The principle of legality of taxation (or principle of fiscal legality) forms part of the legal order of the European Union (EU) as a general principle of law. The Court of Justice of the European Union (CJEU) has ruled as such on two different occasions.
The CJEU laid down this principle for the first time in Case C-566/17 Zwiazek Gmin Zaglebia Miedziowego w Polkowicach. A Polish association of municipalities claimed that it was entitled to deduct all the VAT paid, in the context of both its economic and non-economic activities, owing to the lack of specific rules in the Polish tax legislation regarding the criteria and methods of apportionment. Taking into account the fact that the national practice of granting a right to deduction in full was founded on the principle of legality of taxation as granted by Polish constitutional law, the CJEU stated that “as is apparent from the constitutional traditions common to the Member States, the principle of fiscal legality may be regarded as forming part of the EU legal order as a general principle of law”. Examining the VAT Directive in light of the principle of legality of taxation, the CJEU considered the criteria and methods of apportionment of mixed expenditures to be merely ancillary elements. Consequently, the Court concluded that the mere lack of such rules in the applicable tax legislation in no way results in the right to deduct the input VAT in full.
The CJEU confirmed the importance of the principle of legality of taxation in Cases C-885/19 P and C-898-19 P Fiat Chrysler Finance Europe. In this instance, the Commission had decided that a ruling by the Luxembourg tax authorities in respect of the transfer pricing analysis of a company engaged in intra-group financing activities constituted State aid. The CJEU ruled that the Commission had not properly identified the reference framework for the purposes of determining the existence of a selective advantage, since it had not taken into account the specific transfer pricing rules provided for by Luxembourg law. Moreover, the CJEU held that even though many national tax authorities are guided by the OECD Guidelines in the control of transfer prices, only national provisions are relevant for the purposes of analysing whether particular transactions deviate from the arm’s length principle. Parameters and rules external to the national tax system cannot be taken into account. This finding is, in the CJEU's view, “an expression of the principle of legality of taxation which forms part of the legal order of the EU as a general principle of law”.
In light of these decisions, questions arise as to the exact definition of the principle of legality of taxation and its potential applications.
Definition of the principle of legality of taxation
As a general principle of law stemming from the constitutional traditions common to the Member States, the principle of legality of taxation is part of EU primary law and is applicable to all situations governed by EU law. Reliance on this principle is therefore not limited to VAT and State aid matters; it can be invoked whenever national tax legislation is likely to hinder freedom of movement.
As it forms part of the legal order of the EU, this principle must be given an autonomous interpretation.
- First, the concept of “tax”, which determines the scope of application of the principle, may have a different meaning from that given in national law. The classification of a tax, duty or levy under EU law is determined by the Court on the basis of objective characteristics, irrespective of the classification given in national law (see, for example, Case C-189/15 IRCCS and Case C-443/19 Vodafone España SAU).
- Secondly, with regard to the concept of “law”, Advocate General Eleanor Sharpston noted in her opinion in the above-mentioned Zwiazek Gmin Zaglebia Miedziowego w Polkowicach case that it seems to be generally accepted that “a tax must be defined in a legally binding act of general application adopted by the legislature and duly published”. The principle of legality of taxation therefore refers to a strict and formal concept of “law”, whereas “law” within the meaning of the principle of legality resulting from Article 1 of the First Additional Protocol to the European Convention on Human Rights (ECHR) is broad in scope, and includes case law.
According to the CJEU, the principle of legality of taxation requires that any obligation to pay a tax, as well as all the essential elements that define the fundamental characteristics of the tax, but not necessarily the technical aspects of taxation, be provided for by law, since the taxpayer must be able to foresee and calculate the amount of tax due and determine the point at which it becomes payable.
On the one hand, the principle of legality of taxation seems to require not only the existence of a legal basis, but also that this basis possesses certain qualities, such as precision and foreseeability. The latter characteristic is also a requirement under the general principle of legal certainty. As presented in Advocate General Eleanor Sharpston’s opinion, some Member States (e.g., Germany, the Netherlands, Sweden, Greece and the Czech Republic) draw from this “a prohibition on applying fiscal legislation by analogy and where there is doubt, the requirement that legislation be interpreted in favour of the taxable person”. This raises the question whether the European principle of legality of taxation incorporates such an obligation to interpret “doubt” in favour of the taxpayer.
On the other hand, the distinction between essential elements and technical aspects of taxation may prove difficult. In this respect, the reference to the principle of legality of taxation in the Fiat Chrysler Finance Europe decision is questionable. If the national legislation applicable to companies in Luxembourg definitely aimed to achieve a reliable approximation of the market price, would it not be correct to consider the practical details for the application of the arm’s length principle as mere technical aspects of taxation?
Possible applications of the principle of legality of taxation in a French context
While it is by no means possible to anticipate all developments that will ensue with respect to the principle of legality of taxation, some possible applications can nevertheless be considered.
The “foreseeability” aspect of the law could give rise to some interesting applications. In particular, if the uncertainties caused by the complexity of the law and/or the immediate application of case law are elements that seem to be increasingly taken into account by judges in assessing the validity of penalties (see, for instance, Conseil d’État, 13 July 2022, cases no. 459899 and 459900), the European principle of legality of taxation - as well as the principle of legality derived from Article 1 of the First Additional Protocol to the ECHR - could lead to these factors also being taken into account in the examination of the validity of the tax itself.
It would also be interesting to explore the applicability of the principle of legality of taxation where a reassessment is based exclusively on the OECD’s works, founded on economic rather than legal reasoning, mobilising concepts unknown to French law. Could the principle of legality of taxation be invoked in response to such a reassessment? Despite their “persuasive value” for the interpretation of international tax treaties inspired by the OECD Model and for the practical application of transfer pricing control, the OECD’s works have no normative value and do not emanate from Parliament. Consequently, they cannot constitute a legal basis for taxation and the principle of legality of taxation should therefore preclude such a reassessment. In a similar situation, where an extremely broad statutory provision would however be formally invoked as the legal basis for a reassessment, it may prove difficult to distinguish between the essential elements and the technical aspects of the taxation, so that the outcome of the argument will be more uncertain.
Finally, a question arises as to the extent to which the NPS decision (Conseil d’État, 6 December 2021, case no. 433301, National Pension Service), which recently redefined the consequences of tax discrimination contrary to EU law, is in line with the general principle of legality of taxation. In this decision, the Conseil d’État ruled that, where a discriminatory tax law is contrary to EU law, this need not lead to a cancellation of the tax in full; a partial cancellation to the extent necessary to eliminate the discrimination would be sufficient. It is interesting to view the NPS decision in light of a decision issued by the CJEU a few months later (Case C-205/20 NE v. Bezirkshauptmannschaft Hartberg-Fürstenfeld), where the CJEU ruled that the principle of primacy of EU law requires that national provisions that are partially contrary to the proportionality of penalties requirement provided for in article 20 of Directive 2014/67 be disregarded only to the extent necessary to enable the imposition of proportionate penalties. Indeed, according to the CJEU, such a solution is not contrary to the principles of legality of penalties and legal certainty insofar as the penalty applied will be less severe than that provided for by the applicable legislation and the latter will remain the legal basis for the penalty. However, in NE , the CJEU was ruling on a case where it was possible, in order to ensure compliance with EU law, to set aside certain specific words of the legislation whereas, in NPS, the discrimination stemmed from the existence of a specific discriminatory tax rate: it is not certain that the legal basis for taxation can be considered unchanged when it provided for a specific rate which, as a result of EU law, is not the one finally applied.