7 may, however, by way of exception, enjoy a more favourable tax rate of 35 per cent. 16. It maintains that, in answering that question, it must be remembered that matters of direct taxation do not fall within the scope of Community law as it stands at present. Nevertheless, in accordance with the case law of the Court of Justice, Member States must exercise their direct taxation powers in accordance with Community law in such a way as to avoid any overt or covert discrimination. [FN5] FN5 Judgment in Case C-250/95, Futura Participations and Singer: [1997] E.C.R. I-2471; [1997] 3 C.M.L.R. 483 at para. [19]; judgment in Case C-279/93, Schumacker: [1995] E.C.R. I-225; [1996] 2 C.M.L.R. 450, at para. [21]; judgment in Case C-80/94, Wielockx: [1995] E.C.R. I-2493; [1995] All E.R. (E.C.) 769, at para. [16], and judgment in Case C-107/94, Asscher: [1996] E.C.R. I-3089; [1996] 3 C.M.L.R. 61 at para. [36]. 17. It considers that, since there is no harmonisation with regard to matters of direct taxation, it is for each Member State to define taxable income and lay down tax rates. In those circumstances, the tax rate of 40 per cent poses no problem and in particular does not constitute discrimination on grounds of nationality. 18. Even if the possibility of lower taxation were to be considered to constitute covert discrimination, it would, in any event, be justified. The position of residents differs a priori from that of non-residents. Therefore, no objection can be raised to the granting of tax benefits only to residents. Under the principles of doubletaxation agreements, it is for the country in which the taxpayer is resident to decide whether or not to grant tax benefits to residents. Finally, the differential treatment of foreign and domestic companies is also justified because the definition of taxable income differs from the outset (see Articles 99(1)(a) to (d) of the Greek Income Tax Code) [FN6] and the differential determination of the tax rates is simply a consequence thereof. FN6 Under Article 99(1)(a) and (d) of the Greek Income Tax Code, the following are subject to tax: (a) in the case of Greek public and private limited companies, with the exception of banking institutions and insurance companies, on the total net income or profits earned in Greece or abroad... In the case of Greek banking institutions and insurance companies, on the total net income or profits earned in Greece or abroad... In the case of Greek banking institutions and insurance companies, on the total net income or profits earned in Greece or abroad, after deduction of the portion corresponding to non-taxable receipts or to income subject to special tax entailing extinction of the tax debt.... (d) in the case of foreign undertakings carrying on business in Greece under any form of company and foreign organisations of whatever type, operating with a view to profit, on the net income or profit arising from any source in Greece and on the net profit arising from the permanent establishment of the undertaking in Greece, within the meaning of Article 100.

8 * The Greek Government proposes that the reworded question referred for a preliminary ruling should be answered as follows: As Community law stands on matters of direct taxation, Articles 52 and 58 of the Treaty do not prohibit a Member State from subjecting foreign public limited companies to the same tax rate as is normally applied to domestic public limited companies without allowing them to enjoy the reduced tax rate, applied by way of an exception, to certain domestic public limited companies. 20. The French Government also proposes rewording the question referred for a preliminary ruling but to the effect that the Court of Justice is requested to give judgment on the compatibility of a provision such as Article 109 of the Greek Income Tax Code with Articles 6 and 52 of the Treaty, since it is not for the Court of Justice to rule on the compatibility with Community law of a particular national rule in proceedings for a preliminary ruling brought under Article Furthermore, the French Government refers to the complementary relationship between Articles 6 and 52 of the Treaty. It maintains that, as lex specialis, Article 52 takes precedence over Article 6 of the Treaty. Article 6 no longer applies within the scope of Article As regards the definition of the content of the Article 52 of the Treaty, the French Government states that that provision establishes the principle of equality of national treatment. Consequently, it prohibits any discrimination on grounds of nationality. As the Court of Justice has consistently held, discrimination is characterised by the application of different provisions to objectively comparable situations or the application of the same provision to different situations. 23. It considers that Article 109 of the Greek Income Tax Code provides for different tax rates for Greek companies depending on their legal form whereas it always subjects foreign companies to the higher tax rate regardless of their legal form. The difference in treatment is based solely on the nationality of the company liable to tax (the nationality of a company liable for tax being, in accordance with Article 58, the country in which it was formed). The French Government complains that the fact that foreign companies satisfied all the conditions that Greek companies are required to satisfy to qualify for the lower tax rate is completely disregarded. Therefore, a *981 national provision which imposes a tax rate of 40 per cent on the profits of a foreign company, even though it safisfies the criteria applied to a domestic company to qualify for the lower tax rate of 35 per cent, clearly infringes Article 52 of the Treaty. 24. However, it maintains that there is no discrimination where the foreign company is in a situation objectively comparable to that of a domestic company taxed at 40 per cent. The French Government puts forward certain observations on the comparability of the situations. It considers that the criteria "public limited company" and "bearer shares" are not in themselves discriminatory. However, that is not the case as regards the criteria of quotation on the Athens Stock Market. To satisfy that criteria it should be sufficient for the shares of the company to be quoted on the stock market of any Member State. 25. The French Government proposes that the Court should reply as follows to the question referred to it for a preliminary ruling:

9 Article 52 of the Treaty precludes the application of a national provision such as Article 109 of the Greek Income Tax Code which subjects the companies of other Member States to a higher tax rate than domestic companies which are in an objectively comparable situation, in particular in terms of their legal form. 26. If the Court of Justice considers that greater clarification of the facts in the main proceedings is necessary, the French Government proposes that it should also reply as follows: A company whose shares are quoted on the stock market of a Member State must be considered to be in a situation comparable to that of a domestic company whose shares are quoted on the stock market of the country in which it is established. 27. In its written observations the Commission puts forward a more qualified view. It considers that Article 52 of the Treaty governs a fundamental freedom and prohibits both overt and covert discrimination. In that respect, the linkage to place of residence could constitute covert discrimination. Although differential treatment according to the seat of a company could, in certain circumstances, be permitted under Community law, objective limits are imposed in that respect. 28. It states that the plaintiff maintains a permanent establishment in Greece whose taxable income is determined in the same way as that of Greek companies. Consequently, Article 109 of the Greek Income Tax Code contains both overt and covert discrimination. Since foreign companies are excluded completely from the application of the more favourable tax rate of 35 per cent, Article 109 of the Greek Income Tax Code constituted overt discrimination. Moreover, Article 109(1) of the Greek Income Tax Code provides for overt discrimination in that it lays down a tax rate of 40 per cent "in respect of domestic public limited companies the shares of which, at the end of the accounting period, are bearer shares not quoted on the Athens Stock Exchange, and in respect of foreign companies and organisations operating with a *982 view to profit". That is because that tax rate is never applied to domestic banks--since domestic public limited companies in the banking sector are required to issue registered shares--whereas foreign banks are always subject to it. 29. In its case law [FN7] relating to the differential taxation of residents and nonresidents, the Court of Justice has ruled that non-residents must also be allowed to enjoy tax benefits where, apart from the residence criterion, they are in an identical situation for tax purposes. Therefore, in this case there is no justification for unequal treatment. Consequently, the Commission proposes that the Court should reply as follows to the question referred for a preliminary ruling: A national provision which, for the purpose of taxing profits, treats Greek and foreign companies equally with regard to the determination of taxable income but does not grant to the latter companies the more favourable tax rate of 35 per cent, even under the same conditions as those which apply to companies with their seat in Greece, is incompatible with Article 52 of the Treaty. FN7 Case C-279/93, Schumacker (fn. at paras [36] to [38]; see also Case C- 107/94, Asscher.

10 30. During the hearing the Commission would make no distinction at all between overt and covert discrimination. It maintained that, even though no harmonisation of direct taxation had yet taken place, the Member States should not subject the fundamental freedom at issue to any restriction. In this case, there is no justification for the unequal treatment and therefore Article 52 has been infringed. 31. It is not disputed that Article 52 of the Treaty is a particular expression of the general principle of equality laid down in Article 6 of the Treaty, as is confirmed by the well-established case law of the Court of Justice. [FN8] Consequently, Article 52 prevails over Article 6. Therefore, Article 6 is not applicable within the scope of Article 52. FN8 Judgment in Case 305/87, E.C. Commission v. Greece: [1989] E.C.R. 1461; [1991] 1 C.M.L.R. 611 at paras [12] and [13]; to this effect, see also the judgment in Case C-330/91, Commerzbank: [1993] E.C.R. I-4017; [1993] 3 C.M.L.R. 457, at para. [21], and the judgment in Case C-1/93, Halliburton Services at para. [12]. 32. In answering the question referred to the Court for a preliminary ruling it must, of course, be borne in mind that the Court of Justice does not, in such proceedings, rule on whether or not a national provision is incompatible with Community law. Instead, it provides the referring court with all the criteria necessary to determine whether or not a national provision is compatible with Community law. Therefore, the question referred must be reworded. Such a step is permitted under the case law of the Court of Justice. [FN9] Consequently, the observations below are intended to answer the question worded as follows: Is a provision such as Article 109(1)(a) of the Greek Income Tax Code (Law No. 2238/1994, Official Journal of Greece, No. 151A), which, by *983 applying a 40 per cent tax rate to their taxable income, imposes a heavier tax burden on foreign companies than on domestic companies to which a tax rate of 35 per cent is applied, compatible with Article 52 of the Treaty? FN9 See, to this effect, the early judgment in Case 6/64, Costa v. Enel: [1964] E.C.R. 585; [1964] C.M.L.R. 425 and the judgment in Case 78/70, Deutsche Grammophon GmbH v. Metro: [1971] E.C.R. 487; [1971] C.M.L.R. 631, at para. [3]. 33. Article 52 embodies one of the four fundamental freedoms established by the Treaty. In conjunction with Article 58 of the Treaty, it guarantees legal persons freedom of establishment within the Community. That freedom is enjoyed by companies formed in accordance with the laws of a Member State and having their registered offices, central administration or principal place of business within the Community. The seat of a company, thus defined, is decisive in determining whether it may be ascribed to particular legal system in the same way that nationality is in respect of physical persons. 34. In accordance with the second sentence of the first paragraph of Article 52, that freedom may be exercised by the setting up of agencies, branches or

11 subsidiaries. In accordance with the second paragraph of Article 52, freedom of establishment includes in principle the right to take up and pursue activities as self-employed persons under the conditions laid down for its own nationals by the law of the country where such establishment is effected. Therefore, equal national treatment is a basic characteristic of the rule directly applicable since the end of the transitional period [FN10] and an important part of the freedom of establishment itself. FN10 See the judgment in Case 270/83, E.C. Commission v. France fn. 3 at para. [13]. 35. Therefore, if a national provision relating to the taxation of legal persons imposes a tax rate of 40 per cent "in respect of domestic public limited companies the shares of which, at the end of the accounting period, are bearer shares not quoted on the Athens Stock Exchange, and in respect of foreign companies and organisations operating with a view to profit", [FN11] but 35 per cent "in respect of other domestic public limited companies", [FN12] it is laying down overtly unequal treatment between domestic and foreign public limited companies. Foreign companies are always subject to a tax rate of 40 per cent whereas domestic public limited companies are taxed at 35 per cent where they do not satisfy a particular criterion (bearer shares not quoted on the Athens Stock Exchange at the end of the accounting period). FN11 Article 109(1)(a) of the Greek Income Tax Code; emphasis added. FN12 Article 109(1)(b) of the Greek Income Tax Code; emphasis added. 36. It is clear from the parties' submissions that they differ as to whether taxation at 35 per cent constitutes the norm and 40 per cent the exception, or vice versa. Whereas the plaintiff considers that the tax rate of 35 per cent constitutes the norm, the Greek Government insists that the tax rate of 40 per cent is the norm and taxation at 35 per cent the exception. 37. That difference of opinion may be left unresolved in determining whether or not objectively unequal treatment is accorded to domestic and foreign companies. It is established that foreign companies do not have access to the more favourable tax rate. Therefore, the issue does *984 not turn on the percentage of Greek public limited companies that effectively benefit from the more favourable tax rate. The reality of the situation appears to be that all Greek companies in the banking sector enjoy the more favourable tax rate because by law they must satisfy conditions [FN13] which remove them from the category of domestic public limited companies liable to tax at 40 per cent. FN13 According to the parties, Greek banks are required by law to constitute themselves as public limited companies and issue registered shares. See Article 11(2)(a) of Law No. 2190/1920 and Law No. 5076/1936.

12 38. Since the Greek legislature has chosen a form of direct unequal treatment, the infringement of Community law is clear. 39. However, the Greek Government takes the view that unequal treatment may be justified. In doing so it fails to understand that direct discrimination cannot be justified as a matter of principle. The case law on direct taxation, in which the factor of justification has played an important role each time, [FN14] has arisen from rules that have generally linked differential treatment to the criterion of residence or the "resident" and "non-resident" term combination. To that extent, indirect discrimination had to be assumed to exist in virtually all those cases. [FN15] Such discrimination is incompatible with Community law only where it cannot be justified on grounds such as cohesion of tax systems [FN16] or by pressing reasons of public interest. [FN17] FN14 See the judgments in Case 270/83, E.C. Commission v. France, at para. [17]; Case C-330/91, Commerzbank at para. [16]; Case C-279/93, Schumacker, at paras [39] et seq.; Case C-80/94, Wielockx, at paras [23] et seq.; Case C- 107/94, Asscher, at paras [50] et seq.; Case C-250/95, Futura Participations and Singer at para. [26]; and in Case C-264/96, Imperial Chemical Industries Plc (ICI): [1998] E.C.R. 4695; [1998] 3 C.M.L.R. 293, at paras [24] and [25]. FN15 However, that was only partially the case in Case C-250/95, Futura Participations and Singer. FN16 See the judgments in Case C-80/94, Wielockx, at para. [23] and Case C- 279/93, Schumacker, at para. [49]. FN17 See the judgments in Case C-250/95, Futura Participations and Singer, at paras [26] and [31]; and Case C-264/96, Imperial Chemical Industries (ICI), at para. [28]. 40. Both the French Government in its submissions and the Commission in the written procedure applied the test of indirect discrimination in which there must be comparability of situations and the possible justification of any unequal treatment found to exist. Therefore, the attitudes of the intervening parties could stem from the fact that, in view of previous cases decided by the Court, [FN18] they consider the seat of a company to be a criteria for possible unequal treatment and therefore as decisive as regards any indirect discrimination between domestic and foreign companies. [FN19] FN18 See the judgments in Case 270/83, E.C. Commission v. France; Case C- 330/91, Commerzbank; and Case C-264/96, Imperial Chemical Industries (ICI). FN19 In its judgment in Case C-1/93, Halliburton Services, the Court considered the unequal treatment of companies on the grounds of their seat to be overt discrimination with reference to the judgment in Case C-330/91, Commerzbank (see para. [15]).

13 41. However, the Commission specifically states that Article 109(1) of the Greek Income Tax Code contains direct and indirect discrimination. * The submissions made by the French Government in which it examines the similarity of the characteristics of a company allowing it to enjoy the more favourable tax rate are clearly based on the premise that (indirect) discrimination may arise even where those criteria are applied equally to domestic and foreign companies. The conditions relating to legal form (public limited company) and type of shares (bearer shares) are irrelevant in this regard. However, the requirement of quotation on the Athens Stock Market does pose a problem. On that point, quotation on any stock market within the Community ought to be sufficient. 43. In my view, the examination of this question goes beyond the question referred to the Court for a preliminary ruling. In particular, there is insufficient information on the factual context to establish whether the criterion of quotation on the Athens Stock Market constitutes indirect discrimination between domestic and foreign public limited companies and whether that requirement may, in certain circumstances, be justified. In any event, the necessary investigation of the facts falls within jurisdiction of the referring court. If that court considers that the resolution of the case turns on the answer to the question raised by the French Government, it is for that court, in accordance with established case law, [FN20] to outline the analysis to be applied. FN20 See, in this respect, the case law quoted in fn However, a clear distinction must first be made between physical and legal persons as regards possible discrimination in the area of direct taxation. That is because the factors decisive to the taxation of physical persons' income, such as personal and family circumstances, [FN21] do not apply in the same way to legal persons. FN21 See the judgment in Case C-279/893, Schumacker, at para. [37]. 45. As Community law stands at present, matters of direct taxation do not fall within the competence of the Community. However, the Member States must exercise the powers which they still have in this area consistently with Community law. [FN22] FN22 See the judgment in Case C-264/96, Imperial Chemical Industries (ICI), at para. [19]. 46. The usual distinction made in tax law between residents and non-residents is liable to operate to the detriment of nationals of other Member States since nonresidents are in the majority of cases foreigners. Therefore, differential treatment linked to those criteria may constitute indirect discrimination by reason of nationality. [FN23]

14 FN23 See the judgment in Case C-279/93, Schumacker, at paras [28] and [29]. 47. If a Member State of establishment were freely allowed to apply unequal treatment solely by reason of the fact that a company's seat is situated in another Member State, this would deprive Article 52, read in conjunction with Article 58, of all meaning. [FN24] FN24 See the judgment in Case 270/83, E.C. Commission v. France, at para. [18]; see also, to the same effect, the judgment in Case C-330/91, Commerzbank, at para. [13]. 48. In order to create a balance between, on the one hand, the *986 fundamentally legitimate differentiation between residents and nonresidents [FN25] and, on the other, the associated risk of covert discrimination, it is necessary to examine the comparability of the situations. [FN26] If the situations are comparable, the same legal consequences, in the form of the grant of tax benefits, for example, must be linked to objectively similar situations. It is only where unequal treatment may be justified by overriding interests such as cohesion of the tax system [FN27] or pressing reasons of public interest, as these are set out in Article 56 of the Treaty, [FN28] that such a consequence is not imperative. FN25 See the judgments in Case C-279/93, Schumacker, at para. [31]; Case C- 80/94, Wielockx, at para. [18]; and Case C-107, Asscher, at para. [41]. FN26 See the judgment in Case 270/83, E.C. Commission v. France, at end of para. [20]; and the judgment in Case C-264/96, Imperial Chemical Industries (ICI), at para. [25]. FN27 See the case law quoted in fn. 16. FN28 See the judgment in Case C-264/96, Imperial Chemical Industries (ICI), at para. [28]. 49. If the facts in the main proceedings are considered in that context, it must be acknowledged that discrimination, be it direct or indirect, indisputably exists. The parties differ as to the comparability of the situations. While the Commission is firmly of the opinion that the situation of domestic and foreign companies is the same as regards the determination of their taxable income, the Greek Government considers that the situations are different. Both parties rely on Article 99 of the Greek Income Tax Code. [FN29] FN29 For the wording of that provision, see fn In so far as the relevant provisions of the Greek Income Tax Code are

15 reproduced in the procedural documents, it appears that the taxable income of domestic and foreign companies is determined in the same way. That supports the Commission's view. In the final analysis, it is for the referring court to make that assessment in accordance with the facts. 51. However, the fact that even the Greek Government has put forward no reasons to justify the unequal treatment, other than referring to the fundamentally different situations of residents and non-residents and claiming that the situations are different from the outset, is decisive. Consequently, it must be assumed, even without further examination of the facts, that unequal treatment of domestic and foreign companies, such as is provided for by Article 109 of the Greek Income Tax Code, is not justified and therefore incompatible with Articles 52 and 58 of the Treaty. C. Conclusion 52. in the light of the foregoing observations, I propose that the Court should reply as follows to the question referred for a preliminary ruling: A provision such as Artricle 109(1)(a) of the Greek Income Tax Code (Law No. 2238/1994, Official Journal of Greece, No. 151A), which, *987 by applying a rate of tax of 40 per cent to their taxable income, imposes a heavier tax burden on foreign companies than on domestic companies, to which a tax rate of 35 per cent is applied, infringes Article 52, read in conjunction with Article 58, of the Treaty. JUDGMENT [1] By judgment of 30 June 1997, received at the Court on 8 September 1997, the Diikitiko Protodikio (Administrative Court of First Instance), Piraeus, referred to the Court for a preliminary ruling under Article 177 E.C. a question on the interpretation of Article 7 EEC (now Article 6 E.C.) and Article 52 E.C. [2] The question has been raised in proceedings between the Royal Bank of Scotland plc (hereinafter "the Royal Bank of Scotland") and the DOY (the authority dealing with the direct taxation of public limited companies) concerning the rate of tax applicable to profits earned in Greece in the 1994/95 financial year by the branch of the Royal Bank of Scotland. That rate of tax is higher than the rate applying to banks having their seat in Greece. [3] The Royal Bank of Scotland has its seat in the United Kingdom. It carries on business in Greece through a branch established in Piraeus. [4] On 14 February 1996, the Royal Bank of Scotland submitted to the DOY at Piraeus its income tax declaration for the 1994/95 financial year. For the period from 1 October 1994 to 30 September 1995 it declared taxable profits from the business carried on by its branch of 1,031,256,016 dr and stated that, applying the rate of tax of 40 per cent laid down by Article 109(1)(a) of Law No of 16 September 1994, [FN30] the tax on those profits was 412,502,406 dr. FN30 Official Journal of Greece, No. 151, Vol. A, hereinafter "Law No. 2238/1994".

16 [5] To its tax declaration the Royal Bank of Scotland added a reservation to the effect that its branch's profits should have been taxed, in accordance with Article 109(1)(b) of Law No. 2238/1994, at the rate of 35 per cent applied to Greek banks. [6] The Royal Bank of Scotland in its reservation pointed out that the application of the 40 per cent rate subjected it to heavier taxation than that to which Greek banks are subject, and invoked, first, Article XVI of the Convention between Greece and the United Kingdom on the avoidance of double taxation and the prevention of tax evasion in the matter of income tax, concluded on 25 June 1953 and ratified in Greece by Decree-Law No. 2732/1953, [FN31] according to which "(1) the nationals of one of the Contracting Parties shall not be subject, on the territory of the other Contracting Party, to taxation or any connected requirement which differs from, or is greater or more burdensome than that which the nationals of the other Contracting Party are or may be subject". It also invoked the first paragraph of Article 52 of the Treaty, claiming that it was the subject of discriminatory tax treatment. FN31 Official Journal of Greece, No. 329, 12 November 1953, Vol. A. *988 [7] That reservation was rejected by letter No of 19 February 1996 from the Director of the DOY at Piraeus on the ground that, as regards income tax, the Royal Bank of Scotland was governed by Article 109(1)(a) of Law No. 2238/1994, providing for a rate of taxation of 40 per cent in the case of foreign companies and organisations carrying on business for profit in Greece. [8] The Royal Bank of Scotland brought an action for annulment of the decision rejecting its reservation and sought repayment of a sum of 51,562,800 dr, which it claims was unduly paid, together with interest at the statutory rate. [9] In Greece, tax on the income of natural and legal persons is governed by Law No. 2238/1994, which forms the income tax code (hereinafter "the Code"). [10] As far as legal persons are concerned, it appears from Article 98 of the Code that tax is payable on the total net income, from whatever source, earned by any legal person referred to in Article 101 of the code. Those persons include Greek public limited companies [Article 101(1)(a) of the Code] and "foreign undertakings, whatever the form of company under which they operate, and all types of foreign organisations seeking to make financial profit" [Article 101(1)(d)]. [11] Article 99(1) of the Code provides that, as far as legal persons are concerned, income tax is to be charged: (a) in the case of Greek public and private limited companies, with the exception of banking institutions and insurance companies, on the total net income or profits earned in Greece or abroad. Distributed profits shall be treated as profits after deduction of income tax. In the case of Greek banking institutions and insurance companies, on the total net income or profits earned in Greece or abroad, after deduction of the portion corresponding to non-taxable receipts or to income subject to special tax entailing extinction of the tax debt. In order to determine the fraction of the profits corresponding to non-taxable receipts or to

17 the income subject to special tax entailing extinction of the tax debt, the total net profits shall be broken down in proportion to the amounts of taxable receipts and non-taxable receipts or income subject to special taxation entailing extinction of the tax debt.... (d) in the case of foreign undertakings carrying on business in Greece under any form of company and foreign organisations of whatever type, operating with a view to profit, on the net income or profit arising from any source in Greece and on the net profit arising from the permanent establishment of the undertaking in Greece, within the meaning of Article 100. For the purposes of determining the taxable profits of branches of banking institutions and insurance companies which lawfully carry on their business in Greece and which also earn income exempt from tax or submit to special taxation entailing extinction of the tax debt, there shall be deducted from the net profits referred to in the first paragraph the fraction of those profits corresponding to the aforementioned income, which is to be calculated by breaking down those profits in proportion to the gross receipts subject to tax and exempt income or income subject to special tax entailing extinction of the tax debt. [12] According to Article 100(1)(a) of the Code, a permanent *989 establishment of a company or foreign organisation is regarded as existing in Greece if that company or organisation: has in Greece one or more shops, agencies, branches, offices, warehouses, factories or workshops and plant for the exploitation of physical resources. [13] Article 105 of the Code defines the method by which the gross income and net income of legal persons are determined. It does not distinguish between Greek companies and foreign companies. [14] Determination of the rate of the tax is governed by Article 109 of the Code, which provides: 1. Tax shall be calculated on the total taxable income of the legal person at tax rates to be determined, according to the category of the taxpayer, as follows: (a) in respect of domestic public limited companies the shares of which, at the end of the accounting period, are bearer shares not quoted on the Athens Stock Exchange and in respect of foreign companies and organisations operating with a view to profit, forty per cent (40%); (b) in respect of other domestic public limited companies, thirty-five per cent (35%). Where domestic public limited companies have registered any bearer shares not quoted on the Athens Stock Exchange, the tax rate under (a) shall be charged on that part of the profits which corresponds to the number of existing bearer shares. In order to determine that part of the profits, the total net profits shall be apportioned in accordance with the number of registered and bearer shares as they appear in the books of the company at the end of the accounting period. [15] In the case of banks, Article 109 of the Code was amended by Article 13(4) of Law No. 2459/1997, under which the rate of income tax on profits of banks having their seat in Greece was increased from 35 to 40 per cent and is therefore now the same as that applicable to profits earned by branches of foreign

18 companies. However, that amendment concerns only profits recorded in balance sheets drawn up after 31 December 1996 and does not therefore apply to the case in the main proceedings. [16] Finally, under Article 11a(2) of Law No. 2190/1920, shares of credit institutions are registered shares. Under Law No. 5076/1931 on public limited companies and banks, banks may be constituted and carry on their business only in the form of public limited companies. [17] By judgment of 30 June 1997, the Diikitiko Protodikio Peiraios, unsure as to the compatibility of the national legislation with Community law, decided to stay proceedings and to refer the following question to the Court for a preliminary ruling: Is Article 109(1)(a) of the Greek Income Tax Code, [FN32] which, in applying a tax rate of 40 per cent to the taxable income of foreign companies, *990 imposes on foreign companies a different, heavier tax charge than on domestic companies, to which a tax rate of 35 per cent is applied, permissible under Community law and, in particular, is it in conformity with Articles 7 and 52 of the Treaty? In other words, is the Greek State entitled to impose that differential tax treatment on foreign companies? FN32 Law No. 2238/1994, Official Journal of Greece No. 151 Vol A. [18] By its question, the national court is asking essentially whether legislation of a Member State, such as the tax legislation in question in the main proceedings, which, in the case of companies having their seat in another Member State and carrying on business in the first Member State through a permanent establishment situated there, excludes the possibility, accorded only to companies having their seat in the first Member State, of benefiting from a lower rate of tax on profits, is compatible with Community law, in particular with Article 7 EEC (now Article 6 E.C.) and Article 52 E.C. [19] The first point to be made is that, although direct taxation falls within their competence, the Member States must none the less exercise that competence consistently with Community law and avoid any discrimination on grounds of nationality. [FN33] FN33 Case C-279/93, Schumacker: [1995] E.C.R. I-225; [1996] 2 C.M.L.R. 450, paras [21] and [26]; Case C-80/94, Wielockx: [1995] E.C.R. I-2493; [1995] All E.R. (E.C.) 769, para. [16]; Case C-107/94, Asscher: [1996] E.C.R. I- 3089; [1996] 3 C.M.L.R. 769, para. [36]; and Case C-250/95, Futura Participations and Singer: [1997] E.C.R. I-2471; [1997] 3 C.M.L.R. 483, para. [19]. [20] Next, according to the case law of the Court, the general prohibition of discrimination on grounds of nationality laid down by Article 7 EEC (now Article 6 E.C.) has been implemented, in the particular fields which they govern, by Articles 48, 52 and 59 of the Treaty. Consequently, any rules incompatible with those provisions are also incompatible with Article 6 of the Treaty. [FN34] Article 6 E.C. therefore applies independently only to situations governed by