Case C 110/17 – European Commission v Kingdom of Belgium

Case Note

Case C‑110/17 – European Commission v Kingdom of Belgium

Dunyang Chen   

1. The Case Introduction

Belgium’s Income Tax Code 1992 (ITC 92) stipulates that the income calculation method for immovable property that is not rented out or rented to natural persons not using it for professional purposes or to legal persons providing it to natural persons for private use varies depending on whether the property is located within Belgium or abroad:

1. Immovable property within Belgium: In the articel 7 of ITC92,income is calculated based on the“cadastral value,”which was determined on January 1, 1975, and has been adjusted annually according to the consumer price index since 1991. 

2. Immovable property outside Belgium: In the articel 13 of ITC92,income is calculated based on the “actual rental value”, which represents the annual average gross rent that could be collected if the property were rented out.

The European Commission(EC) claims that the cadastral value of immovable property situated in Belgium is, in spite of its indexation and increases and adjustments applicable since 1997, lower than the actual rental value of that property and the actual rent.Therefore, this differential treatment based on the location of immovable property disadvantages Belgian residents who own immovable property abroad and restricts the free movement of capital. 

The result of the case ——In April 12, 2018,The Court found that Belgium’s tax treatment of income from immovable property abroad disadvantaged Belgian residents who owned immovable property abroad and restricted the free movement of capital. Belgium failed to provide sufficient reasons in the public interest to justify this differential treatment.

B.The Dispute Focal Points In This Case

1. Whether there is a restriction on the free movement of capital.

2. Whether there are justifiable reasons in the public interest for Belgium’s ITC.

C.The Analytical Framework

According to the analytical framework of the Court of Justice on fundamental freedoms, the case can be analyzed as follows:

1.The fundamental freedom involved 

Article 63(1) of the treaty on the fuction of the European Union(TFEU) prohibits all restrictions on the movement of capital between member states and between member states and third countries. In addition,article 40 of the Agreement on the European Economic Area (EEA) provides that, within the framework of the agreement, member states shall not impose restrictions on the movement of capital between member states and shall not discriminate based on nationality or the place where the capital is invested.

This means that EU law broadly protects against any measures that could restrict the movement of capital, such as investments, trading in securities, real estate transactions, and cross-border payments.The Belgium’s resident who has an immovable property situated outside Belgium means that he/she has the corss-border capital for some real estate transactions outside Belgium’s.As a result,this case invloved cross-border element.

2.Discrimination or Restriction to cross-border activities

The key point to judge whether the ITC in Belgium restrict the corss-border activity in this case is whether the result of calculating actual rental value is higher than that of cadastral value.

 Belgium argues that its tax system does not necessarily result in a higher tax burden for immovable property outside Belgium and that the gap between cadastral value and actual rental value does not necessarily mean that income from immovable property abroad is higher than that from comparable immovable property in Belgium.The EC claims that Belgium’s tax system, through different income calculation methods, adversely affects Belgian residents owning immovable property abroad and restricts the free movement of capital.

The court found that the cadastral value of immovable property situated in Belgium is lower than the rent that may be obtained on the Belgian rental market and, in addition, the actual rental value of immovable property corresponds, in principle, to the annual average gross rent which, should that property be rented, could be collected. It follows that, through the differentiated assessment of income from immovable property depending on the State in whose territory that property is situated, income from immovable property situated in a Member State of the European Union or the EEA other than the Kingdom of Belgium is overvalued in relation to income from immovable property situated in Belgium.

Therefore, Belgium’s tax system differentiates the calculation of income from immovable property based on its location. This differential treatment results in an overestimation of income from immovable property abroad, potentially leading to a higher taxable base. The Court found that this difference in treatment disadvantages Belgian residents owning immovable property abroad and restricts the free movement of capital.

3.Justification(s) 

The argument of Belgium’s primary justification is that, under its double taxation avoidance agreements, article 155 of Belgium’s Income Tax Code 1992 (ITC 92): Income exempted under international conventions for the prevention of double taxation shall be taken into account for the purposes of calculating tax, but the tax shall be reduced according to the proportion of the overall income represented by the exempted income.It thinks that income from immovable property abroad is considered when calculating taxable income in order to maintain tax progressivity,Belgium argues that this does not restrict the free movement of capital.The EC contends that even with the consideration of double taxation avoidance agreements, the differential tax treatment can still result in a higher tax burden, thereby restricting the free movement of capital.

The Court ruled that this justification is insufficient because even with these agreements, the overestimation of income from immovable property abroad can still lead to a higher tax burden.Even after accounting for foreign taxes and maintenance costs, this overestimation remains, potentially leading to a higher taxable base and discouraging Belgian residents from investing in immovable property in other member states.

4.Proportionality 

Proportionality test is a negative way of thinking: Is there an alternative way for Member States to achieve the same policy goal and Weighting over the interest of the EU’s fundamental freedoms versus the public interests of the Member State.

The Court concluded that Belgium’s tax system fails the proportionality test. Belgium could not demonstrate that the differential treatment was necessary to achieve a public interest objective and that there were no less restrictive means to achieve the same goal. Therefore, the Court determined that Belgium’s tax system violated the principle of free movement of capital.In consequence ,Belgium could not demonstrate that this differential treatment was necessary to achieve a public interest objective.

D.Conclusion

Having regard to all of the foregoing considerations, it must be held that the Commission’s action is well founded.The Court of Justice ultimately ruled that Belgium’s tax system violated the principle of free movement of capital as stipulated in Article 63 TFEU and Article 40 of the EEA Agreement. Belgium is required to amend its tax system to eliminate the adverse effects on cross-border immovable property investments.

This case shows that member states can’t impose measures that might deter cross-border investments. It also highlights the importance of legal consistency and fairness in taxation. This case also illustrates how the Court ensures member states comply with EU principles, safeguarding the economic freedoms that drive European integration. It’s a vivid example of how legal frameworks can shape economic policies and protect citizens’ rights across the EU.