EU Law Blog

Privileges of Public Shareholders, Italian Civil Code and Free Movement of Capital: Joined Cases C-463/04 & C-464/04

In its important new judgment in Joined Cases C-463/04 and C-464/04 Federconsumatori and others v. Comune di Milano the Court of Justice held that a provision of the Italian Civil Code that permits the state and public bodies to participate more significantly in the activity of the board of directors of a limited company than their status as shareholders would normally allow is contrary to the provisions of the EC Treaty on the free movement of capital.

What happened was this. The City of Milan set up AEM SpA, a limited company, to distribute gas and electricity. When it was first listed on the stock exchange in 1998, the City of Milan held 51% of its capital. As privatization continued, the City reduced its shareholding to 33.4%. Against that background, the right for the City directly to appoint up to one quarter of the directors was inserted in AEM’s articles of association. In addition, the articles confer on it the right to participate in the election on the basis of lists of the directors not directly appointed by it. The consequence was that the City was able to retain an absolute majority of appointments to AEM’s board of directors, even though it holds, subsequent to the transfer of shares, only a relative majority of its capital. That privileged position was based on Article 2449 of the Italian Civil Code that provides that the articles of association of a limited company may confer on a public shareholder the right directly to appoint one or more directors.

Associations of consumers and small shareholders challenged that privileged position in the Italian courts because they considered it discourages potential investors from purchasing shares in AEM and thus reduces the value of their holdings in the corporation. The Italian court seised of the matter then referred the question to the Court of Justice whether the provisions of Article 2449 of the Civil Code amounted to a restriction on the free movement of capital, prohibited by Article 56 EC.

The Court of Justice upheld the claim of the associations of consumers and small shareholders and found that Article 56 EC precluded a provision such as Article 2449 of the Civil Code.

The Court recalled that Article 56 §1 EC lays down a general prohibition on restrictions on movements of capital between member States (see, Case C-112/05 Commission v. Germany, paragraph 17 which we noted here).

It held that by giving public shareholders an instrument to restrict the possibility of the other shareholders participating effectively in the management of the company, the Italian legislation is liable to deter direct investors from other member States. The fact that that measure is included in the provisions of the Civil Code and the right of appointment requires a decision of the general meeting of the shareholders does not take away the restrictive character of the Italian legislation.

Free Movement of Capital, Shareholder Rights and Volkswagen Law: Case C-112/05

The Court of Justice has handed down an important judgment in Case C-112/05 Commission v. Germany on free movement of capital and restrictions on shareholder rights in the so-called "Volkswagen Law" in Germany.

Germany enacted legislation in 1960 (partly) privatizing Volkswagen. The legislation capped the voting rights at 20% even if a shareholder exceeded that holding, fixed a blocking minority at 20% and gave the German Federal State and the Land of Lower Saxony each the right to appoint two representatives to the supervisory board.

The Commission considered that those provisions of the 1960 law restricted the free movement of capital in a manner contrary to Article 56 EC as well as the freedom of establishment guaranteed by Article 43 EC.

The Court of Justice held that the restrictions placed on shareholder rights in Volkswagen were contrary to Article 56 EC on the free movement of capital. It held that while the EC Treaty did not define ‘movement of capital’ within the meaning of Article 56(1) EC, it has previously recognized the nomenclature set out in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty [article repealed by the Treaty of Amsterdam] as having indicative value. Movements of capital within the meaning of Article 56(1) EC therefore include direct investments, i.e. investments of any kind undertaken by persons and which serve to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity (see, Case C‑446/04 Test Claimants in the FII Group Litigation, paragraphs 179 to 181, and Case C‑157/05 Holböck, paragraphs 33 and 34).

The Court held that the capping of voting rights at 20% and the fixing of the blocking minority at 20% taken together enable the German Federal State and the Land of Lower Saxony to exert considerable influence of Volkswagen beyond that which they could exert under general company law. That considerable influence is liable to deter investors from other member States.

The Court also found that the right granted to the German Federal State and the Land of Lower Saxony to appoint two representatives to the supervisory board enables them to exert considerably more influence than their actual level of shareholding would allow normally which thus reduces the influence of other shareholders. That too is liable to deter foreign investors.

The Court of Justice stated that restrictions on the free movement of capital could be justified under Article 58 EC. But it held in this case that the German government had advanced no viable justification for the restrictions.

Rather oddly the German government claimed that the privatization legislation of 1960 was not a state measure and thus not caught by Article 56 EC. It claimed that the 1960 law reproduced an agreement which should be classified as a private law contract. The Court would have none of that and held that the fact that the agreement has become the subject of a Law suffices for it to be considered as a national measure for the purposes of the free movement of capital. It concluded rather tartly that the exercise of legislative power by the national authorities duly authorized to that end is a manifestation par excellence of State power.

The Court dismissed the action as regards Article 43 EC because the Commission put forward no arguments to substantiate that claim.

Tax, fiscal sovereignty, dividends and the free movement of capital: Case C-513/04

The Court of Justice has handed down a neat little judgment on the deduction of tax at source and the free movement of capital. The judgment in question is that in Case C-513/04 Kerckhaert and Morres.

Here's the story. A couple resident in Belgium, Mr and Mrs Kerckhaert-Morres, received dividends from a French company. In France the gross dividends were taxed at source at 15% by way of tax on income. In their tax return made to the Belgian authorities Mr and Mrs Kerckhaert-Morres applied to take advantage of a tax benefit corresponding to the French tax at source. That application was rejected by the Belgians. Not surprisingly, they didn't like it. They considered that the rejection effectively made dividends originating in France subject to a heavier tax burden than that imposed on dividends from companies established in Belgium. Consequently, Mr and Mrs Kerckhaert-Morres brought an action before a Belgian court to have the refusal of he tax authorities reversed.

That court decided to refer a question to the Court of Justice for a preliminary ruling on whether Article 56(1) EC should be interpreted as prohibiting a restriction resulting from a provision in the income tax legislation of a member State (Belgium) which subjects dividends from resident companies and dividends from companies resident in another member State to the same uniform tax rate, without in the latter case providing for the setting off of tax levied at source in that other member State.

The Court of Justice held that Article 56(1) EC does not preclude legislation of a member State, such as Belgian tax legislation, which, in the context of tax on income, makes dividends from shares in companies established in the territory of that State and dividends from shares in companies established in another Member State subject to the same uniform rate of taxation, without providing for the possibility of setting off tax levied by deduction at source in that other member State.

Consequently, Mr and Mrs Kerckhaert-Morres cannot plead the provisions on the free movement of capital to prevent dividends paid in another member State from being taxed twice.

The Court of Justice pointed out that, according to settled case-law, although direct taxation falls within the competence of the member States, the latter must none the less exercise that competence in a manner consistent with Community law (see Case C-319/02 Manninen). A problem would arise under EC law when the laws of the ember States at issue did not treat in the same way dividend income from companies established in the member State in which the taxpayer is resident and dividend income from companies established in another member State, with the result that recipients of the latter dividends are denied the tax benefits granted to the others.

In the present case, the Court of Justice took the view that the situation was different from that in the other cases it had to deal with because the Belgian tax legislation does not make any distinction between dividends from companies established in Belgium and dividends from companies established in another member State. Both are taxed at an identical rate of 25% by way of income tax.

The double taxation which might arise from the application of an income tax system such as the Belgian system at issue in this case results from the exercise in parallel by two member States of their fiscal sovereignty. EC law does not lay down any general criteria for the attribution of areas of competence between the member States in relation to the elimination of double taxation within the EC. Consequently, it is for the member States to take the measures necessary to prevent such double taxation by applying, for example, the apportionment criteria followed in international tax practice.