ECJ Backs Austria In Tax Case

by Ulrika Lomas, Tax-News.com, Brussels

01 November 2010

The European Court of Justice has decided that, in certain circumstances, the "need to guarantee the effectiveness of fiscal supervision constitutes an overriding reason in the public interest capable of justifying a restriction on the exercise of the freedoms of movement".

The case in which this was decided involved Ms Schmelz, a German national and resident in Germany, who owned an apartment in Austria which was let at a small rent, small enough to be considered exempt from the payment of turnover tax.

The local tax office took the view that, unless resident or established in Austria, Ms Schmelz could not benefit from the exemption granted to small undertakings. The tax court in Vienna had doubts as to whether the situation conformed with the general principle of EU law on equal treatment and was unsure whether the amount of turnover which distinguishes small undertakings from other undertakings referred to turnover generated solely in the member state in question, or whether it was necessary to take account of the turnover generated throughout the European Union.

However in this respect it became clear that Ms Schmelz was not pursuing any economic activity in Germany and that she was therefore not regarded as a person subject to VAT. Although the sole activity pursued by Ms Schmelz which was subject to VAT consisted in the Austrian lettings, it was decided this did not mean she could be regarded as established in Austria.

However, in order for the provisions relating to freedom of establishment to apply, it was generally necessary to have secured a permanent presence in the host member state. Because Ms Schmelz did not meet those conditions, the provisions governing freedom of establishment were not applicable in the circumstances. However it was held that Ms Schmelz’s letting activity was covered by freedom to provide services under Article 49 EC.

Where tax provisions applying to cross-border economic activities were less favourable than those pursued within the borders of that member state, this was an example of a restriction prohibited by Article 49 EC.

The ECJ held that this applied in these circumstances where, with the exemption from VAT for small undertakings, businesses established locally could offer their services under more advantageous conditions than small undertakings established outside that member state.

However the ECJ then concluded that the Austrian authorities were not in a position to take advantage of tax information exchange between member states to determine whether Ms Schmelz's overall activities could be small enough to qualify her for exemption from collecting VAT, and consequently the need to maintain effective supervision overrode her rights under Article 49 EC.

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