On June 16, 2023 the Tribunal de première instance du Luxembourg (Belgium) lodged a request for a preliminary ruling with the Court of Justice of the European Union in Case C-380/23, Monmorieux. Basically the parties in the underlying case are disputing whether the enforcement of the amicable settlement reached between the tax authorities of 2 States can be contingent on the taxpayer’s unconditional withdrawal of his legal action in one of these States.
Facts and main proceedings
1 UN, a Belgian national, was domiciled in France, in the border area, and worked in Belgium, in the border area. Having claimed, for the 2008 to 2014 tax years, the specific tax regime for cross-border workers provided for in the Convention for the avoidance of double taxation between Belgium and France (‘the DTC’), he was taxed in France on income of Belgium origin.
2 The Belgian tax authority took the view that UN had been wrong to claim eligibility for the special regime for the tax years concerned, since his only permanent residence was in Belgium. It had levied Belgian tax on the income earned during those tax years, adding a penalty of 50%.
3 UN contests the automatic taxation of his income by Belgium and seeks to establish the liability of the Belgian State. On those two grounds, he referred the case to the tribunal de première instance (Court of First Instance, Belgium) on 14 July 2016. At the same time, as a precautionary measure, he applied for themutual agreement procedure as provided for in Article 24 of the DTC, with a view to remedying the double taxation of his income.
4 On 30 August 2017, the Belgian tax authority informed him of the decision taken by the Belgian and French tax authorities, in the following terms:
‘Since the taxation by Belgium of that income for the years in question is recognised by both States as legitimate, the French tax authorities wish to proceed without undue delay with the rebate of the tax unduly collected by them on that income.
However, to do that, it is essential that your client withdraws all administrative and judicial appeals against the Belgian taxes in question such that they became final.
…
I wish to draw your attention to the fact that in the event of refusal of that agreement and/or in the absence of withdrawal of all appeals, the Belgian and French authorities would be forced to terminate the mutual agreement procedure, with the aggravating circumstance of the risk of the double taxation being maintained on that income.’
5 By judgment of 13 March 2019, the Court of First Instance annulled the additional 50% tax imposed for the 2008 to 2014 tax years and rejected the claim for the remainder, while reserving the right to rule on the liability action against the Belgian State.
6 The Court of First Instance is now examining that liability action and refers the three questions set out below to the Court of Justice for a preliminary ruling.
Questions referred for a preliminary ruling
26 The referring court therefore requests the Court of Justice of the European Union to answer the following questions by a preliminary ruling:
‘1. Does Article 24 of the Convention between France and Belgium for the avoidance of double taxation and the establishment of rules of reciprocal administrative and legal assistance with respect to taxes on income, signed at Brussels on 10 March 1964, ratified by the law of 14 April 1965, interpreted as meaning that a Belgian citizen who claims to be resident for tax purposes in France – which is, however, contested by the Belgian tax authority – and who, as a precautionary measure, has applied for the mutual agreement procedure in order to recover the tax paid in France, who is required by the Belgian and French tax authorities, in order to have the right to the restitution of that tax, to withdraw unconditionally the judicial proceedings brought before the Belgian courts principally to challenge his being automatically taxed in Belgium, infringe Article 19 of the Treaty on the European Union, Article 45 of the Treaty on the Functioning of the European Union and Article 47 of the Charter of Fundamental Rights of the European Union, in conjunction with the principle of proportionality, in so far as he or she would permanently forfeit the right to the restitution of French tax if he or she were to pursue his or her principal challenge to being taxed in Belgium before the Belgian ordinary court?
2. If the answer to the first question is in the negative, does the answer remain the same if, in order to recover the tax paid in France, the applicant, by withdrawing his or her legal action challenging the taxation in Belgium, also loses the right to an effective judicial review of the administrative penalties of a coercive nature, which the European Convention on Human Rights defines as criminal and which increase the amount of tax, thereby losing the right to review the proportionality of the penalty and apply for a suspension, modes of customising the penalty that are recognised by both the Constitutional Court and the Court of Cassation?
3. If the answer to the first two questions is in the negative, does the answer remain the same if there is an administrative policy whereby the applicant is refused access to documents relating to the mutual agreement procedure between the two Contracting States, which refusal has repeatedly been deemed contrary to Article 32 of the Constitution and Articles 4 and 6 of the law of 11 April 1994 on disclosure of information by the administration by the Commission for Access to Administrative Documents and by the Conseil d’État (Council of State, Belgium)?’
Succinct presentation of the reasoning in the request for a preliminary ruling
17 The question that arises in the present case is whether the enforcement of the amicable settlement reached with the French tax authority (the restitution of French tax) can be contingent on the taxpayer’s unconditional withdrawal of his legal action in Belgium.
18 The referring court holds that it is not unlawful for a person who is automatically taxed in Belgium after having paid income tax in France to challenge that taxation before the Belgian court. Indeed, the income tax claimed in Belgium will generally be four or even five times higher than the French tax calculated on the same income, and that basic tax, which is much higher, will be further increased by penalties of 50% of the tax claimed.
19 Moreover, although the applicant is requesting that the Contracting States consult each other under the mutual agreement procedure provided for in Article 24 of the DTC, it is primarily for the purpose of ending the double taxation.
20 The referring court is uncertain whether the Belgian State is complying with Articles 19 TEU, 45 TFEU and Article 47 of the Charter when it makes the restitution of French tax contingent on the withdrawal of the application brought before the Belgian court under the provisions of the DTC and domestic law, whereas, according to the fixed policy of the Belgian tax authority, the taxpayer does not have access to the administrative documents relating to the mutual agreement procedure and, in any event, cannot determine whether his tax situation has actually been examined by the tax authorities of the two Contracting States.
21 The referring court notes that the Commission d’accès aux documents administratifs (Committee on Access to Administrative Documents) takes the view that the refusal of the tax authorities to grant access to the file when a request for access to documents relating to a mutual agreement procedure on the basis of a double taxation convention is addressed to it is contrary to Article 32 of the Constitution and Articles 4 and 6 of the loi du 11 avril 1994 relative à la publicité de l’administration (law of 11 April 1994 on disclosure of information by the administration).
22 The referring court considers that the dispute concerns the free movement of workers, since UN submitted that he resided in France and paid income tax there. As a reminder, it has been consistently held that, whilst direct taxation falls within their competence, the Member States must nonetheless exercise that competence consistently with European Union law. Thus, although the Member States are at liberty, in the framework of bilateral agreements for the avoidance of double taxation, to determine the connecting factors for the purposes of allocating powers of taxation, that allocation of powers of taxation does not allow them to apply measures that are contrary to the freedoms of movement guaranteed by the Treaty. As far as concerns the exercise of the power of taxation thus allocated, the Member States must comply with EU rules. Therefore, where they are bound by bilateral conventions for the avoidance of double taxation, Member States are obliged to respect the general principles of EU law and the fundamental rights of EU citizens.
23 The referring court recalls that Article 47 of the Charter, which constitutes a reaffirmation of the principle of effective judicial protection, enshrines the right to an effective remedy before a tribunal for every person whose rights and freedoms guaranteed by Union law are infringed.
24 It follows that in certain cases, where there is evidence that both supports and undermines the applicant’s case, the applicant may be justified in seeking to convince a court of the substance of his or her argument while retaining a legitimate interest in recovering the foreign tax should it not be examined by the court.
25 Added to this is the fact that taxation in Belgium is accompanied by penalties for fraud (intention to avoid taxation), increasing the taxation from 50% to 200%, which Article 6 of the European Convention on Human Rights has long defined as criminal. However, the Cour constitutionnelle (Constitutional Court, Belgium) and the Cour de Cassation (Court of Cassation, Belgium) have recognised that the Belgian taxpayer has the right to apply to the court for a review of the proportionality of the administrative penalty of a coercive nature and to be eligible for suspension. The principle of proportionality, as a general principle of EU law, requires Member States to employ means which, while enabling them effectively to attain the objective pursued by national legislation, cause the least possible detriment to the principles laid down by EU legislation. However, in the present case, there is no risk of double non-taxation if the tax authorities of the two States suspend the examination of the applicant’s situation under the mutual agreement procedure until the national judicial proceedings lead to a final decision by the Belgian courts, so as not to deprive the applicant of the restitution of the French tax.
Remarks ITP
First it seems understandable that both States are worrying that double non-taxation might arise if as a result of the Mutual Agreement Procedure one State (in the underlying case France) would rebate the tax unduly collected by that state on the income that was the subject of the Mutual Agreement Procedure, and later on the Court of the other State (in the underlying case Belgium) would rule that the levying rights over that income lays with the first State (in the underlying case).
Under 29 above, the Tribunal de première instance du Luxembourg comes with a straightforward solution for the risk of double non-taxation arising. As the tribunal states in the present case however, there is no risk of double non-taxation if the tax authorities of the two States suspend the examination of the applicant’s situation under the mutual agreement procedure until the national judicial proceedings lead to a final decision by the Belgian courts, so as not to deprive the applicant of the restitution of the French tax.
In our view it is very important that next to a Mutual Agreement Procedure a taxpayer keeps access to the national courts to dispute the positions of the tax authorities. According to the Tribunal the income tax claimed in Belgium will generally be four or even five times higher than the French tax calculated on the same income. However, although the authorities of both states might come to an amicable settlement that Belgium is allowed to levy taxes over the income, a Court might possibly come to the conclusion that in the underlying case France is the State that is allowed to levy taxes over the income. By demanding that the taxpayer withdraws all administrative and judicial appeals against the Belgian taxes in question for the Mutual Agreement Procedure being finalized the taxpayer is basically given 2 options:
1. Accepting the outcome of the Mutual Agreement Procedure and perhaps having to pay 4 to 5 times the amount of the tax that he should actually pay;
2. Or not to withdraw his administrative and judicial appeal and therewith causing that the Mutual Agreement Procedure will not be finalized with the risk that the income is either only taxed in France or double taxed.
And then next to the pure tax issue there is the matter of the penalty that the Belgian tax authorities imposed. By requiring that the taxpayer withdraws all administrative and judicial appeals against the Belgian taxes in question, the authorities implicitly also require the taxpayer to accept the penalty that was imposed. In our view it is very important that also in cases where a Mutual Agreement Procedure is undertaken taxpayers remain to have access to a Court and to have that court judge whether or not a penalty was rightfully imposed. Because even in situations where the outcome of a Mutual Agreement Procedure is that a State is allowed to levy taxes over the income, this might not always justify the imposing of a fine.
A Summary of the request for a preliminary ruling as lodged by the Tribunal de première instance du Luxembourg on June 16, 2023 can be found here on the website of the CJEU.
Copyright – internationaltaxplaza.info
Follow International Tax Plaza on Twitter (@IntTaxPlaza)