Case C‑670/21

BA

v

Finanzamt X

(Request for a preliminary ruling from the Finanzgericht Köln)

Judgment of the Court (First Chamber), 12 October 2023

(Reference for a preliminary ruling – Taxation – Free movement of capital – Articles 63 to 65 TFEU – Inheritance tax – Movement of capital between Member States and third countries – Immovable property located in a third country – More favourable tax treatment for immovable property located in a Member State or in a State which is party to the Agreement on the European Economic Area – Restriction – Justification – Housing policy – Effectiveness of fiscal supervision)

1. Free movement of capital and liberalisation of payments – Provisions of the Treaty – Scope – Inheritance tax – Included – Exception – Constituent elements confined to a single Member State – Application, by a Member State, of inheritance tax to estate property located outside its territory –Property concerned belonging to a person residing in its territory on the date of death and reverting to his or her heir who is also a resident of that Member State – Situation with cross-border elements

   (Art. 63(1) TFEU)

   (see paragraphs 36, 38, 39)

2. Free movement of capital and liberalisation of payments – Restrictions – Tax legislation – Inheritance tax – Calculation of inheritance tax – Developed immovable property forming part of personal assets which is located in a non-Member State other than a State which is party to the Agreement on the European Economic Area and is let for residential purposes – National legislation providing, for the purposes of that calculation, for the assessment of that property at its full market value – Legislation concerned providing, for that calculation, for the assessment of a property of the same nature which is located within the national territory at 90% of its market value – Not permissible – Justification – Absence

   (Arts 63, 64 and 65 TFEU)

   (see paragraphs 41, 42, 44-46, 51, 55, 59, 62-67, 70-80, 83-85, operative part)

Résumé

A, a German resident, who died in 2016, bequeathed in 2013 to his son, BA, also a German resident, a share of an immovable property located in Canada let for residential purposes.

In July 2017, the competent tax office determined the amount of inheritance tax payable by BA in Germany. For the purpose of calculating that tax, that immovable property was assessed at its full market value. In March 2018, BA sought to amend the amount of that tax, so that that property would be taxed at 90% of its market value, as provided for in the German law on inheritance and gift tax. Observing that that law requires, in order for that immovable property to benefit from that tax advantage, that that property be located in Germany, another Member State or a State which is party to the Agreement on the European Economic Area, ( 1 ) BA claimed that that law infringed the free movement of capital between Member States and third countries enshrined in Article 63 TFEU. Taking the view, however, that such a difference in treatment between immovable property located in one of those three types of country and property of the same nature located in a non-Member State other than a State which is party to the EEA Agreement complies with that provision, the Tax Office first rejected BA’s request for amendment and then the objection which he had lodged.

Seised of an action by BA, the referring court asks the Court of Justice whether national legislation which excludes from the benefit of a tax advantage a property let for residential purposes in Canada is compatible with Article 63 TFEU. If such legislation constitutes a restriction on the free movement of capital, that court asks whether that restriction can be justified under Article 65 TFEU ( 2 ) or by an overriding reason in the public interest.

By its judgment, the Court holds that Articles 63 to 65 TFEU preclude national legislation which provides that, for the purposes of calculating inheritance tax, developed immovable property forming part of personal assets which is located in a non-Member State other than a State which is party to the EEA Agreement and is let for residential purposes is assessed at its full market value, whereas property of the same nature which is located within the national territory, another Member State or a State which is party to the EEA Agreement is assessed, for the purposes of that calculation, at 90% of its market value.

Findings of the Court

The Court finds, in the first place, that the legislation at issue, which makes entitlement to the tax advantage dependent on the location of the assets contained in the inheritance, results in immovable property situated in a non-Member State other than a State which is party to the EEA Agreement being subject to a heavier tax burden than that situated within the national territory, thus reducing the value of that inheritance and being liable to deter a natural person resident in Germany from investing in an immovable property let for residential purposes in such a non-Member State or from keeping any such property of which he or she is the proprietor. Such legislation therefore constitutes a restriction on the movement of capital for the purposes of Article 63(1) TFEU.

Examining, in the second place, whether that restriction may be justified under Article 65 TFEU, the Court notes, first of all, that the calculation of inheritance tax is, under the national legislation, directly linked to the market value of the assets included in the estate. Consequently, there is objectively no difference in situation capable of justifying unequal tax treatment so far as concerns the level of inheritance tax payable in relation to, respectively, an immovable property located in Germany, another Member State or a State which is party to the EEA Agreement and an immovable property located in a non-Member State other than States which are party to the EEA Agreement. In those circumstances, it would deprive Article 63(1) TFEU of all meaning if it were accepted that situations are not comparable solely because the immovable property in question is situated in a non-Member State other than a State which is party to the EEA Agreement, when that provision specifically prohibits restrictions on cross-border movements of capital.

Taking the view, therefore, that the difference in treatment at issue concerns situations that are objectively comparable, the Court then examines whether the different treatment of those situations can be justified by an overriding reason in the public interest.

In that regard, it recalls, first, that requirements related to public housing policy in a Member State and to the financing of that policy can, in principle, constitute overriding reasons in the public interest. Similarly, since the European Union has an economic and a social purpose, the rights under the provisions of the FEU Treaty on the freedoms of movement must be balanced against the objectives pursued by social policy, which includes proper social protection. As regards the EEA Agreement, it is in the light of the privileged relationship between the European Union and the European Free Trade Association (EFTA) States that one of its main objectives, namely extending to the EFTA States the internal market established within the territory of the European Union, must be understood. Thus, an objective relating to social policy, such as the promotion and provision of affordable rented accommodation in Member States and States which are party to the EEA Agreement, may, in principle, constitute an overriding reason in the public interest capable of justifying restrictions on the free movement of capital. However, it is not apparent that legislation such as that at issue is suitable for securing, in a consistent and systematic manner, the attainment of that objective. In particular, that legislation, which applies generally, does not focus on places where the shortage of affordable rented accommodation is particularly acute, such as in large German cities. Moreover, all categories of immovable property let for residential purposes, from the most basic to the most luxurious, may be valued at 90% of their market value for the purposes of calculating inheritance tax. In addition, it is not apparent that that legislation requires heirs to retain their housing for a certain period and to use it for rental purposes, so that they may, after obtaining the tax advantage at issue, sell that housing or use it as a second home. Consequently, that tax advantage cannot be regarded as justified by the objective of promoting and providing affordable rented accommodation in Member States and States which are party to the EEA Agreement.

Second, the Court holds that the overriding reason in the public interest relating to the need to guarantee the effectiveness of fiscal supervision cannot justify the restriction on the free movement of capital brought about by the national legislation at issue. After recalling the relevant provisions of the Tax Agreement between Germany and Canada, ( 3 ) the Court finds that the German authorities are in a position to ask the competent Canadian authorities for the information necessary to verify that the conditions laid down by the national legislation at issue are satisfied in order to grant the tax advantage referred to above when the immovable property is located in Canada.

( 1 ) Agreement on the European Economic Area of 2 May 1992 (OJ 1994 L 1, p. 3; ‘the EEA Agreement’).

( 2 ) According to that provision:

‘1. The provisions of Article 63 shall be without prejudice to the right of Member States:

(a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested;

(b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.

2. The provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with the Treaties. …’

( 3 ) Agreement between the Federal Republic of Germany and Canada for the Avoidance of Double Taxation with respect to Taxes on Income and certain other Taxes, the prevention of Fiscal Evasion and the Assistance in Tax Matters, concluded in Berlin on 19 April 2001 (BGBl. 2002 II, p. 670).