Case C-602/17-Benoît Sauvage and Kristel Lejeune v État belge / Xiaoyi XIE

Case Note: Case C-602/17-Benoît  Sauvage and Kristel Lejeune v État  belge / Xiaoyi XIE

1. Case Summary

1.1 Facts

Mr Sauvage and Ms Lejeune are resident of Belgium and are consequently subject to unlimited personal income tax liability in Belgium. Mr Sauvage is employed in a company established in Luxembourg and sometimes he goes for business trips outside Luxembourg.

For the tax years 2007 to 2009, Mr Sauvage declared his salary as taxable income in Belgium, claiming that all of that income should be exempted from income tax. However, according to Article 15(1) of the Belgium-Luxembourg Convention, the tax authority of Belgium held that the part of remuneration corresponding to workdays performed outside Luxembourg could not benefit from the exemption and was therefore taxable in Belgium.

After the rejection of appeal by the tax authority, the taxpayer brought an action before the Tribunal de première instance de Liège (Court of First Instance, Liège, Belgium). The national court then decided to refer to the Court of Justice for a preliminary ruling.

1.2 Legal background and issue 

Article 15(1) of the Belgium-Luxembourg Convention provides that a Contracting State has the taxing right on remuneration of employment of a resident of the other State if the employment is pursued in that former State. Furthermore, According to point 8 of the final protocol to that Convention, employment is pursued in the other Contracting State when the activity is in fact performed in that other State, that is to say, when the employee is physically present in that other State to pursue that activity.

Article 15(3) provides a different rule for international traffic which uses the place of effective management as the allocation factor.

Pursuant to Article 23(2)(1) of the Convention, double taxation of income accruing to Belgian residents from Luxembourg is avoided by means of the exemption method.

Article 3, 5 and 155 of the Belgian law stipulate that Belgian residents have worldwide liability for person income tax and the exempted income under international conventions should be taken into account when calculating tax.

The core issue was whether Article 15(1) of the Convention to prevent double taxation between Belgium and the Grand Duchy of Luxembourg infringe Article 45 of the TFEU and breaches the general principle of legal certainty. 

1.3 CJEU Decision

The CJEU ruled that Article 45 TFEU must be interpreted as meaning that it does not preclude a tax scheme of a Member State under a tax convention for the avoidance of double taxation, such as that at issue in the main proceedings, which makes the exemption of the income of a resident which arises in another Member State and relates to employment in that State subject to the condition that the activity in respect of which the income is paid is actually performed in that State.

2. Case Analysis

2.1 Fundamental Freedom Involved 

The case involves the fundamental freedom of movement for workers.

2.2 Discrimination or Restriction to Cross-Border Activities

Under that agreement, the exemption from Belgian tax of the income from Luxembourg of a Belgian resident relating to employment in Luxembourg is conditional upon the physical presence of that resident in Luxembourg.

The Court has made several comparability analysis. First, it found that the income of a Belgian resident relating to employment in Luxembourg, where the activity in respect of which such income is paid is actually carried out outside Luxembourg, is not subject to a different treatment from income relating to employment in Belgium. 

Secondly, subjecting a Belgian resident to Belgian tax on Luxembourg employment income for days worked outside Luxembourg does not constitute unfavorable treatment. A resident employed in Belgium who works abroad is also fully taxed in Belgium on that income.

Thirdly, a Belgian resident, who is employed in Luxembourg and whose employment is effectively exercised outside that State is not treated less favourably than a Belgian resident in employment in Luxembourg who therefore only pursues his activity as an employed person in the territory of that State.

2.3 Justification(s) 

The Court took the view that in the absence of unifying or harmonising measures for the elimination of double taxation at EU level, the Member States retain competence for determining the criteria for taxation on income and capital with a view to eliminating double taxation by means of international agreements. They are free to determine the connecting factors for the purpose of allocating powers of taxation and to choose different connecting factors depending on whether or not the employment is characterised by high mobility at international level. Moreover, it is not unreasonable for the Member States to use the criteria followed in international tax practice.

2.4 Proportionality

The Court affirmed that, under the principle of Member States' fiscal autonomy, national tax authorities are entitled to demand whatever evidence they deem necessary from a taxpayer to correctly apply tax rules and verify eligibility for a tax advantage. This prerogative allows them to set both the formal and material conditions for granting such benefits. Furthermore, the Court noted that an inherent feature of any tax system is the inherent uncertainty of one's final tax liability at the start of a tax year, as the definitive outcome can typically only be established after the year has concluded.

3. Conclusion 

The case underscores the CJEU’s balanced consideration for both the protection of fundamental freedoms within the EU and the fiscal autonomy of Member States. The Member States could opt to enter into international agreements for eliminating double taxation and determine the allocation factor as long as they are not contrary to the freedoms of movement guaranteed by the TFEU. 

In this case, a less favourable tax treatment stems from the allocation of powers of taxation between Belgium and Luxembourg and from the differences existing between the tax schemes of those two States. Therefore it cannot be regarded as constituting discrimination or a difference in treatment prohibited by virtue of the free movement of workers. Under the EU principle of fiscal autonomy, member states may require taxpayers to provide necessary evidence to verify eligibility for tax advantages. Additionally, the inherent uncertainty of final tax liability until a tax year concludes is a fundamental characteristic of tax systems.