Joined Cases C- 478/19 and C- 479/19. Jackson Sambila

Judgment of the Court (Second Chamber) of 16 December 2021.

UBS Real Estate Kapitalanlagegesellschaft mbH v Agenziadelle Entrate.

Joined Cases C- 478/19 and C- 479/19.

Jackson Sambila

Brief Fact of the Case and National Law involved

UBS Real Estate Kapitalanlagegesellschaft mbH (UBS Real Estate), a mutual fund portfolio management company with headquarters in Germany, operates a branch in Italy and manages two German open-ended real estate investment funds, On October 4, 2006, UBS Real Estate, acting on behalf of the UBS Funds, acquired two commercial property complexes located in San Donato Milanese Italy. upon transfer, UBS Real Estate paid significant sums for mortgage registration tax and land registry fees governed by Legislative Decree No 347 of 31 October 1990. Subsequently, UBS Real Estate discovered that Decree-Law No. 223/2006, which came into force on October 1, 2006, allowed for a 50% reduction in these taxes and fees for real estate acquisitions conducted by or on behalf of closed-ended real estate funds under Article 37 of Legislative Decree No. 58/1998.

Believing that open-ended funds, like the UBS Funds, were also eligible for this reduction exemption provided, UBS Real Estate requested a refund of half the taxes and fees paid. However, the Italian tax authorities failed to respond leading UBS Real Estate to initiate legal action against Tax Authority before the Provincial Tax Court, Milan. On December 21, 2009, the court dismissed UBS Real Estate’s claims, holding that the reduction which is specified in Article 35(10-ter) of Decree-Law No. 223/2006 applied exclusively to closed-ended real estate funds, thereby excluding open-ended funds. UBS Real Estate were not satisfied with the decision appealed against rulings before Supreme Court of Cassation, on the ground that the appellate court had erred in holding that Article 35(10-ter) of Decree-Law No 223/2006 was consistent with Articles 18, 49 and 63 TFEU, and therefore UBS Real Estate were of the view that the provisions of the Treatyrelating to the free movement of capital and freedom of establishment had been infringed.

The Supreme Court of Cassation referred a question to the CJEU regarding whether EU law, particularly the freedom of establishment and free movement of capital, precludes a national law (Article 35(10-ter) of Decree-Law No 223/2006) that limits tax reductions on mortgage registration and land registry fees solely to closed-ended real estate investment funds. UBS Real Estate argued that this provision discriminates against open-ended funds and infringes EU Treaty provisions, as it creates barriers for cross-border investments. The national court sought clarification on the compatibility of this selective tax relief with EU law.

Therefore after determinations of all issues raised, the Court, CJEU held that  Article 56 EC (now, after amendment, Article 63 TFEU) must be interpreted as precluding legislation of a Member State which restricts the benefit of the reduction in mortgage registration tax and in land registry fees solely to closed-ended real estate funds, to the exclusion of open-ended real estate funds, provided that those two categories of fund are in objectively comparable situations, unless such a difference in treatment is justified by the objective of limiting systemic risks on the real estate market.

a) Discrimination or Restriction to Cross-Border Activities

The Court of Justice of the European Union (CJEU) examined whether Italian law created a restriction against cross-border activities.

Italian authorities’ procedural rules effectively imposed an additional administrative burden on non-resident companies like UBS. Such rules could discourage foreign companies from participating in the Italian market, thus restricting the free movement of capital. The law did not explicitly discriminate against foreign companies. However, that difference in treatment is liable to discourage open-ended investment funds governed by the law of Member States other than the Italian Republic from acquiring real estate used for commercial purposes in Italy and therefore constitutes a restriction on the free movement of capital prohibited, as a rule, by Article 56 EC (now, after amendment, Article 63 TFEU).

b) Fundamental Freedom Involved

This case involved two fundamental freedoms guaranteed by the Treaty on the Functioning of the European Union (TFEU) are Freedom of Establishment and Free Movement of Capital as provided under (Article 49 and 63 TFEU) respectively.

c) Justifications

The Italian government justified the procedural requirements and the denial refund of half the taxes and fees paid based onthe reasons the Italian Legislature aim to Combatting Tax Evasion and Avoidance, Italian authorities argued that strict procedural rules were necessary to prevent fraud. The reverse-charge mechanism served as a safeguard to ensure that taxobligations were met. Requiring procedural compliance helped streamline tax administration and maintain a consistent application of rules across all entities operating in Italy the Italian legislature had intended to restrict the benefit of the reduction in the mortgage registration tax and in land registry fees solely to the category of closed-ended investment fundsto encourage the development of a particular portfolio management tool.

d) Proportionality

The Court applied the proportionality principle to assess whether the Italian rules were appropriate and necessary to achieve the stated objectives:

The CJEU acknowledged that measures to prevent fraud and ensure efficient tax administration are legitimate objectives under EU law. However, procedural rules should not undermine the substantive rights guaranteed by the EU law. The Court addressed this principle by assessing whether the Italian legislation’s exclusion of open-ended funds from tax relief under Article 35(10-ter) of Decree-Law No 223/2006 was justified. The legislation aimed to promote stable investments and prevent speculative risks tied to open-ended funds. The Court analysed whether this objective could be achieved without disproportionately restricting the free movement of capital and the freedom of establishment. It concluded that selective tax relief imposed undue barriers to cross-border investment, making the measure disproportionate to its stated objectives under EU law.

Conclusion

The CJEU held that national rules denying exemptions for procedural breaches, without considering whether substantive conditions were fulfilled let to violated EU law. The decision reinforced the principles of neutrality and proportionality andhighlighted the need for national rules to align with EU fundamental freedoms.