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Diogo Feio signs the opinion article “Everything has limits in the CJEU Case Law”

SÉRVULO IN THE PRESS 09 Feb 2022 in NOVA Tax Research Lab

Diogo Feio, Partner at SÉRVULO, signs the opinion article in the NOVA Tax Practitioners Column -  “Everything has limits in the CJEU Case Law”. 


A recent judgment of the Court of Justice of the European Union (case C-788/19) discussed the adequacy of the tax rules on the consequences of non-compliance with the obligation to provide information, by the taxpayers, regarding assets or rights held in other States. The basis of the opinion made took into account the existing rules in Spain regarding this matter and the necessary compliance of domestic law rules with the free movement of capital (Article 63 TFEU). 

In brief, the issue at stake were the rules on the administrative offence arising from the failure to provide information regarding bank accounts, assets or real estate located abroad. According to the analysed rules it is mentioned the existence of a regime of very serious offences with large fixed fines with a minimum value of € 10.000; the determination, at income tax level, that such undeclared assets or rights will be treated as unjustified income, being included in the general tax base for the earliest of the tax years not yet prescribed; and, finally, the imposition of a fine of 150% as a very serious administrative offence. 

The judgment 

As regards the possible restriction on the free movement of capital, the Court starts by stating that the penalties in question have no equivalent in respect of assets or rights situated in Spain, that there is a difference in treatment for residents of that State depending on the location of their assets and that, despite the need to have effective controls and prevent tax evasion and avoidance, it restricts the free movement of capital. This restriction may even be admitted provided that it is adequate and proportional to the objectives to be achieved. In other words, being true that the information that tax administrations have about the assets that their residents hold in other tax jurisdictions is very limited (despite all the mechanisms of exchange of information established nowadays between tax administrations) it is reasonable to determine specific rules, the question is whether the measures taken are necessary to achieve the objectives. 

The Court then addressed this second step in relation to three separate determinations: the treatment of these assets as unjustified income, without the possibility of statute of limitations; the proportionality of the 150% fine; and the proportionality of the fixed fines.

On the first point – the determination of an indefinite extension of the statute of limitations – the Court conducts a two-stage analysis. It first recalls that the fact that a taxpayer holds assets outside his territory of residence does not lead to a general presumption of fraud and tax evasion. And that the taxpayer should always have the possibility to rebut any presumption of a fraudulent conduct. In this case the presumption was based on a failure to comply with declaratory obligations that the taxpayer may rebut through evidence. On the other hand, the establishment of a special rule of statute of limitations is also admissible. What the Court is rightly questioning is an indefinite determination of the statute of limitations. In this case, it is considered that the lawmakers are going beyond what is necessary to exercise tax control. 

Secondly, with regard to the proportionality of the fine exceeding 150% of the amount of tax assessed, the Court started by recalling the freedom of States to choose the penalties they may find appropriate, provided, however, that they do so in accordance with the necessary respect of the principle of proportionality. In the present case, and especially when the fine can be cumulated with others, the Court considered that this was an extremely repressive measure and that the penalty was “…more than 100% of the value of those assets or rights…”, which meant that the measure was disproportionate and contrary to the free movement of capital. 

Finally, as regards the fixed fines, the decision considers that they do not comply with the test of comparability with those applied to the generality of taxpayers for the fulfilment of similar obligations. Therefore, this is a case of another restriction being imposed in a disproportionate manner. 

Conclusions and clues for the future 

The commented Decision has some elements that should be kept in mind for future situations. 

First of all, one should note the line of jurisprudence according to which this type of measures correspond to limitations on the free movement of capital, as they may limit the investment option, but may be justified by superior interests, such as the fight against fraud and tax evasion. However, in order for such limitation to be fair it must comply with the limits established by the principle of proportionality. Thus, the lessons extracted in this respect from Constitutional Law and European Union Law must be remembered, taking as a basis the need to respect the necessity of the measures. Thus, the States are limited in determining their legislation. This means that even the fight against fraud and tax evasion has to be guided by limits of reasonableness. 

On the other hand, the determination of these limits must be done on a case-by-case basis, observing the concrete situations and laws. Also here there are lessons to be learned. As mentioned above, the lack of statute of limitations must have limits. One cannot create a situation of lack of definition. Thus, one must now ask: shouldn’t a limitation period be set? It is true that this task is not easy but also here it will be relevant to take a step beyond the inadmissibility of an indefinite statute of limitation. Naturally the determination of a more concrete limit will be a step to be taken. 

The determination of the amount of the fine cannot be established with a scope that goes beyond the limits of repression, being assumed that it cannot exceed the value of the assets, but will it be acceptable to reach that value? Should not the limit be the value of the tax due itself? Is it necessary to go that far? The doubts are legitimate and rules such as article 114 of the General Act on Tax Infringements will naturally be subject to special attention by all those that practice tax law. The determination of penalties with amounts equal or higher than the tax due itself raises problems of proportionality that will be increasingly questioned.

Read Diogo Feio's opinion article here.

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