Hornbach-Baumarkt-AG v Finanzamt Landau.

• Jurisdiction: European Union
• ECLI: ECLI:EU:C:2017:974
• Date: 14 December 2017
• Celex Number: 62016CC0382
• Court: Court of Justice (European Union)
• Procedure Type: Reference for a preliminary ruling
• Docket Number: C-382/16

OPINION OF ADVOCATE GENERAL

BOBEK

delivered on 14 December 2017 ( 1 )

Case C‑382/16

Hornbach-Baumarkt AG

v

Finanzamt Landau

(Request for a preliminary ruling from the Finanzgericht Rheinland-Pfalz (Germany))

(Reference for a preliminary ruling — Freedom of establishment — Direct taxation — Application of transfer pricing in relation to transactions between resident and non-resident companies)

I. Introduction

1. Hornbach-Baumarkt AG (‘Hornbach’) provided comfort letters to banks and creditors guaranteeing that the liabilities of some of its foreign subsidiaries would be met. It did not receive any remuneration from the subsidiaries for the comfort letters. Following a tax assessment, the Finanzamt Landau (Tax Office, Landau, Germany; ‘the Tax Office’) held that the comfort letters had not been granted on arm’s-length terms. The Tax Office therefore increased Hornbach’s business tax. That was to reflect the notional remuneration that it considered would normally have been paid to Hornbach by an unconnected third party in consideration for the comfort letters.

2. Hornbach brought an action challenging the Tax Office’s assessment before the referring court. It argues that the German legislation providing for the adjustment of taxation of transactions between related companies to reflect arm’s-length terms violates the EU Treaty provisions on freedom of establishment. In particular, the rule only foresees the adjustment of taxation where foreign related companies are involved. Moreover, the rule does not allow taxpayers to invoke justifications for transactions not carried out on arm’s-length terms.

3. In that context, the Finanzgericht Rheinland-Pfalz (Finance Court of the Land of Rhineland-Palatinate, Germany), asks whether the relevant rule under German law is compatible with the EU Treaty provisions on freedom of establishment.

II. Legal framework

4. According to the referring court, if a taxpayer’s income from business relations with a related party is reduced as a result of the fact that, in connection with such business relations abroad, it agrees to terms that depart from those that would have been agreed on by unrelated third parties under the same or similar circumstances, then Paragraph 1(1) of the Außensteuergesetz (Foreign Transaction Tax Law), as amended by the Gesetz zum Abbau von Steuervergünstigungen und Ausnahmeregelungen (Law on the Reduction of Tax Advantages and Exemptions) of 16 May 2003 (BGBl. I, 2003, p. 660; ‘the AStG’) applies. That provision requires that income be declared as if it had been earned under terms agreed upon between unrelated third parties.

5. A party is related to a taxpayer, inter alia, if the taxpayer has a direct or indirect shareholding in that party of at least 25%.

III. Facts, procedure and questions referred

6. Hornbach (‘the Applicant’) is a public limited company established in Germany. Its commercial purpose is the operation of do-it-yourself stores in Germany and other countries.

7. In the year at issue (2003), the Applicant had shareholdings in several companies in other countries inside and outside the European Union for which it provided guarantees and comfort letters to creditors and banks without seeking remuneration for doing so. Through, inter alia, its subsidiary Hornbach International GmbH and in turn through the latter’s subsidiary Hornbach Holding BV, the Applicant indirectly owned 100% of Hornbach Real Estate Groningen BV and of Hornbach Real Estate Wateringen BV (‘the foreign group companies’), both of which were established in the Netherlands.

8. On 25 September 2002, the Applicant gratuitously provided comfort letters in favour of the foreign group companies to the bank providing financing to those companies. It did so because the foreign group companies had negative equity capital and required bank loans of EUR 10057000 (Hornbach Real Estate Groningen BV) and EUR 14800000 (Hornbach Real Estate Wateringen BV) in order to continue their business operations, and for the planned construction of a store and garden centre. The financing bank had made the granting of the loans contingent on the provision of comfort letters by the Applicant.

9. In the comfort letters dated 25 September 2002, the Applicant undertook vis-à-vis the financing bank to refrain from disposing of or changing its shareholding in Hornbach Holding BV. In addition it undertook to ensure that Hornbach Holding BV would likewise refrain from disposing of or changing its shareholding in the foreign group companies without giving the bank written notice thereof at least three weeks prior to such disposal or change. Furthermore, the Applicant irrevocably and unconditionally undertook to fund the foreign group companies in such a way as to enable them to meet all of their liabilities. The Applicant was thus required to provide the foreign group companies, as necessary, with the requisite funds to enable them to satisfy their liabilities towards the bank. In addition, the Applicant was required to ensure that such funds would be used to settle any liabilities towards the bank.

10. When the Tax Office (‘the Defendant’) proceeded to a tax assessment of the Applicant, it considered that the terms agreed on between the Applicant and the foreign group companies departed from those that would have been agreed on by unrelated third parties under the same or similar circumstances. Unrelated business partners would agree on remuneration for the provider of a comfort letter due to the associated liability risk. Since the Applicant did not agree with the foreign group companies on any remuneration in exchange for providing the comfort letters, its income from business relations with the parties related to it was reduced.

11. Accordingly, the Tax Office made, inter alia, income corrections of EUR 15253 and EUR 22447 to reflect the notional income that would have been received by the Applicant had it conducted the relevant transactions on arm’s-length terms. The Applicant lodged objections to the resulting assessments for business tax for 2003 and to the basis of calculation for business tax in 2003. Those objections were rejected by the Tax Office as unfounded. The action challenging that decision is now pending before the referring court.

12. In its action, the Applicant submits that the Defendant impermissibly increased its taxable income in the amount of (notional) liability remuneration in a manner contrary to EU law. Paragraph 1 of the AStG, it argues, leads to the unequal treatment of cases involving domestic and foreign transactions, since in a case involving purely domestic transactions a notional increase of income would not occur, whereas the granting of guarantees for foreign subsidiaries is ‘punished’.

13. In support of its position, the Applicant refers in particular to the Court’s judgment in SGI. ( 2 ) The Applicant’s reading of that judgment is that a restriction on the freedom of establishment through a rule requiring correction of profits when benefits are granted to affiliated companies located outside the Member State concerned will be proportionate only if the taxpayer is given an opportunity to provide evidence of commercial justification for any transactions that may not be consistent with the arm’s-length principle. Paragraph 1 of the AStG does not contain any express provision concerning the opportunity to present commercial justification in order to explain a transaction that is not made on arm’s-length terms. According to the Applicant therefore, it is at variance with the principle of proportionality. The gratuitous granting of the comfort letters in dispute was not carried out for tax reasons. On the contrary, it had to do with supportive actions to replace equity capital. Thus, from the standpoint of EU law, liability remuneration cannot be added on, since there is commercial justification for providing gratuitous security for the loans.

14. In its defence, the Defendant essentially argues that, in the SGI case, which dealt with a Belgian tax provision bearing some similarities to Paragraph 1 of the AStG, the Court ruled that Articles 43 and 48 EC do not preclude, in principle, such legal provisions of a Member State. The Defendant acknowledges that Paragraph 1 of the AStG does not contain a separate provision concerning the presentation of evidence of commercial justification. However, it considers that it is always open to the taxpayer to present evidence of reasonableness. If there is commercial justification for departing from what would otherwise be reasonable, such justifications could also be taken into account in the context of Paragraph 1 of the AStG. In addition, under German law, the taxpayer has the option of challenging the tax assessment in both out-of-court and judicial proceedings.

15. In the light of the above, the Finanzgericht Rheinland-Pfalz (Finance Court of the Land of Rhineland-Palatinate) puts the following question to the Court: ‘Does Article 49 of the Treaty on the Functioning of the European Union (TFEU), in conjunction with Article 54 TFEU, (formerly Article 43 of the Treaty establishing the European Community (TEC), in conjunction with Article 48 EC), preclude legislation of a Member State which provides that income of a resident taxpayer derived from business relations with a company established in another Member State in which that taxpayer has a direct or indirect shareholding of at least 25% and with which that taxpayer has agreed terms that depart from those that would have been agreed on by unrelated third parties under the same or similar circumstances must be calculated as if...