Regina v. Inland Revenue Commissioners ex parte. Commerzbank AG (Case C-330/91) Before the Court of Justice of the European Communities ECJ

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1 Regina v. Inland Revenue Commissioners ex parte. Commerzbank AG (Case C-330/91) Before the Court of Justice of the European Communities ECJ (Presiding, RodrÍguez Iglesias P.C.; Zuleeg and Murray PP.C.; Mancini, Joliet, Schockweiler, Moitinho de Almeida, Grévisse and Edward JJ.) M. Marco Darmon, Advocate General. 13 July 1993 Reference from the United Kingdom by the High Court (Queen's Bench Division), under Article 177 EEC. Provisions considered: EEC 52, 58 Companies. Establishment. Branch. A company or firm formed under the law of a member-state and having its seat in a member-state and which carries on business through a branch or agency in another member-state is exercising its right of establishment in the latter State under Articles 52 and 58 EEC. [13] Re Tax Credits: E.C. Commission v. France (270/83): [1986] E.C.R. 273, [1987] 1 C.M.L.R. 401, applied. Companies. Establishment. Branch. Nationality. For the purposes of corporate establishment, the 'nationality' of a company is determined by the location of its seat (in the sense of its registered office, central administration or principal place of business). [13] Re Tax Credits: E.C. Commission v. France (270/83): [1986] E.C.R. 273, [1987] 1 C.M.L.R. 401, applied.

2 Companies. Establishment. Branch. Discrimination. Discriminatory treatment by the host member-state of a resident branch of a foreign EEC company solely because of the fact that *458 the company's seat is situated in another member-state infringes the right of establishment under Articles 52 and 58 EEC. This is so also where by application of criteria of differentiation other than nationality the same result is attained. [13]-[14] Re Tax Credits: E.C. Commission v. France (270/83): [1986] E.C.R. 273, [1987] 1 C.M.L.R. 401, and Sotgiu v. Deutsche Bundespost (152/73): [1974] E.C.R. 153, applied. Companies. Establishment. Branch. Discrimination. Fiscal residence. Where national law provides for payment by the tax authorities of interest on overpaid tax for the period during which the authorities were holding the money prior to its repayment to the taxpayer, such interest may not be restricted to companies which are fiscally resident in that country but must (under the right of establishment under Articles 52 and 58 EEC) be available to all EEC companies there, even if not fiscally resident there. This is so even where the factor which triggers the repayment, and therefore the payability of interest, is precisely the fact that the taxpayer was not fiscally resident. [18]-[20] The Court interpreted Articles 52 and 58 EEC in the context of a German company, CB, with its seat in Germany but with a branch in Britain, the branch having made loans to U.S. companies, having paid U.K. tax on the interest received from the borrowers, having had that tax repaid to it because under the U.K.-U.S. double taxation treaty such tax was only due from lenders who were fiscally resident in the U.K., but having had its claim for interest on the money deposited as tax until its repayment rejected because such interest was available only to taxpayers who were fiscally resident in the U.K., to the effect that CB was exercising its right of establishment under those Articles by operating its branch in Britain, that discrimination even if not based directly on nationality was prohibited by those Articles, that the criterion of fiscal residence as a criterion for a fiscal benefit was likely to have a disadvantageous effect on foreign companies more than on domestic companies, that as such it was discriminatory against EEC companies established in Britain, that payment of the interest was a selfcontained independent benefit to which the rule of non-discrimination applied, that the fact that CB was blowing hot and cold by claiming exemption from tax because of non-residence but entitlement to interest payments in spite of that non-residence was irrelevant, and that therefore the refusal to pay interest on the detained money breached Articles 52 and 58. Representation Gerald Barling Q.C. and David Anderson, of the English Bar, for the applicant company.

3 Alan Moses Q.C. and Derrick Wyatt, of the English Bar, instructed by John Collins, Assistant Treasury Solicitor, for the United Kingdom Government. *459 Thomas Cusack, Legal Adviser to the Commission, for the E.C. Commission as amicus curiae. The following cases were referred to in the judgment: 1. Re Tax Credits: E.C. Commission v. France (270/83), 28 January 1986: [1986] E.C.R. 273, [1987] 1 C.M.L.R Gaz:270/83 2. Sotgiu v. Deutsche Bundespost (152/73), 12 February 1974: [1974] E.C.R Gaz:152/73 The following further cases were referred to by the Advocate General: 3. Conegate Ltd. v. H.M. Customs and Excise (121/85), 11 March 1986: [1986] E.C.R. 1007, [1986] 1 C.M.L.R Gaz:121/85 4. Ministere Public v. Deserbais (286/86), 22 September 1988: [1988] E.C.R. 4907, [1989] 1 C.M.L.R Gaz:286/86 5. Regina v. H.M. Treasury and Commissioners of Inland Revenue Ex parte Daily Mail and General Trust Plc (81/87), 27 September 1988: [1988] E.C.R. 5483, [1988] 3 C.M.L.R Gaz:81/87 6. Segers v. Bestuur Van de Bedrijfsvereniging voor Bank- en Verzekeringswezen, Groothandel en Vrije Beroepen (79/85), 10 July 1986: [1986] E.C.R. 2375, [1987] 2 C.M.L.R Gaz:79/85 7. Reyners v. the Belgian State (2/74), 21 June 1974: [1974] E.C.R. 631, [1974] 2 C.M.L.R Gaz:2/74 8. Re Data Processing Contracts: E.C. Commission v. Italy (3/88), 5 December 1989: [1989] E.C.R. 4035, [1991] 2 C.M.L.R Gaz:3/88 9. Thieffry v. Conseil de l'ordre des Avocats A la Cour de Paris (71/76), 28 April 1977: [1977] E.C.R. 765, [1977] 2 C.M.L.R Gaz:71/ Regina v. Secretary of State for Transport Ex parte Factortame Ltd. (No. 2) (C-221/89), 25 July 1991: [1991] I E.C.R. 3905, [1991] 3 C.M.L.R Gaz:221/ Biehl v. Administration des Contributions du Grand-Duche de Luxembourg (C-175/88), 8 May 1990: [1990] I E.C.R. 1789, [1990] 3 C.M.L.R Gaz:175/ Administration des Douanes et des Droits Individuels v. Legros (C-163/90), 16 July 1992: [1992] I E.C.R Gaz:163/ Ufficio Henry Van Ameyde Srl v. Ufficio Centrale Italiano di Assistenza Assicurativa Automobilisti In Circolazione Internazionale Srl (90/76), 9 June 1977: [1977] E.C.R. 1091, [1977] 2 C.M.L.R Gaz:90/ Dr Werner v. Finanzamt Aachen-Innenstadt (C-112/91), 26 January 1993: not yet reported. Gaz:112/91 * Re Housing Aid: E.C. Commission v. Italy (63/86), 14 January 1988: [1988] E.C.R. 29, [1989] 2 C.M.L.R Gaz:63/ Re Ownership of Landed Property: E.C. Commission v. Greece (305/87), 30 May 1989: [1989] E.C.R. 1461, [1991] 1 C.M.L.R Gaz:305/87

4 17. Carl Schlüter v. Hauptzollamt Lorrach (9/73), 24 October 1973: [1973] E.C.R Gaz:9/73 The following additional case was referred to in argument: 18. Rumhaus Hansen GmbH & Co. v. Hauptzollamt Flensburg (153/80), 7 May 1981: [1981] E.C.R Gaz:153/80 TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE Facts Commerzbank AG, which is a public limited company incorporated under German law, has a branch in the United Kingdom. Through the intermediary of that branch the company granted various loans to United States companies between 1973 and Commerzbank paid tax of 4,222,234 to the Inland Revenue on the interest which it received from those companies. Subsequently Commerzbank claimed a refund of the tax on the ground that the interest in question was exempt from United Kingdom tax by virtue of Article XV of the Double Taxation Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, [FN1] as amended by the Protocol of 20 September [FN2] That article provides in substance that interest paid by a United States company is exempt from United Kingdom tax except where the recipient is a United Kingdom company or a company which is resident for tax purposes in the United Kingdom. The overpaid tax was refunded to Commerzbank in FN1 [1946] S.R. & O FN2 S.I. 1966/1188. Commerzbank also claimed compensation by way of interest on the overpaid tax in respect of the period for which the tax was held by the Inland Revenue. The company calculated the total interest payable until the date on which the tax was refunded as 5,199,258 that is to say an amount which exceeded the tax paid. Commerzbank based its claim on section 825 of the Income and Corporation Taxes Act By virtue of that provision a company *461 receiving a repayment of overpaid corporation tax is entitled to compensation calculated at an annual rate of 8.25 per cent. of the tax repaid, provided that it is resident for tax purposes in the United Kingdom. The provision reads as follows: (1) This section applies to the following payments made to a company in connection with any accounting period for which the company was resident in the United Kingdom...

5 (a) a repayment of corporation tax paid by the company for that accounting period... (2) Subject to the following provisions of this section, where a payment of not less than 100 to which this section applies is made by the Board or an inspector after the end of the twelve months beginning with the material date, the payment shall be increased under this section by an amount (a 'repayment supplement') equal to interest on the amount paid at the rate of 8.25 per cent. per annum... Commerzbank's claim was rejected by the Inland Revenue. The company therefore applied to the High Court for judicial review of the Inland Revenue's decision. It contended that the refusal to grant the repayment supplement to nonresidents constituted a restriction of their freedom of establishment and also indirect discrimination based on nationality, since the companies affected were for the most part foreign. The Inland Revenue replied that, far from being discriminated against, Commerzbank received preferential treatment by virtue of the exemption granted to it. The High Court considers that the solution to the dispute depends on the manner in which Commerzbank's tax position is analysed. If one focuses on the actual incident in which the alleged disadvantage is to be found, namely the refusal of the supplement, there is manifest discrimination. If, on the other hand, one takes into account the exemption received by Commerzbank, the disadvantage vanishes, and it becomes difficult to compare the company's situation with that of its United Kingdom competitors. It is against that background that the High Court of Justice decided to stay the proceedings and, by order of 12 April 1991, referred the following question to the Court for a preliminary ruling: Where: (i) a company which is formed in accordance with the law of, and has its principal place of business in, one member-state carries on business through a branch in a second member-state; (ii) the company is subject to a demand for payment of tax in the second member-state on certain profits generated by the branch, and pays the tax; (iii) the said tax is not in fact due if the company is entitled to benefit from an exemption under a double taxation agreement between the second member- State and a third country to companies which are neither nationals of, nor resident for tax purposes in, the second member-state; (iv) the company successfully claims the benefit of the exemption and secures recovery of the tax paid but not due; *462 (v) the law of the second member-state provides for statutory compensation in the nature of interest (known as 'repayment supplement') where the company recovering the tax paid but not due was resident in that member-state at the material time; (vi) the company claims the repayment supplement notwithstanding that it was not resident in that member-state at the material time; (vii) the second member-state refuses on that ground to pay repayment supplement to the company;

6 is the refusal of the second member-state to pay the company any repayment supplement on the ground of its non-residence inconsistent with Community law and in particular Articles 5, 7 and 52 to 58 EEC, and in answering that question is it relevant that the company would not have been exempt from the tax (so that no question of recovery of the tax and therefore of repayment supplement would arise) if the company had been resident in that member-state? Opinion of the Advocate General (M. Marco Darmon) A tax provision of a member-state lays down arrangements for the repayment of overpaid tax which provide that, in the event of a repayment being made, a company is entitled to compensation calculated as a percentage of the sums repaid, on condition that it is resident for tax purposes in that State. Is such a condition contrary to Article 52 EEC? That, in substance, is the question put to the Court by the High Court of Justice of England and Wales. The London branch of Commerzbank, which is not resident for tax purposes in the United Kingdom, [FN3] granted certain loans to United States corporations between 1973 and It paid the tax demanded in the United Kingdom on the interest received. FN3 This point is not in dispute between the parties--see the national court's decision, [1991] 3 C.M.L.R. 633, para. [35]. It appears from Article XV of the double taxation convention concluded on 2 August 1946 [FN4] between the United Kingdom and the United States that dividends and interest paid by a United States company are exempt from United Kingdom income tax except where the recipient is a United Kingdom citizen, resident or corporation. FN4 As amended by the supplementary protocol of 20 September On 12 February 1990 the Chancery Division of the High Court upheld a decision of the Commissioner for the special purposes of the Income Tax Acts to the effect that, by virtue of that article, the tax was not owned by Commerzbank, which on the same day was refunded the overpaid tax, amounting to 4,222,234. Commerzbank then made a further application for interest on the overpaid tax on the basis of section 825(2) of the Income and Corporation Taxes Act 1988, which provides that the repayment of overpaid tax 'shall be increased... by an amount (a 'repayment supplement') equal to the interest on the amount paid...' The application was rejected by the Board of Commissioners of the Inland Revenue on the ground that under sub-section (1) of that *463 section repayment supplement is payable only to companies resident for tax purposes in the United Kingdom. In May 1990 Commerzbank applied for judicial review of the tax authorities' decision. It contends that the residence condition constitutes a flagrant breach of Articles 52, 53 and 58 EEC; it also relies on Articles 5 and 7. [FN5]

7 FN5 See para of the United Kingdom Government's observations. The High Court therefore asks the Court whether the refusal to pay repayment supplement on the ground that the company is non-resident is compatible with Community law, in particular with the abovementioned Articles of the EEC Treaty? It also asks the Court to rule on whether the reply to that question may be influenced by the fact that the company would not have been exempt from tax if it had been resident. [FN6] FN6 The wording of the preliminary question appears in the Report for the Hearing (I-A). The United Kingdom Government contends that in this case there has been no discrimination contrary to the Treaty. Its central argument is that it is necessary to compare Commerzbank's position with that of a British company under the relevant scheme of taxation viewed as a whole. [FN7] Far from being discriminated against by the British tax system, Commerzbank receives preferential treatment inasmuch as it enjoys an advantage reserved solely to non-residents (namely the possibility of obtaining repayment of tax which residents must pay). If the bank had been resident, it would have had to pay the tax and the question of repayment would not have arisen. It cannot therefore enjoy both the advantages granted to non-residents under the provisions of the double tax convention and those enjoyed by residents under section 825(2) (hereinafter referred to as 'section 825'). FN7 See para. 2.3 of the United Kingdom Government's observations. In order properly to appraise those arguments, it is first necessary to identify precisely the discrimination alleged by Commerzbank. For that purpose it is necessary to compare the effects of a repayment of overpaid tax for a resident company with those for a non-resident company, where both are in the following situation: after paying tax that was not due, whatever the tax might be, they obtain a repayment of the tax and claim interest on the sums repaid in respect of the period in which they did not have use of those sums--regardless of the reason for the repayment. By virtue of the rule in question, whereas the first company may claim the repayment supplement, the second may not. Contrary to the United Kingdom Government's suggestion, it is not, in my view, appropriate to make an overall comparison of the position of a non-resident company exempt from tax under a double tax convention which paid tax that was not due and claims repayment supplement with the position of a resident company which is liable for the tax and which therefore by definition cannot claim a repayment and thus avail itself of section 825. *464 In my view such a rule should apply whatever the reason for the repayment. It has no necessary link with double tax conventions. Admittedly, by virtue of the convention, the non-resident company is not taxed in the United Kingdom in respect of the interest on the loans which it grants.

8 However, that convention is not intended to lay down tax exemptions but to divide taxation between the States to which the taxpayer concerned has an attachment. Even supposing that what is merely a transfer of tax jurisdiction from one State to another leads to a true exemption--in the absence of taxation of interest in the non-president company's State of origin--the advantage which it derives from the exemption flows, in my view, solely from the tax system of the latter State. It has therefore no connection with the repayment supplement, which is incidental to the repayment of the overpaid tax, and does not negate the discrimination which flows from the application of a provision whose benefit is denied to a taxpayer on the sole ground that he is not resident for tax purposes. Let us not forget that the non-resident company has paid tax that was not legally due and that it is claiming repayment of the tax on the same terms as a resident company which has overpaid tax. The supplement is not a further ' advantage' [FN8] granted to the non-resident company. It merely represents fair compensation for loss of the use, for a given period, of sums belonging to it. FN8 Decision of the national court, Annex 15 in fine. The situation of the non-resident company must be equated with the quite specific and wholly comparable situation of a resident company which has overpaid tax and not with the situation of another company which has paid tax for which it was actually liable. Suppose that the non-resident company wrongly paid tax for which neither resident nor non-resident companies are liable. Would not the discriminatory nature of a provision such as the one in issue be plain since the non-resident company would be deprived of interest which the resident company would receive? There is in addition a more fundamental objection to the United Kingdom's view. According to the United Kingdom, the Anglo-American double taxation convention removed any possibility of discrimination against non-resident companies since the latter are exempt from tax which only resident companies must pay. It is therefore by virtue of the application of a double taxation convention that there is no discrimination with respect to the conditions concerning the recovery of overpaid tax. However, as the Court held in Case 270/83, E.C. Commission v. France, [FN9]... the rights conferred by Article 52 EEC are unconditional and a member-state cannot make respect for them subject to the contents of an agreement concluded with another member-state. [FN10] FN9 [1986] E.C.R. 273, [1987] 1 C.M.L.R FN10 Para. [26] (my emphasis). *465 In this case the observance of Community law cannot depend on the

9 application of a double taxation convention concluded with a non-member country. The Court has inferred from Article 234 EEC that, where the rights of nonmember countries are not involved, conventions concluded prior to the Treaty between such countries and member-states cannot be relied on in order to justify restrictions in intra-community trade. [FN11] FN11 See Case 121/85, Conegate Ltd. v. H.M. Customs and Excise: [1986] E.C.R. 1007, [1986] 1 C.M.L.R. 739, para. [25] and Case 286/86, Ministere Public v. Deserbais: [1988] E.C.R. 4907, [1989] 1 C.M.L.R. 516, para. [18]. Equally, a convention concluded with a non-member country by a member-state prior to its accession to the Community cannot be relied upon in order to justify restrictions between member-states on the freedom of establishment. For the purpose of examining whether a non-resident company is discriminated against with respect to the terms on which the repayment supplement is made, its situation may not be compared with that of resident companies whose situation is such that they cannot rely on section 825. Consequently, the fact that a company would not have been exempt from tax (so that the question of repayment of the tax would not have arisen) if it had been resident in the taxing member-state is immaterial for the purpose of answering the national court's question. The right conferred by Article 52 EEC is not only the right to have an establishment in another member-state of the Community but also to set up agencies, branches or subsidiaries. [FN12] FN12 See para. [17] of Case 81/87, Regina v. H.M. Treasury and Commissioners of Inland Revenue, Ex parte Daily Mail and General Trust Plc.: [1988] E.C.R. 5483, [1988] 3 C.M.L.R. 713, para. [17]. The latter must also be free from all discrimination. The fact that a bank could have set up a subsidiary rather than a branch cannot justify an infringement of the right of establishment: The second sentence of Article 52(1) expressly leaves traders free to choose the appropriate legal form in which to pursue their activities in another member-state and that freedom of choice must not be limited by discriminatory tax provisions. [FN13] FN13 Para. [22] of E.C. Commission v. France, supra. See also para. [16] of Case 79/85, Segers: [1986] E.C.R. 2375, [1987] 2 C.M.L.R Can discrimination on grounds of residence be analysed as indirect discrimination on grounds of nationality? First of all, Article 52, like Articles 30, 48 and 59, has been held to be a lex specialis in relation to Article 7 and merely an application of the principle of nondiscrimination laid down by that article.

10 For many years the Court has taken the view that Article 52 precludes overt discrimination based on nationality. [FN14] FN14 Case 2/74, Reyners v. Belgium: [1974] E.C.R. 631, [1974] 2 C.M.L.R Moreover, that judgment establishes that Article 52 has been directly applicable since the end of the transitional period. It also prohibits 'all covert forms of discrimination which, by *466 application of other criteria of differentiation, lead in fact to the same result...'. [FN15] Thus, in Thieffry [FN16] the Court referred to the General Programme for the abolition of restrictions on freedom of establishment, adopted on 18 December 1961 pursuant to Article 54 EEC, which provided for the elimination of 'any form of disguised discrimination, by designating in Title III(B) as restrictions which are to be eliminated any requirements imposed, pursuant to any provision laid down by law, regulation or administrative action or in consequence of any administrative practice, in respect of the taking up or pursuit of an activity as a self-employed person where, although applicable irrespective of nationality, their effect is exclusively or principally to hinder the taking up or pursuit of such activity by foreign nationals. [FN17] FN15 Case C-3/88, E.C. Commission v. Italy: [1989] E.C.R. 4035, [1991] 2 C.M.L.R FN16 Case 71/76, Thieffry v. Conseil de L'Ordre des Avocats A la Cour de Paris: [1977] E.C.R. 765, [1977] 2 C.M.L.R FN17 Ibid., para. [13]. See also Article 67 EEC. A residence condition may constitute disguised discrimination on grounds of nationality inasmuch as, in practice, it principally affects nationals of other member-states. Thus the Court has held that Article 52 precludes a member-state from requiring, as a condition for the registration of a fishing vessel in its national register, that the owners, charterers and operators of the boat should be nationals of that State and be resident or domiciled in the State. [FN18] FN18 Case C-221/89, Regina v. the Secretary of State for Transport, Ex parte Factortame Ltd.: [1991] I E.C.R. 3905, [1991] 3 C.M.L.R. 589, operative part. In that regard the Court stated: As for the requirement for the owners, charterers, managers and operators of the vessel and, in the case of the company, the shareholders and directors to be resident and domiciled in the member-state in which the vessel is to be registered, it must be held that such a requirement, which is not justified by the rights and obligations created by the grant of a national flag to a vessel, results in

11 discrimination on grounds of nationality. The great majority of nationals of the member-state in question are resident and domiciled in that State and therefore meet that requirement automatically, whereas nationals of other member-states would, in most cases, have to move their residence and domicile to that State in order to comply with the requirements of its legislation. It follows that such a requirement is contrary to Article 52. [FN19] FN19 Ibid., para. [32]. Discrimination based on the criterion of residence may therefore be contrary to Article 52. However, what is the position with respect of residence for tax purposes? In this area the criterion of residence is of particular importance. It is preferred to the criterion of nationality, which would involve a member-state in taxing persons who have lost any genuine, in particular economic, link with the State. The criterion of residence has moreover been adopted by *467 Community law. Thus, the Council directives concerning the common system of taxation applicable to mergers and exchanges of shares and the common system of taxation applicable to parent companies and subsidiaries of different member- States [FN20] expressly refer to the concept of residence for tax purposes. FN20 Respectively Directives 90/434 and 90/435: [1990] O.J. L225/1 and 6. By Article 220 EEC the member-states undertook to abolish double taxation within the Community. It is by employing the criterion of residence that the member-states have achieved this by means of bilateral conventions. The Court has not excluded the possibility that in an area such as tax law a distinction based on the location of the registered office of a company or the place of residence of a natural person may, under certain conditions, be justified. [FN21] FN21 See para. [19] of the judgment in E.C. Commission v. France, supra. The Court has however imposed a limit on this. In determining the rules applicable in tax matters the member-states may not encroach upon the freedoms guaranteed by Community law to all nationals of member-states. The principle of freedom of establishment, in particular, would be rendered ineffective if it could be undermined by discriminatory national provisions on income tax. [FN22] Thus, where non-residents are assimilated to residents and both are subject to the same tax system, the Court does not allow that system to be applied in a discriminatory manner. FN22 See, with respect to the principle of equal treatment with regard to remuneration, para. [12] of the judgment in Case C-175/88, Biehl v. Administration des Contributions du Grand-Duche de Luxembourg: [1990] I E.C.R. 1789, [1990] 3 C.M.L.R. 143.

12 That, in my view, is the main principle established in E.C. Commission v. France, supra, where the Court held that By treating the two forms of establishment in the same way for the purposes of taxing their profits, the French legislature has in fact admitted that there is no objective difference between their positions in regard to the detailed rules and conditions relating to that taxation which could justify different treatment. [FN23] FN23 Para. [20]. It is therefore discriminatory to treat them differently in regard to the grant of an advantage related to taxation, such as shareholders' tax credits. [FN24] FN24 Ibid. It was on the basis of that inconsistency, in particular, that the Court held there to be discrimination contrary to Article 52. Similarly, where a right is granted both to residents and to non-residents, it may not be applied in a discriminatory manner. If the right to recovery of overpaid tax is granted both to non-resident companies and to resident companies because there is no objective difference which would justify not making a repayment to non-residents, that right must be applied in a non-discriminatory manner, that is to say, without distinguishing between such companies with respect to the *468 grant of the repayment supplement, which moreover, as I have already said, is merely incidental to it. Consequently, by treating differently companies which are in the same position of being owed money by the tax authorities, a provision which denies the payment of interest to non-resident companies discriminates against those companies. In the case before the national court, does the residence criterion conceal disguised discrimination on grounds of nationality? In company law a company's residence for tax purposes does not necessarily coincide with its official address or nationality. The British position is a particularly good illustration: a company has British nationality where it is incorporated and has its registered office, which is also its official address, in the United Kingdom. Residence is essentially a tax concept: it is determined by reference to the place where the actual management of the company is carried on. [FN25] It has thus been held that a company which was incorporated and had its registered office in the United Kingdom, but whose actual management was carried on in Cairo where the director and staff permanently resided, was resident for tax purposes in Egypt and not in the United Kingdom. [FN26] FN25 'In tax law a company is ordinarily resident where the actual management of the company is carried on', Palmer's Company Law (London 1992), para

13 FN26 Egyptian Delta Land and Investment Co. Ltd. v. Todd, [1929] A.C. 1, cited by Palmer's Company Law, op. cit., para In order for there to be disguised discrimination on grounds of nationality, the Court does not require that the measure should affect only non-residents, but that it should affect them principally or 'in particular.' [FN27] FN27 See para. [14] of the judgment in Biehl, supra. Indeed it is clear that the criteria of residence and nationality overlap to a large extent. As the Court held in Biehl, Even though the criterion of permanent residence in the national territory referred to in connection with obtaining any repayment of an overdeduction of tax applies irrespective of the nationality of the taxpayer concerned, there is a risk that it will work in particular against taxpayers who are nationals of other member-states. [FN28] FN28 Ibid. It is impossible to maintain that in such circumstances companies resident abroad are treated equally. What of the justification given on this point by the United Kingdom Government? It was argued that, in the absence of such a restriction with respect to the repayment of overpaid tax, non-resident companies would be placed at an advantage in relation to resident companies. The Court rejected such an argument in E.C. Commission v. France in the following terms:... the difference in treatment also cannot be justified by any advantages *469 which branches and agencies may enjoy vis-à-vis companies and which, according to the French Government, balance out the disadvantages resulting from the failure to grant the benefit of shareholders' tax credits. Even if such advantages actually exist, they cannot justify a breach of the obligation laid down in Article 52 to accord foreign companies the same treatment in regard to shareholders' tax credits as is accorded to French companies. [FN29] FN29 Para. [21]. The different treatment to which non-resident companies are subject cannot, moreover, be justified by the particular features or differences with respect to the tax systems of the various member-states or the conditions relating to double taxation. In this respect I would again refer to E.C. Commission v. France, where the Court stated: Although it is true that in the absence of such harmonisation, a company's tax

14 position depends on the national law applied to it, Article 52 EEC prohibits the member-states from laying down in their laws conditions for the pursuit of activities by persons exercising their right of establishment which differ from those laid down for its own nationals. [FN30] FN30 Ibid., para. [24]. Finally, the last reason, put forward by the United Kingdom Government appears a little paradoxical. [FN31] It argues that the repayment supplement is justified for residents because residents' tax affairs can normally be settled rapidly 'without supplement arising' [FN32]; on the other hand, claims made by non-residents are often late partly through their own fault and partly because of the difficulties flowing from the sharing of tax liability between several member-states. A claim for repayment of overpaid tax submitted late would prove extremely costly for the tax authorities [FN33] and would enrich the taxpayers who did not show due diligence. FN31 See United Kingdom Government's observations, pages 12 and 13. FN32 Ibid. It should be noted, incidentally, that the provision under consideration was abolished on 7 December FN33 See section 825: interest is paid at an annual rate of 8.25 per cent. on the amount overpaid. I do not think that the complexity of dividing tax jurisdiction between the member- States may be relied upon to the detriment of a taxpayer who has been wrongly taxed. Moreover, I have serious doubts as to whether the application of a statutory rate can lead to enrichment. Above all, however, it seems to me that it is possible to reconcile observance of the principle of non-discrimination with the need to place a temporal limit on the right to repayment of overpaid tax, not by depriving only a non-resident of the right to interest, whether his application is late or not, but by providing a reasonable time-limit, applicable without distinction to residents and non-residents, for requesting repayment of overpaid tax. [FN34] FN34 Case C-163/90, Administration des Douanes et des Droits Individuels v. Legros: [1992] I E.C.R *470 illustrates the difficulties arising from an excessively long period for making claims for recovery of overpaid tax. In support of its request that the temporal effect of the judgment should be limited, the French Government pleaded that the 30-year time-limit was applicable to claims for repayment of the wrongly paid 'octroi de mer'. In the absence of any convincing reasons, the refusal of a member-state to pay a company the repayment supplement by reason of its non-residence seems incompatible with Articles 52 and 58 EEC. The preliminary question also concerns Article 7, which prohibits, within the

15 scope of application of the Treaty, overt or covert discrimination based on nationality. [FN35] FN35 Sotgiu, supra. As the Court held in Van Ameyde v. UCI [FN36] and, quite recently, in Werner, [FN37] since Article 52 EEC guarantees, in the sphere of the right of establishment, the application of the principle laid down by Article 7, it follows that, where rules are compatible with Article 52, they are also compatible with Article 7. [FN38] FN36 Case 90/76, [1977] E.C.R. 1091, [1977] 2 C.M.L.R FN37 Case C-112/91, Para. [20] Not Yet Reported. FN38 Van Ameyde supra, para. [27]. See also Case 63/86, E.C. Commission v. Italy: [1988] E.C.R. 29, [1989] 2 C.M.L.R. 601, para. [12]. Conversely, in E.C. Commission v. Greece the Court stated that [FN39]:... the general prohibition of discrimination on grounds of nationality laid down in Article 7 EEC has been implemented, in regard to their several domains, by Articles 48, 52 and 59 EEC. Consequently, any rules incompatible with those provisions are also incompatible with Article 7... FN39 Case 305/87: [1989] E.C.R. 1461, [1991] 1 C.M.L.R Article 7 EEC... applies independently only to situations governed by Community law in regard to which the Treaty lays down no specific prohibition of discrimination. [FN40] FN40 Para. [12] and [13]. Since no reference has been made to situations other than those covered by Article 52, it is unnecessary to consider whether there is a specific infringement of Article 7. Finally, the national court's question also refers to Article 5 EEC. Is it necessary to point out that the obligation contained in that article does not confer on individuals rights which the national courts are under a duty to protect? [FN41] FN41 Case 9/73, Schlüter: [1973] E.C.R. 1135, para. [39]. I therefore propose that the Court should rule as follows: Articles 52 and 58 EEC preclude the legislation of a member-state from reserving the payment of repayment supplement, following the payment of tax that was not due, to companies which are resident for tax purposes in that State

16 and from refusing it to non-resident companies, even where those companies are registered in another member-state where they are resident for tax purposes. The fact that the companies would not have been exempt from tax if they had been resident in the member-state is of no importance in that regard. *471 JUDGMENT [1] By order of 12 April 1991, received at the Court on 18 December 1991, the Queen's Bench Division of the High Court of Justice of England and Wales referred to the Court for a preliminary ruling under Article 177 EEC a question relating to the interpretation of the provisions of the Treaty concerning right of establishment and prohibition of discrimination on grounds of nationality. [2] Those questions were raised in connection with a dispute between Commerzbank AG, a company incorporated under German law whose registered office is in Germany, and the Inland Revenue Commissioners (hereinafter referred to as 'the tax authorities') concerning the conditions governing liability to tax under the Income and Corporation Taxes Act [3] The facts as set out in the order for reference are as follows. [4] Commerzbank has a branch in the United Kingdom through the intermediary of which it granted loans to a number of United States companies between 1973 and Commerzbank paid tax in the United Kingdom of 4,222,234 on the interest received from those companies. [5] Subsequently Commerzbank sought repayment of that sum from the tax authorities on the ground that the interest was exempt in the United Kingdom by virtue of Article 15 of the Convention of 2 August 1946 between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, [FN42] as amended by a Protocol of 20 September [FN43] That Article provides in substance that interest paid by a United States company is taxable in the United Kingdom only when it is paid to a United Kingdom company or a company resident for tax purposes in the United Kingdom. Since Commerzbank was not resident for tax purposes in the United Kingdom, it received a refund of the overpaid tax. FN42 [1946] S.R. & O FN43 S.I. 1966/1188. [6] Commerzbank then made a claim in connection with that refund under section 825 of the Income and Corporation Taxes Act That section provides: (1) This section applies to the following payments made to a company in connection with any accounting period for which the company was resident in the United Kingdom...: (a) a repayment of corporation tax paid by the company for that accounting period...

17 (2) Subject to the following provisions of this section, where a payment of not less than 100 to which this section applies is made by the Board or an inspector after the end of the twelve months beginning with the material date, the payment shall be increased under this section by an amount ('a repayment supplement') equal to interest on the amount paid at the rate of 8.25 per cent. per annum... *472 [7] Commerzbank claimed repayment supplement from the tax authorities, calculating the amount payable as 5,199,258. [8] The tax authorities rejected Commerzbank's claim on the ground that the company was not resident in the United Kingdom. Commerzbank therefore applied to the High Court for judicial review of that decision, claiming that the refusal to grant repayment supplement to non-residents constituted a restriction of the right of establishment and indirect discrimination on grounds of nationality, since the companies affected were for the most part foreign. [9] The High Court considered it necessary to refer to the Court a question concerning the interpretation of Articles 5, 7, 52 and 58 EEC. [10] That question is worded as follows: Where: (i) a company which is formed in accordance with the law of, and has its principal place of business in, one member-state carries on business through a branch in a second member-state; (ii) the company is subject to a demand for payment of tax in the second member-state on certain profits generated by the branch, and pays the tax; (iii) the said tax is not in fact due if the company is entitled to benefit from an exemption under a double taxation agreement between the second member- State and a third country to companies which are neither nationals of, nor resident for tax purposes in, the second member-state; (iv) the company successfully claims the benefit of the exemption and secures recovery of the tax paid but not due; (v) the law of the second member-state provides for statutory compensation in the nature of interest (known as 'repayment supplement') where the company recovering the tax paid but not due was resident in that member-state at the material time; (vi) the company claims the repayment supplement notwithstanding that it was not resident in that member-state at the material time; (vii) the second member-state refuses on that ground to pay repayment supplement to the company; is the refusal of the second member-state to pay the company any repayment supplement on the ground of its non-residence inconsistent with Community law and in particular Articles 5, 7 and 52 to 58 EEC, and in answering that question is it relevant that the company would not have been exempt from the tax (so that no question of recovery of the tax and therefore of repayment supplement would arise) if the company had been resident in that member-state? [11] Reference is made to the Report for the Hearing for a fuller account of the facts of the case, the relevant rules and the written observations submitted to the Court, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the Court.

18 [12] The file shows that the national court's question is designed to ascertain, first, whether Articles 52 and 58 and Articles 5 and 7 EEC prevent the legislation of a member-state from granting repayment supplement on overpaid tax to companies resident for tax purposes in that State whilst refusing that supplement to companies which are *473 resident for tax purposes in another member-state and, secondly, whether such a rule is still discriminatory where the exemption from tax which gave rise to the refund applies only to companies which are not resident for tax purposes in that member-state. The right of establishment [13] As the Court held in Case C-270/83, E.C. Commission v. France [FN44] the freedom of establishment which Article 52 grants to nationals of a member-state, and which entails the right for them to take up and pursue activities as selfemployed persons under the conditions laid down for its own nationals by the law of the member-state where such establishment is effected, includes, pursuant to Article 58 EEC, the right of companies or firms formed in accordance with the law of a member-state and having their registered office, central administration or principal place of business within the Community to pursue their activities in the member-state concerned through a branch or agency. With regard to companies, it should be noted in this context that it is their seat in the abovementioned sense that serves as the connecting factor within the legal system of a particular State, like nationality in the case of natural persons. In the same judgment the Court held that acceptance of the proposition that the member-state in which a company seeks to establish itself may freely apply to it different treatment solely by reason of the fact that its seat is situated in another member-state would deprive the provision of all meaning. FN44 [1986] E.C.R. 273, [1987] 1 C.M.L.R. 401, para. [18]. [14] Moreover, it follows from Case 152/73, Sotgiu v. Deutsche Bundespost [FN45] that the rules regarding equality of treatment forbid not only overt discrimination by reason of nationality or, in the case of a company, its seat, but all covert forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result. FN45 [1974] E.C.R. 153, para. [11]. [15] Although it applies independently of a company's seat, the use of the criterion of fiscal residence within national territory for the purpose of granting repayment supplement on overpaid tax is liable to work more particularly to the disadvantage of companies having their seat in other member-states. Indeed, it is most often those companies which are resident for tax purposes outside the territory of the member-state in question. [16] In order to justify the national provision at issue in the main proceedings, the United Kingdom Government argues that, far from suffering discrimination under

19 the United Kingdom tax rules, non-resident companies which are in Commerzbank's situation enjoy privileged treatment. They are exempt from tax normally payable by resident companies. In those circumstances, there is no discrimination with respect to repayment supplement: resident companies and non-resident *474 companies are treated differently because, for the purposes of corporation tax, they are in different situations. [17] That argument cannot be upheld. [18] A national provision such as the one in question entails unequal treatment. Where a non-resident company is deprived of the right to repayment supplement on overpaid tax to which resident companies are always entitled, it is placed at a disadvantage by comparison with the latter. [19] The fact that the exemption from tax which gave rise to the refund was available only to non-resident companies cannot justify a rule of a general nature withholding the benefit. That rule is therefore discriminatory. [20] It follows from those considerations that the reply to be given to the national court is that Articles 52 and 58 EEC prevent the legislation of a member-state from granting repayment supplement on overpaid tax to companies which are resident for tax purposes in that State whilst refusing the supplement to companies which are resident for tax purposes in another member-state. The fact that the latter would not have been exempt from tax if they had been resident in that State if of no relevance in that regard. [21] Since legislation such as that at issue in the main proceedings is contrary to Articles 52 and 58 EEC, it is unnecessary to consider its compatability with Articles 5 and 7. Costs [22] The costs incurred by the United Kingdom and the E.C. Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the proceedings pending before the national court, the decision on costs is a matter for that court. Order On those grounds THE COURT, in answer to the question referred to it by the Queen's Bench Division of the High Court of Justice of England and Wales, by order of 12 April 1991, HEREBY RULES: Articles 52 and 58 EEC prevent the legislation of a member-state from granting repayment supplement on overpaid tax to companies which are resident for tax purposes in that State whilst refusing the supplement to companies resident for tax purposes in another member-state. The fact that the latter would not have been exempt from tax if they had been resident in that State is of no relevance in that regard. (c) Sweet & Maxwell Limited

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