Dr Samira-Asmaa Allioui, Research fellow, Centre
d’études internationales et européennes, Université de Strasbourg
Photo credit : Chabe10, via Wikimedia
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The applicants in
the European Court of Human Rights judgment in Deforrey
and others v France are three French nationals who allege reverse
discrimination (ie, treating issues subject to EU law more favourably than
issues subject to national law) in tax matters. Relying on Article 14 (right to
non-discrimination) taken in conjunction with Article 1 of Protocol No. 1 to
the Convention (right to property), the applicants complain about the methods
used to calculate their income tax. They denounce reverse discrimination,
arguing that they would have benefited from more favorable tax treatment if the
capital gains on which they were taxed had been part of transactions falling
within the scope of EU Directive
2009/133/EC of 19 October 2009, which concerns the taxation of mergers of
companies between different Member States.
With regard to this
directive, the Court of Justice of the European Union (CJEU), consulted by the French
Conseil d’Etat decided
that the relevant articles of this directive must be interpreted as meaning
that, in the context of a securities exchange transaction, they require that
the same tax treatment be applied to the capital gain relating to the
securities exchanged and placed in tax deferral, as well as to the capital gain
arising from the sale of the securities received in exchange, with regard to the
tax rate and the application of a tax allowance to take into account the length
of time the securities were held, as that which would have been applied to the
capital gain that would have been realized upon the sale of the securities
existing before the exchange transaction, had it not taken place.
But what if the
same transaction as regards companies in the same Member State is treated worse
for tax purposes? The three applicants denounce the discriminatory nature of
the methods used to calculate their income tax base, claiming they are treated
less favorably than taxpayers who have carried out a securities exchange
transaction governed by European Union law. They maintain that their situation
is comparable to that of taxpayers who have carried out a cross-border
securities exchange transaction within the European Union internal market and
complain of direct discrimination based on the location of the securities
exchanged during the restructuring transactions and the national origin of the
securities, arguing that this difference in treatment did not pursue a
legitimate aim and was devoid of objective and reasonable justification.
In the present
case, the Human Rights Court considers that it has been established that the
alleged difference in treatment is correlated with an identifiable
characteristic, drawn from the nature of the transactions carried out by the
taxpayer, and more specifically, whether he carried out a cross-border exchange
of securities within the European Union internal market.
The Court recalls
that a State is ordinarily granted broad latitude when it comes to defining
general measures in economic or social matters. Thanks to their direct
knowledge of their society and its needs, national authorities are, in
principle, better placed than international courts to determine what is in the
public interest in economic or social matters, and the Court generally respects
the State’s understanding of the imperatives of public interest, unless its
judgment proves to be “manifestly lacking a reasonable basis.”
Similarly, the Court tends to recognize a wide margin of appreciation when the
situation is partly the result of individual choice. Conversely, only very
compelling considerations can justify a difference in treatment based exclusively
on nationality.
In this case, the
Court notes, first, that the difference in treatment at issue is not based on
the taxpayers’ nationality, but on certain characteristics of the transactions
they carried out. Second, it notes that the taxed gains result from
transactions freely entered into, the taxpayers having chosen to dispose of
their securities with full knowledge of the facts. Third, it observes that the
difference in treatment at issue falls within the realm of taxation, this area
being part of the core prerogatives of public authorities.
Regarding the
existence of a “rapport raisonnable de proportionnalité” (reasonable
relationship of proportionality) between the means employed and the aim sought
to be achieved, the Court has already acknowledged that accession to the
European Union and the specific nature of the European Union legal order could
justify a difference in treatment between nationals of Member States and other
categories of foreign nationals. However, it has never been called upon to rule
on a situation of reverse discrimination, in which the rules of a domestic
legal order are less favourable than those applicable to situations covered by
European Union law. In this regard, the Court reiterates that it is not its
task to replace the competent national authorities in determining what is in
the public interest in economic or social matters or in assessing whether – and
to what extent – differences between situations that are similar in other
respects justify differences in treatment. It is solely for it to determine
whether any difference in treatment implemented exceeds the margin of
appreciation granted to the Contracting States.
In this case, the
Court notes, like the French Constitutional Council and the Council of State
(Conseil d’Etat), that the domestic legal system also includes rules with
similar effect. The tax deferral regimes applicable to capital gains from the
exchange of securities are intended to guarantee a degree of tax neutrality for
these transactions by preventing the taxpayer from being forced to sell their
securities to pay the tax. Only the degree of tax neutrality of the exchange of
securities transaction varies, being reinforced for situations falling within
the scope of Directive 2009/133.
The Court further
notes that the deduction for holding period provided for in Article 150-0 D of
the French General Tax Code is intended to apply to all capital gains on
securities when the conditions set out in that article are met. This text does
not, in principle, exclude capital gains realized in purely domestic situations
from its scope. While this allowance does not apply to capital gains carried
forward prior to January 1, 2013, this is primarily an effect of the
transitional provisions attached to the tax reform implemented by the Finance
Acts for 2013 and 2014.
However, the Court
has already observed that the implementation of economic or social reforms
intended for a broad public requires determining their temporal scope, which
implies excluding certain beneficiaries according to criteria that may appear
arbitrary to the persons concerned; the resulting differences in treatment are
the inevitable consequence of the introduction of new rules. In the Court’s
view, these transitional provisions do not appear arbitrary.
The Court considers
that the difference in treatment at issue was based on an objective
justification and was not manifestly lacking a reasonable basis. In view of all
these considerations, the Court considers that the respondent State did not
exceed the wide margin of appreciation available to it in this matter.
Accordingly, there has been no violation of Article 14 of the Convention.
One of the four
components of discrimination is that the rule at issue must establish a
distinction based on a prohibited criterion. In CJEU case law, criteria are
prohibited when they establish a distinction based on a cross-border element,
such as the fact that the services are obtained from a provider established in
another Member State. This is a preliminary question to be examined before the
Court assesses comparability and the existence of a disadvantage. If the rule
at issue does not establish a distinction based on a prohibited criterion,
there can be no discrimination.
Despite the lack of
clear guidelines on how to resolve specific cases, one thing is clear: unlike
the CJEU, which consistently demonstrates concern for the functioning of the
common market and the promotion of free movement in its tax discrimination
cases, this is not the case for the Human Rights Court. The CJEU frequently
concludes that tax policies are discriminatory because they
“discourage” or “deter” cross-border economic activity.
This interpretation makes sense considering that one of the explicit objectives
of the EU’s creation was to integrate the economies of previously independent
states by removing barriers to cross-border economic activity and preventing
states from erecting new ones that would prevent taxpayers from operating
across borders. The problem with tax discrimination decisions, however, is that
they provide little guidance on when tax policies “discourage” or
“deter” the type of cross-border economic activity in question.
Tax discrimination
cases raise complex questions with no readily available answers. For example,
what impact do differential tax rates have on determining whether
discrimination exists? These questions attract much commentary, but neither the
judicial decisions themselves nor the academic commentaries on them provide
answers to these fundamental questions.