Reasons for the decision The ECJ stated that although direct taxation falls within the competence of EC member states, they must exercise that competence in a manner consistent with ec law that avoids discrimination on grounds of nationality Furthermore, the freedom of establishment under Article 43 was relevant in the present case, the ECJ Referring to the judgment in Case C-112/91 Werner, the Swedish tax authorities denied the pertinence of Article 43, saying the fundamental freedoms conferred by the treaty have no bearing on the case The authorities asserted that the freedoms were not applicable because the case involved an EC member's internal affairs2- The European Court rejected the Swedish authorities argument, saying the relevant Swedish tax regulations require a cross-border transaction of shares or a cross-border reference to foreign companies or foreign shareholders of Swedish companies and therefore the matter is not purely internal Sweden s Article 3, Paragraph 1 distinguishes three types of asset transfers having a crossborder reference transfers to a foreign legal person in which the transferor directly or indirectly has a transfers to a Swedish limited company in which a foreign legal person either directly or indirectly has a holding transfers to a Swedish limited company different from those described in the previous indent and in which the transferor directly or indirectly has a holding Article 43 guarantees the foundation and direction of companies by citizens of different EC-member countries. As a consequence the freedom of establishment is relevant if a citizen of one EC member representing an economically structured entrepreneurship. 499 its seat in another EC member state, oreover, the ECj stated that the application of Article 3, Paragraph 1 in the present case constitutes obstacle to the exercise of freedom of establishment under article 43. In the case of a transfer of shares to a foreign person, denying a carryover on a book value basis could have a deterrent effect on the exercise of the taxpayers right to pursue economical activities in another member state through an intermediary company protected by Article 43. Therefore, refusing to provide the tax advantage is an unjustified discrimination of cross-border transactions leading to a restraint of the freedom of establishment. The second case dealing with a transfer of shares to a Swedish company having foreign shareholders or being a subsidiary of a foreign company is judged in a similar way. Apart from the first case, the ECJs evaluation of the EC Treaty is even more strict. The court stated that accepting the proposition that a relevant member state may deny a benefit, i.e., deferring capital gains tax, because the parent company is situated in another member state, thereby depriving the transferor of a cash flow advantage, would deprive Article 43 of all meaning. 16788 Reasons for the Decision The ECJ stated that although direct taxation falls within the competence of EC member states, they must exercise that competence in a manner consistent with EC law that avoids discrimination on grounds of nationality. 11 Furthermore, the freedom of establishment under Article 43 was relevant in the present case, the ECJ said. Referring to the judgment in Case C-112/91 Werner, the Swedish tax authorities denied the pertinence of Article 43, saying the fundamental freedoms conferred by the treaty have no bearing on the case. The authorities asserted that the freedoms were not applicable because the case involved an EC member's internal affairs. 12 The European Court rejected the Swedish authorities' argument, saying the relevant Swedish tax regulations require a cross-border transaction of shares or a cross-border reference to foreign companies or foreign shareholders of Swedish companies and therefore the matter is not purely internal. 13 Sweden's Article 3, Paragraph 1 distinguishes three types of asset transfers having a cross-border reference: - transfers to a foreign legal person in which the transferor directly or indirectly has a holding. ￾ transfers to a Swedish limited company in which a foreign legal person either directly or indirectly has a holding. ￾ transfers to a Swedish limited company different from those described in the previous indent and in which the transferor directly or indirectly has a holding. Article 43 guarantees the foundation and direction of companies by citizens of different EC-member countries. As a consequence the freedom of establishment is relevant if a citizen of one EC member state has a substantial shareholding in a foreign company having its seat in another EC member state, representing an economically structured entrepreneurship. 14 Moreover, the ECJ stated that the application of Article 3, Paragraph 1 in the present case constitutes an obstacle to the exercise of freedom of establishment under Article 43. In the case of a transfer of shares to a foreign person, denying a carryover on a book value basis could have a deterrent effect on the exercise of the taxpayer's right to pursue economical activities in another member state through an intermediary company protected by Article 43. Therefore, refusing to provide the tax advantage is an unjustified discrimination of cross-border transactions leading to a restraint of the freedom of establishment.15 The second case dealing with a transfer of shares to a Swedish company having foreign shareholders or being a subsidiary of a foreign company is judged in a similar way. Apart from the first case, the ECJ's evaluation of the EC Treaty is even more strict. The court stated that accepting the proposition that a relevant member state may deny a benefit, i.e., deferring capital gains tax, because the parent company is situated in another member state, thereby depriving the transferor of a cash flow advantage, would deprive Article 43 of all meaning. 16