Supreme Court renders milestone ruling on legal certainty protecting taxpayers’ rights

21 June 2021

On 4 June 2021, the Supreme Court (“Hof van Cassatie”/“Cour de cassation”) rendered a milestone decision accepting arguments developed by Eubelius both in appellate proceedings and before the Supreme Court. In this decision, the Court applied for the first time the modern case law of the European Court of Human Rights (“ECHR”) confirming that the foreseeability of a legal provision is not only determined by the text of the law itself but also by the approach of the tax authorities (through their circular letters and practice). Annulment of tax assessment based on a legal provision the application of which was rendered unforeseeable by the acts of the tax administration was therefore justified.

Until recently, most of the cases won by taxpayers related to violations of either material tax law or procedural aspects. Despite their importance, a violation of human rights only rarely led to annulment of tax assessments. However, according to Article 1 of the First Protocol to the European Convention on Human Rights, taxation only constitutes a justified interference with the right to the peaceful enjoyment of one’s property if it is, inter alia (i) prescribed by law and (ii) proportionate. The condition of legality not only requires a tax provision to exist but also requires it to be clear, accessible and foreseeable for the taxpayer. In our tax legislation, foreseeability can be a problem: many of the tax laws are poorly drafted, sometimes interpreted in opposite directions by the courts (or even by different chambers of the same court), and there is often an additional complication in the way the tax administration interprets them, inter alia in circular letters (sometimes contradicting the text of the law or adding additional conditions not provided for by law).

Since a Supreme Court ruling of 26 February 2016 and the accompanying conclusions of the Court’s First Advocate General, it was often (but wrongly) believed that the foreseeability of a tax provision could only be determined by its text (including the preparatory works) and its interpretation by the courts, and thus not by the acts and positions of the tax administration. We always considered that position not to be in line with the case law of the ECHR, and we were able to convince the Court of Appeal of Ghent to confirm this in two identical rulings on 5 November 2019.

In short, the case concerned a Belgian taxpayer receiving interest payments in 1991 on his Korean deposits and claiming a lump sum tax credit (“QFIE”/“FBB”). This interest was not subject to withholding tax in Korea. The tax credit claimed in Belgium under the applicable double tax treaty with Korea (“DTT”) was equal to 20% of the gross amount of the interest received. According to the 1991 interpretation of the DTT (based on the explanatory memorandum and various administrative circular letters), this tax credit would be granted even if the interest was not taxed at source (“tax sparing credit”). It was sufficient that the relevant interest income “may” be taxed in Korea under the DTT.

The tax administration disallowed the tax credit on various grounds, and legal proceedings were initiated. The taxpayer lost his plea before the court of first instance and appealed the decision early in 2018. In the meantime, in 2015, the Supreme Court (French-speaking chamber) had ruled, for the first time and rather unexpectedly, that, in order to benefit from the said tax credit, it was required that a withholding tax had been levied in Korea (please note that the Dutch-speaking chamber rightfully contradicted this in another ruling on 4 June 2021). During the appeal procedure, the tax authorities invoked the 2015 ruling of the Supreme Court to deny the benefit of the tax credit.

The Court of Appeal of Ghent followed the above-mentioned 2015 case law of the Supreme Court, but annulled the tax assessment due to violation of the principle of legal certainty under Article 1 of the First Protocol. The Court of Appeal considered (referring to the case law of the ECHR) that the foreseeability of a legal provision (including a provision in a DTT) is affected not only by the text of the law itself but also by the tax authorities through their circular letters and practice. Taking into account the text of the DTT, the preparatory works for the ratification law to amend the DTT, the absence of any case law or legal doctrine to the contrary, and having regard to the explicit administrative commentary and practice applied confirming the tax sparing character of the tax credit, the Court considered that the taxpayer could not have foreseen in 1991 that the tax administration (for the first time, and 24 years after taxation) would require evidence of taxation in Korea.

The tax authorities contested this decision before the Supreme Court. On 4 June 2021, the Supreme Court dismissed the appeal, reconfirming that Article 1 of the First Protocol has direct effect and is applicable in tax matters and pointing out for the first time with reference to the case law of the ECHR that the interpretation of a legal provision given by the tax authorities in their circular letters and practice may also have the consequence that this legal provision does not meet the requirement of foreseeability.

Taking into account the 2016 case law and position of the Advocate General of the Supreme Court as well as the fact that under Belgian domestic law a general principle of law (such as the principle of confidence or legal certainty) cannot as such set aside an explicit provision of a tax law, this new ruling constitutes a huge step forward for the protection of taxpayers’ rights in times when, faced with increasingly poorly drafted tax laws, the positions and practice of the tax authorities play a key role in the understanding and application of legal texts in practice.