ECJ Allows Extended Period For Unpaid Tax To Be Collected From Another Member State

by Ulrika Lomas, for LawAndTax-News.com, Brussels

19 June 2009

An extended recovery period where taxable assets which have been concealed from the tax authorities are held in another member state is in accordance with European law, according to the European Court of Justice (ECJ).

The ECJ said in the case X and E.H.A. Passenheim-van Schoot v Staatssecretaris van Financiën that in so far as the tax authorities have no evidence of the existence of such assets, an extended recovery period does not go beyond what is necessary to guarantee the effectiveness of fiscal supervision and to prevent tax evasion.

In October 2000 the Special Taxation Inspectorate (Belgium) spontaneously forwarded to the Netherlands tax authorities information on financial accounts held in the names of Netherlands residents at Kredietbank Luxembourg (KB-Lux), a bank established in Luxembourg. In 2002, after examination of that information, X, who had been the holder of such an account since 1993, received an additional assessment containing adjustments in regard to wealth tax and income tax for the tax years from 1993 to 2001. A fine amounting to 50% of the additional amounts sought was also imposed on him.

After her husband died, Mrs Passenheim-van Schoot made a full disclosure in January 2003, on her own initiative, to the Netherlands tax authorities of balances held by herself and her late husband at a bank established in Germany. Until that time those balances had never been included in their tax declarations. At Mrs Passenheim-van Schoot’s request, the Inspector granted her the benefit of the ‘repentance’ scheme and imposed no fine. However, he sent her additional assessments concerning the tax years from 1993 to 1997.

X and Mrs Passenheim-van Schoot challenged the tax authorities’ decisions. In their view, the extended recovery period laid down in the Netherlands legislation for taxable items held abroad was contrary to Community law. In that context, the Hoge Raad der Nederlanden (Supreme Court of the Netherlands), before which both cases had come on final appeal, asked the Court of Justice, in particular, whether Community law over-rides the Netherlands legislation under which, in cases where savings balances and income accruing from them are concealed from the tax authorities, the recovery period is five years if the savings balances are held in the Netherlands but is extended to 12 years if they are held in another member state.

While the court observed that such legislation constitutes a restriction both of the freedom to provide services and of the free movement of capital, which is prohibited, in principle, by the EC Treaty, it pointed out that the need to guarantee the effectiveness of fiscal supervision and the prevention of tax evasion “constitute overriding requirements of general interest capable of justifying such a restriction.”

A summary of the judgment stated that:

“Although the extension of a recovery period does not, as such, strengthen the powers of investigation available to the tax authorities, it none the less enables them, in the event of discovery of taxable items held in another member state of which they had no knowledge, to initiate an investigation and, where it emerges that those items have not been subject to tax, or that too little tax has been levied, to issue an additional assessment.”

“The Court holds that it must therefore be accepted that the legislation at issue contributes to the effectiveness of fiscal supervision and to the prevention of tax evasion.”

Recommended