JUDGMENT OF 6. 10. 2022 – JOINED CASES C-433/21 AND C-434/21 CONTSHIP ITALIA SPA V. AGENZIA DELLE ENTRATE /MAKOGE Tatiana Eposi

MAKOGE Tatiana Eposi

JUDGMENT OF 6. 10. 2022 – JOINED CASES C-433/21 AND C-434/21

CONTSHIP ITALIA SPA V. AGENZIA DELLE ENTRATE

Background of the Case

The Joined Cases present a pivotal examination of two references for a preliminary ruling under Article 267 TFEU from the Corte suprema di cassazione (Supreme Court of Cassation, Italy), focusing on the interpretation of Articles 18 and 49 TFEU. Central to these cases are the legality of Italian tax measures designed to prevent tax avoidance by shell companies and their potential infringement on the freedom of establishment. The case originated from disputes involving Borgo Supermercati Srl, an Italian company wholly owned by Eurokai KGaA, a German-listed company. The Italian tax authorities classified Borgo Supermercati as a shell company ie “non-operational” based on predefined income thresholds, unless they can provide sufficient proof to the contrary. According to Article 30(1) of Law No 724/1994, specific income thresholds determine whether a company is deemed operational. If companies fall below these thresholds, they are presumed non-operational. There exists an exemption for companies whose securities are traded on regulated markets, which raises critical questions regarding unjust differential treatment based purely on the legal status of the company. This classification was contested by Contship Italia, which argued that the exclusion criteria for shell companies should apply to foreign-listed companies as well, thereby challenging the discriminatory nature of the law.

A. Fundamental Freedom Involved

The EU legal framework upholds fundamental freedoms that facilitate the movement and operation of businesses across member states without undue restrictions. Article 49 TFEU explicitly guarantees the freedom of establishment, allowing individuals and companies to set up and run enterprises in any EU member state without facing discriminatory barriers. In these cases,

At the heart of this case is the freedom of establishment, which is a cornerstone of the European Union’s internal market. Article 49 TFEU guarantees that nationals of a Member State may establish and manage businesses in any Member State without facing discrimination based on nationality or the location of their registered office. This freedom is essential for promoting competition, investment, and economic integration within the EU.

In the context of the Contship Italia cases, the freedom of establishment is particularly relevant as the Italian legislation in question directly affects the ability of foreign companies to operate within Italy. The law restricts tax advantages to companies whose securities are traded on Italian regulated markets, thereby potentially disadvantaging foreign companies and their subsidiaries.

B. Discrimination or Restriction to Cross-Border Activities

The Italian legislation at issue, specifically Article 30(1)(5) of Law No 724/1994, aimed to prevent tax avoidance by shell companies. However, it limited the ground for exclusion from the measures targeting such companies to those whose securities were traded on Italian regulated markets. This provision raised concerns regarding discrimination against companies that were not listed on these markets, particularly those listed on foreign exchanges.

The restriction effectively created a two-tier system where subsidiaries of Italian-listed parent companies could benefit from tax advantages, while those controlled by foreign-listed parent companies could not. This differentiation based on the location of the parent company’s listing constitutes a potential infringement of the freedom of establishment. The ECJ recognized that this could hinder the ability of foreign companies to establish and operate in Italy, as they would not have access to the same tax advantages as their domestically listed counterparts.

The Court noted that while the legislation did not impose direct barriers to entry for foreign companies, it nonetheless created a disparity in treatment that could be perceived as discriminatory. This situation raises important questions about the compatibility of national laws with the principles of the internal market, where equal treatment and non-discrimination are fundamental tenets.

C. Justification(s)

In assessing the compatibility of the Italian legislation with Article 49 TFEU, the ECJ examined the justifications provided by the Italian government for the restrictions imposed. The primary justification offered was the need to protect the integrity of the Italian regulated market and to prevent tax avoidance by entities that do not engage with the local economy.

The Court acknowledged that Member States have the right to implement measures aimed at combating tax avoidance and ensuring compliance with national tax laws. However, these measures must be consistent with the principles of EU law, including the freedom of establishment. The Italian government argued that by limiting the tax advantages to companies listed on national markets, it could better monitor and regulate those entities, thereby enhancing tax compliance and preventing abuse of the tax system.

The ECJ found that while the objective of preventing tax avoidance is legitimate, the means employed must be proportionate and not unduly restrictive of the freedoms guaranteed under EU law. The Court emphasized that the measures should not create unnecessary barriers to cross-border activities, as this could undermine the fundamental principles of the internal market.

D. Proportionality

The principle of proportionality is a fundamental aspect of EU law that requires any restrictions on fundamental freedoms to be appropriate, necessary, and not excessively burdensome. In this case, the ECJ assessed whether the Italian legislation satisfied the proportionality test.

The Court concluded that the restriction imposed by the Italian law was not proportionate, as it created a significant disparity between companies based on their listing status. While the aim of protecting the national market and preventing tax avoidance is valid, the means by which this was achieved were deemed excessive. The legislation effectively excluded a category of companies from benefiting from the ground for exclusion from tax avoidance measures solely based on their foreign listing, which was not justified in light of the objectives pursued.

Moreover, the Court noted that the restriction did not serve to enhance the integrity of the Italian market in a manner that justified the differential treatment of foreign companies. The legislation did not impose any additional compliance burdens on foreign-listed parent companies that would warrant such a restriction. As a result, the ECJ ruled that the restriction on the freedom of establishment was disproportionate and incompatible with Article 49 TFEU.

Conclusion

The Joined Cases C-433/21 and C-434/21 Contship Italia illustrate the delicate balance between national regulatory objectives and the fundamental freedoms guaranteed under EU law. The ECJ's ruling emphasizes that while Member States have the right to implement measures to combat tax avoidance, such measures must not create unjustified barriers to cross-border activities or discriminate against foreign entities. The Court's application of the principles of non-discrimination and proportionality serves as a reminder that national legislation must align with the overarching goals of the EU internal market, ensuring that all companies, regardless of their listing status, are treated equitably. This case reinforces the importance of maintaining a level playing field for businesses operating within the EU, thereby promoting competition, investment, and economic integration across Member States.