ECJ Allows Governments To Block Contracts To Firms With Tax Arrears

by Ulrika Lomas, Tax-News.com, Brussels

16 February 2006

A recent judgment by the European Court of Justice has upheld the right of public sector organisations to refuse contracts to private sector companies which have not fulfilled their tax and social security obligations.

The case centred on three Italian catering firms, La Cascina, Zilch and G.f.M which had responded to a call by the government for tenders for the award of the contract to supply catering services to Ministry of Defence bodies and departments.

In 2003 the contracting authority excluded these firms from the tender on the grounds that La Cascina and G.f.M had not kept up to date with social security contributions for their employees, and because Zilch was in arrears with respect its tax payments.

Zilch argued that it had regularised its tax position under a tax amnesty scheme and tax relief, and together with La Cascina and G.f.M, it challenged the legality of the decision under EU law. The case was subsequently referred to the ECJ by an Italian regional court, which asked for clarification of when a service provider is regarded as having fulfilled his obligations relating to social security contributions and taxes.

Since the European public services directive does not define when a service provider's obligations have been met, the ECJ concluded in a judgment published last week that it was a matter for national law to define the content and scope of the tax and social security obligations concerning private contractors.

"Thus, the period within which the persons concerned are to have made payments must be established by the Member States and may extend from the date for lodging the requests to participate until immediately prior to the award of the contract," the court stated.

However, the judges noted that there was also an obligation for national governments to determine this period "with absolute certainty", and for it to be made public in the interests of transparency and equal treatment.

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