shareholders results in a transfer of assets on a book-value basis the transfer to a foreign person or a Swedish company with foreign shareholders has to be performed on a market-value basis taxed at the shareholder s personal income tax rate, even if there is no realized income on costs are The legal consequence is that the difference between the market value and the acquisiti X and Y applied for a preliminary decision on tax matters by the revenue law commission on the application of Article 3, Paragraph 1 of the SIL on the present case. From their point of view, the taxation of a gain equivalent to the difference between the market value and the acquisition cost of the assets would represent a breach of the basic freedoms guaranteed by the Ec Treaty. They argued that the Swedish taxation rules are not compatible with the freedom of establishment under Article of the EC Treaty, the freedom of capital movement provision under Article 56 of the treaty, and the double taxation convention between Belgium and Sweden. 7E The Swedish revenue law commission insisted on the realization of the hidden reserves on a market value basis. The commission s view was that Article 43 of the EC Treaty did not apply to the present case. Further, the commission said that even if Section 3, Paragraph 1 of the SiL did apply and was discriminatory on the basis of the basic freedoms guaranteed by the EC Treaty, the discrimination would be justified by overriding public interest requirements recognized by the Swedish Tax System as necessary to ensure effective fiscal supervision and the cohesion of the Swedish tax system.aIn addition, the authorities alleged that it could be determined that there are strong tax avoidance reasons for the transaction X and Y appealed the decision to the Swedish Supreme Administrative Court claiming that the transfer should be taxed on the basis of the book value. Both X and Y pointed out that the different treatment of Swedish companies and foreign companies or Swedish companies with foreign shareholders leads to an obstacle to the basic freedoms under article 43 and 56 of the ec treaty which could not be justified by overriding public interest requirements Taking the view that the solution of the dispute leads to an interpretation of EC law, the Swedish Supreme Administrative Court decided to refer the question of compatibility with the EC Treaty to the ECJ for a preliminary ruling under Article 234 of the treaty The European courts judgment The ECJ declared in its decision that Article 3, Paragraph 1 of the SIL was incompatible with the freedom of establishment under the EC Treatys Article 43. Referring to former decisions, the court held that Article 43 precludes a national provision that excludes the transferor of shares in companies from the benefit of deferral of a tax due on capital gains made on those shares where the transfer is to a foreign person, in which the transferor directly or indirectly has a holding, giving him definite influence over the decisions of that person, or to a Swedish limited company that is a branch or subsidiary of the foreign person a In cases of the transferor directly or indirectly holding shares, which do not give him a substantial influence on the direction of the receiving company, the ECJ conceded an unjustified restriction of the freedom of capital movement under Article 56 of the EC Treaty 00787 shareholders results in a transfer of assets on a book-value basis, the transfer to a foreign person or a Swedish company with foreign shareholders has to be performed on a market-value basis. The legal consequence is that the difference between the market value and the acquisition costs are taxed at the shareholder's personal income tax rate, even if there is no realized income. X and Y applied for a preliminary decision on tax matters by the revenue law commission on the application of Article 3, Paragraph 1 of the SIL on the present case. From their point of view, the taxation of a gain equivalent to the difference between the market value and the acquisition cost of the assets would represent a breach of the basic freedoms guaranteed by the EC Treaty. They argued that the Swedish taxation rules are not compatible with the freedom of establishment under Article 43 of the EC Treaty, the freedom of capital movement provision under Article 56 of the treaty, and the double taxation convention between Belgium and Sweden. 7 The Swedish revenue law commission insisted on the realization of the hidden reserves on a market value basis. The commission's view was that Article 43 of the EC Treaty did not apply to the present case. Further, the commission said that even if Section 3, Paragraph 1 of the SIL did apply and was discriminatory on the basis of the basic freedoms guaranteed by the EC Treaty, the discrimination would be justified by overriding public interest requirements recognized by the Swedish Tax System as necessary to ensure effective fiscal supervision and the cohesion of the Swedish tax system. 8 In addition, the authorities alleged that it could be determined that there are strong tax avoidance reasons for the transaction. X and Y appealed the decision to the Swedish Supreme Administrative Court claiming that the transfer should be taxed on the basis of the book value. Both X and Y pointed out that the different treatment of Swedish companies and foreign companies or Swedish companies with foreign shareholders leads to an obstacle to the basic freedoms under Article 43 and 56 of the EC Treaty, which could not be justified by overriding public interest requirements. Taking the view that the solution of the dispute leads to an interpretation of EC law, the Swedish Supreme Administrative Court decided to refer the question of compatibility with the EC Treaty to the ECJ for a preliminary ruling under Article 234 of the treaty. The European Court's Judgment The ECJ declared in its decision that Article 3, Paragraph 1 of the SIL was incompatible with the freedom of establishment under the EC Treaty's Article 43. Referring to former decisions, the court held that Article 43 precludes a national provision that excludes the transferor of shares in companies from the benefit of deferral of a tax due on capital gains made on those shares where the transfer is to a foreign person, in which the transferor directly or indirectly has a holding, giving him definite influence over the decisions of that person, or to a Swedish limited company that is a branch or subsidiary of the foreign person. 9 In cases of the transferor directly or indirectly holding shares, which do not give him a substantial influence on the direction of the receiving company, the ECJ conceded an unjustified restriction of the freedom of capital movement under Article 56 of the EC Treaty. 10