The judgment in IN and IM/Belgium, delivered yesterday by the Court of Justice, is a relevant development in the definition of Article 51.1 of the Charter of Fundamental Rights and its scope of application when applied by Member States. The judgment is an interesting continuation of the Akerberg Fransson saga which still stirs the passions of EU lawyers.
The judgment is relevant because it stands among the decisions in which the Court of Justice rules that the Charter does not apply to a Member State. It is therefore a contribution to the restriction of the scope of application of EU fundamental rights. As I will explain in this post, the outcome is surprising, not so much because of its contrast with the Akerberg Fransson case-law, but due to the odd position in which it leaves another line of case-law: the Guimont doctrine, which allows national courts to make references to the Court of Justice to resolve discriminations under national law.
The facts of the case are as follows: IN and IM were managing directors of Belgian companies involved in a VAT carousel fraud scheme, which ensued in criminal investigations in Luxembourg. During the Luxembourg proceedings, documents were issued that confirmed the Belgian authorities’ queries and were transferred to them after issuing letters rogatory to their Luxembourg counterparts. However, the execution of the letters rogatory took place without approval from the Luxembourg competent court and, as a result, the evidence was transferred illegally to the Belgian authorities.
Having examined the file, including the Luxembourg documents, the Belgian tax authorities adjusted the income tax returns of IN and IM to consider the income obtained through their Luxembourg accounts. As a result, IN and IM launched applications against the adjusted tax returns because the tax authorities based their decision on information obtained illegally and thus in breach of the fundamental right to private life and an effective remedy. In first instance, the application was upheld but overturned on appeal. The applicants brought a recours de cassation before the Belgian Hof van Cassatie, which made the request for a preliminary reference to the Court of Justice.
The referring court was well aware that EU law does not cover provisions on income tax and therefore the case at hand is, in principle, beyond the scope of application of the Charter. However, the referring court argues that the Court of Justice, in the context of VAT, found in the judgment in WebMindLicences that evidence gathered illegally in a Member State cannot be produced in VAT tax proceedings in another Member State. This case-law is based on an interpretation of the VAT Directive, together with Article 47 of the Charter.
In the case of IN and IM, the referring court argues that if EU law protects VAT tax-payers but not income tax tax-payers, an issue of discrimination on the grounds of Belgian law will ensue. Therefore, to solve the question of discrimination between both legal orders, the referring court requests assistance from the Court of Justice to confirm if the facts of the case, if they would have concerned VAT fraud, would result in a breach of the Charter. If so, then the Belgian court will undertake a discrimination test under national law, to determine if tax-payers like IN and IM, with no link to EU law in their case, are being discriminated in comparison to tax-payers that benefit from the link with EU law.
The answer of the Court of Justice, in line with the Opinion of AG Kokott, is in the negative. The judgment states that EU law does not apply to a procedure for the levying of personal income tax, and therefore the Charter does not apply to the facts of the case. It is true that the investigations in Luxembourg from which the relevant documents were obtained concerned, in their origins, VAT fraud. However, the present proceedings do not involve VAT fraud, but the adjustment of income tax returns of the managers of the undertakings involved in the VAT fraud scheme. Therefore, according to the Court, there is no direct link with VAT EU law.
However, the Court continues its reasoning and explains why it cannot respond to the questions even when the referring court needs to solve the point of discrimination under domestic law. According to the Court, in order to respond to questions falling outside the scope of application of EU law but in which national law enacts the same solutions as those adopted by EU law, those provisions have to apply “directly and unconditionally” to the situations of the case at hand. In other words, if national law refers to EU law in purely internal situations, it has to do so in circumstances that clearly identify the facts that will be covered by EU law as a result of the referral in national law. The Court concludes that such reference has not been made in Belgian law under the income tax provisions and therefore EU law does not apply.
This outcome is odd, to say the least.
The question being put to the Court does not concern a reference from national law to EU law. This is not a Dzodzi situation (as this case-law on references is usually called), but a case of discrimination under national law. What the Belgian court is requesting is a reply on what would happen if the facts of the case would have concerned VAT procedures instead of income tax procedures. That is the question posed, not any other.
For these kinds of questions, the Court has developed a case-law in the context of free movement. This is the Guimont case-law, a product of significant unease with reverse discriminations created as a result of the purely internal situation doctrine applied to EU free movement rules. When a free movement provision was invoked successfully, only the undertakings or individuals benefitting from a transfrontier link could benefit from them. For those without a link, national laws could provide satisfaction through non-discrimination rules. When national law does that, domestic courts may request the Court of Justice to rule on the hypothesis of a free movement case. The national court will ask the Court of Justice about the hypothetical situation of a free movement situation, as if the facts of the case had a transfrontier link (which they don’t). The reply of the Court of Justice would allow the national jurisdiction to solve the discrimination under national law between the individuals that benefit from EU law (in hypothesis) and the individuals that don’t (the applicants in the proceedings).
The Guimont case-law, despite its complexity, is quite settled in the case-law and, in the Ullens de Schooten case, in which the Court codified its case-law on purely internal situations, it was included among the scenarios in which a purely internal situation can nevertheless require an answer from the Court based on EU law (see paragraph 53).
However, in yesterday’s judgment, the Court completely ignores the Guimont doctrine and relies exclusively on the Dzodzi situation, as if the present case involved a reference under national law to EU law, which is obviously not the case.
What does this mean? Is it simply a mistake, or is the Court trying to limit its jurisdiction under the Guimont doctrine to free movement law only? This latter option may be what the Court has in mind, because Ullens de Schooten, when referring to Guimont, clearly enumerates Articles 49, 56 and 53 TFEU, a reference that could be tacitly excluding Guimont situations when questions of applicability concerned other provisions of EU law. If that is what the Court has in mind, this means that, from now on, national courts may not use domestic discrimination rules to solve reverse discriminations created by the Charter.
Whatever it may mean, the truth is that the judgment is sending a message to creative national courts exploring the potential of the Charter, even when EU law has already provided Charter interpretation in equivalent fields of practice. What the Belgian court requested was, in fact, quite sensible: if the tax proceedings involve VAT (which, under EU law, has no provisions on procedure), the Charter and its standard of protection apply. But if the tax proceedings involve income tax, even if the facts concern identical circumstances (the production of illegal evidence on which the tax authorities’ decision is based) the Charter has nothing to say. The national judiciary can still rule on the reverse discrimination anyway (something to which Belgian courts are quite used to, by the way), but they will have to do it without the assistance of the Court of Justice. I wonder if that is what the Court wishes to have, particularly when the time comes to rule in cases which require complex and vital points of principle of EU law (which the national court will decide all on its own).
The Guimont case-law developed precisely to avoid these kinds of odd outcomes. In IN and IM the Court is closing down this path, restricting the Guimont doctrine, the Charter and EU law’s ability to cooperate in constructive ways with national courts. The decision is not optimal, but the consequences may be beyond suboptimal. They could trigger an eroding process of Charter applicability in national courts that leaves EU fundamental rights under no supervision from the Court, and at a time in which the Charter (and assistance from the Court) is needed more than ever.