Solred SA v. Administración General del Estado

Article 7(2) of European Council (council) Directive 69/335 (directive) permitted European Economic Community (EEC) member states to impose a capital duty of up to 1 percent on certain transactions. Directive Article 10 (and other directive provisions) prohibited EEC member states from imposing other taxes with the same characteristics as a capital duty. Article 31 of Spain’s tax law called for 0.5 percent tax on notarial deeds and certain other legal documents. Solred SA (plaintiff) was a Spanish company that was formed on November 21, 1990, with a 300-million-peseta share capital and a 180-million-peseta initial contribution. On November 28, Solred paid three million pesetas to the Spanish tax authority (authority) (defendant), which represented 1 percent of Solred’s nominal share capital. By a January 17, 1991, notarial deed, Solred’s remaining capital (120 million pesetas) was contributed. On February 7, Solred notified the authority that it believed Solred owed no additional tax due to the January contribution because Solred paid tax on the full share capital the previous November. The authority disagreed, assessing a 0.5 percent tax because the January notarial deed was a documented legal transaction. Solred sued the authority in Spain. The regional court dismissed Solred’s claim, and Solred appealed. The appellate court stayed the proceeding to obtain a preliminary ruling from the European Union Court of Justice regarding whether (1) the directive prohibited imposing a 0.5 percent duty on a notarial deed recording the partial contribution of a company’s share capital if a 1 percent capital duty already was imposed on the share capital’s full nominal value and (2) if so, whether Solred could enforce the directive. The Spanish government argued that the 0.5 percent duty did not conflict with the directive because (1) the 0.5 percent duty was levied on the January notarial deed rather than on the second capital contribution itself, (2) Solred legally could conduct business without its full capital contribution or the formal recording of its notarial deed, and (3) Solred could have avoided the 0.5 percent duty if its capital was fully contributed at formation.