By Francesca Amaddeo, Researcher, Tax Law Competence Centre (SUPSI), Manno, Switzerland
The European Court of Justice, on 30 April, released its decision, addressing a challenge to the legality of the pension scheme under the double taxation convention between Italy and Portugal, signed in 1982.
In reaching its decision, the ECJ once again evaluated the compatibility of conventional rules, specifically the nationality criteria and EU principles, such as the nondiscrimination one (Article 18 TFEU) and the free movement of persons (Article 21 TFEU) in joined cases C-168/19 and 169/19.
Background, legal basis, preliminary ruling
Two Italian citizens, Mr. HB and Mr. IC, former employees in the Italian public sector, are now residents of Portugal. Once they transferred their residences, they requested the removal of withholding taxes applied on their pensions by Italy, appealing to conventional provisions (articles 18 and 19 DTC I-PT).
The law provides, in article 18, rules for pensioners who worked in the private sector, while article 19 provides the fiscal regime for former employees in the public sector. Under these provisions, exclusive taxing rights belong to Italy, except when taxpayers are both residents and citizens of Portugal. In this case, Portuguese jurisdiction shall tax entirely public pensions.
The National Social Security Institute (INPS, in Italy) refused to send the pensioners the gross amount of their monthly retirement pensions since the tax treaty allocates exclusive taxing rights to Italy for those who worked in the public sector (unlike Italian pensioners that worked in private companies) unless they were both Portuguese residents and citizens.
HB and IC appealed against this refusal before the competent Tax Court (Corte dei Conti, Sezione Giurisdizionale per la Regione Puglia), claiming the inequality of treatment between Italian pensioners residents in Portugal depending on their former activity in the private sectors or in the public one.
The first category, indeed, benefited from a favorable fiscal regime, unlike the latter.
In the taxpayers’ view, this represented a violation of the principle of nondiscrimination based on nationality (Article 18 TFEU) and, as a consequence, of free movement of persons under article 21 TFEU.
The Italian Court requested the ECJ’s preliminary ruling, asking Articles 18 and 21 TFEU must be interpreted as precluding legislation of a Member State which provides for the taxation of the income of a person resident in another one, who receives all of his/her income from the first Member State, but who does not hold the nationality of the second jurisdiction, without the benefit of the tax advantages provided by that second Member State.
ECJ’s reasoning
The ECJ recalled its own settled case-law (Ragevicius, C-247/17; Commission v. Austria, C-75/11; Dano, C-333/13; TopFit and Biffi, C-22/18) , where the principle of nondiscrimination based on nationality is considered applicable to circumstances referred to by the free movement of persons.
Assuming that articles 18 and 19 DTC I-PT follow the OECD Model Tax Convention on Income and on Capital (2014 version), the choice made by signatory States in including different connecting factors to allocate taxing powers related to former employees of the private or public sector (and, in this case, depending on whether or not they are nationals of the Member State of residence) must be considered in line with international tax practice.
Indeed, tax treaties’ aim is to prevent double taxation (both juridical and economical one), and the signatory States have discretionary power to provide rules of allocation in line with their domestic regimes but respecting EU law.
This means that, according to the previous ECJ decision, Bukovansky (C-241/14), the inclusion of connecting factors such as the paying State and nationality must be considered in the light of the tax treaties’ scope. Since nationality (as well as the paying State) are used as criteria to allocate taxing powers, differentiation based on citizenship must not be regarded as prohibited discrimination.
Indeed, also choosing the paying State criteria for taxing former public employees would not change the situation; the fiscal treatment applied should not be considered as having a negative impact on interested taxpayers since the fiscal disadvantage derives only from the different domestic rules applicable.
The lack of EU harmonization of direct taxes leaves the issue of taxing income to the sovereignty of the Member States, which cannot be defined as discriminatory.
Using nationality as a connecting factor is not discriminatory per se; however, the principle of equality must be respected in exercising taxing power by the competent State, the ECJ said.
Conclusions
Thus, according to the EU court, Using nationality as a connecting factor is not discriminatory per se; however, the principle of equality must be respected in exercising taxing power by the competent State.
Inequality of treatment arises from the allocation of taxing powers and, overall, from the disparities existing between Italian and Portuguese tax systems.
Using these premises, the ECJ concluded that the taxing regime stated in a tax treaty signed by two EU Member States, pursuant to which the powers of taxing retirement pensions are allocated according to whether the recipients of those pensions were employed in the private sector or the public one and, in this latter case, according to whether or not they are nationals of the residence jurisdiction, complies with articles 18 and 21 TFEU.
Francesca Amaddeo
Latest posts by Francesca Amaddeo (see all)
- International taxation: two-pillar plan and the OECD mainstream - February 28, 2022
- Swiss federal act on implementation of international tax agreements: ready for January 2022 - November 23, 2021
- EU Commission seeks to ease withholding tax mechanism on cross-border investments - October 26, 2021
- CJEU to review German transfer pricing obligation: do national tax rules affect EU freedoms? - October 11, 2021
- Switzerland advances withholding tax reform - May 17, 2021
email: [email protected]
Be the first to comment