ECJ, Stauffer: German rental income tax incompatible with EC Law
An Italian charitable non-profit foundation (Stauffer) is the proprietor of commercial premises in Munich, but pursues no other activities in Germany. The services ancillary to the rental of that commercial property are provided by a German property management agent.
A foundation with the same characteristics as the Stauffer foundation would normally be exempt from corporation tax in Germany. However, Stauffer’s seat and management are located in Italy, which under German law makes the foundation liable to tax on rental income.
First of all, the ECJ decides that an investment in real estate, without active management, falls within the scope of Art. 56 EC Treaty (free movement of capital) and not within the scope of Art. 43 EC Treaty (freedom of establishment).
Granting an exemption of corporation tax solely to foundations established in Germany constitutes a restriction to the free movement of capital. Subsequently, the Court examines whether there could be a ground of justification for this restriction. Art. 58 EC Treaty cannot be interpreted as meaning that any tax legislation making a distinction between taxpayers by reference to their place of residence or the Member State in which their capital is invested is automatically compatible with the Treaty.
Only a difference in treatment that is justified by overriding reasons in the general interest, and that does not constitute a means of arbitrary discrimination or a disguised restriction, could be deemed compatible. The ECJ then applies the traditional “rule of reason” test to examine whether the restricting national regulation is relevant and proportional in light of the pursued aim of general interest.
Even though Art. 58 EC Treaty only applies to free movement of capital, and the EC Treaty articles concerning the other freedoms do not contain an equivalent article, the ECJ nevertheless applies the rule-of-reason test to all four Treaty freedoms. This again confirms the view that the ECJ considers Art. 58 EC Treaty as a codification of the rule-of-reason test.
All traditional grounds of justification mentioned by the German tax authorities, i.e. the effectiveness of fiscal supervision, the cohesion of the national tax system and the need to protect the basis of tax revenue, are rejected by the ECJ. A new argument advanced by the German tax authorities was that it cannot be ruled out that criminal and terrorist organizations operate under the guise of a charitable foundation, with the aim of money laundering and illegal transfer of funds between different EC Member States. But this ground of justification was also rejected by the ECJ, which pointed out that a presumption of criminal activity cannot be based solely on the observation that a foundation is established in a different Member State.
The ECJ concludes that refusing an exemption of tax on rental income of charitable foundations, purely because that foundation is established in a different Member State, constitutes an unjustified restriction to the freedom of capital movement.
