The freedom of establishment and German corporation tax - an analysis of the Saint-Gobain judgement

Abstract: Non-harmonized direct taxes fall within the Member States' competence. This means that the Member States are free to develop their own tax systems, as long as there is no Community harmonisation. But since the freedom of establishment (and other rights under the EC Treaty) could be disturbed by national tax law, this competence must be exercised in consistency with Community law to avoid any discrimination or restrictions of the free movement. The freedom of establishment gives natural and legal persons a right to primary and secondary establishment within the Community. The principle is laid down in Article 43 EC for natural persons and is considered to include a prohibition of discrimination as well as a prohibition of restrictions. The freedom of establishment in Article 43 EC has direct effect. However, discriminating or restricting measures can be justified by a Member State, either by Article 46 EC or by matters of common interest, the so called rule of reason. Arguments that could be considered as justifications are cohesion of the tax system and fiscal supervision. Article 43 is extended to legal persons formed in accordance with the laws of a Member State through Article 48 EC. The Saint-Gobain case C-307/97 Compagnie de Saint-Gobain v. Finanzamt Aachen-Innenstadt [1999] ECR I-6161 concerned three German tax benefits that were not granted to Saint-Gobain ZN, since it was subject to limited tax liability, being a permanent establishment. According to Germanys DTAs and the national tax legislation, the benefits in question were granted only to companies with unlimited tax liability. Permanent establishments and subsidiaries were hence treated differently. The ECJ concluded that this was in conflict with the freedom of establishment, since permanent establishments were subject to discrimination. The most important statements of the judgement were: · If a tax concession that is granted, by law or by a double-taxation agreement, to companies with unlimited tax liability but is refused to a company with limited tax liability, and if the refusal is based on the location of the company's seat, there is an infringement of Article 43 EC, unless the different treatment can be justified. · National companies and permanent establishments of companies in other Member States are objectively in the same situation when it comes to taxation of dividends from foreign subsidiaries. This is especially true since the permanent establishment with limited tax liability that is refused the tax concession in practice is liable to tax not only for domestic, but also for foreign income. The consequence of this judgement is that Germany, and other Member States, have to extend the tax legislation and the application of their DTAs so that permanent establishments are granted the same benefits as companies subject to unlimited tax liability. The equal treatment is necessary because of the right to choose the appropriate legal form of a secondary establishment. The analysis in this thesis focuses on the German Körperschaftsteuergesetz. Das Körperschaftsteuergesetz BGBl I 1999 p817ff Some changes in this law were made in 1993 in order to comply with the freedom of establishment. However, there are still provisions that might be in conflict with Community law. The possibility to forward dividends received from a foreign company to another German company without fiscal consequences has for instance not been fully extended to permanent establishments. The exemption in the calculation of income is granted to permanent establishments only where the dividends are received directly from the foreign company. Neither are the provisions on tax exemptions for Organschaften fully extended to constellations where the Organträger is a permanent establishment. There might also be a problem with the tax rates that give companies with unlimited tax liability the possibility to be taxed by a lower rate if it pays dividends of at least 30 %. Consequently, the changes of the KStG were not sufficient&semic there are still some provisions that probably are inconsistent with the freedom of establishment.