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ECJ: Advocate General finds Belgian rules on non-deductibility of debts from inheritance tax base if testator was resident abroad incompatible with EC free movement of capital - details
02/04/2008 @ 08:12
On 13 March 2008, Advocate General (AG) Mazák of the European Court of Justice (ECJ) gave his opinion in the case of Eckelkamp and Others v. The Belgian State (C-11/07). In this case, the AG concluded that the EC Treaty provisions on the free movement of capital (Art. 56 of the EC Treaty) preclude national legislation such as that at issue in the main proceedings, under which - for the purposes of determining the basis of assessment of the tax due on the inheritance of an immovable property situated in the territory of the Member State concerned - account may be taken of certain charges, such as debts secured by the right conferred on a creditor to take out a mortgage against the immovable property inherited, if the person from whom the property was inherited was resident, at the time of death, in that Member State, but not if that person was resident in another Member State. Details of the decision are summarized below.
(a) Issue. The issue was, in particular, whether or not the different treatment of the inheritances from resident and non-resident testators is compatible with the free movement of capital (Art. 56 of the EC Treaty) and the right of free movement of EU citizens (Art. 18 of the EC Treaty).
(b) Advocate General's opinion.
Scope of the fundamental freedoms
At the outset, the AG observed that it is settled case law of the ECJ that a cross-border inheritance is a movement of capital within the meaning of Art. 56 of the EC Treaty. The AG further observed that the situation at issue is clearly not purely domestic and the inheritance at issue falls within the scope of the free movement of capital, since immovable property situated in Belgium was inherited from a person resident, at the time of his death, in another Member State. AG Mazák further noted that it is thus not necessary to examine the issue in the light of Art. 18 of the EC Treaty (right of free movement of EU citizens).
Restriction on the free movement of capital
The AG observed that the immovable property situated in Belgium and inherited from a non-resident testator is treated less favourably than that inherited from a resident testator, since in the former case debts are not taken into account. Referring to the ECJ judgment in Barbier, the AG recalled that, in respect of inheritances, Art. 56 of the EC Treaty prohibits, inter alia, national measures which reduce the value of the inheritance of a resident of a State other than the Member State in which the assets concerned are situated and which taxes the inheritance of those assets. Since the value of the property inherited from a non-resident is reduced as a result of the non-deductibility of the debts relating to such property (and thus a higher tax burden as opposed to property inherited from a resident), the Belgian legislation constitutes a restriction on the free movement of capital (Art. 56 of the EC Treaty).
Justifications
AG Mazák rejected proposed justifications of that restriction on the basis of (i) non-comparability of the situation of residents and non-residents as regards the taxation of inheritances and (ii) the fact that the Member State of the testator's residence is better placed to assess his economic position in its entirely - to take account of all assets and debts relating to the inheritance.
Referring to the ECJ judgments in Commission v. France (C-270/83), Denkavit and Futura (C-250/95), the AG recalled that if a Member State has chosen to impose a tax on residents as well as non-residents, both are in a comparable situation with respect to deductions relating to that tax. Furthermore, it is settled case law of the ECJ (Gerritse (C-234/01), Bouanich, etc.) that it is relevant whether or not the costs, charges or obligations, whose deductibility is at issue, are in a way directly linked with the income, asset or taxable event on which the tax is levied.
In this context, the AG considered that residents and non-residents are in a comparable situation, as both are liable in Belgium to inheritance tax on immovable property located in Belgium.
The AG opined that the fact the inheritance is taxed in the hands of the heirs means that the case at issue does not exclusively concern the personal situation of the testator. The AG was not convinced that where heirs resident in Belgium inherit immovable property located in Belgium and cannot deduct the debts relating to such inheritance, because the immovable property was inherited from a non-resident, the residence state of the testator would be in a better position to take the obligations in question into account.
Further, he observed that the debts at issue are linked with the immovable property, since they can in any event burden the immovable property which is subject to tax.
The AG thus opined that the fact the testator was a non-resident does not provide an objective justification for denying a deduction of the debts concerned. In addition, the AG rejected the argument that allowing a deduction of the debt concerned may lead to double deduction, since a Community national cannot be deprived of the right to rely on the EC Treaty provisions on the ground that he benefits from tax advantages provided in another Member State. Consequently, according to the AG, the different treatment at issue constitutes arbitrary discrimination within the meaning of Art. 58(3) of the EC Treaty and is therefore incompatible with the free movement of capital.
Source: IBFD
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