ECJ: Loss of personal tax advantages due to treaty law may violate EU law

Overview

In a preliminary ruling, the ECJ had to deal with the question of whether the loss of tax advantages due to the application of the Belgium-Luxembourg DTA constitutes a violation of EU law if this results in unequal treatment of EU citizens depending on the origin of their income. In doing so, the Court essentially had to examine a possible restriction on the free movement of workers and the free movement of capital. In line with the previous case law of the ECJ, the decision once again underlines that restrictions of the fundamental freedoms are only permissible in rare cases.

Facts of the case

In the case C-241/20 "BJ", the applicant, who was tax resident in Belgium, received income in respect of employment and from the rental of immovable property in Luxembourg. In addition, the applicant also received income to a lesser extent from the rental of immovable property located in Belgium. When calculating the Belgian income tax, both the Luxembourg and the Belgian income were initially to be taken into account. The tax allowances and tax advantages for long-term savings and energy savings provided for in Belgian tax law were subsequently deducted from the "basic tax" determined on this income. Only in the last step, in accordance with DTA Belgium-Luxembourg, the income earned in Luxembourg was exempt from tax by means of a pro rata reduction of the previously determined basic tax. According to the order of crediting, the tax advantages provided for in Belgian tax law thus only reduced Belgian income tax to a minor extent. To the extent of the allocation to the Luxembourg income to be exempted, the tax advantages were lost.

The referring court turned to the ECJ with the question of whether the tax regulation constitutes an infringement of the freedom of movement of workers or the free movement of capital if its application means that the taxpayer partially loses personal tax advantages when calculating income in the state of residence because he has received income in another member state and paid tax on it there and this income is tax-exempt in the state of residence on the basis of a DTA. In addition, the ECJ had to deal with the question of whether other circumstances are also relevant for the assessment, namely the relationship between the domestic and foreign income earned or the granting of comparable personal tax advantages in the other state.

Decision of the ECJ

The Court held, first, that it is, in principle, for the Member State of residence to grant the taxpayer all the tax advantages linked to his personal and family situation. As the referring court had already ruled, the tax legislation in question could have the effect that a citizen of the EU residing in Belgium did not fully benefit from these advantages only because his income was not exclusively of Belgian origin.

In the ECJ's view, this constituted a restriction on both the free movement of workers (income in respect of employment) and the free movement of capital (investment in immovable property). Sufficient justification for the restrictions could not be put forward in either case.

In this context, according to the ECJ, it does no harm in the assessment if the taxpayer does not receive any significant income in the Member State of residence, as long as sufficient taxable income enables the Member State to take into account the personal and family situation of the taxpayer. Even the granting of any tax advantages under Luxembourg law could not, in the court's view, release Belgium from its obligations, since neither the mechanisms of that convention nor Belgium's tax legislation provided a binding guarantee that due account would be taken of the taxpayer's overall personal and family situation in Luxembourg. According to the ECJ, tax advantages granted unilaterally (in Luxembourg) in this way would not be relevant to the decision even if they were at least equal in amount to those which the taxpayer had lost in the Member State of residence (Belgium).

Conclusion

In its ruling, the ECJ clarifies that a regulation may be contrary to EU law with regard to the free movement of workers and the free movement of capital if this regulation has the effect that personal and family-related tax advantages are (partially) lost in the state of residence if the taxpayer (also) earns such income of foreign origin that is tax-exempt in the state of residence according to the provisions on the avoidance of double taxation. Unilaterally granted tax advantages in the other state do not necessarily release the state of residence from this obligation. In line with its previous case law, the Court of Justice once again emphasizes that a restriction of the fundamental freedoms under EU law is only permitted in a very restrictive manner, ie in any case requires sufficient justification in line with the requirements of the Treaty.