AG Opinion in tax treaty dispute brought before CJ

TL;DR
– CJ has jurisdiction to rule in cases where disputes regarding the interpretation of double tax treaties have been voluntarily submitted to it
– Link with EU law is not too strong, in that Member States would be obliged to submit such disputes to the CJ
– However, CJ cannot issue injunctions to the Member States in this respect

On April 27, 2017, advocate general (‘AG’) Mengozzi issued its opinion in Case C-648/15 Austria v Germany, a very exceptional case in which the Court of Justice (‘CJ’) is being requested to rule on the interpretation and application of a tax treaty between two Member States.

To recall, article 273 TFEU provides that the “Court of Justice shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties”. In the case at hand, Austria and Germany have agreed, in article 25 of the tax treaty concluded between them, to submit the settlement of unresolved disputes with regard to tax treaty interpretation and application to the CJ pursuant to article 273 TFEU. This is the only tax treaty between the Member States having such a clause. Furthermore, this is also the first case brought before the CJ under such clause (although other cases are reportedly pending).

In the case at hand, Austria and Germany disagreed as to whether interest received by Bank Austria in consideration of Genussscheine acquired from WestLB would fall under article 11, para 1 or para 2 of the tax treaty. If the first option would be adopted, only the residence State (Austria) would have taxing rights; if, on the other hand, the second option would be followed, the source State (Germany) would have taxing rights as well. This post will not delve in extenso on this query (suffice it to say that – in the end – the AG supported the first conclusion). Instead, we will discuss some more general (institutional) issues raised in the case before the CJ, as discussed in the AG’s opinion.

In this respect, two interesting questions are raised by AG Mengozzi:

  • Notwithstanding the express clause in the Austrian-German tax treaty, are all conditions in article 273 TFEU for the CJ to have jurisdiction fulfilled?
  • Does the CJ have the power to issue injunctions to the parties under the article 273 TFEU procedure?

First query

With regard to the first query, AG Mengozzi argues that article 273 TFEU embeds three cumulative conditions for triggering CJ jurisdiction over the matter.

The first condition is that the dispute brought before the CJ must exclusively be between Member States. According to the AG, there is no doubt that this condition is fulfilled in the case at hand.

Secondly, the dispute must be submitted to the CJ under a special agreement. The main query here is whether Member State can submit disputed to the CJ in advance, or whether they have to wait for the dispute to arise and submit such dispute to the CJ afterwards. With reference to the Pringle case (Case C‑370/12), the AG sees no reason why a ‘special agreement’ cannot be given in advance, with reference to a “class of predefined disputes, by means of an arbitration clause or special agreement”. This condition is, thus, also fulfilled.

Finally, the dispute must relate to the subject matter of the Treaties. As we understand the AG, the link with EU law should thus neither be (i) too strong nor (ii) too weak.

  • The link may not be too strong, in that the dispute may not relate to EU law (i.e. the interpretation or application of the Treaties) as such. In that case, the CJ would indeed have (mandatory and exclusive, cf. article 344 TFEU) jurisdiction, and disputes between the Member States should be brought before the CJ under the procedure of article 259 TFEU. Applied to the case at hand, the AG argues that the link between disputes relating to double taxation and EU law is not too strong, as under EU law as it currently stands (see e.g. Case C‑128/08 Damseaux, paras. 22, 30 and 33), (i) it is up to the Member States to conclude tax treaties between them to avoid double taxation, (ii) the CJ does not have jurisdiction to rule on the interpretation of tax treaties, (iii) the CJ can neither mitigate double taxation arising from disparities between tax systems and (iv) the CJ is not competent to examine the compatibility of national law with tax treaty provisions.
  • On the other hand, the link may not be too weak. Whilst this requirement should, according to the AG, not be construed too strictly, there has to be a sufficient and objectively identifiable link nonetheless. In the case at hand, the AG concedes that such link exists, based on the following arguments: (i) the AG rightly argues that the issue of double taxation (and thus a dispute related thereto) is linked to EU law, in that the avoidance of double taxation through tax treaties furthers the realisation of an internal market (cf. article 3(3) TEU); and (ii) the AG rightly holds that the repeal of article 293 EC Treaty (which called on the Member States to enter into negotiations to abolish double taxation within the EU) by the Lisbon Treaty does not negate this finding, i.e. the avoidance of double taxation remains crucial for the establishment of an internal market.

Particularly the analysis under the first bullet point above is elucidating. As per today, there is still a significant debate as to the relationship between article 273 TFEU and article 344 TFEU (according to which “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein“). This debate is highly important, as it determines whether or not the Member States are obliged to submit disputes between them to the CJ. The AG – in line with certain scholars (Grabitz/​Hilf/​Nettesheim, Das Recht der Europäischen Union, 2016, Art. 273 AEUV, §7 and 11; Streinz, EUV/AEUV, 2012, Art. 273 AEUV, §3 and 7 and von der Groeben/​Schwarze/​Hatje, Europäisches Unionsrecht, 2015, Art. 273 AEUV, §4) – takes the position that these provisions are mutually exclusive, and that such obligation therefore does not exist.

On the other hand, several other scholars had historically seemed to argue that these provisions must be read together and that therefore, where a dispute between Member States which “relates to the subject matter of the Treaties” arises, Member States are required under article 344 TFEU to (provide for a mechanism in their inter se agreement to) submit the dispute to the CJ (K. Lenaerts et al., EU Procedural Law, Oxford, Oxford University Press, 2014, no. 19.27 and M. Wathelet, Contentieux européen, Brussels, Larcier, 2014, no. 434). In line with their position, disputes relating to the subject matter of the Treaties – which should include disputes with regard to the interpretation and application of (other) tax treaties (supra) – should be submitted to the CJ. We are looking forward to what the CJ will ultimately have to say on the matter.

Second query

The second query revolves around the question whether the CJ has the authority to issue injunctions to the Member States in the article 273 TFEU procedure, i.e. to have either Germany or Austria, as the case may be, refrain from levying taxes or reimburse excess taxes levied.

In this respect, the AG – although conceding that the choice to submit a dispute to the CJ pursuant to article 273 TFEU also implies that the Member States concerned are presumed to have consented to the CJ applying the entirety of the provisions of EU law which govern its powers and its procedures – considers that “it is not within the Court’s jurisdiction to compel one or other Member State party to the German-Austrian Convention to act in a particular way”. The arguments for this position are mainly based on the principle of conferral (infra). In this respect, the AG notes that:

  • The CJ can only give injunctions in proceedings pursuant to article 279 TFEU (concerning interim measures).
  • The CJ cannot give injunctions in the context of infringement proceedings (article 259 TFEU) or annulment proceedings (article 263 TFEU); instead, it is up to the Member States and the EU institutions to take the necessary measures to comply with the judgment delivered (article 260 and 266 TFEU).
  • Although article 273 TFEU is not worded in terms similar to those of articles 260 and 266 TFEU and remains silent on the issue, it cannot be inferred a contrario that the Member States conferred competence on the CJ to issue injunctions in the context of settling disputes covered by Article 273 TFEU. This power must, according to the AG, follow unambiguously from the provisions of the Treaties, quod non in casu.

At first blush, the AG’s conclusion has its merits. After all, the CJ can indeed only act within the bounds of the competences conferred on it by the Treaties (pm: the CJ – like any EU institution – “shall [only] act within the limits of the powers conferred on it in the Treaties, and in conformity with the procedures, conditions and objectives set out in them”, see Article 13(2) TEU and also article 5(2) TEU) (see also R. Lukits, “Arbitration before the European Court of Justice”, International Arbitration Law Review 2014, 2). In addition, in case of doubt as to whether competence has been conferred upon the EU (and the CJ, by extension), the presumption is that the competence has remained with the Member States (article 4(1) TEU, as confirmed in doctrine, e.g. Callies/Ruffert, EUV/AEUV, 2016, Art. 4 EUV, §2 and Blanke/Mangiameli, The Treaty on European Union (TEU) – A Commentary, 2013, 188).

Nevertheless, authoritative legal scholars have argued that – within the context of article 273 TFEU – the CJ can have jurisdiction to issue injunctions, if said jurisdiction is allocated to it in the ‘special agreement’ (e.g. Streinz, EUV/AEUV, 2012, Art. 273 AEUV, §11; Grabitz/Hilf/Nettesheim, Das Recht der Europäischen Union, 2016, Art. 273 AEUV, §19; von der Groeben/​Schwarze/​Hatje, Europäisches Unionsrecht, 2015, Art. 273 AEUV, §11; contra: Lukits, “Arbitration before the European Court of Justice”, International Arbitration Law Review 2014, ). The AG, although having concluded that the CJ does not have jurisdiction to issue injunctions, also does not seem to exclude that possibility. According to the doctrine, the CJ can therefore not only determine that the agreement has been violated (declaratory judgment, cf. the AG’s position), but can also issue injunctive measures intended to restore the violation (performance judgment) (ibidem).

In addition, insofar as the judgment requires an action of the Member States, it can be enforced against Member States if the ‘special agreement’ supports such enforceability (article 288 and 299 TFEU), as many authors have argued that the restriction in article 299(1) TFEU – namely that judgments cannot be enforced against Member States – does not apply in the context of article 273 TFEU arbitrations (Streinz, EUV/AEUV, 2012, Art. 273 AEUV, §11; von der Groeben/​Schwarze/​Hatje, Europäisches Unionsrecht, 2015, Art. 273 AEUV, §11; Grabitz/Hilf/Nettesheim, Das Recht der Europäischen Union, 2016, Art. 273 AEUV, §20; but contra: R. Lukits, “Arbitration before the European Court of Justice”, International Arbitration Law Review 2014, 4-5).

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