Judgment of the Court (Fifth Chamber) of 17 September 2015

System of taxation of private foundations before 2001

4 Private foundations (Privatstiftungen) were introduced by the Austrian legislature in 1993 by means of the Privatstiftungsgesetz (Private Foundations Law, BGBl. No 694/1993).

5 Private foundations are subject to corporation tax. Nevertheless, on the basis of the legislation that was in force until the end of 2000, capital gains and income from holdings, when received by private foundations, were generally exempt from corporation tax at the level of the foundation. Taxation thus took place at the time when the income was transferred to the various beneficiaries as a result of gifts made by private foundations. Under Paragraph 27(1), point 7, of the Einkommensteuergesetz 1988 (Income Tax Law, ‘the EStG 1988’), those gifts were considered, when received by their beneficiary, to be capital gains subject to capital gains tax at a rate of 25%.

System of taxation of private foundations from 2001 to 2004

6 The system of taxation of private foundations was amended from 2001 by the Budgetbegleitgesetz 2001 (Supplementary Budget Law, BGBl. I, No 142/2000), inter alia by the introduction of several new provisions in the Körperschaftsteuergesetz 1988 (Law on corporation tax 1988, ‘the KStG 1988’).

7 According to the explanatory memorandum to the Budgetbegleitgesetz 2001, those provisions were principally intended to reduce the complete exemption from corporation tax from which private foundations previously benefited and to levy a ‘schedular’ tax directly on those foundations at a reduced rate on certain private foundations’ capital gains and income from holdings. That direct tax at a reduced rate has been termed as ‘interim taxation’ (Zwischensteuer, ‘the interim tax’).

8 Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, states:

‘In the case of [private] foundations which do not fall under Paragraph 5, points 6 or 7, or under Paragraph 7(3), the following are not to be taken into account either as earnings or as income, but are to be taxed separately in accordance with Paragraph 22(3):

1. domestic and foreign capital gains from

   • cash deposits and other accounts with credit institutions (Paragraph 93(2), point 3, of the [EStG 1988]),

   • debt securities within the meaning of Paragraph 93(3), points 1 to 3, of the [EStG 1988], if, when issued, they are offered, in law and in fact, to unspecified persons,

   • debt securities within the meaning of Paragraph 93(3), points 4 and 5, of the [EStG 1988], in so far as such capital gains fall within the scope of income from capital assets within the meaning of Paragraph 27 of the [EStG 1988];

2. Income from the disposal of holdings within the meaning of Paragraph 31 of the [EStG 1988], unless subparagraph 4 applies.

Tax shall not be payable (Paragraph 22(3)) on capital gains and income from the disposal of holdings in so far as gifts within the meaning of Paragraph 27(1), point 7, of the [EStG 1988] were made in the assessment period, capital gains tax was withheld from them and capital gains tax is not exempted on the basis of a double taxation convention.’

9 Under Paragraph 22(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, the rate of corporation tax for a private foundation’s capital gains and other income taxable under Paragraph 13(3) of the KStG 1988 was 12.5%.

10 Under Paragraph 24(5) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001:

‘Corporation tax payable on capital gains and income within the meaning of Paragraph 13(3) and (4) shall be credited by way of assessment in accordance with the following provisions:

1. Corporation tax shall be determined and paid on the submission of a tax return after an assessment of the taxable amount.

2. Private foundations must have made gifts within the meaning of Paragraph 27(1), point 7, of the [EStG 1988] that are not exempted from tax within the meaning of the last sentence of Paragraph 13(3).

3. The tax credit shall be 12.5% of the taxable amount of the gifts for the purpose of withholding capital gains tax.

4. Private foundations shall maintain an account in which the corporation tax paid in each year, the amounts credited and the balance remaining after the deduction of each tax credit shall be recorded on an ongoing basis.

5. In the event of the dissolution of a private foundation, the whole of the amount eligible to be credited at the date of dissolution shall be the subject of a tax credit.’

Information relating to the system of interim taxation in Austrian law

11 The explanatory memorandum of the Budgetbegleitgesetz 2001, cited by the referring court, states, with regard to the interim tax:

‘… from 2001[, i]nterest earned on deposit securities and debt securities is to be subject to a form of interim tax, and at a specially reduced rate. The tax falls due first when the income accrues. If gifts are (subsequently) made by a private foundation, however, a tax credit will be granted in accordance with the detailed statutory rules. Consequently, the amount of the gifts does not affect the overall tax charge.

The system is implemented by amendments to the law in two areas. First, the previous exemption provisions in Paragraph 13(2) [of the KStG 1988] are correspondingly modified. Previously exempt income will be taxed in the form of schedular taxation at a reduced rate of 12.5% (Paragraph 13(3) [of the KStG 1988]) by way of assessment. No tax will be due where distributions are made in the year when interest earnings accrue. Secondly, a tax credit at the same rate as that of the reduced tax is provided for in Paragraph 24(5) [of the KStG 1988]; this is effected by way of assessment. The tax credit presupposes, first, that the reduced tax has in fact been paid at the date when the tax return is submitted. In addition, there must be gifts from which capital gains tax has been withheld. The tax credit is granted at a rate of 12.5% of a gift, which is the same as the reduced rate of the tax. In terms of form, an account must be kept, detailing the movements and balance of the sums that may be used for a tax credit.

For example: in 2001 a private foundation receives income from interest in the amount of 2 000 000 Austrian schillings (‘ATS’). Gifts in that year total ATS 500 000. Interim tax at a rate of 12.5%, that is to say ATS 187 500, is due. In 2002, income from interest amounts to ATS 2 500 000. No gifts are made in that year. Interim tax for 2002 is ATS 312 500. In 2003, income from interest is ATS 2 000 000 and gifts total ATS 2 100 000. No interim tax is due for that year. Consequently, 12.5% of ATS 100 000, that is to say ATS 12 500, is credited from the interim tax paid in 2001 and 2002.’

Preliminary observations

31 According to its wording, the question referred by the national court concerns the levying of the interim tax on resident private foundations where the beneficiaries of gifts made by those foundations are exempt from tax in Austria on the basis of a double taxation convention. That question is intended to ascertain whether Article 56 EC precludes a system such as that established for the levying of the interim taxation on foundations from 2001 which is at issue in the case in the main proceedings.

32 As is apparent from paragraphs 7, 11, 26 to 28 of the present judgment, the order for reference describes at some length the system of interim taxation at issue in the case in the main proceedings, which is a complex system in the light of which the referring court states that it refers its question and one which must be taken into consideration before the question itself can be fully understood.

33 In the light of that description, it appears that the doubts of the referring court relate, within the context of interim taxation which is charged on the capital gains and income from the disposal of holdings that a resident private foundation has received in the course of a given assessment period, to the right of such a foundation to deduct the amount of gifts made during that term from its taxable amount. That deduction is permitted only if the beneficiary of the gift is taxable in the Republic of Austria. However, such a deduction is refused to a foundation where the beneficiary of a gift resides in a Member State other than the Republic of Austria and relies on a double taxation convention in order to be exempted from Austrian capital gains tax.

34 As a result, by its question, the Verwaltungsgerichtshof asks, in essence, whether Article 56 EC must be interpreted as precluding tax legislation of a Member State such as that at issue in the case in the main proceedings under which, as regards interim tax which is charged on capital gains and income from the disposal of holdings of a resident private foundation, that foundation has the right to deduct from its taxable amount only gifts made in the course of a given assessment period that have been the subject of a tax levied on the beneficiaries of those gifts in the Member State in which the foundation is taxed, whereas such a deduction is excluded by that national tax legislation where the beneficiaries reside in another Member State and are exempted, on the basis of a double taxation convention, from a tax that is otherwise charged on gifts in the Member State in which the foundation is taxed.

Restriction on the free movement of capital

35 According to the settled case-law of the Court, Article 56(1) EC lays down a general prohibition on restrictions on the movement of capital between Member States (judgments in Persche, C‑318/07, EU:C:2009:33 , paragraph 23, and Mattner, C‑510/08, EU:C:2010:216 , paragraph 18).

36 In the absence of a definition in the EC Treaty of ‘movement of capital’ for the purposes of Article 56(1) EC, the Court has recognised the nomenclature which forms Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty [repealed by the Treaty of Amsterdam] (OJ 1988 L 178, p. 5) as having indicative value, even though that directive was adopted on the basis of Articles 69 and 70(1) of the EEC Treaty (later Articles 69 and 70(1) of the EC Treaty both of which were repealed by the Treaty of Amsterdam), it being understood that, in accordance with the introduction to that annex, the list it contains is not exhaustive. Gifts and endowments appear under heading XI, ‘Personal capital movements’, of that annex (judgments in Persche, C‑318/07, EU:C:2009:33 , paragraph 24; Mattner, C‑510/08, EU:C:2010:216 , paragraph 19; and Commission v Spain, C‑127/12, EU:C:2014:2130 , paragraph 52).

37 The Court has already held that the tax treatment of gifts, whether they are gifts of money, immovable property or movable property, falls under the provisions of the Treaty on the movement of capital, except where their constituent elements are confined within a single Member State (see, to that effect, judgments in Persche, C‑318/07, EU:C:2009:33 , paragraph 27; Mattner, C‑510/08, EU:C:2010:216 , paragraph 20; and Q, C‑133/13, EU:C:2014:2460 , paragraph 18).

38 The case in the main proceedings does not directly relate to the tax treatment of gifts in the sense of a difference in treatment between gifts made to resident recipients and gifts made to recipients resident in another Member State. It concerns the tax treatment of resident private foundations which differs according to whether the gifts that it makes are made to recipients residing in Austria or recipients residing in another Member State.

39 In the case in the main proceedings, in 2001 and 2002, the private foundation made gifts, in particular, to two recipients residing in a Member State other than the Republic of Austria. Those gifts involved payments being made without any consideration being given by the recipients. As the Commission correctly states, both the initial contribution of the assets to the foundation on its being set up by the founder as well as the subsequent payments made from those assets to the recipients fall within the concept of ‘movement of capital’ within the meaning of Article 56(1) EC.

40 It follows that a situation such as that in the case in the main proceedings in which a private foundation established in Austria makes gifts to two recipients, one residing in Belgium and the other in Germany, concerns, both for 2001 and 2002, international movements of capital, which may not be the subject of any restriction under Article 56(1) EC.

41 It must therefore be examined, in the first place, whether, as submitted by the private foundation in the case in the main proceedings and the Commission in its written observations before the Court, national legislation such as that at issue in the case in the main proceedings constitutes a restriction on the movement of capital.

42 The system established by Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, involves a difference of treatment between resident private foundations in their right to an immediate reduction in the interim tax according to whether the beneficiaries of the gifts that they make in the course of a given tax year are or not subject to Austrian capital gains tax.

43 Although, as the Austrian Government claims, gifts for which such a right to immediate reduction or immediate reimbursement is excluded can also include gifts to beneficiaries residing in Austria where those beneficiaries are exempted from capital gains tax, they cover in particular gifts made to non-resident beneficiaries in so far as, under the model double taxation convention drafted by the Organisation for Economic Co-operation and Development (OECD), gifts are considered to be income within the meaning of Article 21(1) of that model convention, and are not taxable in Austria since they are subject to the exclusive powers of taxation of the State of residence of the beneficiary.

44 As the Commission submits, such movements of capital are restricted by the last sentence of Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, which is applicable to the case in the main proceedings.

45 Since a resident private foundation is entitled to a reduction of, and even exemption from, the interim tax on gifts that it has made to national beneficiaries as a result of the deductibility of those types of gifts from the taxable amount of that tax, such a foundation will, all other things being equal, always have greater financial means at its disposal that can be used either immediately to make additional gifts to resident beneficiaries or used to obtain additional income, which will enable it subsequently to grant larger gifts to the same beneficiaries.

46 In addition, the unfavourable tax treatment which follows from the application of the last sentence of Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, in the case of gifts to beneficiaries exempt from capital gains tax in Austria as a result of a double taxation convention concluded between the beneficiaries’ Member State of residence and the Republic of Austria, is capable of leading to a restriction at the level of the foundation itself.

47 A foundation which has beneficiaries residing in the national territory and others residing in another Member State would therefore be discouraged from making gifts to the latter because, without being able to benefit from a tax reduction or reimbursement in connection with those gifts, the interim tax charged on its income reduces the aggregate financial means at its disposal both for generating income and for making gifts to resident beneficiaries. At the level of the foundation, this would lead to a distortion in the resulting selection, from a tax point of view, between international gifts which are less advantageous and national gifts which are more advantageous.

48 Furthermore, in so far as gifts to beneficiaries residing in another Member State will lead to interim taxation being levied at a rate of 12.5% on his foundation, it is from the founder’s point of view less advantageous from the outset to set up a private foundation with beneficiaries residing in another Member State than setting up an equivalent foundation with beneficiaries residing only in Austria.

49 In this context, it is clear that it is not necessary for the tax charge to be excessive or definitive for tax legislation to be regarded as forming a prohibited restriction of a fundamental freedom.

50 According to the settled case-law of the Court, a restriction on a fundamental freedom is prohibited by the Treaty, even if it is of limited scope or minor importance (see, to that effect, regarding the free movement of capital, judgment in Dijkman and Dijkman-Lavaleije, C‑233/09, EU:C:2010:397 , paragraph 42; and, regarding the freedom of establishment, judgments in Commission v France, C‑34/98, EU:C:2000:84 , paragraph 49, and de Lasteyrie du Saillant, C‑9/02, EU:C:2004:138 , paragraph 43).

51 A cash-flow disadvantage which arises from a cross-border situation can form a restriction on a fundamental freedom where such a disadvantage does not arise in a purely national situation (see, to that effect, judgments in Metallgesellschaft and Others, C‑397/98 and C‑410/98, EU:C:2001:134 , paragraphs 44, 54 and 76; X and Y, C‑436/00, EU:C:2002:704 , paragraphs 36 and 37; Rewe Zentralfinanz, C‑347/04, EU:C:2007:194 , paragraphs 26 to 30; National Grid Indus, C‑371/10, EU:C:2011:785 , paragraphs 36 and 37; DMC, C‑164/12, EU:C:2014:20 , paragraphs 40 to 43; and Commission v Germany, C‑591/13, EU:C:2015:230 , paragraphs 55 to 61).

52 A difference of treatment concerning the calculation of the interim tax is capable of resulting in a disadvantage in terms of cash-flow for a resident private foundation wishing to make gifts to recipients residing in another Member State and can therefore form a restriction on fundamental freedoms if the private foundation at issue does not incur the same disadvantage in a purely national situation. The private foundation in the case in the main proceedings incurred a cash-flow disadvantage of that kind arising from gifts that it made to beneficiaries residing in Belgium and Germany in 2001 and 2002, and that disadvantage has not been offset by the tax credit upheld by the UFS, which attributed part of the interim tax due for 2001 to that due in 2002.

53 The application of the last sentence of Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, therefore leads to a restriction of the free movement of capital, which is, in principle, prohibited by Article 56 EC.

54 It must, however, be considered, in the second place, whether that restriction on the free movement of capital is capable of being objectively justified having regard to the provisions of the Treaty.

55 In that regard, under Article 58(1)(a) EC, the provisions of Article 56 EC ‘shall be without prejudice to the right of 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’.

56 In so far as Article 58(1)(a) EC is a derogation from the fundamental principle of the free movement of capital, it must be interpreted strictly. It cannot therefore be interpreted as meaning that all tax legislation which draws a distinction between taxpayers on the basis of their place of residence or the State in which they invest their capital is automatically compatible with the Treaty (judgments in Mattner, C‑510/08, EU:C:2010:216 , paragraph 32, and Santander Asset Management SGIIC and Others, C‑338/11 to C‑347/11, EU:C:2012:286 , paragraph 21).

57 The derogation in Article 58(1)(a) EC is itself limited by Article 58(3) EC, which states that the national provisions referred to in paragraph 1 of that article ‘shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 56’ (judgments in Mattner, C‑510/08, EU:C:2010:216 , paragraph 33, and Santander Asset Management SGIIC and Others, C‑338/11 to C‑347/11, EU:C:2012:286 , paragraph 22).

58 The differences in treatment authorised by Article 58(1)(a) EC must therefore be distinguished from discrimination prohibited by Article 58(3) EC. The case-law of the Court shows that, for national tax legislation such as that at issue in the case in the main proceedings to be capable of being regarded as compatible with the provisions of the Treaty on the free movement of capital, it is necessary that the difference in treatment concern situations which are not objectively comparable or be justified by an overriding reason in the public interest. In order to be justified, moreover, the difference in treatment between those two categories of gifts must not go beyond what is necessary in order to attain the objective of the legislation in question (see, to that effect, judgments in Manninen, C‑319/02, EU:C:2004:484 , paragraph 29; Mattner, C‑510/08, EU:C:2010:216 , paragraph 34; and Santander Asset Management SGIIC and Others, C‑338/11 to C‑347/11, EU:C:2012:286 , paragraph 23).