On 7 November 2013 the CJEU delivered its decision on the K case (C-322/11) concerning the refusal of the Finnish tax authorities to allow K., an individual who had full liability to income tax in Finland, to deduct losses he sustained on the sale of immovable property in France, from income charged to tax in Finland. The Court was essentially asked by the referring court whether Articles 63 TFEU and 65 TFEU (on free movement of capital) precluded the Finish tax legislation, which did not allow a taxpayer, who resided in Finland and was fully liable to income tax there, to deduct losses arising on the transfer of immovable property situated in another Member State from the income from moveable assets which is taxable in Finland, although that would have been possible, on certain conditions, if the immovable property had been situated therein. The Court concluded that the Finish legislation was not in breach of EU law, namely the rules on free movement of capital.
The CJEU’s judgment in this case is rather disappointing. In some perspectives, it is a very useful decision: it is a relatively unusually long one, providing a systematic analysis of the various possible public interest justifications for restrictions to free movement, insofar as direct taxes are concerned. It disappoints, however, on two levels. First, it fails to take advantage of the opportunity, created by the circumstances in the main proceedings, to provide the clarification that many were hoping for – including Advocate General Mengozzi – as regards the scope of application of the Marks & Spencer judgment (C-446/03) on deductibility of group losses. Second, whilst the justifications accepted by the Court for the restrictions, namely safeguarding the balance of taxing powers, and the need to ensure the cohesion of the tax system, are indeed convincing, the arguments presented for their proportionality are rather less so.
On the first aspect, as regards the scope of application of the Marks & Spencer judgment, this is clearly a missed opportunity. Since the release of that decision by the CJEU there has been significant controversy in relation to its meaning and scope, with Member States responding – and interpreting – its content differently. This has had, not only a significant impact on levels of legal certainty, but it has also led to a decrease in the levels of neutrality and in the level playing field across the EU internal market (see paper co-authored with Clemens Fuest). Whilst it is true that the decision in Marks & Spencer related to transfer of group losses within the context of corporation tax, and K concerned deductibility / transfer of losses in the context of individual income tax, there are clearly enough similarities in the circumstances of the main proceedings to have allowed the Court to clarify what Advocate General Mengozzi has designated as the “Marks & Spencer exception”.
On the second point, as regard the arguments presented by the CJEU on why the restrictions imposed by Finland to the deductibility were proportional, these were rather unhelpful. After briefly stating a proportionally test, the Court goes on to contend that those restrictions were proportional since “a Member State cannot be required to take account, for the purposes of applying its tax law, of the possible adverse consequences arising from particularities of legislation of another Member State” (para 79). This point, however, although perhaps relevant for a justification-level analysis, bears no impact on the analysis of the proportionality of the restriction – at least not as it has been understood until now. The proportionality test is based on suitability and necessity, namely is the measure suitable to attain the aim, and is the measure necessary to attain that aim, i.e. could the same aim have been attained by imposing a less onerous measure. HHad the Court applied this test, the Finish law would most likely still have passed it. The Court’s statement is therefore unconstructive: not only does it create uncertainty as regards the proportionality test, but equally – and perhaps more importantly – it also gives rise to question marks as to why the Court felt that it was necessary to make this statement, in the context of this case, in this moment in time. Such an option is sure to fuel ongoing controversy over the Court’s so-called “retreat from judicial activism” as regards direct tax matters.
Prof Rita de la Feria
Professor, Durham Law School