1.

In the present Opinion, I respond to the request of the Court of Justice to address a novel question: can Member States pursue social policy objectives within the territory of the European Union, such as the promotion of affordable rental housing, by means of measures that constitute a restriction on the free movement of capital to and from third countries?

2.

Article 40 of the Agreement on the European Economic Area (‘the EEA Agreement’), of 2 May 1992, ( 2 ) declares that, within the framework of its provisions, there shall be no restrictions between the Contracting Parties on the movement of capital belonging to persons resident in EU Member States or European Free Trade Association (EFTA) States and no discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested.

3.

Paragraph 1(1).1 of the Erbschaftsteuer- und Schenkungsteuergesetz (Law on inheritance and gift tax), of 27 February 1997, ( 3 ) as amended by the Gesetz zur Reform des Erbschaftsteuer- und Bewertungsrechts (Law reforming the rules on inheritance tax and valuation), of 24 December 2008, ( 4 ) applies inheritance tax to acquisitions on death.

4.

Under Paragraph 2(1)(1) of the Law on inheritance and gift tax, liability to tax arises:

‘…

1.   in the cases referred to in Paragraph 1, subparagraph 1(1) to (3), in respect of the entire estate …, where the deceased on the date of death, the donor on the date of making the gift, or the acquirer on the date of the chargeable event, is a resident. The following persons are regarded as residents:

…’

5.

Pursuant to Paragraph 13c ( 5 ) of the Law on inheritance and gift tax, entitled ‘Special rules for immovable property leased for residential use’:

‘(1)   The real estate property referred to in subparagraph 3 shall be valued at 90% of its market value.

…

(3)   The reduced market value approach shall apply to real estate property or to the parts thereof which:

…’

6.

On 19 April 2001, the Federal Republic of Germany and Canada concluded an Agreement 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 (‘the Double Taxation Agreement’). ( 6 ) Under Article 2 thereof, the Double Taxation Agreement does not apply to inheritance taxes. Notwithstanding that, by Article 26 thereof:

‘(1) The competent authorities of the Contracting States shall exchange such information as is relevant for carrying out the provisions of this Agreement or of the domestic laws in the Contracting States concerning taxes covered by the Agreement in so far as the taxation thereunder is not contrary to the Agreement. The exchange of information is not restricted by Article 1. …

…

(4) For the purposes of this Article, the taxes covered by the Agreement are, notwithstanding the provisions of Article 2, all taxes imposed by a Contracting State.’

7.

At the time of his death in 2016, A was a German resident. He bequeathed to his son, BA, who was also resident in Germany, a share of a property located in Canada leased for residential purposes.

8.

By decision of 17 July 2017, Finanzamt X (Tax Office X, Germany) assessed BA to inheritance tax with respect to that property.

9.

In accordance with Paragraph 13c(1) of the Law on inheritance and gift tax, on 19 March 2018 BA sought to amend that assessment to inheritance tax so that the property located in Canada would be subject to tax at 90% of its market value. BA submitted that the property met all of the conditions laid down in the said provision, save with respect to its location. In so far as the Law on inheritance and gift tax required that the property be located in Germany, in another Member State or in a European Economic Area (EEA) State in order to benefit from the tax advantage in Paragraph 13c(1), BA submitted that that law infringed the free movement of capital between Member States and third countries enshrined in Article 63 TFEU.

10.

By decision of 25 April 2018, Tax Office X rejected BA’s application. BA brought an administrative complaint against that decision. Tax Office X dismissed his complaint on 23 April 2019, finding that the favourable treatment for inheritance tax purposes of property leased for residential purposes and located in a Member State or in an EEA State is not contrary to Article 63 TFEU. On 24 May 2019, BA brought an action before the Finanzgericht Köln (Finance Court, Cologne, Germany) for the annulment of the decision to reject his complaint.

11.

In its order for reference, that court expresses doubts as to the compatibility with Article 63 TFEU of the relevant provisions of the Law on inheritance and gift tax. The property in question meets all of the conditions under national law that would enable it to benefit from the 10% reduction of the taxable base, save its location in a State outside the EEA. According to the case-law, the transfer of assets, including real estate, from a deceased person’s estate to one or more individuals constitutes the movement of capital for the purposes of Article 63 TFEU. ( 7 ) The Finanzgericht Köln (Finance Court, Cologne) observes that restrictions on the free movement of capital include measures likely to discourage persons resident in a Member State from making investments in other States, ( 8 ) including third countries. The Finanzgericht Köln (Finance Court, Cologne) also has doubts as to whether that restriction on the free movement of capital may be justified by the standstill clause in Article 64 TFEU, the grounds of justification listed in Article 65 TFEU or any overriding reason in the general interest. It takes the view that the standstill clause is inapplicable since the relevant tax advantage was introduced in 2008. Irrespective of whether it is located in a Member State, in an EEA State or in a third country, property leased for residential purposes is in the same situation for the purpose of the application of Article 65(1)(a) TFEU. Finally, it observes that there appears to be no overriding reason in the general interest capable of justifying that restriction.

12.

In those circumstances, the Finanzgericht Köln (Finance Court, Cologne) decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling:

‘Are Articles 63(1), 64 and 65 TFEU to be interpreted as precluding national legislation of a Member State on the levying of inheritance tax which, for the purposes of calculating inheritance tax, provides that developed immovable property forming part of personal assets which is located in a third country (in this case: Canada) and is let for residential purposes is to be taken into account at its full value, whereas immovable property forming part of personal assets which is located within the national territory, in a Member State of the European Union or in a State of the European Economic Area and is let for residential purposes is to be taken into account at only 90% of its value in the calculation of inheritance tax?’

13.

The German Government and the European Commission submitted written observations. At the hearing of 17 November 2022, BA, the German Government and the Commission presented oral argument and replied to the Court’s questions.

14.

In line with the Court’s request, the present Opinion examines whether Member States can justify restrictions on the free movement of capital to and from third countries by relying upon overriding reasons in the general interest.

15.

Article 63 TFEU applies to capital flows between Member States and third countries. Since a higher base is used to calculate inheritance tax due in respect of real estate located in a third country, BA, the German Government and the Commission agree that the national rules at issue in the proceedings before the referring court restrict the free movement of capital within the meaning of Article 63 TFEU. They disagree as to whether that restriction can be justified by reliance upon an overriding reason in the general interest.

16.

At the hearing, BA contended that the applicable German legislation does not promote the availability of affordable rental housing since the tax advantage applies to all property, irrespective of its value. There is no reason why property located in third countries ought not to benefit from that tax advantage.

17.

The German Government emphasised that the main proceedings engage the free movement of capital between Member States and third countries, as opposed to the free movement of capital between EEA States. In assessing the existence of an overriding reason in the general interest, account must be taken of the higher degree of legal integration between Member States. A restriction on the free movement of capital to or from third countries may thus be justified for reasons that would not justify a restriction on the free movement of capital between Member States.

18.

The German Government observed at the hearing that, in major German cities, four out of ten households spend over 30% of their disposable income on rent. A similar problem exists in other Member States and is of concern to their respective public authorities. As appears from the draft Law reforming the rules on inheritance tax and valuation, the German legislature adopted Paragraph 13c in pursuit of an objective of general interest, namely to increase the availability for residential use of individually owned real estate property so as to reduce the concentration of residential leasehold property in the hands of investor groups. ( 9 ) The German Government points out that investor groups, unlike individuals, are not subject to inheritance tax. The tax advantage is designed to reduce the pressure on individuals who inherit property leased for residential use to sell it in order to pay tax, thus retaining its use for that purpose.

19.

The German Government submits that strengthening competition on the market for the supply of rental housing contributes to the availability and financing of affordable housing, which can constitute an overriding reason in the public interest. ( 10 ) Facilitating access to affordable housing is a European policy goal, which is why the applicable German legislation extended the tax advantage at issue to real estate located in the EEA. Neither the German Government, nor the European Union, nor the EEA, is responsible for promoting the availability of affordable housing in third countries. It is impracticable to assess the need for social housing in third countries as that would require a very high level of cooperation with those countries. Extending the tax advantage to property located in third countries would also increase the cost of the measure to the exchequer without generating any additional benefit for the population of the European Union or of the EEA. Limiting the benefit of the tax advantage to leased property located in the European Union or in the EEA incentivises investment in such assets and thereby contributes to the attainment of the social objective pursued. The German Government considers that it can ‘draw a line’ by excluding property located in third countries from the benefit of the tax advantage.

20.

The German Government contends that the restriction on the availability of the tax advantage is proportionate since it is appropriate to achieve the objective pursued and does not go beyond what is necessary to attain it. In that context it observes that the availability of the tax advantage is dependent upon the location of the property, not that of the residence of the deceased or of his or her heirs.

21.

The German Government also justifies the restriction on the availability of the tax advantage by the need to protect the effectiveness of fiscal supervision. In the absence of mechanisms for the exchange of information with third countries, the German authorities are unable to verify whether a property is leased for residential use. At the hearing, the German Government nevertheless accepted that the Double Taxation Agreement allows the German authorities to request relevant information from the Canadian authorities for the purpose of raising assessments to inheritance tax.

22.

The Commission takes the view that no overriding reason in the general interest can justify the restriction at issue in the main proceedings.

23.

As regards the promotion of affordable rental housing, in its written observations the Commission contended that there is no evidence to show that real estate property located in third countries, such as Canada, is not in a situation comparable to that of such property located in Germany, the European Union or the EEA. In response to the Court’s questions at the hearing, the Commission admitted that the promotion of affordable rental housing can constitute a valid justification for a restriction on the free movement of capital between Member States or EEA States and third countries, irrespective of whether there is a comparable need in those third countries. It is nonetheless a matter for the German Government to show that its legislation validly pursues a social policy objective and that it is proportionate. In that context, the applicable German legislation raises at least two issues. First, a person who inherits property leased for residential purposes may obtain the benefit of the tax advantage and then proceed to sell it to an institutional investor. Second, the tax advantage applies to all real estate, including luxury properties.

24.

The Commission furthermore submits that the restriction in question cannot be justified by the effectiveness of fiscal supervision, since the tax advantage is unavailable in respect of property located in any third country, irrespective of whether the Federal Republic of Germany has concluded an information exchange agreement with that country, which it has with Canada.

25.

By Article 63(1) TFEU the free movement of capital applies to capital flows both between the Member States and between the Member States and third countries, without any condition of reciprocity. ( 11 ) That feature distinguishes the free movement of capital from all of the other internal market freedoms, since the latter apply exclusively within the territory of the Member States. ( 12 )

26.

Making the grant of an advantage in the assessment to inheritance tax conditional upon an asset being located on the territory of a Member State or an EEA State is a restriction on the free movement of capital that Article 63(1) TFEU, in principle, prohibits. ( 13 ) The favourable tax treatment of real estate located in Member States or EEA States may discourage investment in that asset class when it is located in third countries.

27.

According to established case-law, the concept of a restriction on the free movement of capital should be interpreted in the same manner with regard to transactions between Member States, those to and from EEA States, ( 14 ) and those between Member States and third countries. ( 15 )

28.

In addition to the grounds of justification listed in the Treaty, restrictions on the free movement of capital may be accepted where they are justified by an overriding reason in the general interest, provided they comply with the principle of proportionality. ( 16 )

29.

The possibility of invoking overriding reasons in the general interest exists only to the extent that there are no EU harmonisation measures to ensure the protection of those interests. In the absence of such harmonisation measures it is, in principle, for the Member States to decide on the degree of protection that they wish to give to those interests and the way in which that protection is to be achieved. Such measures must remain within the limits set by the Treaty and must be proportionate. ( 17 )

30.

As a matter of principle, Member States may invoke overriding reasons in the general interest in order to justify restrictions on capital movements with third countries. Those reasons may include ensuring the effectiveness of fiscal supervision and combating tax evasion, ( 18 ) preventing wholly artificial arrangements, ( 19 ) and preserving both the coherence of tax systems ( 20 ) and a balanced allocation of the power to tax in relations between Member States and third countries. ( 21 ) Whilst the Court has often rejected the justifications put forward in support of such restrictions, in a number of instances it has accepted justifications for restrictions on capital movements between Member States and non-Member States in circumstances where it would not have accepted restrictions upon equivalent movements between Member States. ( 22 )

31.

This approach is explained by the fact that capital flows to or from third countries take place in a different legal context from those between the Member States, ( 23 ) or within the EEA. ( 24 ) Due to the degree of legal integration between the Member States, the taxation of cross-border economic activities between Member States is not always comparable with the taxation of similar activities between those states and third countries. That the free movement of capital to and from third countries takes place in a different legal context also explains why Article 64, Article 65(4) and Article 66 TFEU envisage that Member States may adopt specific derogations from the free movement of capital as between them and third countries. That different legal context has consequences for Member States’ reliance upon overriding reasons in the general interest. A Member State may, in principle, be able to show that a restriction on the movement of capital to or from third countries is justified for a reason that would not necessarily justify a restriction on capital movements between Member States. ( 25 )

32.

In the present case, the German Government puts forward two overriding reasons in the general interest to justify the restrictions its legislation imposes: the promotion of affordable rental housing as a social policy objective and the effectiveness of fiscal supervision.

33.

As regards the first ground of justification, the Court accepts social policy justifications as overriding reasons in the general interest in the context of the free movement of capital between Member States. In its judgment in Jäger, the Court considered the German Government’s justification for inheritance tax legislation that afforded the valuation of agricultural land and forestry located in Germany more favourable treatment as compared to similar assets located in another Member State. Having found that the more favourable treatment of assets located in the national territory constituted a restriction on the free movement of capital, ( 26 ) the Court held that the social function of agricultural and forest land, including the retention of employment in cases where such lands were inherited, was an overriding reason in the general interest. ( 27 ) The Court concluded nonetheless that that restriction was unjustified since there was no evidence that the social aim pursued was not equally worthy of protection in other Member States. ( 28 )

34.

In its judgment in Woningstichting Sint Servatius, the Court examined a public housing scheme in the Netherlands that refused to authorise an investment in an experimental project located in Belgium, near the Netherlands border. The requirement for prior authorisation and its refusal were both deemed restrictions on the free movement of capital. ( 29 ) The Court observed that the objective of the public housing scheme was to ensure an adequate supply of accommodation for persons on low incomes residing in the Netherlands. ( 30 ) It held that requirements related to public housing policy can constitute overriding reasons in the general interest. ( 31 ) As for the principle of proportionality, a requirement of prior authorisation could be necessary and appropriate in order to attain that public housing policy objective. ( 32 ) The Court nevertheless criticised the authorisation scheme since it was not based upon objective, non-discriminatory criteria known in advance, thereby circumscribing the exercise of the national authorities’ discretion. The restriction on the free movement of capital was unjustified since the sole criterion was that a project be deemed ‘in the interests of public housing in the Netherlands’. ( 33 )

35.

The Court also examined the application of Member State housing policy objectives in its judgment in Busley and Cibrián Fernández. German legislation afforded a more favourable tax treatment for income obtained from the rental of property located in Germany than that earned from the rental of property located in other Member States, which constituted a restriction on the free movement of capital. ( 34 ) The Court accepted that the social policy objective the national legislation pursued, namely the encouragement of the construction of rental property to satisfy the requirements of the German population, was capable of being an overriding reason in the general interest. It nonetheless concluded that that national legislation did not respect the proportionality principle since it applied to all rental property, including luxury properties, and it was not targeted at locations in Germany where there was an acute housing shortage. ( 35 )

36.

It follows that, in principle, a Member State may invoke social policy objectives, such as the promotion of the availability of affordable housing, as overriding reasons in the general interest to justify a restriction on the free movement of capital between the Member States. In that context, the Preamble of the Treaty on the European Union declares the Member States’ determination to promote social progress for their peoples. Article 3(3) thereof charges the European Union with, inter alia, the task of promoting social cohesion and solidarity among the Member States. Similarly, Article 151 TFEU, under Title X relating to ‘Social policy’, establishes the objective of ensuring proper social protection as an aim of both the European Union and of its Member States. It is difficult to conceive how Member States could complete that task without being entitled to pursue policies at national level with a view to the promotion of social cohesion and solidarity.

37.

The Court has moreover ruled that since the European Union has an economic and a social purpose, the rights under the provisions of the Treaty on the free movement of goods, persons, services and capital must be balanced against social policy objectives, which include that of ensuring proper social protection. ( 36 ) Article 4(2) TFEU indicates that social policy is a shared competence of the European Union and its Member States. While Article 9 TFEU provides that the European Union must guarantee an adequate level of social protection when defining and implementing its own policies and activities, Article 153 TFEU indicates that it shall support and complement Member States’ activities to fight social exclusion.

38.

There thus appears to be no reason why a Member State may not rely upon social policy grounds to justify a restriction on the free movement of capital to and from third countries. There is, however, nothing in those provisions or elsewhere in the Treaties to oblige Member States to pursue social policy objectives in third countries. ( 37 ) It follows that the public authorities’ responsibility to ensure social protection refers principally to the population of the European Union and that they may adopt measures to that end.

39.

Contrary to what the Commission suggests in its written observations, I take the view that EU law does not require Member States to take the availability of affordable housing in third countries into account in order to justify a restriction on the free movement of capital between the European Union and third countries. The level of legal integration between the Member States and their common policy objectives, which explain the strict approach of the case-law towards accepting justifications for restrictions on the free movement of capital between Member States, ( 38 ) are not to be transposed automatically to those justifications when applied to the movement of capital between Member States and third countries. As observed in point 31 of the present Opinion, that consideration explains why the Court has ruled that restrictions on the free movement of capital to or from third countries may be justified in circumstances where the same restriction on capital movements between Member States would not be justified.

40.

This conclusion is unaffected by the fact that a Member State may extend a tax advantage to property located in States party to the EEA Agreement. In so doing, that Member State simply avoids creating a restriction on the free movement of capital to and from EEA States, which, by virtue of the EEA Agreement, enjoy a closer degree of legal integration with the European Union than third countries.

41.

It is principally a matter for the referring court to assess the national legislation’s compliance with the principle of proportionality. In carrying out that exercise, it should acknowledge that Member States have a broad discretion when they choose measures capable of achieving social policy aims, notwithstanding that the exercise of that discretion cannot undermine an individual’s enjoyment of rights laid down in the Treaties. ( 39 )

42.

Restrictions are deemed appropriate where they are suitable to achieve the general interest objective they purport to pursue, here the availability of affordable rental housing in the European Union and in the EEA. It for the referring court to determine, on the basis of the evidence adduced before it, whether a 10% reduction in the base used to calculate the value, for the purposes of assessment to inheritance tax, of property leased for residential use, is capable of reducing the pressure on heirs to sell such property and the consequences for the availability of rental property.

43.

In order to assess whether a restriction goes beyond what is necessary to attain the objective pursued, the question arises as to whether measures of a less restrictive kind would ensure that the objective would be attained as effectively. ( 40 ) Whilst it is again a matter for the referring court, if the scope of the tax advantage were narrower and it was limited to real estate property valued at below a certain threshold, thereby excluding luxury properties, the impact of the restriction on the free movement of capital to and from third countries might be attenuated. Such a limitation might also have the consequence of making the taxable base progressive, thereby possibly favouring access to affordable rental housing.

44.

I therefore advise the Court that Article 63(1) TFEU does not preclude national legislation which, for the purposes of calculating inheritance tax, treats the value of real estate property leased for residential use in a Member State or in an EEA State more favourably than property located in a third country put to the same use in order to promote the availability of affordable rental housing in the European Union and in the EEA. It is for the referring court to assess whether that national legislation is appropriate to achieve the objective pursued and whether there are less restrictive yet equally effective measures to attain that goal.

45.

I turn to the second overriding reason in the general interest that the German Government puts forward to justify the restriction, namely the effectiveness of fiscal supervision.

46.

The case-law to which point 30 of the present Opinion refers contains numerous examples where the Court has accepted that the effectiveness of fiscal supervision justified restrictions on the free movement of capital to and from third countries. ( 41 ) Where national legislation makes the award of a tax advantage conditional on the fulfilment of certain conditions, and there is no legal framework for the exchange of information between Member States and third countries, the Member State may be unable to verify that the conditions to obtain that tax advantage have been met.

47.

The information in the file before the Court in the present case indicates that access to the tax advantage in question is conditional on the property being let for residential purposes. It is for the referring court to verify the existence of a legal framework for the exchange of information between the competent tax authorities. Although the Double Taxation Agreement does not apply to inheritance tax, the German Government accepted at the hearing that, by virtue of Article 26 thereof, the obligation to exchange information covers all taxes charged by the Contracting States.

48.

In view of the foregoing, I advise the Court to reply to the second aspect raised by the referring court that Article 63(1) TFEU precludes national legislation which, for the purposes of calculating inheritance tax, treats the value of real estate property leased for residential use in a Member State or in an EEA State more favourably than property located in a third country put to the same use in order to ensure the effectiveness of fiscal supervision, where there exists a legal framework for the exchange of relevant information between the competent tax authorities.

49.

In the light of the foregoing considerations, I propose that the Court answer the question referred for a preliminary ruling by the Finanzgericht Köln (Finance Court, Cologne, Germany) as follows:

Article 63(1) TFEU is to be interpreted to the effect that: