Most-favoured nation principle denied in European law

The European Court of Justice decision on 5 July 2005 in the "D" case (C-376/03) is a landmark decision, which ruled that taxpayers may not benefit from a most-favoured nation principle under European law. Using the words of Wattel, “bilateral treaties are the outcome of negotiations between two different jurisdictions with their own idiosyncrasies, budgetary interests and taxpayer and income migration flows and cannot simply be extended to other bilateral situations with other jurisdictions with different systems and different taxpayer and income migration”. The ECJ simply followed this approach and denied Mr. D (a German resident) the possibility to benefit from an allowance included under the Netherlands-Belgium treaty.

In fact, in 1998, a German national and resident D owned real estate in the Netherlands, which accounted for 10% of his property. Accordingly, the taxpayer was subject to the Netherlands net wealth tax as a non-resident taxpayer. The taxpayer requested the granting of the basic allowance of Art. 14(2) of the net wealth tax on the basis of the principle of the free movement of capital (Art. 56 of the EC Treaty), in particular because Belgian residents were always entitled to the allowance under Art. 25(3) of the 1970 Netherlands-Belgium treaty. The Netherlands tax authorities refused the taxpayer's request, as the 90% test was not satisfied, and the taxpayer appealed.

In its decision, the ECJ referred to its case law (C-279/93 - Schumacher) according to which it is not discriminatory when a Member State does not grant to a non-resident taxpayer certain benefits, which it grants to a resident taxpayer because they are not in a comparable situation. Subsequently, the ECJ established a parallel between the situation of a person liable to wealth tax and that of a person liable to income tax. The ECJ then observed that a taxpayer, who only holds a minor part of his wealth in another State than his state of residence, is not in a comparable situation as a resident. Therefore, it is not discriminatory that he is not entitled to the allowance granted to resident taxpayers.

In respect of the eventual application of the most-favoured nation principle, the ECJ started by referring to its case law (C-336/96 - Gilly) according to which the ECJ accepted that a different treatment of nationals of two contracting States resulting from the allocation of taxation powers is not discriminatory. The ECJ noted that the taxpayer is not in the same position as a taxable person resident in Belgium with respect to wealth tax levied on real property situated in the Netherlands. Consequently, the ECJ held not incompatible with the freedom of movement of capital the denial of the extension of benefits under the Belgium-Netherlands tax treaty to an individual of a third state. In this respect, the ECJ observed that the fact that reciprocal rights and obligations of a tax treaty only apply to individuals of those states is inherent to bilateral tax treaties.

In this decision, the ECJ did not follow the Advocate General's opinion of 26 October 2004. We should remember that on his opinion, the Advocate General Colomer had suggested the ECJ not to address the issue of the most-favoured-nation principle, by concluding that the taxpayer could claim equal treatment as compared to a Netherlands resident taxpayer based on a the application of the non-discrimination principle. The ECJ answered differently to the first question (relying primarily on the principles laid down in the Schumacher case), considering that Netherlands tax law, which denied the taxpayer an allowances it grants to resident taxpayers, is compatible with the freedom of movement of capital, laid down in Article 56. The ECJ then addressed the question whether or not a most-favoured nation principle may be derived from European law. In a very concise decision, the ECJ considered that a situation of a non-resident (as that of the taxpayer) could not be compared to that of another non-resident, who receives special treatment under a tax treaty. The ECJ appears to supports is ruling on the concept of reciprocity of tax treaties and on the fact that an allowance given under a tax treaty constitutes a benefit non-separable from the remainder of the treaty. Finally, this decision may affect a similar pending case dealing with application of a most-favoured nation treatment (C-8/04 - Bujara).