Case Analysis: Case No. C-388/19 - MK vs. Autoridade Tributáriae Aduaneira/Chukwu, Chidi Barry

European Union Tax Law Case Analysis:

Case No. C-388/19 - MK vs. Autoridade Tributáriae Aduaneira

Chukwu, Chidi Barry

China – OECD LLM PROGRAM ON TAXATION

 Case No. C-388/19 (MK vs. Autoridade Tributária e Aduaneira

1.0. Facts

Taxpayer: MK, a resident of France, purchased a building in Portugal in 2002.

Sale of Property: In July 2017, MK sold the property for €180,000.

Tax Declaration: In 2018, MK filed a tax return in Portugal, declaring the capital gains from the sale along with other income. He opted to be taxed as a non-resident, which meant his capital gains were subject to a flat tax rate of 28%.

Tax Assessment: The Portuguese tax authority issued a tax assessment of €24,654.22 based on the 28% rate applied to the entire amount of capital gains.

Legal Challenge: MK challenged the assessment, arguing that the Portuguese tax legislation discriminated against non-residents by imposing a higher tax burden compared to residents, who benefited from a 50% allowance on their capital gains.

Referral to CJEU: The case was referred to the CJEU by the Portuguese Tax Arbitration Tribunal, seeking clarification on whether the legislation violated EU law, particularly concerning the free movement of capital.

The central issue was whether the different tax treatments for residents and non-residents constituted discrimination and a restriction on the free movement of capital under EU law.

2.0. Fundamental Freedom Involved:

In Case C-388/19, the fundamental freedom involved is primarily the free movement of capital as established in Article 63 TFEU. This provision prohibits restrictions on capital movements between EU Member States, which includes taxation measures that discriminate against non-residents.

Additionally, Article 18 TFEU, which prohibits discrimination on the basis of nationality within the scope of EU law, is relevant, as it underscores the non-discriminatory treatment of individuals and entities within the EU. The court examined whether the Portuguese tax legislation unfairly disadvantaged non-residents compared to residents, ultimately concluding that the differing tax treatments constituted a restriction on these fundamental freedoms.

3.0. Forms of Discrimination/Restriction involved? 

In Case C-388/19, there was both discrimination and a restriction regarding the free movement of capital.

3.1. Discrimination Against Non-Residents:

Article 18 TFEU: Addresses discrimination based on nationality. The Portuguese tax law subjected non-residents to a flat tax rate of 28% on the total capital gains from the sale of immovable property. In contrast, residents benefited from a 50% allowance on their capital gains, effectively lowering their tax burden.

This differential treatment meant that non-residents faced a higher effective tax rate for the same transactions, which is discriminatory based on residency status.

3.2. Restriction on Free Movement of Capital:

Article 63 TFEU prohibits all restrictions on the movement of capital between Member States. The different tax treatments created a barrier to investment for non-residents, as they were placed at a disadvantage compared to residents. This was seen as a restriction on the ability to freely move capital across EU borders.

The requirement for non-residents to choose between a discriminatory regime and a potentially non-discriminatory option did not eliminate the inherent disadvantage, thus perpetuating the restriction.

4.0. Justification(s) for the discriminations or restrictions?

4.1. The Court noted that the Portuguese Government did not assert that there are justifications. Nevertheless, the government offered the following reasons as justifications:

4.1.1. Preventing Excessive Taxation: The government argued that the 50% allowance for residents was designed to avoid penalizing them for capital gains, which could be seen as an abnormal form of income.

4.1.2 Progressive Taxation Structure: The Portuguese government contended that while non-residents were subject to a flat rate, the progressive tax structure for residents could result in a lower effective tax rate for them, depending on their total income.

4.2. CJEU's Findings on Acceptability:

The CJEU did not find these justifications acceptable for several reasons:

4.2.1. No Overriding Public Interest: The court ruled that the Portuguese government failed to demonstrate an overriding reason in the public interest that could justify the discrimination against non-residents. The court highlighted that the justifications provided were insufficient to warrant the unequal treatment.

4.2.2. Comparability of Situations: The court maintained that the situations of residents and non-residents were objectively comparable regarding capital gains from immovable property. As such, the distinction drawn between them was not justified.

4.3.  The CJEU noted that the benefits provided to residents did not establish a direct link to the progressive rates applicable to their overall income, meaning that the claimed justification for the difference in treatment was not sufficiently substantiated. Ultimately, the court concluded that the discriminatory tax treatment constituted a breach of the TFEU provisions regarding the free movement of capital, emphasizing that unjustifiable discrimination could not be permitted under EU law.

5.0. Findings on Proportionality:

In Case C-388/19, the CJEU assessed the proportionality of the measures contained in the Portuguese tax law in light of the discriminatory treatment of non-residents. The court found the following:

5.1. Lack of Justification for Discrimination: The court concluded that the Portuguese tax law, which imposed a flat tax rate of 28% on non-residents while allowing residents to benefit from a 50% allowance on their capital gains, was inherently discriminatory. This discrimination could not be justified by any overriding public interest, which is a critical requirement under the proportionality principle.

5.2. Comparability of Situations: The court reiterated that the situations of residents and non-residents regarding capital gains from immovable property were objectively comparable. Therefore, the differential treatment imposed by the Portuguese tax law failed to demonstrate a valid basis for the disparity in tax burdens.

5.3. Discriminatory Effects Remain: The court stated that even though non-residents had the option to choose a potentially non-discriminatory regime, this choice did not negate the discriminatory effects of the existing tax structure. It highlighted that a tax regime cannot be justified simply by providing an option if the regime itself is discriminatory.

6.0. Conclusion: 

Overall, the CJEU found that the measures in the Portuguese tax law were disproportionate, as they unjustifiably discriminated against non-residents.