B —The Danish Government represented by the Ministry for Fiscal Affairs, as a party to the main action, submits first of all some general observations. After summarizing the Community and Danish laws applicable to the dispute, it points out to begin with that Conradsen has not entered into any binding obligation to discharge the tax at issue. It is not in fact certain that the effect of the company's taking into account the deduction for tax purposes from the value of the stock and goods on order is to produce a corresponding taxable profit, since this eventuality depends on facts which are completely uncertain including in particular the commercial steps which the company has itself taken. It is therefore impossible to determine objectively with due regard to the fiscal rules whether the taking over of assets written down for tax purposes will involve the company in any charge to tax and even more impossible to ascertain the date on which the liability will arise. In these circumstances there is therefore no justification for holding that the company is entitled to deduct the ‘potential’ tax from the amount on which the capital duty is assessed.The Danish Government, after having drawn attention to the fact that the Danish legislation implementing Council Directive of 17 July 1969 abides strictly by the principles laid down by the latter, describes the relevant system of writing down for tax purposes which applied in Denmark at the time the dispute arose.For these purposes it refers in particular to the rules adopted in this sphere by the Law concerning the taxation of companies (Law No 255 of 11 June 1960 as amended). These rules provided that limited companies and other companies referred to therein (and also natural persons who carry on business with a view to making a profit) may deduct depreciation from assets for tax purposes, create certain tax-exempt reserves and write down assets by way of deductions from the actual value of goods in stock and goods bought pursuant to binding contracts, called goods on order.The system of writing down for tax purposes is in particular governed by Law No 255 of 10 May 1973 (‘Varelag-erloven’) concerning the valuation for tax purposes of stock and the like.Under these rules the stock valuation carried out at the end of the financial year must be taken as the value of that stock at the beginning of the next financial year, with the result that the deduction made at the end of the financial year is taken as an increase for the following year. But, if the undertaking also had goods in stock at the end of that year, it can effect a deduction again so that, if the level of the stock remains the same, the writing down does not affect the taxable profits, even if the undertaking continues to make the same deduction at the end of each financial year. Should the undertaking maintain its policy of writing down and the level of its stock remains the same the deductions do not in fact increase its taxable profit.The rules relating to the writing down of stock only apply to goods delivered before the end of the financial year of the company in question. These rules have been completed up to 1975 by the addition of those dealing with the writing down for tax purposes of goods bought pursuant to binding contracts (goods on order).These provisions imply that in the case of a binding contract entered into before the end of the financial year and providing for delivery of goods to the undertaking during the next financial year, the undertaking concerned may write down the cost price of these goods by a certain percentage. Initially the authorized deduction amounted to 30 %. However the right to write down the value of goods on order ceased to exist following the application of a degressive rate which has been zero since 1976.A tax system of this kind based on this writing down, can also be applied to the conversion, as in this case, of a partnership into a limited company. Under the terms of the circular of the ‘Ligningsdirektorat’ (Directorate General of Taxes) of 12 October 1962, relating to taxation on the conversion of a private undertaking into a limited company, the tax authorities raise no objections, provided that certain conditions are fulfilled, to the contribution (other than a contribution in cash) being calculated on the basis of its book value to the contributor. If the contributor decides to exercise this option the deductions from the actual value of the contribution do not affect his tax position at all. The taking into account of untaxed reserves, after the contribution has been made, is only of importance in relation to the amount of the company's taxable profit which is thus for this purpose subrogated to the contributor.If the assets are brought in after the writing down their book value as far as the company is concerned is their cost price. If they are sold to third parties at a higher price the limited company is liable for payment of corporation tax on the difference.As far as concerns the written down stock the above-mentioned rules imply that the limited company has generally to calculate, at the end of its financial year, the actual value of the stock; the said company, nevertheless, may write down its stock. In so far as the level of stock remains the same the contribution of written down stock does not therefore result in an increase in the company's taxable profits.Similarly as far as concerns the writing down of goods on order the company can avoid an increase in taxable profits for the year following its formation in so far as these goods have been included in the goods in stock and form part of them at the end of the said year, so that in fact the company takes a deduction from the value of these goods pursuant to the rules governing the writing down of stock. If the volume of goods in stock remains constant the deduction can continue unchanged from year to year.Thus the fact that a limited company is subrogated to the contributor in so far as the tax attributable to the writing down of certain contributions is concerned does not necessarily lead to an increase in the company's taxable profit so long as the stock does not decrease.As far as concerns the goods on order the ‘Varelagerloven’ provides that the deduction from the value of these goods is entered separately under liabilities and is subsequently included in the profit for the following year. This does not however necessarily produce an increase in the company's taxable profits. The writing down in question is in fact conditional on the goods being delivered pursuant to the terms of the binding contract during the year following the company's financial year in respect of which the deduction has been taken. Now if the goods are included in the undertaking's stock at the end of the said year it may write down the value of those goods by up to 30 %. Thus the company can, by increasingly writing down its stock, offset the inclusion in its profits of the amount by which goods on order have been written down for tax purposes.The Danish Government, in reliance on this reasoning, having placed on record that, according to Article 13 of Law No 149 of 10 April 1922, as subsequently amended, ‘in calculating the capital subject to capital duty there must be deducted from the basic taxable amount: (a) the debts payable by the taxable legal person …’, states that the authoritative legal academic writers concede however that there must be a ‘perfected’ legal obligation for a debt to be able to be accepted as a valid deduction from the basic taxable amount. It points out on the other hand, that inquiries made by the Danish Government in 1974 indicated that none of the Member States with the partial exception of the Netherlands allows the deduction at issue. It is indeed possible that the rules in force in certain Member States relating to the taxation of profits do not cover a contribution consisting of untaxed reserves when a limited company is formed, so that it is difficult to draw a direct comparison between the answers given by this Member State and the present case. For all that parts of the answers received may prove helpful in the case in point.Finally the Danish Government points out that its argument is not inconsistent either with Danish company law or with the Fourth Council Directive of 27 July 1979 on the annual accounts of certain types of companies. As far as concerns the first point it draws attention to Article 105 (13) of the Law concerning limited companies which provides that ‘in so far as a realization of any assets at their value as shown on the balance sheet gives rise to a tax liability and the corresponding charge to tax does not appear as a separate item under the heading of amounts payable that liability should be mentioned’.That provision applies to those cases where the accounts published by the company show some assets of which the book value for tax purposes has been revalorized. However, even if the aim of the provision in question is to prevent a picture of the company being given to third parties which is too optimistic there is no obligation under this particular provision to enter the potential charge to tax in question under liabilities in the company's balance sheet. It is simply advisable to state in a note to the accounts that such a tax — which it is assumed will arise — may possibly be levied. That is why the academic writers have said that ‘It is not necessary to give particulars of the amount of this tax which it is assumed will be levied. The company may, if it wishes to do so, enter this amount under liabilities, but this entry differs from the ordinary debit item, because its amount depends on the tax rules which would apply in the event of a subsequent assignment, because it will perhaps never be assigned or, lastly, because the limited company may avoid paying the tax by including the gain in a financial year in which it makes a loss’.As far as concerns the second point the aforesaid Fourth Council Directive does not allow a potential tax charge to be regarded as a ‘debt’ either. Since the aim of the Fourth Council Directive is very different from that of the directive concerning capital duty there was nothing to stop the Fourth Council Directive from providing that the potential charge to tax should be entered in the annual accounts as one of the company's debts without this charge to tax having for that reason to be treated as a debt for the purpose of determining the value of the contribution of capital which is liable to capital duty. However, the directive in question has not created any such legal obligation. Article 39 (1) (e) of that directive indicates that a company, which has received a contribution other than in cash at a written down value, is allowed to enter that value in its official accounts. It seems that the difference with reference to the Danish rules applicable at the present time, in so far as this dispute is concerned, lies solely in the fact that the amount of the deduction must be given in a note (annex) to the accounts.Should untaxed reserves be entered in the official accounts the Fourth Council Directive does not require that any tax which may be levied thereon be entered as one of the company's debts, but prescribes that reserves which are intended to cover any tax liability which may arise are to be entered under the heading ‘Provisions for liabilities and charges’ (cf. Article 9, Liabilities B. 2 and C. 8 and Article 10, J. 2 and I. 8). As far as concerns the trading ‘Provisions for charges’ Article 20 (1) provides that ‘Provisions for liabilities and charges are intended to cover losses or debts the nature of which is clearly defined and which at the date of the balance sheet are either likely to be incurred, or certain to be incurred but uncertain as to amount or as to the date on which they will arise’. Article 20 (3) states in this connexion that ‘Provision for liabilities and charges may not be used to adjust the values of assets’.Even if the concern to provide protection which is the aim of the Fourth Council Directive is borne in mind one cannot discover any reasons for treating a ‘potential’ tax charge as an actual debt of the company.The Danish Government after having stated these general views gives its opinion on each of the questions referred by the national court by submitting inter alia the following observations:The first questionThe main purpose of this question is to find out whether Council Directive of 17 July 1969 must be interpreted as meaning that it precludes national rules which do not allow the deduction of the actual tax relating to untaxed reserves contributed to a limited company.Now on the one hand Article 5 (1) (a) and in particular the words “the actual value of assets of any kind contributed or to be contributed by the members” therein contained make it quite clear that in determining the value of the assets contributed the first thing to do is to calculate the objective value of those assets.On the other hand it can hardly be denied that, having regard to the context of the expressions “liabilites assumed and expenses borne” in that provision, they can only cover “legal” obligations in the case under consideration. The above-mentioned provision does not in fact use the words “liabilities” and “expenses” in isolation but in the context of “liabilities assumed and of expenses borne by the company as a result of each contribution”. Consequently the event giving rise to the liability must occur at the moment when the contribution is made at the latest with the result that the liability can no longer arise as a result of a step taken subsequently by the company. This interpretation is supported by the wording of Article 5 (1) (b) which makes it quite clear that in the case of conversion into a capital company only liabilities and expenses “for which the company is responsible at that time” may be deducted. The liability must therefore be perfected when the assets are contributed to the company.This being the case it is also necessary to ask whether the liability, which is legal and binding, must not also be “perfected” in the sense that it must not be conditional on future and uncertain circumstances.Now, in answering this question it must not be overlooked that the deduction which may be allowed is taken from the “actual” value of the assets. For a deduction to be possible, there must therefore also be an actual basis for calculating the amount of the deduction.The exact implications of this are that liabilities which from the very beginning are connected with completely unascertainable facts and, consequently, liabilities which are conditional on events over which the company itself exerts an influence, through measures which it is lead to take, should in any case be disregarded: in such cases there is in fact no objective basis for anticipating the company's future commercial operations.In these circumstances a reduction of the taxable amount simply because the company is liable, after it has been formed, to corporation tax in accordance with rules laid down by law cannot therefore be allowed. The tax liability, considered by itself, is not, at the moment when the assets are contributed, an existing binding liability to discharge any particular amount and it is the company's commercial operations after its formation which alone determine, if it should be necessary to do so, whether there is in fact a taxable profit, and, if so, the amount thereof. This conclusion also applies if it is possible to foresee with certainty that the company is going to pay corporation tax, because for instance it has hitherto regularly made a profit. The liability to pay the tax only arises from the date when the tax has become payable, that is to say after the company has been formed. On the other hand if, when a company is formed, it assumes responsibility for arrears of tax not yet paid by the contributor in consideration of the capital or assets he has brought in, that company has clearly undertaken to discharge a debt which is regarded as fixed and which can be ascertained from the amount of the taxable capital or assets contributed. This however is not what happened in the case in point.In fact the inclusion, when the company was formed, of an untaxed reserve in the capital or assets contributed does not indicate that the company undertakes to discharge arrears of tax for which the contributor was responsible: no tax would be collected, even subsequently, in respect of the untaxed reserve as far as the contributor is concerned.The tax which the company may have to pay arises from the fact that, after its formation, it is subject to the rules generally applicable to taxation. In the first place it is the results as a whole of the company's operations during the following years which will determine whether entering the untaxed reserves in the accounts will result in a corresponding surplus for accounting purposes. Furthermore it is certain steps taken by the company for tax purposes, in connexion with depreciation, writing down of assets or the creation of tax free reserves which will be to a very great extent the deciding factors in the calculation of the taxable profit attributable to the inclusion of the untaxed reserves in the profit. This field affords opportunities to adjust taxable profits and to defer to payments. A company can very often postpone the tax liability until the profits can be included in a financial year which shows a loss. Furthermore the taxation of any taxable profit made by the company also depends on the tax rules applicable in the field in question not being amended.These considerations apply also to untaxed reserves in the form of the writing down of stock and goods on order. They do not differ from other untaxed reserve which may be brought into the company. Whether the company may be taxed depends, once again, on the company's operations after its formation.The Danish Government points out, on the other hand, that to allow in this case as a deduction a “potential” tax liability is not only in breach of the general principles of Danish tax law and also of Danish company law in force at the moment and of the Fourth Council Directive of 25 July 1978 — the potential liability in question cannot either be considered as a liability properly so-called — but is also incompatible with the aim of Council Directive of 17 July 1969.The specific objective of this directive is to achieve a harmonization of indirect taxes on the raising of capital. This objective cannot however be fully attained if, when the taxable amount is calculated, account has to be taken of the future taxation of the company at national level. Since the national systems of taxation vary considerably from one country to another the directive would lead to differences in the calculation of the tax liability if it had to be interpreted as meaning that Member States are obliged to allow a potential charge to tax as a deduction.The fact that the right to take deductions for tax purposes has been reduced by progressive stages and abolished as from 1976 in no way alters the preceding considerations. The entitlement to write down the value of goods on order has in fact been replaced by the right to write down such goods pursuant to the rules relating to stock, in so far as they are in stock at the end of the financial year. Thus, for this reason alone, the steps taken by the company are determinative in this case also as far as concerns the question whether the company is to be made liable to pay an amount of tax in connexion with the reduction by progressive stages in the permitted deduction from the value of the goods in question.Finally the Danish Government points out that the national court refers in its questions to Article 5 (1) (a) of Council Directive of 17 July 1969 which covers inter alia“the formation of a capital company”, whereas in the case in point one ought rather to speak of a “conversion” (of a general commercial partnership into a limited company), within the meaning of Article 4 (1) (b) of that directive, with the result that the capital duty must be discharged in accordance with the rules referred to in Article 5 (1) (b). Since however Denmark has exercised the option given by Article 3 (2) of the directive not to consider general commercial partnerships as capital companies, the conversion into a limited company of a limited partnership is governed by the general rules applicable to a limited company.The national court therefore is right to refer to the provisions of Article 5 (1) (a) and not to those of Article 5 (1) (b) although they both produce the same answer.The British Government considers, on the strength of these considerations, that the first question must be answered in the negative.But, even if the Court does not accept the interpretation suggested above, it is nevertheless not certain that the first question calls for an affirmative answer.In any case the directive does not contain any provision defining the words “expenses and liabilities”. As the Court has held, in particular in its judgment of 1 February 1977 in Case 51/76 (Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 113), when a directive does not contain explicit guidance for defining uniformly and precisely a concept, the meaning whereof is in dispute, the Member States have a certain margin of discretion in this connexion. This being so it is therefore necessary to leave it to the Member States to determine whether the tax can be allowed as a deduction having regard to its action nature.The second questionShould the Court be of the opinion that the directive precludes the deduction at issue being allowed the answer to the second question must be in the affirmative.The same applies if the Court takes the view that it is for the Member States to determine whether such a deduction must be allowed or not.According to the information obtained from the other Member States there is no evidence of potential tax liabilities having arisen in similar cases on such a scale as to call for the extension of the Member States' freedom of action to the organization of a system in which a potential tax liability is treated in the same way as arrears of tax calculated as a liability of the contributor and taken over by the company. It is the practice in the Netherlands only to allow a tax rebate of less than one half of the amount of the tax calculated in accordance with the guidelines referred to in the second question.The same applies if the answer to the first question has to be in the affirmative.In fact even if it is assumed that the directive has laid the obligation on Member States to allow the potential tax to be deducted, that tax cannot be deducted from the entire sum liable to corporation tax. The most that can be envisaged is a deduction from a specific amount (to be determined) of that tax. In this connexion it must also be borne in mind that even in Article 33 A of the ‘Kildeskatteloven’ [Law on taxation of revenue at the source], which is a special provision, the legislature considered that if it had determined exactly how much of the potential tax was to be allowed as a deduction by simply authorizing a deduction of about one half of the amount of the tax.The Danish Government is therefore of the opinion that in any event the second question calls for an affirmative reply.
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