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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on a European Court of Justice ruling that is likely to be welcomed by the UK and other EU member states.

Context

An allowance against the Netherlands Wealth Tax is available to Dutch residents and to all other European nationals, so long as 90% or more of their assets are located in the Netherlands. Under a Belgian/Netherlands Double Tax Treaty Agreement, Belgian nationals are entitled to a Wealth Tax allowance regardless of a percentage of that wealth located in the Netherlands. A German national resident in Germany has Netherlands property which equates to just 10% of his wealth. He argued that under the free movement of capital provisions of the EC Treaty he should be entitled to the wealth tax allowance. This argument was upheld by the Advocate General (see CTR Issue No 10 Spring 2005 Item 22). But the ECJ has found otherwise.

The ECJ’s ruling

The Court in the Netherlands had sought preliminary rulings on the following:

• whether the refusal of a tax allowance to a non-resident ran contrary to article 56(1) of the EC Treaty (free movement of capital between Member States); and

• whether the tax treatment of residents of different Member States, resulting from bi-lateral double taxation conventions between individual Member States, amounted to discrimination prohibited under the EC Treaty.

On the first point the ECJ ruled that, although there were 56 precluded restrictions on the free movement of capital, they were subject to art 58, which allowed Member States to distinguish between resident and non-resident taxpayers.

On the second point, the ECJ ruled that the reciprocal rights and obligations under double taxation conventions applied only to persons resident in one of the two contracting States and that there was no prohibition under the EC Treaty. Therefore a taxable person resident in Belgium (in particular) was not in the same situation as a taxable person resident outside Belgium, so far as concerned wealth tax on real property situated in the Netherlands.

Accordingly, the refusal by a state to grant, to a non-resident who held only a minor part of his wealth in that state, allowances available to residents, did not entail discrimination against the non-resident.

(D v Inspecteur van de Belastingdienst /Particulieren /Ondernemingen buitenland te Heerlen (Case C-376/03) reported at [2005] STI Issue 28)

Comment

It is unusual that the ECJ rules otherwise than in accordance with the Advocate General’s opinion. In this case of course both the UK and other Member States will breath a sigh of relief as otherwise (as suggested in the comment paragraph in Item 25 in CTR Issue No 10) the Advocate General’s opinion could have enabled taxpayers to claim the economic benefit of the most favourable treaty between the relevant EU Member State and any other EU or indeed third country – perhaps leading to all EU tax treaties (including those with non-EU countries such as the US and Japan) being thrown into the melting pot. That danger has been averted.

October 2005

Matthew Hutton MA, CTA (fellow), AIIT, TEP

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.