Article 21.5º of the Belgian Income Tax Code 1992 (“ITC”) provides that the first tranche of € 1,830 (for 2013 fiscal year) per year of income from savings deposits received by credit institutions established in Belgium shall not be included in the income from capital and movable property for the purposes of calculating the corresponding income tax.
Concretely, this means that taxpayers in Belgium benefit from a tax exemption up to € 1,830 (for the 2013 fiscal year) on the interest payments made by Belgian banks, whilst the same taxpayers cannot benefit from this exemption when the interest are paid by a bank established in another Member State with no establishment in Belgium.
According to Articles 56 and 63 of the Treaty on the Functioning of the European Union (“TFEU”), restrictions on freedom to provide services within the European Union (“EU”) and on the movement of capital between Member States are prohibited. Nevertheless, by introducing and maintaining a different tax system for interest from a savings deposit according to whether or not the interest is paid by banks established in Belgium, the European Commission (“EC”) considered that Belgium was failing to fulfil its obligations under the above mentioned provisions, as the Belgian system would be discriminatory.
The EC brought an action against Belgium for failure to fulfil its Treaty obligations before the European Court of Justice (“ECJ”) under Article 258 TFEU on 30 July 2010 (Case C‑383/10).
In its judgment of 6 June 2013, the ECJ reminds (i) that although direct taxation falls within the Member States competence, Member States must none the less exercise that competence in a manner consistent with European Union law, and (ii) that the provision of banking services constitutes a service within the meaning of Article 57 TFEU and is therefore submitted to the freedom to provide services.
According to the ECJ, Article 56 TFEU precludes the application of any national legislation which, without objective justification, impedes a provider of services from actually exercising the freedom to provide them: the application of any national rules which have the effect of making the provision of services between Member States more difficult than the provision of services purely within one Member State shall be prohibited. Shall also be prohibited any national legislation which is liable to prohibit or further impede the activities of a provider of services established in another Member State where he lawfully provides similar services.
The ECJ observes that the ITC has clearly set up a different tax system for interest from a savings deposit according to whether or not the interest is paid by banks established in Belgium. The Belgian government did not deny in its defence the existence of such a difference or the existence of an obstacle to the freedom to provide services.
The Belgian legislation has the first effect of discouraging Belgian residents from using the services of banks established in other Member States and from opening and keeping savings accounts with banks which are not established in Belgium, since interest payments by those banks are not eligible for the tax exemption where those banks are not established in that Member State. A second effect is to discourage holders of a savings account with a bank established in Belgium from transferring their account to a bank established in another Member State.
National measures which are liable to hinder or make less attractive the exercise of fundamental freedoms may be allowed provided (i) that they pursue an objective in the public interest, (ii) that they are appropriate for attaining that objective and (iii) that they do not go beyond what is necessary to attain the objective pursued. The Belgian State based its defence in those possible exceptions, alleging that the aim of ITC provisions is to prevent tax evasion and that current instruments at the EU level are insufficient for achieving such purpose.
The ECJ does not accept the argument based on the inadequacy of the cooperation instruments at the EU level, in particular the Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation and the Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.
The ECJ also states that the risk of evasion or abuse is inherent in the national system of exemption and does not depend on the existence of a cross-border element, and considers that the Belgian legislation goes beyond what is necessary to attain the objective pursued.
Belgium alleged that, in the case of savings accounts with banks established outside Belgium, where a taxpayer would have wrongly benefitted from an exemption, it would be incumbent on that taxpayer to pay the withholding tax without any possibility of bringing a civil action against the foreign bank. The ECJ does not accept such allegation, considering that Belgium would not have demonstrate why its concerns relating to a fair division of civil liabilities between the taxpayers and banks concerned could justify the application of a measure such as that at issue, with the aim of pursuing the objective of ensuring the effectiveness of fiscal supervision.
It follows from the above that, by introducing and maintaining a system of discriminatory taxation of interest payments by non-resident banks, resulting from the application of a tax exemption reserved only to interest payments by resident banks, Belgium failed to fulfil its obligations under Article 56 TFEU.
Basically, Belgium has now two options: (i) to maintain the tax exemption but by opening its scope to any EU bank without a permanent establishment in Belgium, (ii) to purely and simply remove the tax exemption currently in force. In both cases, this will be a political matter. The first option could mean a significant income losses for the Belgium State in the current economical and financial crisis, whilst the second one would be very unpopular.
When it comes to direct taxation, Member States usually do not take into account impact of EU fundamental freedoms, hiding behind their exclusive competence. However, they often forget (and so did Belgium in the case at stake) that the exercise of such exclusive competence may not lead to undermine those freedoms. This was the last example. To be followed...
