Court of Justice of the European Communities (including Court of First Instance Decisions)

OPINION OF ADVOCATE GENERAL

TRSTENJAK

delivered on 20 March 2012 (1)

Case C-31/11

Marianne Scheunemann

v

Finanzamt Bremerhaven

(Reference for a preliminary ruling from the Bundesfinanzhof (Germany))

(Fundamental freedoms - Delimitation - Freedom of establishment - Article 49 TFEU - Free movement of capital - Article 63 TFEU - Inheritance tax - Acquisition by inheritance of a shareholding, forming part of the private assets of the testator, as sole shareholder in a capital company with its registered office in a third country - Provision of national law providing tax advantages for companies having their registered office or principal place of business in the national territory)

I - Introduction

1. This case concerns a reference for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court), under Article 267 TFEU, by which that court has submitted a question concerning the interpretation of the provisions of primary law on the free movement of capital.

2. The reference for a preliminary ruling has its origin in a dispute between Mrs Scheunemann ('the claimant in the main proceedings') and the Finanzamt Bremerhaven (Tax Office, Bremerhaven) ('the defendant in the main proceedings') concerning the lawfulness of a decision fixing her inheritance tax debt. The claimant in the main proceedings, who inherited inter alia a shareholding as sole shareholder in a capital company with its registered office in Canada, objects to the withdrawal of a number of tax advantages which, under national law, apply to the holding of shares in capital companies with their registered office in Germany or other States of the European Economic Area (EEA). She claims that the provisions concerning the free movement of capital have been infringed. In her view, those provisions require that the tax advantages at issue should also be granted in respect of shares in capital companies with their registered office in a third country. Her action seeking to have her tax debt adjusted accordingly was dismissed at first instance on the ground that the tax advantages at issue must be assessed not in the light of the free movement of capital but only in the light of the freedom of establishment. However, it does not apply to establishment in third countries.

3. In addition to the question as to whether such a differentiation in tax law is compatible with European Union law, the present case also raises the question of the delimitation between the free movement of capital and the freedom of establishment, both of which must be clarified in the light of the Court's existing case-law. The priority in this regard is to develop clear criteria for such a delimitation. The relevance of defining the relationship between those two fundamental freedoms in the specific context of the main proceedings derives not least from the fact that, if the free movement of capital were to be ousted by the freedom of establishment, the claimant would not be able to rely on the protection of European Union law in order to benefit from the tax advantages provided for in national law.

II - Legal context

A - European Union law

4. Article 43 EC (now Article 49 TFEU) provides:

'Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital'.

5. Article 56(1) EC (now Article 63(1) TFEU) provides:

'Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited'.

6. Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (2) refers in Heading XI ('Personal capital movements'), inter alia, to 'Inheritances and legacies' (item D).

7. In particular, Article 58 EC (now Article 65 TFEU) contains the following provisions:

'1. The provisions of Article 56 shall be without prejudice to the right of Member States:

(a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested;

(b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.

2. The provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with the Treaties.

3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 56'.

B - National law

8. The relevant provisions are to be found in the Erbschaftsteuer- und Schenkungsteuergesetz (Law on Inheritance Tax and Gift Tax) in the version in force in the year at issue, 2007 (3) ('the ErbStG').

9. Under Paragraph 1(1), point 1, of the ErbStG, acquisition by inheritance is subject to inheritance tax.

10. Under Paragraph 2(1) of the ErbStG, liability to tax on all assets accruing to a national arises at the time when the tax is incurred. This provision also applies to assets located abroad, which is to say that it also includes shareholdings in a capital company the registered office of which is not in Germany.

11. Paragraph 13a(1) and (2) of the ErbStG, in the version applicable at the material time, provides for tax advantages in respect of operating assets, agricultural and forestry establishments and shareholdings in capital companies. It reads:

'(1) Subject to the second sentence hereof, operating assets, agricultural and forestry assets and shareholdings in capital companies, within the meaning of subparagraph 4, amounting in total to no more than EUR 225 000 shall not be taken into account

1. if acquired by inheritance;

...

(2) The value of the assets defined in subparagraph 4 that remain after the application of subparagraph 1 shall be set at 65%'.

12. Under Paragraph 13a(4), point 3, of the ErbStG, 'the tax-free amount and the reduced-rate valuation [shall apply] ... to ... shares in a capital company where the capital company has its registered office or principal place of business in Germany at the time when the tax is incurred and the testator or donor had a direct holding in the nominal capital of that company amounting to more than one quarter thereof'.

13. Under Paragraph 13a(5), point 4, of the ErbStG, the tax-free amount or proportion thereof and the reduced-rate valuation are to be disapplied retrospectively if the acquirer disposes of some or all of a shareholding in a capital company within five years of acquisition.

14. It appears from the documents before the Court that, in the light of the judgment in Jäger, (4) the tax authority decided to apply the advantages provided for in Paragraph 13a(1) and (2) of the ErbStG also to shares in unlisted capital companies with their registered office in another Member State. Furthermore, after the period at issue, Paragraph 13a of the ErbStG was itself amended to the effect that the assets benefiting from the aforementioned advantages now also include shares, forming part of private assets, amounting to more than 25% of a capital company with its registered office in a Member State of the European Union or a State of the European Economic Area (EEA). Shares in companies in States not belonging to the EU or the EEA continued to be excluded.

III - Facts, main proceedings and questions referred for a preliminary ruling

15. The claimant, who is resident in Germany, is the sole heir of her father, also resident in Germany, who died in February 2007. The estate included a shareholding owned by her father as sole shareholder in a capital company with its registered office in Canada. The daughter's inheritance was made subject to unlimited German inheritance tax.

16. The inheritance tax payable on that acquisition was fixed by decision of 24 November 2008. Since the capital company had neither its registered office nor its principal place of business in national territory or in a Member State of the European Union, the tax advantages provided for in Paragraph 13a(1) and (2) in conjunction with Paragraph 13a(4) of the ErbStG in the version of that law in force at the material time (that is to say, a tax-free amount of EUR 225 000 and a reduction in value of 35%) were not granted.

17. After having raised an unsuccessful objection with the tax authority, the claimant brought an action against that decision before the Finanzgericht, alleging in particular that there had been an infringement of Article 56 EC. She argued that the facts of the case should be examined in the light of the free movement of capital. That freedom, she submitted, requires that the tax advantages in question should also be granted in respect of shares in capital companies with their registered office in a third country.

18. The Finanzgericht dismissed the action, on the ground that the tax advantages in question must be assessed not in the light of the free movement of capital but only in the light of the freedom of establishment, with the result that a tax advantage cannot be claimed for an establishment in a third country. The claimant's appeal on a point of law to the Bundesfinanzhof is directed against that decision.

19. The Bundesfinanzhof has doubts about the grounds cited by the Finanzgericht, inasmuch as, in accordance with the case-law of the Court of Justice, the treatment for tax purposes of inheritances of any kind falls within the scope of the Treaty provisions on the free movement of capital. In its view, it is necessary for the Court of Justice to clarify whether it is compatible with EU law for national tax advantages not to be applicable to the acquisition of shares in capital companies with their registered office and principal place of business in a third country. For that reason, it stayed the proceedings and referred the following question to the Court of Justice for a preliminary ruling:

'Must Article 56(1) EC, in conjunction with Article 58 EC, be interpreted as precluding legislation of a Member State which, for the purposes of calculating the inheritance tax on an estate, provides that account be taken of the entire value of a shareholding, forming part of private assets, as a sole shareholder in a capital company with its registered office and principal place of business in Canada, whereas where such a shareholding in a capital company with its registered office or principal place of business in Germany is acquired a tax free amount is granted and only 65% of the remaining value is taken into account?'

IV - Procedure before the Court of Justice

20. The order for reference of 15 December 2010 was received at the Court Registry on 20 January 2011.

21. Written observations were submitted by the German Government and the European Commission within the period laid down in Article 23 of the Statute of the Court of Justice.

22. As none of the parties requested that the oral procedure be opened, the Opinion in this case was prepared following the Court's general meeting on 7 February 2012.

V - Main arguments of the parties

A - The fundamental freedom applicable

23. Both the German Government and the Commission point out that, in accordance with the case-law of the Court, acquisition by inheritance is a form of capital movement which, other than in purely national cases, is covered by Article 63 TFEU. It follows from that case-law that an inheritance tax rule the effect of which is to reduce the value of the estate constitutes a restriction on the free movement of capital.

24. Ultimately, however, the answer to the question as to whether a particular provision of national legislation falls within the scope of the free movement of capital or the freedom of establishment depends on which provision of EU law is more affected. Making that determination requires an overall assessment that includes the subject-matter of the national provision at issue, its broader objective and the actual circumstances of the shareholding in the dispute in the main proceedings. The main proceedings are concerned primarily with the provisions on the freedom of establishment. The German Government and the Commission agree that the claimant is unable to rely on those fundamental freedoms since the Treaty provisions on the freedom of establishment do not contain any rules which extend the scope of those provisions to situations in which the cross-border connection is with a third country.

B - The existence of a restriction on the free movement of capital

25. Both the German Government and the Commission make submissions in the alternative on the question whether, in the main proceedings, there has been a restriction on the free movement of capital.

26. While the German Government simply points out that the free movement of capital is affected, the Commission expressly states that that fundamental freedom is restricted. In the case of shareholdings, the national legislation at issue precludes the application of the tax-free amount and the reduced-rate valuation in cases where the registered office and principal place of business of the company in question are located abroad. It thus adversely affects the value of an estate that includes shares in such companies as compared with one that includes shares in companies with their registered office or principal place of business in national territory. This constitutes a restriction on the free movement of capital.

C - Justification of a restriction on the free movement of capital

27. The German Government considers a restriction on the free movement of capital to be justified in the main proceedings. It takes the view that the justification of the contested restriction on tax advantages is supported in particular by fundamental employment-policy considerations. Succession to undertakings in third countries is not objectively comparable with succession to undertakings with their registered office in the European Union or the EEA. Since the tax advantages are subject to conditions, there is also a considerable need for fiscal supervision, which cannot be guaranteed in the same way in the case of a capital company with its registered office in Canada.

28. The Commission, on the other hand, does not consider a restriction on the free movement of capital to be justified. With regard to the national legislature's objective of not overburdening heirs to company-bound assets and of ensuring that the company does not have to be sold or encumbered in order to pay the inheritance tax, the Commission argues that there is no evidence that the desired effects can be achieved only by restricting the advantage to shares in domestic companies. As regards the incomparability, the Commission maintains that there is nothing to indicate that situations in which the company's registered office or principal place of business is in national territory are any different from those in which the connecting factors are located abroad, be it in another Member State or in a third country. Finally, it states that the case-law of the Court of Justice shows that Member States cannot rely on arguments based on a lack of reciprocity in order to restrict the free movement of capital in cases with a third-country connection.

VI - Legal assessment

A - Introductory remarks

29. In view of the complexity of the legislation at issue and the changes which it has undergone over time, it is worth summarising its essential features. As is apparent from the order for reference, this case concerns national legislation on the calculation of inheritance tax in a case where the estate includes a shareholding, forming part of private assets, in the capital of a company, which holding must be at least 25% of that capital. Under that legislation, a tax-free amount is granted against that holding and only 65% of the remaining value is taken into account. Originally, those advantages applied only if the registered office or principal place of business of the company in question were located in national territory, but not if the company's registered office or principal place of business were located abroad. Following the judgment in Jäger, in which the Court held that legislation to be incompatible with the free movement of capital, (5) the national legislature abolished that distinction in part and extended the aforementioned tax advantages to companies with their registered office or principal place of business in the EEA. The peculiarity of the present case lies in the fact that, in the main proceedings, the two points of reference are located in a third country outside of Europe. The referring court wishes to know whether the legislation at issue is compatible with the free movement of capital in such circumstances.

30. In the interests of clarity, we should start by identifying the considerations to be taken into account in determining the particular points that need to be examined. Before the question referred can be answered, it must first be established that the provisions concerning the free movement of capital are actually applicable. This in turn depends on the relationship between that fundamental freedom and the provisions concerning the freedom of establishment, which may also be relevant. This is likely to be a critical point of the examination and one which will determine how that examination proceeds thereafter. Only at that stage will it be possible to establish the legal criterion against which the compatibility of the legislation at issue with European Union law will have to be assessed. Given that the free movement of capital is the only one of the fundamental freedoms the scope of which extends to matters involving third countries, the question of the justification of any restriction would arise only if that fundamental freedom was not ousted by the other.

B - The fundamental freedom applicable

1. Criteria for delimitation

31. In order to answer the question as to which fundamental freedom is the relevant criterion against which the national legislation is to be examined, we must determine which provision of European Union law is more affected. (6) Making that determination requires an overall assessment that includes the subject-matter of the national provision at issue, (7) its broader objective and the actual circumstances of the shareholding in the dispute in the main proceedings.

32. In principle, national legislation must be examined in relation to only one of two possible fundamental freedoms if one of them is entirely secondary in relation to the former and may be considered together with it. (8) Such is the case where the effects of the national legislation on the exercise of a fundamental freedom are simply the unavoidable consequence of the restriction of another fundamental freedom which is more affected by that provision. (9) If, on the other hand, no particular provision can be established as being more affected because the legislation directly encroaches on both the fundamental freedoms in question, then both are equally relevant. (10)

33. The national legislation at issue concerns the consequences from the point of view of tax of an acquisition by inheritance. It is true that, in principle, direct taxes - including the inheritance tax at issue here - fall within the competence of the Member States. The Court has made it clear, however, that Member States must exercise their powers in this area consistently with European Union law, in particular the fundamental freedoms. (11) The national legislation at issue cannot therefore escape an examination by the Court as to its compatibility with European Union law. The only question, then, is the effects which that legislation might have on the free movement of capital and the freedom of establishment.

2. Effects of the national legislation on the fundamental freedoms

a) Free movement of capital

i) Substantive applicability

34. With regard to the free movement of capital, it must in any event be concluded that that fundamental freedom is affected, since the main proceedings concern an acquisition by inheritance. A transaction of that kind is covered by the free movement of capital, as I shall explain in detail below.

35. The Treaty contains no definition of the term 'capital movements'. However, since Article 63 TFEU essentially reproduces the content of Article 1 of Directive 88/361 and notwithstanding that that directive is based on Articles 69 and 70(1) of the EEC Treaty (Articles 67 to 73 of the EEC Treaty were replaced by Articles 73b to 73g of the EC Treaty, subsequently Articles 56 to 60 EC, now Articles 63 to 66 TFEU), it is settled case-law that the nomenclature in respect of movements of capital annexed to that directive still has the same indicative value for the purposes of defining the notion of 'capital movements'. (12)

36. In this regard, the Court, finding in particular that inheritances involving a transfer to one or more persons of assets left by the deceased fall under heading XI of Annex I to Directive 88/361, entitled 'Personal capital movements', has held that an acquisition by inheritance is a movement of capital, except in cases where its constituent elements are confined within a single Member State. (13)

37. The free movement of capital is affected by national inheritance tax rules because assets located in another State are acquired. The Court regards an acquisition by inheritance as the cross-border transaction that is the precondition for the applicability of the free movement of capital. (14) An inheritance involves the transfer to one or more persons of the estate left by a deceased person; that is to say, the transfer to the heirs of the rights and obligations of which the estate is composed.

38. The Court takes the view that a situation in which a person who is resident in a Member State at the time of his death leaves to his heir, also resident in that Member State, immovable property situated in another Member State is by no means purely domestic. (15) The same must apply in cases such as this, where the testator has bequeathed to his sole heir 100% of the shares in a capital company with its registered office in a third country. Moreover, heirs to shares in a company based in a third country fall in principle within the scope of the free movement of capital, since Article 63(1) TFEU also guarantees the free movement of capital between Member States and third countries. The inheritance in question in the main proceedings is therefore a cross-border transaction which satisfies the above definition of 'capital movement'.

39. It must therefore be concluded that legislation such as that at issue in the main proceedings is in principle capable of falling within the scope of the Treaty provisions on the free movement of capital.

ii) Restriction

40. Article 63(1) TFEU lays down a general prohibition on all restrictions on the movement of capital between the Member States. It is settled case-law that the measures prohibited by Article 63(1) TFEU as being restrictions on the movement of capital include those whose effect is to reduce the value of the estate of a resident of a State other than the Member State in which the assets concerned are situated and which taxes the inheritance of those assets. (16)

41. In the present case, the legislation at issue excludes, in the case of shareholdings, the tax-free amount provided for in Paragraph 13a(1), point 1, of the ErbStG and the reduced-rate valuation provided for in Paragraph 13a(2) of the ErbStG where the registered office and principal place of business of the company in question are located abroad. As a result, an estate which includes shares in such companies is, from the taxpayer's point of view, treated less favourably than an inheritance including shares in companies with their registered office or principal place of business in national territory. From the point of view of the heir, this is effectively a reduction in the value of the estate and must therefore be regarded as a restriction on the free movement of capital.

b) Freedom of establishment

42. Because of its specific objectives and subject-matter, however, the national legislation at issue may also affect the freedom of establishment.

i) The criterion of definite influence on the company

43. Evidence of this may lie in the fact that the legislation at issue is not generally applicable to any situation in which shareholdings are acquired by inheritance, but targets only very specific circumstances. Under Paragraph 13a(1) and (2) in conjunction with (4), point 3, of the ErbStG, the tax advantages in the form of the tax-free amount and the reduced-rate valuation are applicable only 'if the testator had a direct holding of more than one quarter of the nominal capital of a company'. As I shall examine below, the restriction of the applicability of that legislation to shareholdings above a certain percentage could have consequences for the delimitation between the free movement of capital and the freedom of establishment.

44. Freedom of establishment under Article 49 et seq. TFEU concerns the establishment of natural or legal persons in another Member State for the purpose of activities as self-employed persons. This must be understood to mean the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period. (17) The concept of establishment is a very broad one; it allows a European Union national to participate, on a stable and continuous basis, in the economic life of a Member State other than his State of origin. (18)

45. The judgment in Baars (19) affords the best understanding of the essence of the freedom of establishment, and does so in the specific context, at issue here, of activities as a shareholder in a capital company. In that judgment, the Court declared the Treaty provisions on the freedom of establishment to be applicable in a situation where the national of a Member State in which he was also resident held a 100% shareholding in the capital of a company with its registered office in another Member State. By way of grounds for its decision, the Court stated that a holding of that kind gives the shareholder such an influence over the company's decisions that he is able to determine its activities. In view of the fact that the freedom of establishment covers the setting-up and management of undertakings, in particular companies or firms, in a Member State by nationals of another Member State, it is also correct to rely on the primary-law provisions concerning that fundamental freedom in a situation such as that described, where the shareholder exercises a prominent function within a company.

46. Since Baars, the Court has recognised in its case-law that national provisions which apply to shareholdings that give the shareholder definite influence on the company's decisions and allow him to determine its activities come within the substantive scope of the Treaty provisions on the freedom of establishment. (20) That case-law can now be regarded as settled. It would also make sense, therefore, to examine the national legislation at issue here with a view to ascertaining whether it is also covered by the provisions on the freedom of establishment. For that to be the case, it would have to be aimed, from the point of view of its legislative purpose, at holdings which give the shareholder definite influence on the company within the meaning of the case-law. The question here is whether the threshold of more than one quarter of a company's nominal capital laid down by the national legislature can be considered sufficiently high to satisfy the requirements of the case-law.

47. It is beyond question that the aforementioned national provisions simply stipulate a minimum holding above which the tax advantages are to be granted. Consequently, the national legislation can of course also cover a situation, such as that in this case, in which the shareholder holds a far greater proportion of the company's capital. Particularly in a case such as that in the main proceedings, where the claimant has a 100% holding in the company's capital, there should be no doubt that, in accordance with the provisions of national company law and the articles of association, her influence on the company's decisions is considerable if not comprehensive. In the light of the parallels between the respective facts, the Court's conclusions in Baars can in my opinion be transposed to the present case. As the Court rightly stated in the former case, a person who has such influence over a company is exercising his right of establishment. (21) There is no scope, however, for applying the provisions on the free movement of capital. Accordingly, the latter freedom must give way to the freedom of establishment.

48. However, this does not prevent us, for the sake of completeness, from going beyond the factual circumstances of the main proceedings in order to make a number of basic points about the level of that threshold. It is true that a shareholding of more than one quarter of the nominal capital will not always guarantee that the shareholder is able to determine the company's activities. This will depend rather on how the company's shares are distributed. (22) However, as the German Government has convincingly explained by reference to the relevant provisions of national company law, even a relatively modest holding of at least 25% allows the shareholder to influence a capital company's fate. After all, such a holding gives him a blocking minority in the context of important decisions determining the undertaking's continued existence. For example, under Paragraph 179(2), first sentence, of the Aktiengesetz (Law on Public Limited Companies) (the AktG), (23) any change to the articles of association of a public limited company requires a resolution of the general meeting that must be carried by a majority consisting of at least three quarters of the capital represented when the resolution is adopted. An amendment to the articles of association can therefore be prevented if a minority consisting of at least 25% of the capital represented rejects it. The position is similar in the case of private limited companies: under Paragraph 53(2) of the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (Law on Private Limited Companies) (the GmbHG), (24) any amendment to the articles of association requires a shareholders' resolution passed by a majority of three quarters of the votes cast. If that majority is not obtained, the articles cannot be amended.

49. Those considerations may also have played a role when the German legislature set the mandatory threshold above which the tax advantages are to be granted. As is clear from the observations of the German Government (25) and the Commission, (26) those tax advantages applied specifically to persons inheriting substantial shareholdings. The aim of the legislation was to ease the tax burden on them and to encourage business activity, the ultimate intention being to ensure the continued existence of undertakings and jobs during the crucial stage of the transfer of an undertaking on inheritance. However, this presupposed that the shareholder would have a definite influence on the undertaking, so the target group for the advantage was to be confined to persons inheriting shares that give their holders decision-making powers. The conclusions that emerge from an examination of the provisions of national company and tax law therefore support the view that the legislation at issue is indeed directed at shareholdings that afford a definite influence on a company within the meaning of the aforementioned case-law.

50. An examination of the case in the light of existing case-law does not lead to a different conclusion. Reference is made to Lasertec, (27) in which the national measure at issue applied to situations in which a non-resident company had a shareholding of more than one quarter in a resident company. The party concerned also held two thirds of the nominal capital, so that the freedom of establishment was relevant. In Truck Center, (28) the national measure at issue was confined to holdings of at least 25%. The party concerned held 48% of the capital, which, in the view of the Court, gave it a definite influence. That case-law suggests that even the statutory minimum requirement of more than one quarter of a company's nominal capital is sufficient to render the freedom of establishment applicable. It must a fortiori be applicable where, as in the main proceedings, the shareholder holds as much as 100% of the company's capital.

51. Since it must be assumed that there is a definite influence on the company in the main proceedings, the provisions on the freedom of establishment ought in principle to apply, in accordance with the case-law of the Court.

ii) The objections to the transposability of that case-law

52. In its order for reference, (29) however, the referring court expresses doubts as to whether that case-law can be transposed to the main proceedings. It points out that the decisions which have shaped that case-law are concerned not with the taxation of inheritances but with other situations. The referring court therefore seems to prefer to apply the provisions on the free movement of capital. It takes the view that the freedom of establishment is at most only indirectly affected and cannot therefore preclude the application of the free movement of capital. The referring court does, however, concede that it is for the Court of Justice to provide definitive clarification on this question.

53. To counter the referring court's misgivings, it must be pointed out that the Court of Justice has already applied that case-law to a provision of national inheritance tax law, in Geurts and Vogten. (30) That provision was aimed at family companies where the deceased - where appropriate together with close relatives - held at least 50% of the company's capital, giving him a definite influence over the decisions of the company concerned and allowing him to determine its activities. Together with his spouse, the testator held, in part directly and in part indirectly, 100% of the capital of a company with its registered office in another Member State. The freedom of establishment was therefore applicable.

54. In that judgment, the Court held that the legislation at issue primarily affected the freedom of establishment and fell within the scope only of the Treaty provisions concerning that freedom. The Court took the view that, if such a measure were to lead to restrictions on the free movement of capital, such effects were an unavoidable consequence of any restriction on the freedom of establishment and did not justify an examination of that measure in the light of the provisions on the free movement of capital. (31) The judgment in Geurts and Vogten therefore clearly shows that the free movement of capital must give way to the freedom of establishment, in so far as the latter is more affected.

55. That judgment also shows that there is no obvious reason why that case-law should not be applied to situations involving inheritance tax. The fact that inheritance is a particular form of capital movement does not preclude its application. On the one hand, inheriting shares is a transfer of equity like any other and every shareholding in an undertaking involves a transfer of capital. On the other hand, it must be borne in mind that, since inheritance tax law directly affects the interests of the heir, as the Commission rightly says, it is only reasonable that the matter must also be looked at from his point of view. (32) It must be borne in mind here that, during the transfer of title, the heir is in the same position as any other shareholder in a company. After all, the heir enters into the position of the testator with respect to the item inherited. He therefore has the same fundamental freedoms under European Union law as the testator did when he was still alive and was himself a shareholder in the company. The distinction drawn by the Court between 'portfolio' shares and shares that allow the holder to determine the activities of the company concerned is entirely relevant in this regard. The latter situation is the same in every respect as one in which the heir is established in another State.

56. As a precaution, it should also be pointed out that, contrary to what the referring court assumes, the judgment in Busley and Cibrian Fernandez (33) cannot provide any useful guidance on the assessment of the relationship between the two fundamental freedoms, particularly since the Court's findings related exclusively to the circumstances of that particular case. In that case, the Court had no reason to consider the question of the applicability of the freedom of establishment, since the underlying situation concerned a different item of inheritance - that is to say, immovable property and not, as in the present case, a shareholding. The same is true of the other judgments cited in the order for reference: Eckelkamp, (34)Arens-Sikken, (35) and Mattner. (36) Accordingly, in those cases too, the Court held that the inheritance of immovable property is in principle subject to the provisions concerning the free movement of capital. That case-law is not objectionable per se. It is, however, of little help when it comes to assessing the situation in the main proceedings in this case.

57. On closer examination, therefore, the referring court's misgivings are unfounded. Consequently, I cannot see any convincing argument for not transposing the principles of the case-law in Baars to the dispute in the main proceedings. It follows that national legislation such as that at issue in the main proceedings also falls in principle within the substantive scope of the freedom of establishment.

3. Interim conclusion

58. In the light of all the foregoing, it must be concluded that, in principle, the national legislation at issue affects both the free movement of capital and the freedom of establishment.

C - Delimitation between the fundamental freedoms

59. Following a separate examination of how the legislation at issue affects the free movement of capital and the freedom of establishment, the question now arises as to whether one of the two fundamental freedoms might be more affected than the other. To that end, the national legislation must be considered in its entirety and from the point of view of the relationship between its individual provisions.

60. The first point to be regarded as relevant is the fact that that legislation is directed exclusively at shareholdings that give the holder a definite influence on the company. This supports the assumption that it is the freedom of establishment and not the free movement of capital which is directly affected. In accordance with the Court's case-law on the delimitation between those two fundamental freedoms in such a situation, as discussed above, the latter should therefore give way to the freedom of establishment.

61. The examination of this question must, however, also include the rule contained in Paragraph 13(5) of the ErbStG, which imposes on the heir as a condition for the grant of tax advantages - in so far as the company has its registered office or principal place of business in a country of the European Economic Area - the obligation actually to continue operating the undertaking for at least five years and not to dispose of his shares. That rule further provides that the advantages in question are to be disapplied if the heir does not satisfy those conditions. It is clearly aimed at situations in which the heir exercises his freedom of establishment in order to participate in economic life in the other State on an ongoing basis, since it requires him to continue to operate the undertaking for a not inconsiderable period of time. The prospect of having those advantages retrospectively disapplied is intended to ensure that, in his new capacity as owner of the undertaking following the transfer of title, the heir will bring his conduct permanently into line with the requirements of the national legislature. In offering the heir financial incentives to continue operating the undertaking, the law effectively lures him into the role of business leader. His room for manoeuvre here, if he does not wish to lose the tax advantages available, is greatly restricted, particularly from the point of view of the possibility of disposing of his shareholding or even of deciding to relocate the company outside the European Economic Area. It is precisely in the light of the deliberate influence thus brought to bear on an heir who has taken over from the testator a position in the undertaking of such prominence that he is able to direct the conduct of its business that a restriction on the free movement of capital seems to be nothing more than an unavoidable consequence of a restriction on the freedom of establishment.

62. It follows from the foregoing that the national legislation at issue primarily affects the freedom of establishment and falls within the scope only of the Treaty provisions concerning that fundamental freedom. As the Court held in a similar situation in Geurts and Vogten, (37) any restrictions on the free movement of capital need not therefore be examined from the point of view of their compatibility with Articles 63 to 65 TFEU.

63. The foregoing holds good even where, as in the main proceedings, the establishment in question is located in a third country and the provisions on the freedom of establishment are not therefore ultimately applicable. (38)

64. In the light of all the above, I come to the conclusion that the claimant in the main proceedings cannot rely on the free movement of capital in order to benefit from the tax advantages provided for in national law. The legal criterion against which the compatibility of the national legislation at issue with European Union law must be assessed is confined to the provisions of primary law concerning the freedom of establishment. However, the claimant in the main proceedings cannot rely on those provisions because the cross-border connection in this case is exclusively with Canada, a third country.

65. Accordingly, as far as the subject-matter of the question referred for a preliminary ruling is concerned, it must also be concluded that the provisions of primary law concerning the free movement of capital do not preclude national legislation such as that at issue here, which, for the purposes of calculating the inheritance tax due on an estate, provides that a shareholding, forming part of private assets, which a person owns as sole shareholder in a capital company with its registered office and principal place of business in Canada is to be taken into account at its full value, whereas, where such a shareholding is acquired in a capital company with its registered office or principal place of business in Germany, a tax-free amount is to be granted and only 65% of the remaining value is to be taken into account.

VII - Conclusion

66. In the light of the foregoing considerations, I propose that the Court should reply as follows to the question referred by the Bundesfinanzhof:

Article 63(1) TFEU (formerly Article 56(1) EC) in conjunction with Article 65 TFEU (formerly Article 58 EC) must be interpreted as meaning that it does not preclude the legislation of a Member State which, for the purposes of calculating the inheritance tax due on an estate, provides that a shareholding, forming part of private assets, which a person owns as sole shareholder in a capital company with its registered office and principal place of business in Canada is to be taken into account at its full value, whereas, where such a shareholding is acquired in a capital company with its registered office or principal place of business in Germany, a tax-free amount is to be granted and only 65% of the remaining value is to be taken into account.

1 - Original language of the Opinion: German

Language of the case: German

2 - OJ 1988 L 178, p. 5.

3 - Version published on 27 February 1997 (BGBl. I p. 378), with later amendments.

4 - Case C-256/06 Jäger [2008] ECR I-123.

5 - Cited in footnote 4, paragraph 56.

6 - See the Opinion of Advocate General Alber in Case C-251/98 Baars [2000] ECR I-2787, points 28 to 30.

7 - See Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-7995, paragraphs 31 to 33; Case C-452/04 Fidium Finanz [2006] ECR I-9521, paragraphs 34 and 44 to 49; Case C-374/04 Test Claimants in Class IV of the ACT Group Litigation [2006] ECR I-11673, paragraphs 37 et seq.; Case C-446/04 Test Claimants in the FII Group Litigation [2006] ECR I-11753, paragraph 36; Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I-2107, paragraphs 26 to 34; and Joined Cases C-436/08 and C-437/08 Haribo and Österreichische Salinen [2011] ECR I-0000, paragraph 34).

8 - See Case C-275/92 Schindler [1994] ECR I-1039, paragraph 22; Case C-390/99 Canal Satélite Digital [2002] ECR I-607, paragraph 31; Case C-71/02 Karner [2004] ECR I-3025, paragraph 46; Case C-36/02 Omega [2004] ECR I-9609, paragraph 26; Case C-20/03 Burmanjer and Others [2005] ECR I-4133, paragraph 35; and Fidium Finanz (cited in footnote 7 above), paragraph 34.

9 - See Omega (cited in footnote 8 above), paragraph 27; Cadbury Schweppes and Cadbury Schweppes Overseas (cited in footnote 7 above), paragraph 33; Fidium Finanz (cited in footnote 7 above), paragraph 48; Case C-492/04 Lasertec [2007] ECR I-3775, paragraph 25; Case C-102/05 A and B [2007] ECR I-3871, paragraph 27; Case C-231/05 Oy AA [2007] ECR I-6373, paragraph 24; Case C-464/05 Geurts and Vogten [2007] ECR I-9325, paragraph 16; Case C-414/06 Lidl Belgium [2008] ECR I-3601, paragraph 16; Case C-284/06 Burda [2008] ECR I-4571, paragraph 74; Case C-326/07 Commission v Italy [2009] ECR I-2291, paragraph 39; Case C-303/07 Aberdeen Property Fininvest Alpha [2009] ECR I-5145, paragraph 35; and Case C-384/08 Attanasio Group [2010] ECR I-2055, paragraph 40.

10 - See Case C-157/05 Holböck [2007] ECR I-4051, paragraph 24; Commission v Italy (cited in footnote 9 above), paragraph 36; Case C-543/08 Commission v Portugal [2010] ECR I-0000, paragraph 43.

11 - See Case C-319/02 Manninen [2004] ECR I-7477, paragraph 19; Case C-386/04 Centro di Musicologia Walter Stauffer [2006] ECR I-8203, paragraph 15; Case C-347/04 Rewe Zentralfinanz [2007] ECR I-2647, paragraph 21; and Jäger (cited in footnote 4 above), paragraph 23.

12 - See Case C-222/97 Trummer and Mayer [1999] ECR I-1661, paragraph 21; Joined Cases C-519/99 to C-524/99 and C-526/99 to C-540/99 Reisch and Others [2002] ECR I-2157, paragraph 30; Case C-513/03 Van Hilten-van der Heijden [2006] ECR I-1957, paragraph 39; Fidium Finanz (cited in footnote 7 above), paragraph 41; and Case C-25/10 Missionswerk Werner Heukelbach [2011] ECR I-0000, paragraph 15. The interpretation of the term 'capital movements' within the meaning of Article 63 TFEU is an example of the systematic interpretation of legal acts of unequal rank within the European Union hierarchy of norms. The Court interprets primary law by reference to the secondary law adopted on the basis of it (see Grundmann, S. 'Inter-Instrumental-Interpretation, Systembildung durch Auslegung im Europäischen Unionsrecht', Rabels Zeitschrift für ausländisches und internationales Privatrecht, Vol. 75, 2011, p. 898).

13 - See Jäger (cited in footnote 4 above), paragraph 25.

14 - See Case C-364/01 Barbier [2003] ECR I-15013, paragraph 58, and Van Hilten-van der Heijden (cited in footnote 12 above), paragraphs 41 and 42.

15 - See Jäger (cited in footnote 4 above), paragraph 26.

16 - See Van Hilten-van der Heijden (cited in footnote 12 above), paragraph 44; Jäger (cited in footnote 4 above), paragraph 32; and Missionswerk Werner Heukelbach (cited in footnote 12 above), paragraph 22.

17 - See Case C-221/89 Factortame II [1991] ECR I-3905, paragraph 20; and Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 25.

18 - See Gebhard (cited in footnote 17 above), paragraph 25; and Case C-470/04 N [2006] ECR I-7409, paragraph 26.

19 - Baars, cited in footnote 6 above.

20 - See Case C-112/05 Commission v Germany [2007] ECR I-8995, paragraph 13; Commission v Italy (cited in footnote 9 above), paragraph 34; Case C-81/09 Idryma Typou [2010] ECR I-0000, paragraph 47; Commission v Portugal (cited in footnote 10 above), paragraph 41; and Case C-212/09 Commission v Portugal [2011] ECR I-0000, paragraph 43.

21 - See Baars (cited in footnote 6 above), paragraph 22.

22 - See Commission v Italy (cited in footnote 9 above), paragraph 38.

23 - Aktiengesetz of 6 September 1965 (BGBl. I p. 1089), most recently amended by Article 2(49) of the Law of 22 December 2011 (BGBl. I p. 3044).

24 - Gesetz betreffend die Gesellschaften mit beschränkter Haftung, in the revised version published in Bundesgesetzblatt Part III, subsection 4123-1, most recently amended by Article 2(51) of the Law of 22 December 2011 (BGBl. I p. 3044).

25 - See paragraph 60 of the German Government's written observations.

26 - See paragraph 50 of the Commission's written observations.

27 - Lasertec, cited in footnote 9 above.

28 - Case C-282/07 Truck Center [2008] ECR I-10767.

29 - See p. 8 of the order for reference.

30 - Geurts and Vogten (cited in footnote 9 above).

31 - See Geurts and Vogten (cited in footnote 9 above), paragraph 16.

32 - See point 48 of the Commission's written observations.

33 - Case C-35/08 Busley and Cibrian Fernandez [2009] ECR I-9807.

34 - Case C-11/07 Eckelkamp [2008] ECR I-6845.

35 - Case C-43/07 Arens-Sikken [2008] ECR I-6887.

36 - Case C-510/08 Mattner [2010] ECR I-3553.

37 - See point 54 of this Opinion.

38 - See Lasertec (cited in footnote 9 above), paragraph 27; order of 6 November 2007 in Case C-415/06 Stahlwerk Ergste Westig not published in the ECR, paragraph 13; Holbök (cited in footnote 10 above), paragraph 28. See mutatis mutandis, in relation to the relationship between the freedom to provide services and the free movement of capital, Fidium Finanz (cited in footnote 7 above), paragraph 50.

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