CJEU, 1st chamber, March 18, 2021, No C-388/19

THE COURT (First Chamber),

1 This request for a preliminary ruling concerns the interpretation of Articles 18 and 63 to 65 TFEU.

2 The request has been made in proceedings between MK and the Autoridade Tributária e Aduaneira (Tax and Customs Authority, Portugal) (‘the tax authority’) concerning the tax assessment notice issued by the tax authority in respect of MK’s income for the year 2017.

 Legal context

3 Article 43(1) and (2), under the heading ‘Capital Gains’, of the Código do Imposto sobre o Rendimento das Pessoas Singulares (Personal Income Tax Code) in the version applicable to the facts in the main proceedings (‘the CIRS’) provided:

‘1. The amount of income classified as capital gains is represented by the balance of the difference between capital gains and capital losses occurring in the same year, determined in accordance with the following articles.

2. The balance referred to in the previous paragraph, in respect of transfers made by residents as provided for in Article 10(1)(a), (c) and (d) whether positive or negative, shall be taken into account to the extent of only 50% of its amount.’

4 Article 68(1) of that code sets out the progressive scale of tax brackets. In 2017, the maximum tax rate applicable to taxable incomes higher than EUR 80 640 was 48%.

5 In accordance with Article 68a of that code, an additional solidarity tax of 2.5% applied to taxable income between EUR 80 000 and EUR 250 000; above that amount, the solidarity rate was 5%.

6 Article 72 of the CIRS, entitled ‘Special Tax Rates’, laid down, inter alia, the following provisions:

‘1. The following shall be taxed at the autonomous rate of 28%:

(a) capital gains referred to in Article 10(1)(a) and (d) realised by persons not resident in Portuguese territory, provided that they do not arise from a permanent establishment situated in that territory;

…

9. Persons resident in another Member State of the European Union or of the European Economic Area (provided, in the latter case, that there is an exchange of information on tax matters) may elect, in respect of the income to which subparagraph 1(a) and (b) and paragraph 2 apply, for such income to be taxed at the rate which would apply under the table established by Article 68(1), had the income been realised by persons resident in Portuguese territory.

10. In order to determine the tax rate referred to in the previous paragraph, all income shall be taken into account, including income realised outside the said territory, on the same terms that apply to residents.

…’

 The dispute in the main proceedings and the question referred for a preliminary ruling

7 MK is a resident in France for tax purposes.

8 On 17 January 2002, MK purchased a building located in Portugal at a cost of EUR 79 807.66.

9 On 17 July 2017, MK sold that building for EUR 180 000.

10 On 31 May 2018, MK filed tax returns declaring, in addition to income from immovable property of EUR 8 800, the transfer of ownership of that building together with the expenses and costs of the purchase and sale thereof.

11 In Table 8B, on the front of those tax returns, MK ticked box 4 (for ‘non-resident’), box 6 (for ‘resident in an EU country’) and box 7 (permitting him to choose to be subject to the tax regime applicable to non-residents), and rejected the option in box 9 (to be taxed in accordance with the general tax rates established in Article 68 of the CIRS) and the option in box 10 (to be taxed under the legislation applicable to residents).

12 On 5 July 2018, the tax authority issued a tax assessment notice for EUR 24 654.22 in income tax for the year 2017, in which, in accordance with the options chosen by MK in his tax return, the single rate of 28% applicable to non-residents on the basis of Article 72(1) of the CIRS was applied to the entire positive balance of the capital gain realised from immovable property.

13 On 30 November 2018, MK challenged that tax assessment notice before the national court, the Tribunal Arbitral Tributário (Centro de Arbitragem Administrativa – CAAD) (Tax Arbitration Tribunal (Centre for Administrative Arbitration – CAAD), Portugal) on the ground that it is vitiated by illegality in that it is based on legislation which discriminates against taxable persons resident in the territory of an EU Member State other than the Portuguese Republic (‘non-residents’) as compared with taxable persons resident in Portugal, and claimed, in accordance with the judgment of the Court of Justice of 11 October 2007, Hollmann (C 443/06, EU:C:2007:600), that that legal framework constitutes a restriction on the free movement of capital as enshrined in Article 63(1) TFEU.

14 Before the national court the tax authority claims that the legal framework applicable to the facts in the main proceedings is different to that applicable to the facts giving rise to the judgment of 11 October 2007, Hollmann (C 443/06, EU:C:2007:600). It recalls that, admittedly, in that judgment, the Court held that Article 43(2) of the CIRS, which provided that only capital gains realised by taxable persons resident in Portugal would be taken into account as to 50% of their amount, resulted in a heavier tax burden for non-residents and for that reason constituted a restriction on the movement of capital prohibited by Article 63 TFEU.

15 However, the tax authority states that following the judgment of 11 October 2007, Hollmann (C 443/06, EU:C:2007:600), the Portuguese legislature amended the applicable legislative framework by introducing, in Article 72(9) and (10) of the CIRS, the possibility for non-residents to opt for a taxation regime analogous to that which applies to Portuguese residents and thus to benefit from the 50% allowance provided for in Article 43(2) of the CIRS, and from progressive rates, on the condition that they file a tax return in Portugal for their total worldwide income. In the present case, MK opted for the taxation regime provided for in Article 72(1) of the CIRS and not for that provided for in Article 72(9) and (10) of the CIRS.

16 MK points out, however, that the Court has ruled, in a case concerning the freedom of establishment, that a choice between a discriminatory tax regime and one which would not be discriminatory is not capable of remedying the discriminatory effects of the first of those two tax regimes (judgment of 18 March 2010, Gielen, C 440/08, EU:C:2010:148, paragraphs 50 and 51).

17 The national court has doubts therefore as to whether the changes to Portuguese tax legislation following the judgment of 11 October 2007, Hollmann (C 443/06, EU:C:2007:600) namely, inter alia, the introduction of the possibility for non-residents to opt, pursuant to Article 72(9) and (10) of the CIRS, for a taxation regime analogous to that which applies to residents, and thus to benefit from the 50% allowance provided for in Article 43(2) of that code, suffice to remedy the restrictions on capital movements identified by the Court in that judgment.

18 Under those circumstances, the Tribunal Arbitral Tributário (Centro de Arbitragem Administrativa – CAAD) (Tax Arbitration Tribunal (Centre for Administrative Arbitration – CAAD)) decided to stay the proceedings and to refer the following question to the Court for a preliminary ruling:

‘Should Articles [18, 63, and 65 TFEU] taken together, be interpreted as precluding national legislation, such as that in dispute in the present case [Article 43(2), of the CIRS], which was amended [by the insertion of paragraphs 9 and 10 into Article 72 of that code] to enable the capital gains realised from the transfer of immovable property situated in a Member State (Portugal) by a resident of another Member State of the European Union (France) not to be subject, by virtue of a choice made by the taxable person, to a tax burden greater than the one which would be applicable for the same type of transaction to capital gains realised by a resident of the State in which that immovable property is situated?’

 Consideration of the question referred

19 By its question, the referring court asks, in essence, whether Articles 18 and 63 to 65 TFEU must be interpreted as precluding the legislation of a Member State which, in order to permit the capital gains realised from the transfer of immovable property situated in that Member State, by a taxable person resident in another Member State, to not be subject to a tax burden greater than that which would be applied to capital gains realised from the same type of transaction by a person resident in the first Member State, makes the taxation regime applicable dependent upon the choice made by that taxable person.

 The principles and freedoms applicable

20 As a preliminary matter, it should be borne in mind that, according to settled case-law, Article 18 TFEU applies independently only to situations governed by EU law for which the TFEU lays down no specific rules of non-discrimination (see, to that effect, the judgment of 11 October 2007, Hollmann, C 443/06, EU:C:2007:600, paragraph 28 and the case-law cited).

21 Article 63 TFEU lays down, in particular, a specific rule of non discrimination in relation to the free movement of capital (see, to that effect, the judgment of 11 October 2007, Hollmann, C 443/06, EU:C:2007:600, paragraph 29 and the case-law cited).

22 Moreover, it can be inferred from the Court’s case law that a transaction concerning the liquidation of an investment in immovable property, such as that at issue in the case in the main proceedings, constitutes a movement of capital (judgment of 11 October 2007, Hollmann, C 443/06, EU:C:2007:600, paragraph 31 and the case-law cited).

23 It follows that the transfer for consideration of immovable property situated in the territory of a Member State by non-resident natural persons falls within the scope of Article 63 TFEU.

24 In addition, to the extent that there is nothing in the order for reference that is capable of bringing such a transaction within the scope of Article 64 TFEU, there is no need in the present case to examine the question in the light of the provisions of that article.

 Free movement of capital

25 It should be recalled that Article 63 TFEU prohibits all restrictions on the movement of capital between the Member States, subject to the justifications laid down in Article 65 TFEU.

26 In the present case, it is clear from the order for reference that Article 43(2) and Article 72(1) of the CIRS laid down, in the case of capital gains realised from the transfer for valuable consideration of immovable property situated in Portugal, taxation rules which vary depending on whether or not the taxable persons liable to income tax were resident in the territory of that Member State.

27 In particular, under Article 43(2) of the CIRS the amount of capital gains realised by residents when transferring immovable property situated in Portugal were to be taken into account as to only 50% of their amount. By contrast, for non-residents, Article 72(1) of the CIRS provided that the full amount of those same capital gains was to be taxed at the autonomous rate of 28%.

28 It follows that, by the application of those provisions, the basis for the assessment of tax on such capital gains was not the same for residents and non-residents. Thus, for the sale of the same immovable property situated in Portugal, if capital gains are realised, non-residents are subject to a tax burden greater than that applied to residents and are consequently in a less favourable position than the latter (see, to that effect, judgment of 11 October 2007, Hollmann, C 443/06, EU:C:2007:600, paragraph 37).

29 Although under Article 72(1) of the CIRS, a non-resident was taxed at a rate of 28% applied to a basis for assessment representing the total amount of the capital gains realised, the taking into account, as the basis for assessment, of only half of the capital gains realised by a resident enables the latter to benefit systematically from a tax burden which, for that reason, is lower regardless of the tax rate applicable to the whole of his income, since, according to the observations made by the Portuguese Government, residents’ income was subject to tax in accordance with a scale of progressive rates, under which the highest rate was 48%, and that is so even though an additional solidarity levy of 2.5% could be applied to taxable income between EUR 80 000 and EUR 250 000 and of 5% above that amount.

30 The Court has already had occasion to hold, in the judgment of 11 October 2007, Hollmann (C 443/06, EU:C:2007:600, paragraph 40), that the fixing by Article 43(2) of the CIRS of a basis of assessment of 50% that applies only to capital gains realised by taxable persons residing in Portugal and not to those realised by non resident taxable persons constituted a restriction on the movement of capital prohibited by Article 63 TFEU.

31 That finding is not called into question by paragraph 44 of the judgment of 19 November 2015, Hirvonen (C 632/13, EU:C:2015:765), in which the Court held that a difference in treatment between non-resident and resident taxable persons, consisting in the fact that it subjects the income of non-residents to a definitive tax at the single rate of 25%, deducted at source, whilst the income of residents is taxed according to a progressive scale, including a tax-free allowance, is compatible with EU law provided that the single rate is not higher than that which would actually be applied to the person concerned, in accordance with the progressive scale, in respect of net income increased by an amount corresponding to the tax-free allowance. In the present case, as is clear from paragraph 29 of the present judgment, the tiered taxation system in dispute means that non-residents are systemically subject to a tax burden greater than that applied to residents where capital gains are realised on the sale of property.

32 In those circumstances, fixing the basis for assessment at 50% for capital gains realised by all taxable persons residing in Portugal but not for non-resident taxable persons who have opted for the tax regime provided for in Article 72(1) of the CIRS constitutes a restriction on the movements of capital prohibited by Article 63(1) TFEU.

33 It must therefore be examined whether such a restriction can be held to be objectively justified under Article 65(1) and (3) TFEU.

 Whether the restriction on the free movement of capital under Article 65(1) and (3) TFEU is justified

34 It follows from Article 65(1) TFEU, read in conjunction with Article 65(3), that the Member States may distinguish in their national legislation between resident and non-resident taxable persons provided that such a distinction does not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital.

35 It is therefore necessary to distinguish between unequal treatment that is permitted under Article 65(1)(a) TFEU and arbitrary discrimination that is prohibited under Article 65(3) TFEU. In that respect, it follows from the case-law of the Court that, in order for national tax provisions, such as Articles 43(2) and 72(1) of the CIRS, to be regarded as compatible with the Treaty provisions on the free movement of capital, the difference in treatment must either relate to situations which are not objectively comparable or be justified by an overriding reason relating to the public interest (see, to that effect, judgment of 11 October 2007, Hollmann, C 443/06, EU:C:2007:600, paragraphs 44 and 45 and the case-law cited).

36 In the present case, the difference in treatment between resident taxable persons and non-resident taxable persons laid down in the Portuguese legislation concerns situations that are objectively comparable. Furthermore, that difference in treatment is not justified by an overriding reason in the public interest.

37 As regards, in the first place, the comparability of the situations, it should be noted that the Court has already ruled in paragraph 50 of the judgment of 11 October 2007, Hollmann (C 443/06, EU:C:2007:600), first, that the taxation of the capital gains resulting from the transfer of immovable property concerns, under Article 43(2) and 72(1) of the CIRS, only one category of taxpayers’ income, irrespective of whether they are residents or non-residents; secondly, that taxation concerns both categories of taxpayer and, thirdly, the Member State in which the source of that taxable income is located is the Portuguese Republic in both cases.

38 It follows from the above and in particular from paragraph 29 of the present judgment that there is no objective difference between resident taxpayers and non-resident taxpayers that is capable of justifying an inequality of tax treatment between them, under Articles 43(2) and 72(1) of the CIRS, as regards the taxation of the positive balance of capital gains realised following the transfer of immovable property situated in Portugal. Consequently, the situation in which a non-resident taxpayer, such as MK, finds himself is comparable to that of a resident taxpayer.

39 That finding is not called into question by the ratio legis of Article 43(2) of the CIRS laying down the 50% allowance applicable to capital gains made by residents, which, according to the Portuguese Government, is to avoid the excessive taxation of such income which is considered abnormal and fortuitous since it cannot be ruled out that that consideration could apply to non-resident taxable persons.

40 As regards, in the second place, whether there are justifications based on overriding reasons in the public interest, it should be noted that the Portuguese Government does not assert that there are such reasons. Nevertheless, it argues that, in the context of the taxation of the positive balance of capital gains on immovable property realised in Portugal, Article 43(2) of the CIRS seeks to avoid penalising taxable persons residing in Portugal or non-resident taxable persons choosing to be taxed as such under Article 72(9) and (10) of the CIRS due to the application of a progressive rate to them.

41 In paragraphs 58 to 60 of the judgment of 11 October 2007, Hollmann (C 443/06, EU:C:2007:600), the Court held that the tax advantage granted to residents, consisting of a reduction by half of the basis for the assessment for tax on capital gains realised, outweighs, in any event, the consideration for that advantage, namely the application of a progressive rate to the taxation of their income. Consequently, the Court took the view that, in the case giving rise to that judgment, a direct link between the tax advantage and the offsetting of that advantage by a particular tax levy was not established and that that the restriction resulting from the national legislation in dispute could not be justified by the need to ensure the cohesion of the tax system.

 Option to be taxed under the same arrangements as for residents

42 It should be noted from the outset that the possibility for persons resident in the European Union or in the EEA to opt, under Article 72(9) and (10) of the CIRS, for a taxation regime analogous to that which applies to Portuguese residents, and to thereby benefit from the 50% allowance provided for in Article 43(2) of that code, affords a non-resident taxpayer, such as MK, a choice between a discriminatory tax regime, namely that provided for by Article 72(1) of the CIRS, and another which would not be discriminatory.

43 In that respect, it is important to stress that, in the present case, such a choice is not capable of excluding the discriminatory effects of the first of those two taxation regimes.

44 If it were recognised that such a choice had that effect, the consequence would be to validate a tax regime which, in itself, remains contrary to Article 63 TFEU by reason of its discriminatory nature (see, to that effect, judgment of 18 March 2010, Gielen, C 440/08, EU:C:2010:148, paragraph 52).

45 In addition, as the Court has already had the opportunity to state, a national scheme which restricts a fundamental freedom guaranteed by the TFEU, in the present case the free movement of capital, remains incompatible with EU law, even if its application is optional (see, to that effect, the judgment of 18 March 2010, Gielen, C 440/08,  EU:C:2010:148, paragraph 53 and the case-law cited).

46 It follows that the choice, in the case in the main proceedings, open to the non-resident taxpayer to be taxed under the same arrangements as resident taxpayers is not such as to render the restriction found in paragraph 32 of the present judgment compatible with the Treaty.

47 In the light of all the foregoing considerations, the answer to the question referred is that Article 63 TFEU, read in conjunction with Article 65 TFEU, must be interpreted as precluding the legislation of a Member State which, in order to permit the capital gains realised from the transfer of immovable property situated in that Member State, by a taxable person resident in another Member State, to not be subject to a tax burden greater than that which would be applied to capital gains realised from the same type of transaction by a person resident in the first Member State, makes the taxation regime applicable dependent upon the choice made by that taxable person.

 Costs

48 Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

On those grounds, the Court (First Chamber) hereby rules:

Article 63 TFEU, read in conjunction with Article 65 TFEU, must be interpreted as precluding the legislation of a Member State which, in order to permit the capital gains realised from the transfer of immovable property situated in that Member State, by a taxable person resident in another Member State, to not be subject to a tax burden greater than that which would be applied to capital gains realised from the same type of transaction by a person resident in the first Member State, makes the taxation regime applicable dependent upon the choice made by that taxable person.