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ECJ: hearing in case regarding transitional rules in respect of abolished German imputation system

On 27 September 2007, the hearing in the case of Per Gronfeldt und Tatiana Gronfeld v. Finanzamt Hamburg-Am Tierpark (C-436/06) took place before the European Court of Justice (ECJ). A request for a preliminary ruling, lodged by the Financial Court of Hamburg on 20 September 2006, was published in the Official Journal of the European Union of 30 December 2006. Details of the request are summarized below.

(a) Background. The case deals with the transitional rules for taxation of capital gains derived by individuals from domestic and foreign shareholdings as applicable in 2001. Initially, capital gains were taxable when the seller of the shares had directly or indirectly held at least 10% of the share capital of a corporation for the last 5 years. In 2000, the threshold was lowered to 1%. However, under transitional rules, the lower threshold applied to capital gains realized from the sale of shares in foreign companies from 2001, while it did not generally apply to capital gains derived from the sale of domestic shares until 2002. The same treatment applied to the losses from the sale of shares in domestic and foreign companies.

(b) Facts. The plaintiff held a 2.1% and a 2.5% shareholding in two different Danish companies. In 2001, he sold a substantial part of his shares and incurred a loss in respect of the shares of the latter company, while making a profit from the sale of the shares of the former. The local tax authorities set off the profit against the loss, and assessed a taxable profit. The plaintiff refused this assessment, arguing that the profit derived from the sale of the shares in the Danish company must not be taken into account for income tax purposes under the German Income Tax Act (2001).

(c) Issue. The issue is whether or not the tax treatment of the sale of shares in foreign and domestic corporations provided for in Sec. 17 of the German Income Tax Act (2001) is compatible with the free movement of capital (Art. 56 of the EC Treaty).

(d) Question. The Financial Court of Hamburg referred the case to the ECJ for a preliminary ruling asking the following question:

Is it compatible with Article 56 of the EC Treaty, on the free movement of capital, that the profits from a sale of shares in a foreign limited company in 2001 were subject to tax if the seller held, either directly or indirectly, a share of at least 1% of the company's capital within the previous five years, whereas the profits from the sale of shares in a (national) limited company subject to unlimited corporation tax in 2001 were, in otherwise comparable circumstances, subject to tax only in the case of a substantial shareholding of at least 10%?"

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