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OPINION OF ADVOCATE GENERAL
KOKOTT
delivered on 18 March 2004(1)


Case C-319/02



Petri Mikael Manninen




(Reference for a preliminary ruling from the Korkein hallinto-oikeus (Finland))

(Free movement of capital – Income tax – Tax credit for dividends paid by domestic companies – Justification on grounds of cohesion of the tax system)






I –  Introduction

1.        This reference for a preliminary ruling from the Korkein hallinto-oikeus (Supreme Administrative Court) (Finland) relates to the Finnish regulations on the taxation of dividends. They provide that a shareholder of a domestic company receives, in addition to the dividend, a tax credit in proportion to the corporation tax paid by the undertaking. The tax credit is offset against tax on the dividend, so that in practice the shareholder has no further tax to pay on this capital-derived income. By contrast, a recipient of dividends from foreign companies cannot set the corporation tax paid in the country where the company is established against his tax liability.

2.        Mr Manninen lives in Finland and is liable for income tax in Finland on dividends he received from a Swedish company. He considers that the Finnish legislation preventing him from offsetting the corporation tax paid in Sweden is incompatible with the free movement of capital.

3.        The idea underlying the Finnish legislation is to avoid the double taxation of corporate profits by the Finnish tax authorities (economic double taxation), which would occur if tax were charged on profits first in the form of corporation tax levied on the undertaking and then again in the form of income tax on the dividends.

4.        Many Member States have or had comparable set-off or exemption schemes to prevent or attenuate such double taxation. (2) As in the present case, however, these schemes often apply only to purely domestic situations, as the Member States consider it appropriate to offset corporation tax when taxing dividends only if the corporation tax has also been received by the national tax authorities. (3)

5.        The Court has already found, in particular in the Verkooijen judgment, (4) that an exemption from the income tax payable on dividends may not be made subject to the condition that the company paying those dividends has its seat in that Member State. However, in none of the cases decided hitherto has the economic and legal link between corporation tax on the one hand and income tax on dividends on the other been as close as in the present case. For that reason, the question of justification on grounds of tax cohesion, which the Court has recognised so far only in the judgments in Bachmann (5) and Commission v Belgium, (6) is again raised.

II –  The national legislation on corporation tax credits

6.        In Finland dividends received by fully-taxable individuals are taxed at a rate of 29%. The rate of corporation tax that companies must pay on their profits is also 29%. In order to prevent the double taxation of profits distributed in the form of dividends, Article 4 of the Law on Corporation Tax Credits grants the recipient of dividends a credit equal to 29/71 of the dividend. The tax credit and the cash dividend are added together and subjected to the tax on capital-derived income.

7.        The effect of the tax credit is illustrated by the following hypothetical calculation. Assuming that a company’s pre-tax profit is 100 cents per share, the undertaking deducts 29 cents from this as corporation tax. The remaining 71 cents are distributed in the form of a dividend. The corporation tax credit amounts to 29/71 of the dividend (71 cents), in other words 29 cents. The recipient of the dividend receives 71 cents per share in cash and 29 cents in the form of a corporation tax credit, in other words 100 cents in total. As the income tax on capital-derived income is 29% of these 100 cents, the tax amounts to 29 cents, which is offset against the credit for the same amount. After tax, the recipient of the dividend is therefore left with precisely the amount of the cash dividend of 71 cents. The taking into account of the corporation tax paid by the company therefore leads in practice to full settlement of the income tax liability on the capital-derived income.

8.        There is a reciprocal effect between the corporation tax payable by the company and the corporation tax credit. If the corporation tax actually paid is less than 29/71 of the dividend, in other words less than the corporation tax credit, the company must make up the difference in the form of additional tax. This occurs if the distributed dividends exceed the company’s after-tax profits.

9.        If on the other hand the company has paid more corporation tax than the corporation tax credits granted to shareholders, the company retains the difference as a credit balance, which it can offset against corporation tax liabilities over the ensuing 10 years.

10.      However, under Article 1(1) of the Law on Corporation Tax Credits, that Law applies only to the central and local taxation of dividends distributed by domestic share companies and of the fully-taxable recipients of dividends from such companies. Under paragraph 4, the provisions of this law also apply to companies established in a Member State of the European Economic Area whose shares giving rise to dividends are in fact linked to a fixed place of business which the company in question has in Finland.

11.      In Sweden dividends paid to domestic taxpayers are fully subject to income tax. A withholding tax is levied on recipients who are not resident in Sweden. Under a double taxation agreement concluded by the Nordic States, the state of payment may deduct a maximum of 15% withholding tax on dividends, which is set against the income tax payable in the recipient’s country of residence.

12.      Continuing with the example given above, the tax works out as follows if a Swedish undertaking pays a dividend of 71 cents per share to a taxpayer resident in Finland. The Swedish tax authorities retain a withholding tax of (at most) 15%, in other words 10.65 cents. In Finland the recipient must deduct 29% income tax on 71 cents (20.59 cents), against which is set the 10.65 cents deducted at source. As a result, the dividend remaining after tax amounts to 50.41 cents. The corporation tax already paid in Sweden by the company is not taken into account.

III –  Facts of the dispute in the main proceedings and the questions referred for a preliminary ruling

13.      In his application to the keskusverolautakunta (Central Tax Commission), Mr Manninen sought a preliminary ruling on the question whether he, as a person fully taxable in Finland, could be charged tax in Finland on dividends paid by the Swedish listed company Telia Ab (publ), having regard to Articles 56 EC and 58 EC. The keskusverolautakunta stated in its preliminary ruling that the dividends paid by Telia Ab (publ) were fully liable to income tax in Finland in the 2001 tax year and that there was no entitlement to a corporation tax credit.

14.      Mr Manninen appealed against the preliminary ruling to the Korkein hallinto-oikeus, which by order of 10 February 2002 submitted the following questions to the Court of Justice for a preliminary ruling under Article 234 EC:

‘1.Is Article 56 EC to be interpreted as precluding a corporation tax credit system like the Finnish one described above, in which the recipient of a dividend who is generally liable to tax in Finland is granted a corporation tax credit in respect of a dividend paid by a domestic share company, but not in respect of dividends he receives from a share company registered in Sweden?

2.If the answer to the first question is in the affirmative, may Article 58 EC be interpreted as meaning that the provisions of Article 56 EC are without prejudice to Finland’s right to apply the relevant provisions of the Law on Corporation Tax Credits, since it is a condition for obtaining a corporation tax credit in Finland that the company distributing the dividend has paid the corresponding tax or supplementary tax in Finland, which does not take place with respect to a dividend paid from abroad, in which case taxation is not even carried out once?’

IV –  Arguments of the parties

15.      In the proceedings before the Court Mr Manninen, the Finnish, French and United Kingdom Governments and the Commission submitted observations. Whereas Mr Manninen and the Commission consider the Finnish system of corporation tax credits to be incompatible with Articles 56 EC and 58 EC, the governments unanimously take the opposite view.

16.      According to Mr Manninen and the Commission, the free movement of capital is impeded because the way in which the regulations on corporation tax credits are couched is liable to deter investors from investing in another Member State. As no corporation tax credit can be set against tax on dividends from abroad, such income is taxed more heavily than dividends from domestic companies. At the same time, they contend that the scheme makes it more difficult for companies with their seat in another Member State to raise capital in Finland.

17.      In their opinion, the regulations cannot be justified by reference to Article 58 EC and the cohesion of the tax system. As the Court has ruled in the Verkooijen judgment, (7) it is not possible to plead the cohesion of the tax system where different taxpayers and different taxes are involved. The contested regulations relate on the one hand to the corporation tax payable by the company and on the other to taxation of the income of the recipient of dividends.

18.      The Commission considers that a system of corporation tax credits to prevent double taxation is permissible only if it is not discriminatory and is actually coherent. In its view, the Finnish regulations do not meet those criteria, as no corporation tax credit is granted in respect of investments abroad. Furthermore, taxpayers resident in another State receive no tax credit in respect of dividends from Finnish companies. It contends that the real purpose of the disputed regulations is to safeguard the revenues of the tax authorities.

19.      Mr Manninen also maintains that the system would be coherent only if a corporation tax credit were also granted in respect of dividends from abroad. In his view, that this is possible is proved by a corresponding provision in the Irish-Finnish double taxation agreement, under which taxpayers resident in Ireland receiving dividends from Finnish companies are also granted a corporation tax credit up to certain limits.

20.      The Finnish, French and United Kingdom Governments cite the case-law of the Court, which permits differences in the treatment of taxpayers, provided that their situation is not the same. (8) In their view, the situation differs primarily in that in the case of undertakings in Finland complete identity between the tax credit granted to the recipient of dividends and the corporation tax actually paid by the company can be achieved by means of the additional tax. This is not possible in the case of foreign companies that are not subject to the additional tax. For the French Government the scheme is an expression of the principle of territoriality recognised by the Court. (9)

21.      In the opinion of the United Kingdom, French and Finnish Governments it is also a coherent system. They contend that the regulations ensure that the same income is taxed only once in Finland. As the income of foreign companies is not taxed in Finland, the taxation of dividends paid by those companies to taxpayers in Finland does not lead to double taxation by the Finnish tax authorities.

22.      They assert that there is a direct link between taxation of the recipient of dividends and that of the company, as the granting of a corporation tax credit depends on the corresponding corporation tax having actually been paid. In that respect they consider that the contested scheme differs from the exemption scheme that was the subject of the dispute in Verkooijen.

23.      The offsetting of corporation tax paid abroad that Mr Manninen seeks would, in their view, run counter to the system, which rests precisely on the link between the tax credit and the corporation tax. In the case of companies with their seat abroad this link does not exist.

24.      The United Kingdom and French Governments question whether Article 58(1)(a) EC and the principle of tax coherence would be left with any scope at all if the Finnish system were deemed not to meet the requirements of these provisions. They concede that coherence is not achieved in the taxation of a single taxpayer, but contend that the regulations pursue the legitimate objective of avoiding double taxation. In the absence of Community-wide harmonisation, the Court should not, in their opinion, interfere too deeply in the configuration of national tax systems by permitting only one particular form of corporation tax set-off or exemption.

V –  Legal assessment

25.      In its two questions, which must be examined together, the referring court essentially seeks to ascertain whether arrangements such as the contested Finnish regulations on corporation tax credits are compatible with the provisions on the free movement of capital, and especially with Article 56 EC and paragraphs (1)(a) and (3) of Article 58 EC.

26.      As regards the applicability of the free movement of capital to national provisions on direct taxation, note has to be taken of consistent case-law, according to which ‘although, as Community law stands at present, direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law’. (10) Consequently, the Finnish legislature is obliged to respect the fundamental freedoms and especially the provisions on the free movement of capital.

A – Restriction of the free movement of capital

27.      Article 56(1) EC prohibits all restrictions on the movement of capital between Member States. Under Section III-A-2 of the Nomenclature in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, (11) the acquisition by residents of foreign securities traded on a stock exchange is a process that falls within the scope of the free movement of capital, as the Commission has aptly stated. The Nomenclature can continue to be relied upon even after the introduction of Articles 73b to 73d of the EC Treaty (now Articles 56 EC to 58 EC) by the Maastricht Treaty. (12)

28.      Any measure that makes the cross-border transfer of capital more difficult or less attractive and is thus liable to deter the investor constitutes a restriction on the free movement of capital. (13) In this respect the concept of a restriction of capital movements corresponds to the concept of a restriction that the Court has developed with regard to the other fundamental freedoms, especially the freedom of movement of goods. (14)

29.      The contested national provisions do not, it is true, relate directly to the acquisition of shares but to the tax treatment of the income deriving from the investment. However, as the objective of the investment is mostly to earn net income, regulations relating to the tax treatment of the income also affect the attractiveness of the capital investment itself.

30.      The Finnish legislation treats dividends from foreign and domestic companies differently. A shareholder receiving a dividend from a domestic company is granted a corporation tax credit, which, when set against tax, effectively reduces the income tax to zero. Tax must be paid at a rate of 29% on dividends from abroad, without it being possible to offset the corporation tax paid by the foreign company. Consequently, in the case of an investment abroad the undertaking’s profits are subject to double taxation – albeit not by the same tax authorities – whereas this outcome is avoided by the granting of a corporation tax credit in the case of purely domestic investments.

31.      It is true that the withholding tax already levied abroad is offset. This does not, however, reduce the tax burden on the recipient of the dividend, who must continue to pay a total of 29% tax, partly in the form of a deduction at source in the country in which the company paying the dividend is established and the remaining part in the form of income tax in Finland.

32.      The worse tax treatment of an investment in the shares of companies established abroad makes such investment less attractive for the investor than the acquisition of the shares of domestic companies and thus impedes the movement of capital.

33.      As it is disadvantageous from the tax point of view for individuals to acquire the shares of foreign companies, the raising of capital on the Finnish market is also hampered for foreign companies. This constitutes a further restriction on the free movement of capital to the detriment of foreign share companies.

B – Justification for the restriction

1. Interpretation of Article 58 EC

34.      Article 58(1)(a) EC (15) permits the Member States ‘to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested’.

35.      The contested tax provisions treat taxpayers who have invested in domestic undertakings differently from taxpayers with equivalent investments in another Member State. There is therefore differentiation according to the place where their capital is invested, which Member States are in principle entitled to apply under Article 58(1)(a) EC within the framework of their tax law.

36.      It may be true that the Member States introduced Article 73d(1)(a) of the EC Treaty (now Article 58 EC) by means of the Maastricht Treaty in order to permit some Member States to maintain their set-off schemes that differentiated according to the place of investment, as the United Kingdom Government submitted in the oral procedure. (16) Since the Verkooijen judgment, however, it has been firmly established that this provision does not give the Member States carte blanche to apply every form of different treatment of taxpayers according to the place of investment under their national tax law.

37.      Rather, Article 58(1)(a) EC must, as a derogation from the fundamental principle of free movement of capital, be interpreted strictly. (17) In addition, this provision must be read in conjunction with Article 58(3) EC, which lays down that the measures and procedures referred to in paragraph 1 may not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital. (18)

38.      In the Verkooijen judgment (19) the Court also pointed out that the derogations from the free movement of capital provided for in Article 58 EC had previously already been recognised in case-law. The Court has therefore treated Article 58 EC as almost a codification of its previous case-law. (20) Hence, the provision must also be interpreted in the light of the case-law preceding its introduction. (21)

39.      Consequently, it must be held that restrictions on the free movement of capital in accordance with Article 58(1)(a) EC are in turn limited by the principles laid down in Article 58(3) EC and developed in case-law.

2. Comparability between the situation of domestic investment and that of investment abroad (Schumacker case-law)

40.      For different tax treatment of dividends according to the place of investment to be permissible, pursuant to Article 58(3) EC, it must not constitute arbitrary discrimination or a disguised restriction.

41.      Arbitrary discrimination can be ruled out, because the different treatments relate to different situations. In the Schumacker judgment the Court recognised that differences in treatment according to whether the taxpayer is resident in the State in question or in another Member State do not constitute prohibited discrimination to the extent that residents and non-residents are not in a comparable situation. (22)

42.      The principle of territoriality cited by the French Government is ultimately linked with this finding. As expounded by the Court in the Futura Participations and Singer judgment, (23) this principle states that where the taxation of non-residents is concerned only income and expenses arising in the taxing State are to be taken into account, whereas in the case of domestic taxpayers their worldwide income and expenses constitute the basis of assessment to tax. As the present case relates to an individual fully liable to tax, it cannot be deduced from the principle of territoriality that the offsetting of corporation tax paid abroad is precluded.

43.      By analogy with the Schumacker case-law, the governments involved contend that the situation differs according to whether a dividend is paid by a domestic company or by a foreign company.

44.      It must be stated in this regard that there is no difference between the two situations at the outset. There is a risk of double taxation of an undertaking’s profits, irrespective of whether the undertaking distributing the dividend has its seat in a different Member State to that of the recipient of the dividend or in the same Member State. In both cases the earnings are subject first to corporation tax and then, if distributed as a dividend, to income tax.

45.      The only difference is that in one case the double taxation stems from taxation by one and the same State, whereas in the case of the cross-border payment of dividends tax is levied by two States. This difference is of no consequence, however, from the point of view of the investor or the undertaking.

46.      The fact that taxpayers are resident in different States and that tax jurisdiction is therefore divided between two States only acquires particular significance if there is a wish to introduce schemes to avoid double taxation. The objective of such systems is to ensure that corporate profits are taxed once and only once. To achieve that end, the taxation of the two taxpayers must be coordinated. Since no Community harmonisation has taken place in the field of direct taxation and there is no double taxation agreement between Finland and Sweden to cater for this situation, such coordination is possible only if both taxpayers live in the same Member State.

47.      At this interim stage, it can be stated that as regards the avoidance of the double taxation of corporate earnings the situation differs according to whether a company liable to corporation tax and an individual liable to income tax because he receives dividends from that company reside in the same State or in different States.

48.      It does not follow, however, that differences in treatment of all kinds would be permissible, for different situations may be treated differently only to the extent that is unavoidable because of the differences. (24)

3. Cohesion of the tax system and the principle of proportionality

49.      Moreover, for differences in tax treatment between purely domestic situations and cross-border situations that impede capital movements not to constitute arbitrary discrimination or a disguised restriction within the meaning of Article 58(3) EC, they must be necessary on overriding grounds of the public interest. The scheme must comply with the principle of proportionality; in other words it must be appropriate for attaining an objective compatible with the EC Treaty, and be necessary and proportionate in the narrow sense of the term. (25)

a) The concept of cohesion of the tax system

50.      The Finnish and other Governments consider that the regulations on corporation tax credits are justified by the need to ensure cohesion of the tax system.

51.      This rather diffuse concept has become firmly established in case-law and in the literature since the judgments in Bachmann (26) and Commission v Belgium. (27) In those decisions the Court recognised in principle that maintenance of the cohesion of the tax system is an objective approved by Community law, on which the Member States can rely to justify restrictions on the fundamental freedoms. (28) The concept generally means no more than avoiding double taxation (29) or ensuring that income is actually taxed, but only once (30) (the principle of only-once taxation). The aim of the Belgian scheme at issue at that time was to ensure that the income invested by a taxpayer in a pension policy was not subject to income tax first as earned income and later again upon payment of the pension.

52.      An essential aspect is that the avoidance of double taxation also contributes to the neutrality of the tax system from the point of view of competition. One of the Finnish legislature’s motives for introducing the law on corporation tax credits was to put the raising of own funds on an equal tax footing with financing by means of bank loans. Loan interest is also taxed only once, as revenue of the bank. The borrower, on the other hand, can offset the cost of taking out the loan against tax as a business expense.

53.      In the wake of the Bachmann judgment, the cohesion of the tax system has been cited repeatedly as justification for restrictions on various fundamental freedoms. In an attempt to take account of the exceptional nature of this justification, the Court narrowly limited the concept of tax cohesion in subsequent judgments. In consistent case-law it has required that there be a direct link between the grant of a tax advantage and the offsetting of that advantage by a fiscal levy, both of which relate to the same tax. (31)

54.      In the Bosal judgment the Court then continues: ‘Where there is no such direct link, because, for example, one is dealing with different taxes or the tax treatment of different taxpayers, the argument based on the coherence of the tax system cannot be relied upon’. (32)

55.      It is unclear whether the criteria ‘one and the same taxpayer’ and ‘the same tax’ are binding and must both be met, or whether they are only indicators – albeit strong ones – of the existence of a direct link between a tax advantage and disadvantage.

56.      If the first interpretation were preferred, it would not be possible for Finland to argue from start to finish on the basis of the cohesion of the tax system. It is true that corporation tax and income tax could be seen as essentially similar taxes, as they are both levied on current income, in contrast to wealth tax, for example. (33) The criterion of the same taxpayer is not met, however. As the Court has already made clear in the Verkooijen judgment, the levying of corporation tax on the company on the one hand and income tax on the recipient of dividends on the other are separate taxation exercises involving different taxpayers. (34)

57.      The merit of this narrow understanding of the concept of tax cohesion is that it is particularly suited to the objective of a restrictive authorisation of exceptions to the free movement of capital. On the other hand, strict adherence to the criterion of the same taxpayer may have arbitrary consequences in some circumstances, as is evident in a situation such as the present.

58.      In principle, the double taxation of corporate profits can be avoided in a number of ways. The corporation tax can be fully offset when taxing the dividend (as with the Finnish model for domestic dividends) or the dividend can be exempted from income tax. In that case the one and only taxation occurs entirely at company level. However, the opposite is also conceivable, namely that only the undertaking’s retained profits are subjected to corporation tax. Then the shareholder receives his dividend from untaxed income; it is taxed for the first time when he is assessed for income tax. (35)

59.      Finally, taxes can be levied partly on the undertaking and partly on the recipient of the dividend, as under the half income tax method or what the Commission terms schedular systems. (36) In the dispute in the main proceedings, in fact, only part of Mr Manninen’s dividend is taxed in Finland; the other part consists of withholding tax retained by the undertaking in Sweden at the time of distribution.

60.      These examples show that it is relatively unimportant who is ultimately credited with the once-only tax payment – the undertaking or the shareholder – at least as long as the same tax rates are applied at both levels. In the case of the Finnish set-off model, one could also take the view, as does the referring court, that the undertaking ultimately pays a kind of advance dividend tax on behalf of the shareholder, in so far as it deducts corporation tax on corporate earnings that are subsequently distributed as dividends.

61.      These considerations suggest that, exceptionally, a link justifying the tax cohesion argument may exist if a charge on one taxpayer is offset by a relief for another. The preconditions for this are that:

–the tax is levied, if not on the same taxpayer then at least on the same income or the same economic process, and

–the legal configuration of the system ensures that the advantage accrues to the one taxpayer only if the disadvantage to the other is real and in the same amount.

62.      The application of these criteria is just as effective as the criterion of the same taxpayer in ensuring that justification on the grounds of cohesion of the tax system does not run out of control. For example, it would also have been impossible to regard the national schemes at issue in the Verkooijen (37) and Svensson and Gustavson (38) cases as coherent systems on the basis of the abovementioned conditions.

63.      In the Verkooijen case there was no guarantee that the dividend would be exempt from income tax only if the undertaking distributing it actually paid corporation tax in the same amount. Under the Luxembourg scheme, to which the Svensson and Gustavson judgment related, the criterion of the same economic relationship or the same income would not have been met. Under these schemes taxpayers in Luxembourg received an interest rate subsidy for home loans obtained from domestic banks. The limitation to domestic banks was explained by the fact that only such banks were liable to taxation in Luxembourg.

64.      The contested Finnish legislation meets the conditions set out in paragraph 61. They relate to the same income – namely the income of the company, which in essence is passed to the person liable to income tax in the form of a dividend – and ensure that the advantage (the setting-off of corporation tax against the tax liability) is granted only if the disadvantage (the payment of corporation tax) has actually occurred. The provisions regarding the additional tax also ensure that the amount of the corporation tax credit matches that of the tax deducted by the company.

65.      Hence, the argument based on cohesion of the tax system does not fail by reason of the fact that the present case relates to two taxpayers: the company and the recipient of the dividend.

b) The cohesion of the tax system as a legitimate objective in the context of justification for the unequal treatment of domestic and foreign situations

66.      It is debatable how far the cohesion of the tax system can be relied upon in real terms as an objective compatible with the EC Treaty if the system treats domestic and cross-border situations differently. If the EC Treaty required that cohesion may not be established solely at national level and that cross-border situations must also be catered for as far as possible, the objective of the Finnish regulations would not comply with Community law.

67.      The disputed Finnish provisions on corporation tax credits are not applied if the company distributing the dividend is established abroad. Hence the scheme merely precludes the double taxation of purely domestic income but accepts the same effects on investments abroad.

68.      In addition, the Commission objects that a foreign recipient of dividends from a Finnish company also receives no corporation tax credit. In the oral procedure, however, the Finnish Government rightly stated that it does not lie in the power of the Finnish tax authorities to ensure the offsetting of corporation tax when a recipient of dividends is taxed abroad.

69.      It is true that Community law does not prescribe how the Member States should design their systems to avoid economic double taxation, but, as stated at the outset, when adopting tax legislation the national legislature must in any event ensure that the fundamental freedoms, in this case the free movement of capital, are respected in the internal market, even though at present the Community has no jurisdiction of its own in the field of direct taxes. (39) Moreover, the Member States may in principle treat purely domestic and cross-border situations differently. However, if different treatment also entails the restriction of a fundamental freedom, the differentiation may not go beyond what is unavoidable on account of the differences in situation. (40)

70.      This is the starting-point for the line of argument of the governments involved. They essentially advance two arguments. First, they point out that the corporation tax paid abroad – in this case in Sweden – does not benefit the Finnish tax authorities and can therefore not be offset against tax on the dividend in Finland. Secondly, they maintain that the Finnish tax authorities would not be able to guarantee a complete match between the corporation tax paid in Sweden and the corresponding tax credit to be recognised in Finland because they cannot levy additional tax on the Swedish company.

71.      With regard to the first argument, it is settled case-law that a loss of tax revenue cannot be relied upon to justify a measure that is in principle contrary to a fundamental freedom. (41) Consequently, Finland must accept that when taxing domestic recipients of dividends it loses tax revenue as a result of the offsetting of the corporation tax received by the Swedish tax authorities. Hence the tax revenues ultimately remain in the State in which entrepreneurial activity is undertaken to generate profits.

72.      As to the Governments’ second argument, the fact that it is far easier to carry out offsetting if both of the taxpayers involved are subject to the same tax jurisdiction cannot be dismissed out of hand. This cannot, however, justify taking no account of corporation tax deducted abroad in any circumstance and thereby impeding the free movement of capital.

73.      Instead, a recipient of dividends who is taxable in Finland must at least be afforded the opportunity to furnish proof of the actual amount of corporation tax paid, for example by presenting certificates to that effect from the company. However, the requirements as to proof may not be excessively onerous, so as to render virtually impossible or excessively difficult the exercise of rights conferred by Community law. (42)

74.      Moreover, offsetting need not lead to dividends received from Sweden being completely exempt from income tax in Finland. Rather, the prohibition on discrimination in applying once-only taxation requires only that the amount of corporation tax actually paid be taken fully into account. As the Finnish tax authorities cannot call upon the foreign undertaking to make up any difference between the corporation tax paid and the income tax due, it would be permissible for the adjustment to be made by levying correspondingly higher income tax on the domestic taxpayer.

75.      Under this arrangement a recipient of dividends from an investment abroad would, it is true, be treated worse than a recipient of dividends from a domestic company. First, in individual cases he may have to accept somewhat higher taxation, and secondly he would have to complete additional formalities in order to obtain a corporation tax credit, whereas offsetting would be automatic in the case of domestic investments. These inequalities of treatment are unavoidable, however, in view of the differences in situation. (43)

76.      In the wake of these arguments, the Court asked the parties what practical difficulties would prevent the corporation tax paid abroad from being offset when taxing dividends in Finland.

77.      During the oral procedure the Finnish and United Kingdom Governments pointed out in particular that in the context of the taxation of dividends it was difficult for the taxpayer or the tax administration, as the case may be, to obtain the necessary information on the corporation tax paid by the company in another Member State. The Finnish Government added that it was not only the rate of corporation tax applicable abroad that had to be taken into account for the purposes of offsetting, as the basis of assessment could differ from one State to another. The United Kingdom Government pointed to the particular difficulties that could result from the fact that the free movement of capital also applied in relation to third States.

78.      These difficulties cannot, however, justify the complete exclusion of the offsetting of corporation tax paid abroad. In order to take account of differences in tax rates and in the basis of assessment, the amount of corporation tax actually paid per share could be offset. The company involved should be able to state this figure, for example on the basis of its accounts for the financial year for which the dividend was distributed. If it were not in a position to do so, the cost of this failure would ultimately fall on the shareholder, who would not be able to produce adequate proof of the tax to be offset against the tax on his dividend. In that case he might choose another investment.

79.      Particular problems may arise where third countries are involved. The principle of the free movement of capital between Member States and third countries set out in Article 56(1) EC does not, however, lay down a binding requirement that corporation tax paid in third countries be offset in the same way as in situations involving two Member States. Here too, the rule is that equal treatment is required only if the situations are comparable. In view of the facts in the dispute in the main proceedings, however, it is not necessary to decide to what extent the principles developed here can be transposed to cases involving third countries.

80.      In conclusion, it must be held that a scheme providing for corporation tax to be offset against the tax on dividends cannot be justified by arguments based on the coherence of the tax system if the scheme prohibits offsetting in the case of investments abroad even though such offsetting would in principle be possible.

VI –  Conclusion

81.      In the light of the foregoing considerations, I propose that the reply to the questions from the Korkein hallinto-oikeus be as follows:

Article 56(1) EC and paragraphs 1(a) and 3 of Article 58 EC preclude provisions of a Member State under which the tax on a dividend received by an individual who is fully taxable in his country of residence from a share company established in the same country is calculated to take account of the corporation tax paid by the company, whereas corporation tax is not offset in the same manner if the dividend is distributed by a company established abroad.

1 – Original language: German.

2 – In Communication COM(2003) 810 final of 19 December 2003 on the dividend taxation of individuals in the Internal Market, the Commission gives an up-to-date survey of the systems in the Member States. See also the regime in the Netherlands, which was the subject of the judgment in Case C-35/98 Verkooijen [2000] ECR I-4071, and the Austrian scheme, which was examined by Advocate General Tizzano in his Opinion in Case C-516/99 Schmid [2002] ECR I-4573 (see also Case C-315/02 Lenz, currently still pending before the Court).

3 – The problems that this taxation practice causes for the internal market have been examined by the Commission since the 1960s (see Lupo, ‘Reliefs from Economic Double Taxation on EU Dividends: Impact of the Baars and Verkooijen Cases’, in European Taxation, 2000, p. 270, 271). See also the Communication cited in footnote 2.

4 – Cited in footnote 2.

5 – Judgment in Case C-204/90 Bachmann [1992] ECR I-249.

6 – Judgment in Case C-300/90 Commission v Belgium [1992] ECR I-305.

7 – Cited in footnote 2, paragraphs 57 and 58. See also the Opinion of Advocate General Tizzano in the Schmid case, cited in footnote 2, paragraph 51.

8 – The Verkooijen judgment, cited in footnote 2, paragraph 43, and the judgment in Case C-279/93 Schumacker [1995] ECR I-225, paragraph 26 et seq.

9 – Judgment in Case C-250/95 Futura Participations and Singer [1997] ECR I-2471, paragraph 22.

10 – Judgment in the Schumacker case, cited in footnote 8, paragraph 21; see also the Verkooijen judgment, cited in footnote 2, paragraph 32, and the judgment in Case C-364/01 Barbier [2003] ECR I-0000, paragraph 56.

11 – OJ 1988 L 178, p. 5.

12 – The Commission cites the Opinion of Advocate General Tesauro in Joined Cases C-163/94, C-165/94 and C-250/94 Sanz de Lera and Others [1995] ECR I-4821, paragraphs 9 and 10.

13 – To this effect, see the judgment in Case C-222/97 Trummer and Mayer [1999] ECR I-1661, paragraph 26.

14 – See the ground-laying judgments in Cases 8/74 Dassonville [1974] ECR 837, paragraph 5, C-76/90 Säger v Dennemeyer [1991] ECR I-4221, paragraph 12, and C-55/94 Gebhard [1995] ECR I-4165, paragraph 37.

15 – Pursuant to Declaration No 7 to the Maastricht Treaty, this provision applies only to national tax regulations in existence at the end of 1993. In the case of Finland the relevant date is therefore the date of accession. The applicable version of the Law on Corporation Tax Credits appears to date from 1998. From the observations submitted by the Finnish Government at the proceedings, however, it transpires that the system of corporation tax credits was introduced as early as 1990.

16 – See Terra and Wattel, European Tax Law, 3rd edition, 2001, p. 19.

17 – Judgment in Case C-54/99 Église de Scientologie [2000] ECR I-1335, paragraph 17.

18 – The Verkooijen judgment, cited in footnote 2, paragraph 44; Opinion of Advocate General Tizzano in the Schmid case, cited in footnote 2, paragraph 44.

19 – The Verkooijen judgment, cited in footnote 2, paragraph 43.

20 – See my Opinion in Case C-242/03 Weidert and Paulus [2004] ECR I-0000, paragraph 27.

21 – Advocate General Tizzano expressed the same view in his Opinion in the Schmid case, cited in footnote 2, paragraph 44.

22 – The Schumacker judgment, cited in footnote 8, paragraph 31 et seq.

23 – See the Futura Participations and Singer judgment, cited in footnote 9, paragraphs 20 to 22.

24 – Judgment in Case C-234/01 Gerritse [2003] ECR I-5933. In this ruling the Court recognised that in the case of a partially taxable person, taxation at a uniform rate that takes no account of the person’s level of income is permissible, because the situation of a non-resident (partially taxable) person differs from that of a resident taxpayer. However, it regarded the different treatment of business expenses as an infringement of Community law.

25 – See the judgments in Case C-478/98 Commission v Belgium [2000] ECR I-7587, paragraph 41, and in Sanz de Lera and Others, cited in footnote 12, paragraph 23. See also the Opinion of Advocate General Mischo in Case C-436/00 X and Y [2002] ECR I-10829, paragraph 80, and the Opinion of Advocate General Tizzano in the Schmid case, cited in footnote 2, paragraph 44.

26 – Cited in footnote 5.

27 – Cited in footnote 6.

28 – The Community legislature itself also pursues this objective (see the second recital of Council Directive 2003/123/EC of 22 December 2003 amending Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ 2004 L 7, p. 41): ‘... to exempt dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and to eliminate double taxation of such income at the level of the parent company’).

29 – This consideration is also likely to have been the basis of the national regulations that were the subject of the judgments in Cases C-136/00 Danner [2002] ECR I-8147 and C-422/01 Skandia and Ramstedt [2003] ECR I-6817.

30 – See the judgment in X and Y, cited in footnote 25; the purpose of the Swedish scheme under examination in that case was to ensure that capital gains were actually taxed once.

31 – The Verkooijen judgment, cited in footnote 2, paragraph 57, and the judgment in Case C-168/01 Bosal Holding [2003] ECR I-0000, paragraph 29.

32 – The Bosal judgment, cited in footnote 31, paragraph 30, which refers to the judgment in Case C-251/98 Baars [2000] ECR I-2787, paragraph 40.

33 – In the Baars judgment, cited in footnote 32, one of the reasons for rejecting justification on the grounds of tax cohesion was that two different types of tax were involved, namely wealth tax and corporation tax.

34 – The Verkooijen judgment, cited in footnote 2, paragraph 58.

35 – With this model, however, the State will levy a withholding tax to ensure that dividends going abroad do not escape taxation. A system of this kind exists (or existed) in Greece (see Terra and Wattel, cited in footnote 16, 4.2.3.2, p. 166 et seq.).

36 – See Communication COM(2003) 810 final, cited in footnote 2, paragraph 2.2.2. According to the Commission’s information, this is now the approach adopted in most Member States, subject to certain variations; see paragraph 2.4 of the Communication.

37 – Cited in footnote 2.

38 – Judgment in Case C-484/93 Svensson and Gustavsson [1995] ECR I-3955.

39 – See paragraph 26 above.

40 – See paragraph 47 et seq. above.

41 – Judgments in Cases C-264/96 ICI [1998] ECR I-4695, paragraph 28, and C-385/00 de Groot [2002] ECR I-11819, paragraph 103, and the Verkooijen judgment, cited in footnote 2, paragraph 59.

42 – With regard to the principle of effectiveness, see in particular the judgments in Cases 33/76 Rewe [1976] ECR 1989, paragraph 5, and C-255/00 Grundig Italiana [2002] ECR I-8003, paragraph 33.

43 – See paragraph 48 above.