Case C-600/10: The free movement of capital, infringement actions and the need for a plausible case

A short note on a case of yesterday: In Commission v. Germany (judgment only available in German and French so far), the Commission had argued that the free movement of capital was hindered by provisions of German tax law according to which non-resident pensions funds could not deduct directly connected operating costs from dividends and interests generated in Germany. This would create a disadvantage compared to resident pension funds which were entitled to deduct these costs in full. However, the Commission failed to convince the Court that it had a plausible case.

The case is substantially a follow-up to (and also quotes at quite a number of occasions) Commission v. Finland (this time available in English) from earlier this month. In that case, Finland’s tax system provided for a de facto tax exemption for resident pension funds: they were authorised to deduct the amounts reserved in order to meet their obligations as regards pensions. Non-resident pension funds did not have this option. Despite contrary arguments by several Member States, the Court had found that this constituted an obstacle to the free movement of capital, which even the conclusion of double taxation conventions with most EU and EEA Member States could not remove, as the effective tax rate remained higher than that for resident pension funds under all but three of those conventions (para 33-34).

However, in Commission v. Germany, the Commission’s case proved to be too weak: While the Court accepted in principle that a less favourable treatment of dividends could constitute an obstacle to the free movement of capital (para 15), it was not convinced by the Commission’s arguments. The Commission could in particular not demonstrate a plausible case where such operating costs were indeed directly linked to identifiable dividends or interests. The Court thus insisted that the Commission could not simply base its case in infringement proceedings on assumptions (para 26):

Toutefois, à cet égard, il convient de relever que, si la Commission ne parvient à donner aucun exemple plausible d’une situation dans laquelle la République fédérale d’Allemagne soumettrait effectivement dans la pratique les fonds de pension non‑résidents à un traitement désavantageux par rapport aux fonds de pension résidents en refusant à ces premiers de déduire des frais professionnels directement liés à la perception par eux de dividendes et d’intérêts en Allemagne, il ne saurait être considéré, sous peine d’admettre que la Commission puisse se fonder sur des présomptions, qu’elle a prouvé à suffisance de droit le manquement aux obligations qui incombent à cet État membre en vertu de l’article 63 TFUE (voir, par analogie, arrêt Commission/Portugal, précité, points 30 et 31).

The Court refused thus to take the easy way out of not going into further detail and simply relying on the concept of a merely ‘potential’ obstacle to free movement as it has done at quite a number of occasions (thanks to Laurens for stressing that point in a discussion). Rather, as this case shows, there remains a non-negligible burden of persuasion for the Commission before a violation of the provisions on the free movement of capital will be found.