CARLO SONCINI: TAX EXEMPTION APPLIED ONLY TO INTEREST PAYMENTS OF BELGIUM BANK REPRESENT A SYSTEM OF DISCRIMINATORY TAXATION OF INTEREST OF NON-RESIDENT BANKS: THE PROPORTIONALITY PRINCIPLE IN THE DIRECT TAXTATION

The ECJ Judgment of 6 June 2013 on Commission v. Belgium (C-383/10) confirms the application of the principles of proportionality in direct taxation. The action promoted by the European Commission against the Kingdom of Belgium that has introduced and maintained a tax exemption applied only to interest payment of Belgium banks. This tax exemption, following the conclusions of the judgment, represents a discrimination so that “the Kingdom of Belgium has failed to fulfil its obligations under Article 56 TFEU and Article 36 of the Agreement on the European Economic Area of 2 May 1992”.

The national tax law in Belgium introduces a tax exemption only to interest payments of Belgium Banks. The same exemption is not applicable to interest payment of non resident banks. 

A pre-litigation procedure has preceded the action promoted by the Commission. The European Commission, with a exchange of letter, first reminded the obligations of the Belgium authorities, in particular art. 56 TFEU and 63 TFEU (in the case art. 49 EC and 56 EC). The Kingdom of Belgium replied that the direct taxation is a competence of member state. The Commission replied and imposed a time limit to remove this discrimination. The Belgian authorities replied with reasoned opinion that “the contested measure was justified by the need to guarantee the effectiveness of fiscal supervision and the need to protect small savings”.

The Commission, promoting the action, puts forward, as a preliminary issue, that direct taxation, referring to in Art 4(2) (a) TFEU, has to be considered in the competence of member States, but the “the Member States must none the less exercise that competence in a manner consistent with European Union Law”. In fact, the exemption introduced by the Belgian authorities represents a limitation of the fundamental rights to provide services and the free movement of capitals.

As indicated in paragraph 14 of the judgment, “such a restriction cannot be justified by any of the arguments put forward by the Kingdom of Belgium and that, in any event, that restriction infringes the principle of proportionality”.

The Court has recognised that the exemption represents a violation of the right to provide services and the free movement of capitals and also infringes the principle of proportionality.

This conclusion is, perhaps, to be considered a natural consequence of the new TFEU, because of the deeper relevance of proportionality and subsidiarity principles. The principle of proportionality is to be connected with the principle of subsidiarity as stated in art 6, comma 2, TFEU. The court has not expressly affirmed this connection but the motivation of the sentence seems implicitly  to confirm this opinion. 

Two aspects of this judgment should be highlighted: the first one concerns Article 56 of the TFUE and Article 36 of the AEE Agreement. The second one refers to Article 63 of the TFUE and Article 40 AEE Agreement.

Concerning the art. 56 TFUE we can examine two different issues. The first one regarding fiscal supervision and its effectiveness. The second and most important on the relevance of the proportionality principle.

1)  According to the Belgian Government, tax legislation which is justified by the need to guarantee the effectiveness of fiscal supervision can be considered to constitute a proportionate interference with the free movement of capital, even if that legislation is not aimed at purely artificial arrangements. 

However, according to the Court “income from foreign savings accounts which must be declared by the taxpayer is also subject to an exchange of information in the framework of Directive 2003/48 (paragraph 58).

Accordingly, the Belgian tax authorities have at their disposal a legal instrument, the effectiveness of which has not been called in question, in order to obtain information concerning the existence of foreign income from moveable assets and are therefore able to tax that income (paragraph 59).

It follows from the foregoing that the justification based on the inadequacy of the cooperation instruments at the European Union level cannot be accepted (paragraph 60).

Therefore “the restriction on the freedom to provide services brought about by the application of the contested national legislation, which reserves the grant of a tax exemption solely to interest payments by banks established in Belgium, to the exclusion of interest payments by banking institutions established in other Member States, cannot be justified by the objectives relied upon by the Kingdom of Belgium, and nor does that restriction satisfy the requirement of proportionality” (paragraph 69).  

2)  Regarding Article 36 of the EEA Agreement, relating to the freedom to provide services, “it must be observed that that provision of the EEA Agreement is similar to the provision laid down in Article 56 TFEU, so that the considerations relating to that article set out in paragraphs 40 to 69 of this judgment apply, in principle, also to the corresponding article of the EEA Agreement” (paragraph 72).

Furthermore, “Since the provisions of the Treaty and the EEA Agreement on freedom to provide services preclude the contested legislation, there is no need for a separate examination of that legislation in the light of Article 63 TFEU and Article 40 of the EEA Agreement concerning the free movement of capital” (paragraph 74). 

Carlo Soncini

Università degli studi di Parma

Italia

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