JUDGMENT OF THE COURT (First Chamber)

7 November 2013 ( *1 )

‛Reference for a preliminary ruling — Articles 63 TFEU and 65 TFEU — Free movement of capital — Tax legislation of a Member State which does not allow deduction of the loss on the sale of immovable property situated in another Member State from the gain on the sale of securities in the Member State of taxation’

In Case C‑322/11,

REQUEST for a preliminary ruling under Article 267 TFEU from the Korkein hallinto-oikeus (Finland), made by decision of 23 June 2011, received at the Court on 28 June 2011, in the proceedings brought by

K,

THE COURT (First Chamber),

composed of A. Tizzano, President of the Chamber, A. Borg Barthet and E. Levits (Rapporteur), Judges,

Advocate General: P. Mengozzi,

Registrar: K. Malacek, Administrator,

having regard to the written procedure and further to the hearing on 10 January 2013,

after considering the observations submitted on behalf of:

—

K, by M. Tiusanen, asianajaja,

—

the Finnish Government, by H. Leppo and S. Hartikainen, acting as Agents,

—

the German Government, by K. Petersen and T. Henze, acting as Agents,

—

the Swedish Government, by A. Falk and K. Petkovska, acting as Agents,

—

the United Kingdom Government, by C. Murrell, acting as Agent, and by K. Bacon, Barrister,

—

the European Commission, by I. Koskinen, R. Lyal and W. Roels, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 21 March 2013,

gives the following

Judgment

1This request for a preliminary ruling concerns the interpretation of Articles 63 TFEU and 65 TFEU.

2The request has been made in proceedings brought by K., who has full liability to income tax in Finland, concerning the refusal of the Finnish tax authorities to allow him to deduct losses he sustained on the sale of immovable property in France from income charged to tax in Finland.

Legal context

Finnish law

3Paragraph 45, first subparagraph, of Law 1992/1535 on income tax (Tuloverolaki (1992/1535)), of 30 December 1992, in the version in force at the material time, that is to say, during the 2004 tax year (‘the Income Tax Law’) provides that the gain made on the transfer of property is taxable income from capital.

4Paragraph 50 of the Income Tax Law was worded as follows:

‘A loss arising on the transfer of property may be deducted from any gain made on the transfer of property in the tax year in which the loss was suffered and the three following tax years, and account shall not be taken of it in determining any capital gains deficit.’

5Paragraph 6 of Law 1995/1552 on the avoidance of international double taxation (Kansainvälisen kaksinkertaisen verotuksen poistamisesta annettu laki (1995/1552), ‘the Law on the avoidance of double taxation’) is worded as follows:

‘Income received in a foreign State, in respect of which Finland has, in an international convention, waived its taxing rights, shall be regarded as taxable income of a natural person … The proportion corresponding to the part of the income exempted on the basis of the source and type of income shall, however, be deducted from the taxpayer’s income tax (progressive exemption method). In calculating the income received from a foreign State, expenditure and interest connected with the acquisition or preservation of the income shall be deducted, unless elsewhere provided otherwise. Expenditure and interest shall not, however, be deductible in so far as they exceed the amount of income received from the foreign State … Deduction shall be carried out by reference to the various future taxes.’

6The referring court explains that in Finland the taxation of income from capital is proportional. In accordance with the second subparagraph of Paragraph 124(2) of the Income Tax Law, the rate of tax applied in 2004 to income from capital was 29%.

The double taxation convention

7In accordance with Article 6(1) and (2) of the Convention between the Government of the French Republic and the Government of the Republic of Finland for the avoidance of double taxation and the prevention of tax evasion in respect of taxes on income and capital, signed in Helsinki on 11 September 1970 (‘the France-Finland Convention’), income deriving from immovable property is taxable in the Contracting State in which the property is situated.

8Article 13(1) of the France-Finland Convention provides that gains arising on the disposal of immovable property are taxable in the Contracting State in which the property is situated.

9Article 23 of the France-Finland Convention provides as follows:

‘Double taxation shall be avoided as follows:

1. …

2. As regards Finland:

(a)

Income and property other than that referred to below in point (b) of this paragraph shall be exempt from the Finnish taxes referred to in Article 2(3)(b), where that income or property may be taxed in France under this convention.

...

(c)

Notwithstanding the provisions of points (a) and (b) of this paragraph, Finnish tax on the part of income which is taxable in Finland under this convention may be calculated at the rate of tax corresponding to the total amount of taxable income in accordance with Finnish tax legislation.’

The dispute in the main proceedings and the question referred for a preliminary ruling

10In 2004 K sold an immovable property in France which he had acquired in 2001. He declared, on that account, a loss of EUR 172 623. According to K’s declaration, he did not receive any income in France from which he could have deducted that loss; nor did he have any other property in France in 2004, which would have allowed him, on a transfer of the latter property, to offset that loss. However, in the same tax year (2004), K made gains in Finland, on the sale of securities, which were taxable in Finland and from which he sought to deduct the loss on the sale of the French immovable property. K does not carry on any professional or trade activity which is connected with the immovable property or the securities.

11The local tax office (Verovirasto) took the view that K was not entitled to deduct the losses arising on the sale of the immovable property in France from the income he received in Finland from his moveable assets.

12Following the rejection, on 13 April 2006, by the Lounais-Suomen verotuksen oikaisulautakunta (Board of appeal for taxation for South-West Finland) of K’s claim that he should be able to deduct the loss, K brought proceedings before the Turun hallinto-oikeus (Turku Administrative Court). As that action was also dismissed by a decision of 31 October 2007, K brought an appeal before the Korkein hallinto-oikeus (Supreme Administrative Court).

13K submits that, if his action were not upheld, the non-deductibility of the loss sustained would become definitive, since he has full liability to income tax in Finland and does not have any other income or assets in France. Non-deductibility of that kind would, so he argues, amount to an infringement of the principles of freedom of establishment and the free movement of capital, which could not be justified by the allocation of the power to impose taxes between the Member States.

14According to K, deduction of the loss on the sale of immovable property in France from the gains made on the sale of shares in Finland does not jeopardise the exercise of parallel powers of taxation. He argues that it follows from the Court’s case-law, in particular from Case C-446/03 Marks & Spencer [2005] ECR I-10837 , paragraph 40, and Case C-347/04 Rewe Zentralfinanz [2007] ECR I-2647 , paragraph 69, that the fact that the Republic of Finland does not charge tax on a gain resulting from the sale of immovable property located in France is not sufficient in itself to justify a rule that only losses related to immovable property in Finland may be deducted.

15Nor, in K’s submission, can preventing the double deduction of losses be relied on as justification, since K does not own property in France, does not carry on business there and does not receive any income there.

16The referring court states that a person who has full liability to income tax in Finland may deduct there a loss incurred on the sale of immovable property situated in Finland, in accordance with the detailed rules laid down by the Income Tax Law, but may not deduct a loss incurred on the sale of immovable property situated in France. The referring court explains that in a case similar to the one before it now, the decision was taken not to allow losses on the sale of immovable property situated in another Member State to be deducted from income taxable in Finland; however, that case was decided before delivery of the judgments of the Court of Justice in Case C-414/06 Lidl Belgium [2008] ECR I-3601 , and Case C-157/07 Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt [2008] ECR I-8061 .

17Moreover, the referring court considers that the present case can be distinguished from Lidl Belgium and Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt by the fact that the loss sustained by K is not connected with any professional or trade activity carried on through a permanent establishment in another Member State. An activity carried on in that context generally continues over a period of time so that it may reasonably be expected that it will eventually generate income from which the loss may be deducted anew. In such a situation it is thus not certain that the loss will be definitive and there is a risk of double deduction of losses. Conversely, where a taxpayer has no source of income in another Member State from which the loss could be deducted, the situation is different as regards the finality of the loss, even if the French tax system were also to afford a possibility of deducting the loss arising on the sale of property from the income of subsequent years. In a situation such as that in issue in the main proceedings, in which there is no connection to a professional or trade activity, it cannot be assumed that the taxpayer will subsequently receive income in the State in which the property is situated, from which the loss can be deducted anew.

18In those circumstances, the Korkein hallinto-oikeus decided to stay the proceedings and refer the following question to the Court for a preliminary ruling:

‘Must Articles 63 TFEU and 65 TFEU be interpreted as precluding national legislation under which a person who is fully liable to income tax in Finland cannot deduct a loss incurred on the transfer of immovable property situated in France from gains, taxable in Finland, made on the transfer of shares, whereas a person who is fully liable to income tax in Finland may on certain conditions deduct a loss on the transfer of equivalent immovable property situated in Finland from gains on transfer?’

The question referred for a preliminary ruling

19By its question, the referring court is asking, in essence, whether Articles 63 TFEU and 65 TFEU preclude national tax legislation such as that at issue in the main proceedings, which does not allow a taxpayer who resides in the Member State concerned and is fully liable to income tax there to deduct the losses arising on the transfer of immovable property situated in another Member State from the income from moveable assets which is taxable in the first Member State, although that would have been possible, on certain conditions, if the immovable property had been situated in the first Member State.

The existence of a restriction

20The Court has consistently held that, in the absence of a definition in the FEU Treaty of ‘movement of capital’ within the meaning of Article 63(1) TFEU, the nomenclature which constitutes Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (an article repealed by the Treaty of Amsterdam) retains an indicative value, even though that directive was adopted on the basis of Articles 69 and 70(1) of the EEC Treaty (after amendment, Articles 69 and 70(1) of the EC Treaty, repealed by the Treaty of Amsterdam), it being understood that, according to the third paragraph of the introduction to that annex, the nomenclature which it contains is not exhaustive as regards the notion of movement of capital (see, inter alia, Case C-386/04 Centro di Musicologia Walter Stauffer [2006] ECR I-8203 , paragraph 22 and the case-law cited; Case C-67/08 Block [2009] ECR I-883 , paragraph 19; and Case C-35/08 Busley and Cibrian Fernandez [2009] ECR I-9807 , paragraph 17).

21Among the capital movements listed in Annex I to Directive 88/361, under heading II entitled ‘Investments in real estate’, are investments in real estate abroad by residents.

22Concerning the existence of restrictions on the movement of capital within the meaning of Article 63(1) TFEU, it should be borne in mind that the measures prohibited by that provision include those which are liable to discourage non-residents from making investments in a Member State or to discourage that Member State’s residents from doing so in other States (see Case C-370/05 Festersen [2007] ECR I-1129 , paragraph 24; Case C-101/05 A [2007] ECR I-11531 , paragraph 40; Case C-377/07 STEKO Industriemontage [2009] ECR I-299 , paragraph 23; Busley and Cibrian Fernandez , paragraph 20).

23National measures liable to prevent or limit the acquisition of immovable property situated in another Member State may be deemed to constitute such restrictions (see, to that effect, Busley and Cibrian Fernandez , paragraph 21).

24As regards the tax rules at issue in the main proceedings, Paragraph 50, first subparagraph, of the Income Tax Law provides that resident taxpayers may deduct the loss incurred on the transfer of a moveable or immovable asset from the gain made on the sale of another moveable or immovable asset during the tax year in which the loss is suffered and the three following tax years.

25However, that deductibility is a tax advantage which is granted, in the case of immovable property, only when the losses derive from the transfer of immovable property situated in the Member State in which the taxpayer is resident, but not when the property is situated in another Member State.

26In accordance with Paragraph 6, first subparagraph, of Law 1995/1552, losses incurred in another Member State are not deductible in so far as they exceed the amount of income received in that State.

27A resident taxpayer therefore may not deduct losses incurred on the transfer of property situated in another Member State from gains made on the transfer of securities which are taxable in Finland.

28Accordingly, the tax situation of a resident taxpayer who has full liability to income tax in Finland and who makes a loss on the sale of a property situated in another Member State is less favourable than that of a taxpayer who makes a loss on the sale of property situated in Finland.

29Contrary to what is maintained by the Finnish Government, the fact that it is impossible for a taxpayer who is resident in one Member State to deduct losses incurred on the sale of a property situated in another Member State from profits that are taxable in the first Member State is not the result of the exercise in parallel by the two Member States concerned of their powers of taxation.

30In the present case, the Republic of Finland has chosen, on the one hand, to allow resident taxpayers to deduct losses made on the transfer of one asset from gains made on the transfer of another asset and, on the other hand, to limit the extent to which such losses may be taken into account, and in particular not to allow losses incurred in another Member State to be offset against gains which are taxable in Finland.

31Such a difference in treatment on the basis of the place where the immovable property is situated is liable to deter a taxpayer from investing in immovable property in another Member State and therefore constitutes a restriction on the free movement of capital, prohibited in principle by Article 63 TFEU.

32It is, however, necessary to examine whether such a restriction on the free movement of capital may be justified in the light of the provisions of the FEU Treaty.

Justification for the restriction on the free movement of capital

33According to Article 65(1)(a) TFEU, ‘the provisions of Article 63 [TFEU] shall be without prejudice to the right of Member States … to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested’.

35Indeed, the derogation provided for in Article 65(1)(a) TFEU is itself limited by Article 65(3) TFEU, which provides that the national provisions referred to in Article 65(1) TFEU ‘shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63’ ( Haribo Lakritzen Hans Riegel and Österreichische Salinen , paragraph 57).

37In that regard, the Finnish and German Governments and the European Commission submit that the situation of a taxpayer who has invested in immovable property in another Member State is objectively different from that of a taxpayer who has made such an investment in his State of residence.

38According to the Finnish Government, the legislation at issue in the main proceedings is based on the symmetrical tax treatment of income and losses, deduction being allowed solely for losses related to income taxable in Finland. They maintain that it is therefore not contrary to European Union law for resident taxpayers who have made investments in immovable property in another Member State which generate income that is taxable solely in that other Member State, in accordance with the allocation of powers of taxation agreed upon in the double taxation convention, to be treated differently from resident taxpayers who have made investments in immovable property in their Member State of residence which generate income that is taxable in that Member State.

39The German Government submits that the owner of immovable property situated on national territory and the owner of immovable property situated in another Member State are in situations which are not objectively comparable, inasmuch as the first owner will be subject to national tax, whilst the second owner will be taxed in the other Member State, since, where there is a double taxation convention, the profits and losses arising on the transfer of immovable property are subject exclusively to the tax jurisdiction of the Member State in which the property concerned is situated.

40The Commission argues that in circumstances such as those of the case before the referring court, it cannot be maintained that, so far as the deductibility of loss on the transfer of immovable property is concerned, the Finnish owners of a property situated in France or in Finland are in comparable situations. It submits that French tax law, unlike Finnish tax law, does not even recognise the principle of such deductibility, so that the Finnish State’s refusal to allow deduction is justified by that difference in situation.

42Article 6(1) of the France-Finland Convention confers on the Member State in which the immovable property is situated power to tax the income which the property generates for the taxpayer. Provision is also made in Article 13(1) of that convention for gains made on the disposal of immovable property to be taxable in the Contracting State in which the property is situated.

43However, as the referring court points out, the France-Finland Convention allows the Republic of Finland to apply a progressive exemption method in eliminating double taxation. Thus, Article 23(2)(c) of the convention provides that Finnish tax may be calculated on income taxable in Finland under the convention at the rate of tax corresponding to the total amount of such income in accordance with Finnish tax legislation.

44It appears from the explanations of the referring court and from those given by K and the Finnish Government at the hearing that, although the France-Finland Convention allows income that is taxable in France to be taken into account in the calculation of the tax on income that is taxable in Finland in order to apply progressive taxation, that option is not exercised in relation to income from capital assets which is taxed at a fixed rate.

45It none the less follows from that option that, since the France-Finland Convention, according to which it is the Member State on whose territory an immovable asset is situated which taxes the income generated by that asset, does not preclude the taking into account of income related to an asset situated in France in the calculation of the tax of a taxpayer residing in Finland, that choice also cannot preclude a loss sustained by that taxpayer from being taken into account in the context of the sale of that asset.

46Consequently, the fact that the France-Finland Convention confers the power to tax on the Member State in which the property is situated does not necessarily mean that the situation of such a taxpayer is different, as regards the taking into account of income (including negative income) in the Member State of residence, from the situation of a taxpayer all of whose income arises within the Member State of residence.

47Nor, in the second place, does the fact, alluded to by the Commission, that the Member State in which the immovable property is situated does not provide for a right to deduct losses arising on the sale of a property render the situation of a taxpayer any different as regards the legislation of his State of residence, since, as has been stated in paragraphs 30 and 45 of the present judgment, the decision not to take such losses into account is the result of the choice made by the taxpayer’s Member State of residence and the France-Finland Convention does not preclude such losses from being taken into account.

48It follows that the difference in treatment, so far as concerns the possibility of deducting losses sustained on the sale of immovable property, cannot be justified by a difference in situation related to the place where the property concerned is situated.

49It therefore remains to be ascertained whether the restriction at issue in the main proceedings may be justified by overriding reasons in the public interest, which the various governments that have submitted observations to the Court and the Commission have invoked and which relate to the need to safeguard the balanced allocation of the power to impose taxes between the Republic of Finland and the French Republic, the need to prevent losses being taken into account twice, the need to prevent tax evasion and the need to ensure the cohesion of the Finnish tax system.

52In the case before the referring court, if the France-Finland Convention were to be disregarded, the Republic of Finland would have the right to tax the profits made by a taxpayer residing in Finland from the sale of a property situated in France.

53However, the result of applying the France-Finland Convention in conjunction with the Finnish tax legislation is that the Republic of Finland does not exercise any tax powers over the profits deriving from the transfer of immovable property situated in France, as those profits are neither taxed nor otherwise taken into account in Finland.

54If it were accepted that losses incurred on the sale of immovable property situated in another Member State must be deductible in the Member State in which the taxpayer resides, regardless of the allocation of taxing powers agreed between the Member States, that would effectively allow the taxpayer to choose freely the Member State in which the taking into account of those losses is most advantageous from the tax perspective (see, to that effect, Lidl Belgium , paragraph 34).

56As regards, in the second place, the justification relating to the need to prevent losses being taken into account twice, which is put forward by the German and Swedish Governments, the Court has accepted that the Member States must be able to prevent that danger (see Marks & Spencer , paragraph 47; Rewe Zentralfinanz , paragraph 47; and Lidl Belgium , paragraph 35).

57However, in circumstances such as those underlying the dispute in the main proceedings, there appears to be no danger of a taxpayer deducting the same loss twice.

58As the Advocate General has noted in point 32 of his Opinion, losses incurred in France on an immovable property situated there cannot be deducted either from overall income or from a gain realised on the sale of another asset.

59In the third place, according to the Swedish and United Kingdom Governments, the Finnish legislation at issue in the main proceedings is intended to guard against the risk of tax avoidance which would be created by the possibility of transferring between two Member States losses in income incurred by a natural person, given that such a possibility could result in such losses being transferred to the Member State in which their deductibility for tax purposes is the most advantageous.

63Consequently, the need to prevent tax avoidance and evasion cannot justify the tax legislation at issue in the main proceedings.

73The referring court is unsure in that regard of the significance which should be accorded to the fact that the loss sustained is not linked to a professional or trade activity carried on through a permanent establishment in another Member State and that, since the taxpayer no longer has any sources of income in the Member State in question from which he could deduct that loss, the loss could be definitive.

83The answer to the question referred is therefore that Articles 63 TFEU and 65 TFEU do not preclude national tax legislation such as that at issue in the main proceedings, which does not allow a taxpayer who resides in the Member State concerned and is fully liable to income tax there to deduct the losses arising on the transfer of immovable property situated in another Member State from the income from moveable assets which is taxable in the first Member State, although that would have been possible, on certain conditions, if the immovable property had been situated in the first Member State.

Costs

84Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

On those grounds, the Court (First Chamber) hereby rules:

Articles 63 TFEU and 65 TFEU do not preclude national tax legislation such as that at issue in the main proceedings, which does not allow a taxpayer who resides in the Member State concerned and is fully liable to income tax there to deduct the losses arising on the transfer of immovable property situated in another Member State from the income from moveable assets which is taxable in the first Member State, although that would have been possible, on certain conditions, if the immovable property had been situated in the first Member State.

[Signatures]

( *1 ) Language of the case: Finnish.