Temporal limitation of the effects of ECJ judgments – recent developments

Two recent developments require an analysis of one of the current “hot issues” of European Tax, whether the European Court of Justice (ECJ) should limit the retroactive effects of some of its groundbreaking judgments.

Just last week Advocate General Tizzano issued an opinion on the Meilicke case, concluding that the already repealed German imputation tax credit system was contrary to the free movement of capital principles in the EC Treaty. For the ones that follow the developments of the ECJ jurisprudence, Tizzano's opinion is not unexpected. In fact, last year decision on the Manninen case (dealing with the Finnish imputation system) and the 2000 decision in the Verkooijen case (dealing with the Dutch exemption for dividends from companies in the Netherlands) were precedents that would foresee the conclusions of Advocate General Tizzano. Nevertheless, what was suppressing about this case was the considerations of the Advocate General on the request of the German government that the ECJ should restrict the retroactive effect of the decision.

According to the Advocate General, case-law of the Court of Justice allow that such a limitation be imposed if there is a risk of serious economic repercussions and if there is objective, significant uncertainty as to the scope of the Community provisions. The Advocate General considers that in the Meilicke case, both those conditions appear to be fulfilled (not only the amount of tax refunds at stake is enormous but also the provisions on the free movement of capital were far from clear).

The question now is how would such limitation operate? According to the Advocate General, if the ECJ would rule in favour of the taxpayer, only refunds for tax credit for corporate income taxes paid abroad for dividends received after 6 June 2000 (date of the judgment in the Verkooijen case) would be refundable. With regards to dividends received before that date, the Advocate General considers that only claims filled before 11 September 2004 (date the preliminary ruling request was published in the EU Official Journal) would be accepted.

The second development involves the discussion around another high profile case pending in the ECJ, namely dealing with an Italian tax called IRAP (imposta regionale sulle attività produttive). IRAP is a regional tax payable by companies, partnerships and the self-employed. The tax, which applies broadly, is imposed on all commercial transactions involving the production of, or trade in, goods and the provision of services. There is some expectation in Europe as to whether IRAP conforms to EC law. In that regard, Advocate General Jacobs’s opinion delivered on 17 March 2005 already indicated that the local business tax might be contrary to the Sixth VAT Directive (“IRAP must be characterised as a turnover tax prohibited by Article 33(1) of the Sixth VAT Directive”). These recommendations raised concerns not only in Italy (where the amount of refunds can damage the budget equilibrium) but also to Hungary that apparently has a similar tax. In an unprecedented move, the ECJ published an order where it decided to reopen the oral proceedings. According to the ECJ, Italian, German, UK, Dutch, Belgium, Swede, Austrian, Check and French governments suggested the reopening of the proceedings. One of the issues that apparently forced the reopening of the case is the issue of temporal limitation of the effects of the judgment (see par. 72 to 88 of the Opinion).

If the ECJ were to decide that IRAP had been collected unlawfully, the Italian government would suffer a loss estimated in more than EUR 120 million. According to the Advocate General that damage is, in itself, insufficient to limit the temporal effect of the ECJ judgment. Nevertheless, the Advocate General mentioned that the ECJ may limit the possibility for parties to rely on a certain judgment. In order to impose such a limitation, two essential criteria must be fulfilled, namely that those concerned should have acted in good faith and that there should be a risk of serious difficulties. In that regard, the Advocate General proposed that the ECJ should consider a temporal limitation of the effects of its judgment in this case. The problem is to find an appropriate date from which the limitation applies. One possible approach is the German Constitutional Court approach, that sets the date from which citizens may rely on its judgments in such a way that sufficient time is allowed for new legislation to be enacted. But that would be a groundbreaking departure from previous case law.

Since the issue of temporal limitation of the effects of ECJ judgments can be applied in several “high profile” cases currently pending in the ECJ (like the Marks & Spencer), the move to follow the suggestion of the Advocate General to reopen the oral procedure to hear further arguments comes as good news for legal certainty in Europe (see point 88).

Another aspect to consider is the impact of such limitation of a judicial ruling on the dialogue between the ECJ and the legislative institutions of the Union and Member States. Some of the recent groundbreaking tax cases gave clear signs to Member States that their decisions should be followed by a normative change within the tax system of Member States and eventually by a reaction by the legislative institutions of the European Union. For example, the EU Commission already stated that it would issue a communication and a proposal on cross-border losses after the decision of the ECJ in the Marks & Spence case. The question that needs to be asked now is what would be the impact of a more ECJ “pro-member state approach” on the push towards tax harmonization in Europe that we experienced in the last 10 years?