C-161/78

JUDGMENT OF 27. 6. 1979 — CASE 161/78 CONRADSEN v MINISTERIET FOR SKATTER OG AFGIFTER

CELEX: 61978CJ0161
Datum: 1979-06-27
Källa: eur-lex.europa.eu

In Case 161/78 REFERENCE to the Court under Article 177 of the EEC Treaty by the Fourth Chamber of the Østre Landsret (Eastern Division of the High Court) for a preliminary ruling in the action pending before that court between

THE COURT composed of: J. Mertens de Wilmars, President of Chamber, Acting as President, Lord Mackenzie Stuart (President of Chamber), P. Pescatore, M. Sørensen, A. O'Keeffe, G. Bosco and A. Touffait, Judges, Advocate General: G. Reischl Registrar: A. Van Houtte

gives the following

JUDGMENT

Facts and Issues

I — Summary of the facts and procedure

1. Under Danish law relating to companies limited by shares the capital of a newly formed company may be raised by the contribution of assets other than cash such as goods in stock and goods on order pursuant to binding contracts but not yet delivered (‘goods on order’). That law forbids the valuation of these contributions at a level higher than that of their actual value, but does not prevent assets other than cash which have been contributed from being written down. Writing down in fact presupposes that there is a hidden reserve so that when the company is formed the actual value of its shares is greater than their nominal value and this does not expose the company's creditors to any risks. The fact that the founder members of the company may write down assets which are contributed cannot of course prevent the application of the general principle of tax law that they remain liable to be taxed on any profits which they may derive from the contributions calculated at their actual value. Thus, should the founder members write down the assets which they have contributed they have to treat as a taxable profit the difference between the actual value determined by the tax authorities and the written down value which they have used for the purpose of their tax accounting. However, if a private undertaking is convened into a company limited by shares Danish law provides that, in certain circumstances, the value of the assets contributed ‘may’ at the option of the contributor who retains the right to manage the company in his capacity as the principal shareholder, be fixed at their value ‘for accounting purposes’ as determined by applying the tax laws, in which case there is no charge to tax on the contributor's profits arising out of the transfer of the assets which he has contributed. In such a case the newly-formed company is subrogated to the rights and liabilities of the contributors for tax purposes as far as this writing down of assets is concerned. This means that, in so far as the assets in question are realized subsequently, for a sum in excess of their written down value, the company is liable to pay corporation tax on the difference.

2. The permissible depreciation and deductions in relation to contributions to a company which determine their value for accounting purposes are under Danish law: depreciation for tax purposes; the creation of certain tax exempt reserves; writing down for tax purposes of (a) goods in stock and (b) goods bought pursuant to binding contracts (‘goods on order’). As far as concerns the writing down of ‘stocks’ Law No 255 of 10 May 1973 (Lovbekendtgørelse) provides that ‘when persons engaged in industry or trade, including companies, calculate their taxable income and capital duty they may elect to value their goods in stock at the end of their financial year at the current market price … or at the purchase price … or at the cost of manufacture’ and to reduce the figure so ascertained by not more than 30 %. Likewise Articles 3, 4 and 5 of the above-mentioned Law allow the value of ‘goods on order’, that is to say goods bought pursuant to binding contracts (entered into before the end of the relevant financial year) for delivery during the following financial year, to be written down. The permitted deduction was also initially 30 % but later on was replaced by a degressive rate which was 25 % in 1973 and dropped to zero in 1976 owing to difficulties in assessing the value of binding contracts. As provided for in Article 5 of that Law the amount by which an item of goods is written down is entered separately under liabilities (since goods not yet delivered cannot appear in the balance sheet as goods in stock which have been written down) and is subsequently included in the profits for the following year. In so far, however, as goods delivered during the following year appear in the balance sheet as stock of the undertaking at the end of that year a deduction of 30 % may be taken in accordance with the rules governing the writing down of stock.

3. One of the effects of the accession of Denmark to the Community on 1 January 1973 has been to make applicable to Denmark Council Directive (69/335/EEC) of 17 July 1969 (Official Journal, English Special Edition 1969 (II), p. 412) which provides for the abolition of stamp duty on certain operations relating to securities and also of all indirect taxes other than capital duty on capital which has been raised. The directive has harmonized in all the Member States the contributory factors in the fixing and levying of this duty. Under current Danish law before the entry into force of the directive stamp duty was levied on the issue of shares and on the transfer of certain assets to a company limited by shares; on the other hand this law did not provide for any capital duty. The abolition of stamp duty contrary to the directive was enacted by Law No 283 of 23 May 1973. A capital duty has been introduced by Law No 284 of the same date. Both Laws entered into force on 1 July 1973. As provided for in Article 6 (1) of Law No 284: The ‘value of the assets contributed’ to which this provision refers is their ‘actual’ value and not the value written down for tax purposes or the value for accounting purposes. A second Council Directive (73/79/EEC) of 9 April 1973 (Official Journal L 103 of 18 April 1973, p. 13) provided that there might be a deduction of 50 % or more of capital duty in the case of certain company arrangements and reconstruction. Pursuant thereto Council Directive 73/80/EEC of 9 April 1973 (Official Journal L 103 of 18 April 1973, p. 15) implemented in Denmark by Danish Law No 583 of 26 November 1975 reduced the capital duty to 1 % as from 1 January 1976.

‘On formation … and on an increase in the capital of a company duty shall be levied at the rate of 2 % of the value of the assets of any kind contributed by the members after the deduction of liabilities assumed and expenses borne by the company as a result of each contribution.’

4. P. Conradsen A/S, a company limited by shares, having its principal place of business at Frederikshavn, Denmark, was incorporated on 1 January 1974. When it was formed it received by way of assets contributed by two founder members a stock of goods worth Dkr 3925804 and also binding contracts, entered into in 1973, covering goods which had been ordered for delivery in 1973 having a value of Dkr 3 million, that is to say stock and orders amounting in the aggregate to Dkr 6925804. This amount had been reduced for tax purposes by being written down by an aggregate amount of Dkr 1927740, broken down as follows: Dkr 1177740 in respect of goods in stock (30 %) and Dkr 750000 in respect of the goods on order (25 %). The formation of the new company gave rise to the levying of capital duty at the rate of 2 %, pursuant to the above-mentioned Council Directive (69/335/EEC) of 17 July 1969 relating inter alia to the duty on ‘the raising of capital’ and to Article 6 (1) of the Danish Law No 284 of 23 May 1973. In its return of contributions of 16 December 1974 the company calculated the taxable amount to be Dkr 1 million, without taking account of the deductions for tax purposes from the value of the stock and of the goods on order pursuant to binding contracts (Dkr 1927740). But the tax authorities assessed the taxable amount at Dkr 2927740 by adding to the figure arrived at by the company the deductions taken. The Advokatrådet (hereinafter referred to as ‘the Bar Council’), as representative of the company concerned, lodged a complaint with the Ministry for Fiscal Affairs, its principal submission being that it was necessary to make the value of the stock and of the contracts contributed tally with the values entered in the balance sheet, its alternative submission being that the taxable amount in any case must be reduced by the amount of the tax chargeable on the written down value of the stock and of the goods on order pursuant to binding contracts. Since the Bar Council refused to accept the reasoning on which that part of the decision dealing with the alternative claim was based, it submitted in its appeal to the Byret, Copenhagen, that the amount liable to capital duty be calculated after deduction for tax purposes of 37 %, so that at least part of the liability duty on the company attributable to this writing down was covered. The Byret dismissed this claim in its judgment of 7 December 1976. The Bar Council then appealed to the Østre Landsret [Eastern Division of the High Court], the grounds of its appeal being that according to Article 5 (1) (a) of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (Official Journal, English Special Edition 1969 (II), p. 412), the amount of the assets on which capital duty has to be assessed must be valued by taking account of the potential tax liability which the company has had transferred to it, created the written down contributions or, more precisely, by the difference between the market value of the goods in stock and on order, which formed pan of the contributions and the written down value of those goods (their book value). The Bar Council submits that, since the company had had this potential tax liability transferred to it, it contracted a tax ‘debt’ which, in accordance with the above-mentioned provision and the rules applied in this sphere by the tax authorities, should be deducted from the amount liable to capital duty. The Ministry for Fiscal Affairs replied that the company had not contracted any tax liability within the meaning of Article 5 (1) of the said directive, that is to say, ‘ascertained’ liability to discharge the amount of the tax arising out of the deductions taken for tax purposes from the assets contributed for its incorporation. The fact that taking into account the amount of the deduction may result in a corresponding taxable company profit depends upon circumstances which are entirely uncertain. Whether the repurchase of assets written down for tax purposes gives rise to any tax liability to be discharged by the company cannot in fact be determined objectively and it is even more difficult to ascertain the date when this liability will arise. Article 5 (1) (a) of Council Directive No 69/335/EEC — implemented in so far as capital duty is concerned by the Danish Law No 284 of 23 May 1973 provides as follows: The Bar Council has also maintained that the provision ought also to be interpreted in the light of the Fourth Council Directive No 78/660/EEC of 25 July 1978 on the annual accounts of certain types of companies (Official Journal L 222 of 14 August 1978, p. 11) taking into account in particular Article 9, Liabilities, B.2 thereof — which provides that ‘Provisions for liabilities and charges’ including ‘Provisions for taxation’ are to be entered under liabilities — and Article 20 (1) which reads as follows: The Østre Landsret decided by an order of 30 June 1978 to stay proceedings and to refer to the Court, pursuant to Article 177 of the EEC Treaty, the following questions:

‘1. The duty shall be charged:

a) in the case of formation of a capital company or of an increase in its capital or assets, as referred to in Article 4 (1) (a) (c) and (d): on the actual value of the assets of any kind contributed or to be contributed by the members, after the deduction of liabilities assumed and of expenses borne by the company as a result of each contribution. Member States may postpone the charging of capital duty until the contributions have been effected’.

1. ‘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 in which they will arise.’

‘1) Must the provisions of Article 5 (1) (a) of the Council Directive of 17 July 1969 concerning indirect taxes on the raising of capital (69/335/EEC) be interpreted to mean that those provisions prevent a Member State, in assessing the liability to duty on the raising of the capital of a newly-formed limited company A, whose share capital was created by contributions from an existing undertaking belonging to a person B, from refusing a deduction for any tax on an untaxed reserve which is regarded as an asset in the assessment of duty and which was created when B contributed to A the undertaking's goods in stock and goods on order at a value written down for tax purposes less than the actual value of the relevant goods in stock and goods on order?

2) Must the provisions of Article 5 (1) (a) of the Council Directive of 17 July 1969 concerning indirect taxes on the raising of capital (69/335/EEC) be interpreted to mean that, in the circumstances related in connexion with Question 1, these provisions preclude a deduction's being allowed for the amount of tax payable by A if A took the untaxed reserves as income in the year when the company was formed and thereby obtained a corresponding amount of income which is in fact liable to tax?’

5. A copy of the order making the reference to the Court was received at the Court Registry on 28 July 1978. Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC written observations were submitted by the Bar Council, represented by Niels Th. Kjølbye, by the Danish Government, represented by its Ministry for Fiscal Affairs, in turn represented by Per Lachmann and Gregers Larsen, by the Netherlands Government represented by its Minister for Foreign Affairs and by the Commission of the European Communities represented by its Legal Adviser, Antonino Abate, assisted by Bjarne Hoff-Nielsen. Having heard the report of the Judge-Rapporteur and the views of the Advocate General the Court decided to open the oral procedure after calling on the Commission to furnish certain information in writing.

II — Written observations submitted under Article 20 of the Protocol on the Statute of the Court of Justice of the EEC

A —. The Bar Council draws attention to the provisions of both Danish law and EEC law relating to capital duty and points out that Council Directive of 17 July 1969 imposes very specific obligations on Member States concerning, on the one hand, the rate of the duty to be levied and, on the other hand, its basis of assessment. As far as concerns the latter the Danish authorities are in fact in breach of the above-mentioned obligation from the moment they refuse, when assessing capital duty, to allow by way of deduction an item under liabilities which can justifiably be deducted on the basis of a proper interpretation of Article 5 (1) (a) of the directive. It is the interpretation of the above-mentioned Community directive and not the interpretation of the Danish Law which is to be considered the essential reference point in this case. Although the rules set out in the directive allow some freedom in selecting the transactions liable to capital duty and the exemption therefrom, the provisions, as to the bases of assessment (Article 5) on the other hand are both exhaustive and mandatory. There is nothing in the statement of the reasons upon which Article 5 of the directive is based or elsewhere to substantiate the argument that this article is to be given a restrictive interpretation in that, in spite of its wording, the tax authorities can refuse to allow by way of deduction from the basic taxable amount a tax of the kind at issue in this case. Such a refusal is even contrary to the reasons underlying the directive as stated by the Commission in its proposal relating thereto, which refer to the elimination, which is very much to be desired, of taxes which could stand in the way of the establishment of a free capital market between Member States and those reasons also indicate that it was solely the need for a comprehensive approach to the problems raised by direct taxation which caused the Commission during the first stage only to regulate by indirect taxation capital duty on the raising of capital. Having made these general submissions the Bar Council then goes on to criticize the argument put forward by the tax authorities that the possible collection of this tax from the company depends on a number of uncertain factors. There is no doubt whatever that contributing stock and goods on order, which have been written down in accordance with tax law, to the new company implies that the company would have a taxable profit for the following financial year exceeding the profit it would have made, if there had been no such writing down, by an amount equal to the amounts by which the stock and goods have been written down. As far as concerns the goods on order this is the effect of Article 5 of the ‘Varelagerloven’ under which writing down of the kind in question must be included in the following year's profits. Approximately the same rule applies to the written down stock transferred to the new company. This follows from the fact that the gross profit is calculated as the difference between the goods sold and the goods utilized, the latter being calculated as the value of the stock at the end of the company's financial year after taking into account goods purchased during the year and the stock on hand at the beginning of the year; the profits for one of the company's financial years are thus increased by the amount corresponding to this writing down compared with the profits which the company would have made if the goods in stock had been transferred without their actual value having been written down. These observations on the meaning of the writing down of stock may be illustrated with the help of the facts of this case in which the stock and the goods on order, which were transferred to the company when it was formed, were intended to be sold immediately by the new company and it was likewise assumed that these assets were going to be resold at their actual value, as determined when the capital duty was calculated and what is more at a profit. By means of such a transaction the company would have made a taxable profit — all other things being equal — and consequently incurred a tax liability corresponding to the liability (in the form of potential tax on the deductions taken from the value of the goods) assumed by the company when it was formed. Furthermore, it is highly probable that the potential tax liability corresponding to such writing down would result in fact in a charge to tax. It is only if the undertaking's results as a whole produce a loss for the company's financial year in which it includes in its profits the deductions taken from the value of the stock and the goods on order that there will be no actual tax liability for the company's financial year under consideration. That does not however mean that the deduction cannot then be included in the profits for the following financial years. Should there be a profit for the following financial year the yield from the tax will be larger, since the loss for the preceding years which can be set against the profit, will have been smaller because of the inclusion in the profits of the amounts by which goods in stock and goods on order were written down. As provided for in Danish law an undertaking is allowed to set losses against profits for five years after the losses arise. It is only if the undertaking makes a loss for five years running, following the year during which a loss made by the undertaking has had the effect of deferring tax attributable to the amount by which stock has been written down and which has been deducted against the profit, that the tax claim will have to be regarded as barred. However the fact that an undertaking may make a large loss for five years running — which in the case in particular of a newly-formed company such as ‘Conradsen’ is very unlikely and exceptional — cannot justify the argument put forward by the tax authorities which is that account is not to be taken in the case in point of the tax liability which in all the other cases transformed into a charge to tax. Moreover the fact that every contracting party makes it a condition that the purchase price of the stock contributed by the transferor be reduced by the amount of tax which he must be expected to pay the following year on that pan of the increase in taxable profits attributable to the writing down of the stock, makes it clear that there really is such a tax. The Bar Council emphasizes, viewing the problem from another angle, that the vested fiscal interest which the tax authorities have in levying capital duty cannot in such circumstances justify their refusal to allow as a deduction the potential tax on the amounts by which the stock and goods on order were written down. The founder members of the company, which is liable for payment of the tax, could in fact have elected first of all to sell the stock which was to be contributed and then to contribute the proceeds of sale thereof to the newly-formed company. In such circumstances the contribution in cash would have been reduced by the tax charged on the amounts by which the stock, which had been disposed of by the sale, had been written down. It is not understood why the capital duty on the other hand is higher — because it does not have to take account of the potential tax — once the founder member of the company which is liable for payment of the tax has elected to contribute stock at its written down value and to cause that company to pay the consequential tax. The Bar Council makes it clear that there is of course no question of allowing as a deduction, when the capital duty is assessed, any kind of potential tax chargeable in respect of the contributions to companies liable to be taxed. The above-mentioned considerations only relate to successive writing down of current assets, acquired directly for the purpose of resale which is supposed to take place within a very short period of time. The potential charge in respect of this depreciation arises within such a period unless there are unusual or special circumstances which affect the opportunities for disposing of them. The said considerations, on the other hand, do not apply to the potential tax in respect of fixed assets which have not been acquired for resale, will probably be retained by the company for a fairly long period and could only be realized if certain special conditions are fulfilled. The Bar Council goes on to say that the Danish tax provisions, which cover the possibility that when a single trader or partnership is convened into a limited company contributions derived from goods in stock and goods on order have been written down, are justified by the presumption that, in accordance with the preceding considerations, the newly-formed company will be taxed on the profit margin equivalent to the writing down carried out for tax purposes. In accordance with accounting practice the potential tax in respect of such writing down must be treated in the same way as the other liabilities in calculating the assets and liabilities of the company. Refusal to deduct the liabilities in question in the valuation of the assets subject to capital duty is a breach of the rules applicable to the valuation for accounting purposes of the capital of companies liable to pay the tax. Furthermore to include in the calculation of the capital of an undertaking the depreciation of stock and other similar reserves without reducing the tax on the reserves in question is not in accordance with the practice adopted by the tax authorities. The Bar Council, having then gone on to assert that the profit and loss account of Conradsen — amplified with the help of statistical data for the periods 1 January 1974 to 31 May 1975 and 1 June 1975 to 31 May 1976 — confirms that its argument is well founded, concludes by stressing that its submission that allowing a deduction in respect of the tax chargeable on the additional writing down of the items comprising the current assets, of the kind contemplated in this case, in the assessment of the value of the contributions (other than in kind) subject to capital duty complies with the principles laid down in the Fourth Council Directive of 25 July 1978 (78/660/EEC) on the annual acounts of certain types of companies (Official Journal 1978 L 222, p. 11). This directive, with special reference to Articles 9.B and 10.J thereof, to the provisions of Articles 2 (3) thereof and to the general principle laid down in Article 20 thereof giving Member States a discretion, provides that an untaxed reserve in the form of an additional writing down of stock, in accordance with tax rules, can never be included in the capital of the company without the tax chargeable on this reserve being deducted at the same time. Now in this case, when the tax authorities assessed the capital duty, they included the said untaxed reserves in the capital of the company without taking account of the fact that the company is not itself entitled to add this reserve to its capital without deducting from it the tax liability relating thereto. Such a practice is contrary both to the letter and the spirit of the directive and also to the ‘ordinary’ interpretation of this directive, based on the Community rules in force. On the basis of these observations the Bar Council asserts: that Article 5 (1) (a) of Council Directive of 17 July 1969 must be interpreted as meaning that in this case there are grounds for allowing the potential tax chargeable on the writing down in question for tax purposes, the basis of assessment whereof consists of goods in stock and goods purchased pursuant to binding contracts, to be deducted; that consequently the Ministry for Fiscal Affairs must, having regard to the facts of the case, allow, when it assesses capital duty, a deduction for the potential tax chargeable on the above-mentioned writing down for tax purposes.

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 question The 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 question Should 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.

C —. The Netherlands Government stresses with reference to the first question that when its domestic law was adapted to conform to Council Directive 69/335/EEC of 17 July 1969, it was of the opinion that Article 5 (1) (a) thereof in principle authorized Member States, in the circumstances described by the court making the reference to the Court of Justice, to allow, in the calculation of the taxable capital raised, the deduction therefrom of any tax which may be charged in respect of an untaxed reserve. The tax liabilities payable in respect of this reserve may in fact be regarded as expenses within the meaning of this directive. That is why Article 35 (1) of the Netherlands Law on the taxation of certain transactions expressly allowed this deduction. With reference to the second question, the Netherlands Government states that the Netherlands Law fixed the deduction at 20 % of the amount of the reserves. Fixing a flat rate is due to the fact that it is not certain whether the reserves will be realized and, if so, when. The amount of the deduction depends on the tax provisions in force in the Member State in question viewed as a whole.

D —. The Commission first of all explains the framework of Danish and Community rules within which the question referred by the national court fail. It lays special stress on the fact that the primary aim of Council Directive of 17 July 1969 is to establish in the field of taxation the conditions which must exist in order to bring about free movement of capital, which is one of the objectives of the EEC Treaty. In order to achieve free movement of capital it is in fact necessary to prevent a company seeking to raise capital in one Member State from being placed at a disadvantage as against another company seeking to raise capital in another Member State where taxation turns out to be not so high. That is the specific objective of the directive which, by abolishing stamp duty on certain operations relating to securities as well as all indirect taxes other than capital duty, has harmonized all those factors which must be considered in fixing and levying this duty. The Commission summarizes the main features of the rules laid down for this purpose by the directive. In giving its opinion specifically on Article 5 (1) (a) it puts forward the argument that the debts or liabilities mentioned in that directive for which the company is responsible are — and this is confirmed by the French, Italian and English versions of this provision — first the liabilities and expenses resulting from acts which have already been performed and which give rise to debts which are ascertained and payable when the assets are contributed; secondly the expenses and all other sums payable by the newly-formed company by reason of the contributions of assets. It follows that the ‘actual value’ of assets affected by the provision in question is their market value when they are contributed after the deduction of the sums mentioned above. This book value is not taken into account in so far as it is above or below the market value. In actual fact the directive lays down uniform and independent criteria for determining the basic taxable amount for the purpose of capital duty. Otherwise the harmonization which the directive seeks to attain could not be achieved because of the differences found in the tax laws of the Member States. The criteria Which govern the determination of the basic taxable amount for purposes other than that of levying capital duty cannot therefore be taken into consideration; on the other hand the criteria used for determining the basic taxable amount for the purposes of capital duty have been completely harmonized and cannot be affected at all by national laws. Naturally when all the factors forming the basis of this assessment are considered the sums deductible from the actual value of the assets are only taken into consideration to the extent to which the national law itself treats them as being of such a kind as to be regarded as ‘liabilities or expenses’ within the meaning of the directive. Now it stands to reason that a tax which under national law is a potential tax can on no account be a debt which is ascertained and payable and thus rank as a ‘liability or expense’. This potential tax is in fact chargeable on an excess value in respect of assets written down provisionally, in accordance with specific tax arrangements, whereas the directive provides for capital duty to be levied on the basis of the ‘actual’ value of the assets at the time they are contributed (and not on the basis of some value calculated for purposes other than the calculation and levying of capital duty). The Commission having stated these general considerations goes on to examine the two questions referred to the Court of Justice by the national court and submits the following observations: The first question Taking a potential or latent tax into consideration is incompatible with the harmonized basic taxable amount introduced by the directive. It is of course for the national court to find as a fact whether the practice adopted under Danish tax law in the matter of depreciation implies that the capital company has taken over a tax liability which may be classified as a debt or liability which is ascertained and payable. The fact that the company in the end actually pays the tax on the untaxed reserves carried forward to the next financial year depends — according to the information received — on uncertain factors such as the company's writing down and depreciation policy and the operating results of the years ahead. In so far as the debt or liability in question cannot be regarded as a liability which is ascertained and payable it is incompatible with the provisions and objectives of the directive to deduct it from the basic taxable amount for the purposes of capital duty. There are two alternatives. Either the contribution of assets which have been written down is to be treated as a disposal for tax purposes which leads as such to the taxation of the profit relating thereto and, if so, then, if the company when it was formed assumed responsibility for the tax payable on the assets contributed, the amount of the said tax may be deducted from the basic taxable amount; or else the contribution is not to be treated as a disposal for tax purposes and, if so, the tax liability cannot be deducted from the basic taxable amount if under national law it cannot be classified as a debt which is ascertained and due at the time when the assets are contributed. Otherwise a capital company would add to the advantage of not paying corporation tax the benefit of a reduction of the basic taxable amount of the capital duty. The second question Assuming that the deduction at issue is in principle allowed the amount thereof must be determined. The directive precludes a deduction equal to the amount of tax which the contributor would have had to pay if he had realized the assets at a profit to himself during the year in which the company was formed, thereby in fact earning a corresponding taxable profit. A deduction calculated on such an assumption would benefit capital companies to an extent which is unjustified. In fact such a deduction would reduce the basic taxable amount by the maximum amount in respect of which the company might subsequently be taxed. In any case it seems to be unnecessary to make any further observations on such a question since Article 5 (1) of the directive in question does not allow the actual value of the contributions to be reduced by the potential tax which, at the time of the assessment, cannot be regarded as a debt which is ascertained and payable. Having regard to these observations, the Commission suggests that the two questions referred be answered as follows:‘Article 5 (1) (a) of Council Directive of 17 July 1969 concerning indirect taxes on the raising of capital must be interpreted as meaning that the actual value of the assets subject to capital duty is their market value calculated at the time at which they are contributed to the newly-formed capital company. Only expenses and liabilities for which the company has assumed responsibility and which are debts, ascertained and payable, at the time of the contribution and also the costs and/or all sums due as a result of the contribution may be deducted from this value’.

III — Oral procedure

The Bar Council, represented by Niels Th. Kjølbye, the Danish Government, represented by the Ministry for Fiscal Affairs as one of the parties to the main action, in turn represented by Gregers Larsen, and the Commission of the European Communities presented oral argument at the hearing on 3 April 1979.

During the oral procedure the Bar Council produced inter alia in support of its argument a decision of the head office of the Danish tax authorities, published in 1978 and referred to two statements made by the Danish Companies Registry as far as concerns entering the potential tax under liabilities. It particularly stressed that these statements indicate that the potential tax is to be regarded as being equivalent to a tax liability and that a deduction equal to the applicable rate of corporation tax is to be allowed from the time at which the assets in question constitute current assets, that is to say, when steps are taken to sell goods in stock. On the other hand the Danish Companies Registry is more cautious, as far as the amount of the percentage is concerned, where fixed assets have been written down and the excess values relating to them are under consideration, because in such cases it cannot be presumed as confidently that the writing down will result in the tax liability arising by reason of possible later realization of the assets. That is why the Danish Companies Registry draws a distinction between deferred potential tax on current assets and possible potential tax on fixed assets. On this point the Bar Council also draws attention to the statements of principle made by the Danish association of accredited accountants, which give expression to the customary rules relating to accounts and valuations for accounting purposes which are applied both in Denmark and internationally.

The Advocate General delivered his opinion at the hearing on 29 May 1979.

Decision

1. By order of 30 June 1978 received at the Court Registry on 28 July 1978 the Østre Landsret, Copenhagen, referred to the Court of Justice pursuant to Article 177 of the EEC Treaty two questions on the interpretation of certain provisions of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (Official Journal, English Special Edition 1969 (II), p. 412).

2. These questions have been raised in the course of an action between the Advokatrådet (hereinafter referred to as ‘the Bar Council’) as representative of P. Conradsen A/S and the Danish Ministry for Fiscal Affairs concerning the calculation of the basic taxable amount liable to the capital duty provided for in Article 5 (1) (a) of the said directive.

3. The file relating to that action indicates that P. Conradsen A/S was formed by a memorandum of association dated 26 July 1974 as a limited company with a share capital of Dkr 1000000. The memorandum of association provided inter alia that two of the three founder members were to transfer to the company by way of contribution the undertaking P. Conradsen, which they had owned and managed until then as a general commercial partnership, the value thereof being fixed in accordance with the opening balance sheet prepared on 1 January 1974. That balance sheet included among the items on the assets side goods in stock and goods ordered pursuant to binding contracts, for delivery in 1974, valued in the aggregate at a cost price of Dkr 6925804 and entered thereon after deducting Dkr 1927740.

4. This deduction was equal to writing down the stock by 30 % and the goods on order pursuant to binding contracts by 25 %, which is permitted by the (Consolidated) Danish Law No 255 of 10 May 1973 concerning the valuation for tax purposes of stock and the like (‘Varelagerloven’) completed in 1975 by the rules laid down in Articles 3, 4 and 5 thereof which allow persons engaged in industry and commerce, including companies, when they calculate their taxable profits and assets, to declare the book value of their goods in stock and of the goods which they have ordered pursuant to binding contracts after writing down the purchase price of the stock and goods on order.

5. Council Directive No 69/335/EEC of 17 July 1969 abolished inter alia stamp duty on certain operations relating to securities and made contributions to capital companies subject to capital duty at a rate of duty which normally may not exceed 2 % or be less than 1 %. This directive was implemented in Denmark by Law No 283 of 23 March 1973 which abolished the stamp duty which had until then been imposed and by Law No 284 of the same date which introduced a capital duty of 2 %. This rate of duty was later reduced to 1 % from 1 January 1976 by Law No 583 of 26 November 1975 pursuant to Council Directive No 73/80/EEC of 9 April 1973 (Official Journal L 103 of 18 April 1973, p. 13).

6. P. Conradsen A/S in its tax return of 16 December 1974, which it forwarded to the tax authorities pursuant to the above-mentioned Law No 284 and in particular to Article 4 thereof, valued the taxable amount, for the purpose of capital duty at a figure equal to the value of the contributions given in the memorandum of association.

7. The tax authorities amended this valuation by increasing the figure in the tax return by the amounts deducted from the value of the stock and the goods on order pursuant to binding contracts, namely Dkr 1927740.

8. P. Conradsen A/S, through the Bar Council, has asserted in particular that the taxable amount had to be reduced in any case by the charge to tax on the amounts by which the stock and the goods ordered pursuant to binding contracts were written down.

9. The tax authorities rejected this argument and submitted that the possible taxation of the amounts deducted is one stage in the general taxation of the profits of a company after it has been formed and that it is furthermore not certain that if the amounts deducted are taken into account this will necessarily result in the company's being taxed on profits of an equivalent amount, since such a possibility is contingent on uncertain factors, including in particular the commercial arrangements made by the company. The charge to tax which may arise out of these deductions is not a ‘liability’ within the meaning of Article 5 (1) (a) of Council Directive No 69/335/EEC and cannot be deducted from the amount attracting capital duty.

10. In order to obtain clarification of this problem the Østre Landsret decided to refer to the Court the following questions:

11. Since the two questions relate to the same subject-matter they fall to be considered together. In order to answer them both the wording of Article 5 (1) (a) of Council Directive 69/335/EEC and the main objectives which this article has in view should be considered in the context of this directive. As the recitals in its preamble indicate, the latter aims at encouraging the free movement of capital which is regarded as essential for the creation of an economic union whose characteristics are similar to those of a domestic market. As far as concerns taxes on the raising of capital the pursuit of such an objective presupposes the abolition of indirect taxes which had been in force in the Member States until then and imposing in place of them a tax levied only once in the Common Market and at the same rate in all the Member States. For these purposes the directive provides for the levying on capital which has been raised a capital duty, which, as stated in the seventh recital, should be harmonized with regard both to its structures and to its rates, so as not to interfere with the movement of capital.

12. The harmonization of such a duty, especially of its structure, implies, primarily, that the basis for its assessment shall be calculated in each Member State in accordance with objective criteria which apply uniformly within the Community and are unaffected by national laws. To this end Article 5 (1) (a) of Council Directive 69/335/EEC expressly states what the main elements are which go to make up this tax by providing that ‘The duty shall be charged: … on the actual value of assets of any kind contributed or to be contributed by the members, after the deduction of liabilities assumed and expenses borne by the company as a result of each contribution …’.

13. That article, in the light of its objectives, indicates that the capital duty shall be charged on the ‘actual value’ of the assets at the time at which they were contributed and not on their book value, and that the ‘liabilities and expenses’ which are deductible under this provision from the actual value of the contributions can only be those the existence and amount whereof are certain.

14. The need, for the reasons already given, to base the taxation of capital which has been raised on criteria which are objective and uniform within the Community in fact precludes the book value of the assets contributed and also of potential tax liabilities chargeable on the profits of the company from being taken into consideration. Such liabilities, for the very good reason that they are unascertained, make it impossible to determine the actual value of assets contributed at the time at which they were contributed and thus to calculate one of the main constituent elements for the levying of the duty, namely the basic taxable amount.

15. The fact that Article 9, Liabilities B. 2 of the Fourth Council Directive No 78/660 of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies (Official Journal L 222, p. 11) provides for ‘Provisions for taxation’ to be entered under liabilities as ‘Provisions for liabilities and charges’ is not conclusive. That directive, the periods for the implementation of which by the Member States have moreover not yet expired, pursues an objective which differs considerably from that of Council Directive No 69/335/EEC of 17 July 1969: it does not aim at harmonizing taxation of the raising of capital, but, as provided for in the above-mentioned Article 54 (3) (g) of the Treaty, is among the measures which, in the context of the right of establishment aim at ‘co-ordinating to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms within the meaning of the second paragraph of Article 58 with a view to making such safeguards equivalent throughout the Community’.

16. In these circumstances, although entering ‘Provisions for taxation’ under liabilities fulfils the requirements for the presentation by companies of their balance sheet, in accord with the interests of the members and of third parties, it does not imply that such an entry may affect the value of capital which has been raised and is liable to the capital duty introduced by Directive No 69/335/EEC.

17. Although Article 20 (1) of the Fourth Council Directive does not rule out the possibility 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, paragraph (3) of the very same article states that the said provisions ‘may not be used to adjust the values of assets’, and thus makes it clear that entering these provisions in the accounts relates to the requirements for the presentation of the balance sheets of certain types of companies but cannot in fact alter the basis for the assessment of a tax such as capital duty which in substance is based on the actual value of the assets.

18. For the same reasons it is of no avail in this case to rely on the attitude taken up by the Danish Companies Registry which the plaintiff in the main action mentioned during the oral procedure. This attitude, the implications of which the parties dispute, is not determinative for the purpose of valuing the taxable amount for capital duty which, for the reasons already given, meets its own special needs, and must be applied in all the Member States in accordance with objective and uniform criteria.

19. In any event, since the national court has itself classified the liability at issue as ‘potential’, the particular aspects of the national law referred to by the parties to the main action are not relevant for the purpose of defining the scope of Article 5 (1) (a).

20. For these reasons the answers to the questions referred are that the provisions of Article 5 (1) (a) of Council Directive No 69/335 of 17 July 1969 concerning indirect taxes on the raising of capital must be interpreted to mean that those provisions prevent a Member State, in assessing the liability to capital duty on the raising of the capital of a newly-formed limited company, whose share capital is created by contributions from an existing undertaking belonging to one of the founders, from granting a deduction for the potential tax liability on an untaxed reserve created when the aforesaid founder contributed to the new company the said undertaking's goods in stock and goods on order under binding contracts at a value written down for tax purposes less than their actual value. Likewise, in the circumstances related above, Article 5 (1) (a) of Directive No 69/335 precludes a deduction's being allowed for the amount of any potential tax which the newly-formed company would have to pay if, during the year in which it was formed, it realized a profit from the reserve resulting from the writing-down of the contributions for tax purposes and thereby obtained a corresponding amount of actual income liable to tax as such.

Costs

21. The costs incurred by the Danish Government, the Netherlands Government and by the Commission of the European Communities, which have submitted observations to the Court, are not recoverable. As the proceedings are, in so far as the parties to the main action are concerned, in the nature of a step in the action pending before the national court, the decision on costs is a matter for that court.

On those grounds, THE COURT in answer to the questions referred to it by the Østre Landsret by order of 30 June 1978, hereby rules: