Last week, Advocate General to the Dutch Hoge Raad (Supreme Court) Niessen concluded that the Dutch capital income tax (vermogensrendementsheffing) is incompatible with the requirements of the right to protection of property of Article 1 of the First Protocol to the European Convention on Human Rights. This ‘flat rate’ tax, dating from 2001, ensures that taxes have to be paid over 4% of a tax payer’s capital, regardless of the actual returns. The case concerned was brought by a Dutch citizen living in Norway who owns an apartment in the Netherlands for personal use. He argued that in his case the capital income tax resulted in an individual and excessive (tax) burden. The Court of Appeals held that there had not been a violation of Article 1 P1 ECHR as with the introduction of the tax rule the legislature had stayed within its margin of appreciation. Moreover, the individual burden in the case at hand could not be considered excessive.
Conclusion of the Advocate General
In his conclusion, the Advocate General clarifies that the system of presumptive returns had resulted from the optimistic economic outlook in the 1990s. Recent years have, however, shown that one cannot rely on a certain percentage of returns. The capital income tax may have arbitrary effects as individuals have individual preferences when it comes to investment strategies. Since actual returns are not taken into account the tax rule may conflict with the principle of equal treatment.
According to the Advocate General, if the tax is seen as a net wealth tax – rather than as a taxation on income – it gets a confiscatory nature the moment the tax burden outnumbers the actual gains. Referring to the judgments of the European Court of Human Rights in cases like N.K.M. v. Hungary, he stresses that a combination of relevant circumstances can lead to the conclusion that a tax charge forms a disproportional interference with someone’s property rights. Given its arbitrary and (potentially) confiscatory character, this is the case for the presumptive capital income tax. The Advocate General concludes that it is not for the court to devise a different rule, yet in individual cases an effective remedy needs to be provided.
For years now, there has been a debate about the Dutch capital income tax and in particular about whether the 4% rule is appropriate or not. In the light of this – as well as of the fact that the system is currently about to be altered – the conclusion that something needs to be changed does not come as a surprise. However, it is worth noting that the single legal question central to the case at stake here, is whether the capital income tax violates the fundamental, human right to protection of property as it can be found in the European Convention. In its case law, the ECtHR interprets the ‘possessions’ protected by Article 1 P1 in an ‘autonomous’ manner. For example, it has become clear that also social security benefits – regardless of whether these are based on contributions – form a possession, at least once these are granted. This has had the effect that in a large number of national social security procedures, Article 1 P1 is invoked and (necessarily) obtains a prominent part in the reasoning of the court.
Also in the field of tax law, as the current example shows, the right to protection of property is gaining ground. This even though it is stated in Article 1 P1 that this provision does not ‘impair the right of a State to enforce such laws as it deems necessary … to secure the payment of taxes’. It seems mainly due to a series of cases (including N.K.M., mentioned above) that the (potential) effects of this article for taxes have become increasingly visible. In my opinion, however, these cases must be viewed as an exception: they considered a 98% tax on a severance payment above a certain level that was devised and entered into force only weeks before a great wave of civil servant dismissals. If not the individual burden for someone who has just lost his job, then at least the way the law had come into being could in these cases be seen to be disproportional from a human rights perspective. Whether the cases form a good reason for subjecting all kinds of tax measures to fundamental property rights review, is however a different question.
What can be seen in a lot of national (social security or tax) cases in which Article 1 P1 is invoked, is that courts simply refer to the margin of appreciation to conclude that this provision has not been violated. They seem to have good reasons for doing so: after all, sensitive political and budgetary matters are generally not for courts to determine. At the same time, however, it is extremely difficult to pin down exactly where the margin of the legislature stops. I think the Advocate General rightly holds that national courts may opt for stricter review than the Strasbourg court, if only because the margin is not always granted to the legislature but often also applies to the state in its entirety. Nevertheless, when in all the cases in which property rights nowadays are concerned ‘all relevant circumstances’ need to be taken into account to see whether something is disproportional, a measure of arbitrariness can hardly be overcome. Relevant circumstances relate to the percentages of cuts or taxes and the effects of these, but also include, inter alia, transitory periods, legislative and judicial procedures, and issues of good governance. When trying to balance all of these aspects or fighting over the margin, it is good to keep in mind that in the end the human right to property protection and the meaning of this right is what it is all about.