OPINION OF ADVOCATE GENERAL

STIX-HACKL

delivered on 29 June 2006 ( )

Case C‑437/04

Commission of the European Communities

v

Kingdom of Belgium

(Protocol on the Privileges and Immunities of the European Communities – Article 3 – Tax on owners of buildings in the Region of Brussels Capital leased to the Communities)

I – Introduction

1. The present case, ( ) as does the pending case of European Community v Belgium, concerns the interpretation of a provision of the Protocol on the Privileges and Immunities of the European Communities (‘the Protocol’) ( ) – specifically Article 3, on exemption from direct and indirect taxes – which the Court has had to consider only rarely up until now, ( )

2. In essence, the Commission claims that the Kingdom of Belgium has infringed the Protocol by imposing a regional tax which is incompatible with the Communities’ fiscal immunity. Although the disputed tax is charged directly to the owner of any building used for business purposes with more than a certain floor area, indirectly the tax burden is passed to the occupier, and thus to the Communities in respect of buildings of which they are the tenant.

II – Legal framework

A – Community law

3. Article 291 EC ( ) provides that the Community is to enjoy in the territories of the Member States such privileges and immunities as are necessary for the performance of its tasks.

4. Article 3 of the Protocol provides:

‘The Communities, their assets, revenues and other property shall be exempt from all direct taxes.

The governments of the Member States shall, wherever possible, take the appropriate measures to remit or refund the amount of indirect taxes or sales taxes included in the prices of movable or immovable property, where the Communities make, for their official use, substantial purchases the price of which includes taxes of this kind. These provisions shall not be applied, however, so as to have the effect of distorting competition within the Communities.

No exemption shall be granted in respect of taxes and dues which amount merely to charges for public utility services.’

5. Article 13 of the Protocol provides:

‘Officials and other servants of the Communities shall be liable to a tax for the benefit of the Communities on salaries, wages and emoluments paid to them by the Communities, in accordance with the conditions and procedure laid down by the Council, acting on a proposal from the Commission.

They shall be exempt from national taxes on salaries, wages and emoluments paid by the Communities.’

6. Article 19 of the Protocol provides:

‘The institutions of the Community shall, for the purpose of applying this Protocol, cooperate with the responsible authorities of the Member States concerned.’

B – National law

7. Article 3(1) of the Order of the Region of Brussels Capital of 23 July 1992 concerning a regional tax on occupiers of buildings and owners of real property rights over certain buildings (‘the Regional Order’) provides as follows:

‘The tax shall be charged:

(a) on every householder who occupies all or part of a building situated within the territory of the Region of Brussels Capital as a first or second residence …;

(b) on every person who occupies all or part of a building situated within the territory of the Region of Brussels Capital and in it carries on an activity, including a profession, for his own account, with or without the intention of making a profit, and on every legal person or unincorporated association whose seat of business, administration, trade or firm is there…;

(c) on the freehold owner … of all or part of a building situated within the territory of the Region of Brussels Capital which is not used for any of the purposes above under (a).’

III – Facts and preliminary procedure

8. On 3 February 1988 the European Community and SA Vita, whose rights and obligations were subsequently transferred to SA Zurich, entered into a lease of a building in Ixelles (Brussels, Belgium). That lease provides that, from the date when it enters into force, all taxes and duties, of whatsoever nature, imposed in relation to the leased building for the benefit of any public authority, together with all other charges of the same nature, will be borne by the tenant, except where, because of its specific status as governed inter alia by Article 3 of the Protocol, the latter obtains from the competent public authorities an exemption for the landlord.

9. On the basis of the Regional Order, the Region of Brussels Capital charged SA Vita various amounts corresponding to the disputed tax for the years 1992 to 1997. The Commission rejected the claims of SA Vita for reimbursement of those amounts which corresponded to the tax. SA Vita raised proceedings before the magistrate of the First Canton of Ixelles who, by decision dated 26 May 1998, ordered the Commission to pay to SA Vita amounts of BEF 20 000 277 and BEF 290 211. After the Commission’s appeal to the Brussels Court of First Instance had been dismissed, the Commission appealed to the Belgian Court of Cassation against the appeal decision.

10. The Belgian Court of Cassation did not consider it necessary for the purposes of that appeal to refer to the Court of Justice for a preliminary ruling the question suggested by the Commission. The Commission had proposed that the Court should be asked to clarify whether Article 28 of the Treaty establishing a Single Council and a Single Commission of the European Communities and Article 3 of the Protocol, possibly in conjunction with Article 23 of the Vienna Convention on Diplomatic Relations ( ) (‘the Vienna Convention’), should be interpreted as precluding the adoption of any law or other national provision introducing a direct tax apparently to be borne by any persons who had contracted with a legal person governed by public international law but which, in reality, necessarily had the object or effect of making the legal person governed by public international law (including the European Commission) bear the actual burden of the tax or of passing the tax on to it.

11. By letter of formal notice dated 2 April 2003 the Commission instituted infringement proceedings under Article 226 EC. On 3 June 2003 the Belgium Government replied that the disputed tax was not aimed at international institutions either directly or indirectly, but at all owners of buildings which were not used for residential purposes and which exceeded a certain floor area. It followed that the Region of Brussels Capital had not infringed the principle that Treaty obligations should be performed in good faith.

12. By a reasoned opinion dated 16 December 2003 the Commission called upon Belgium to put an end to the infringement of the Treaty within two months of receipt of the opinion. By letter dated 30 July 2004 the Belgian Government notified the Commission that its view had not changed, whereupon, by application of 11 October 2004, lodged at the Registry of the Court on 15 October 2004, the Commission brought the matter before the Court.

13. By order of the President of the Court dated 6 April 2005 the Council of the European Communities was given leave to intervene.

IV – Submissions of the parties

A – Commission and Council

14. The Commission and the Council submitted that the Regional Order is an example of a tax provision intended to circumvent the fiscal immunity of international organisations and in particular that of the European Community. The intention of the national legislature appears both from Article 3(1) of the Regional Order, which identifies the taxable person, and from the travaux préparatoires for the Regional Order.

15. Whereas the previous provision taxed only occupiers, the Regional Order added a tax on owners in the event of business occupancy of a building with more than a certain floor area. However, this was in practice still a tax on occupancy of buildings. That the tax was in reality borne by occupiers was ensured by the taxpayer-owner inevitably passing on the tax to his tenant by means of an increase in rent, for example by contractual passing on of the tax burden to the tenant. Admittedly, the clauses of the leases entered into by the Commission which provided for property taxes to be passed on to the tenant were already contained in those leases when the disputed tax was introduced, and the Commission had thus agreed in advance to an increase in rent to take account of tax. However, it had to be borne in mind that in Brussels leases were entered into normally for a period of nine years, and usually provided for the burden of property taxes to be passed on to the tenant. It was in practice impossible for a tenant to avoid such a clause, and the Commission was in that regard in no better position than any other tenants. Accordingly, the decisive point was that the factual and legal context had been the reason for introducing the tax in its present form, as was shown by the statements made by the competent Minister for Finance, the Budget and the Civil Service for the Region of Brussels Capital on which the Commission had relied.

16. The introduction of the tax had noticeably increased tax receipts, in that a tax was received in relation to buildings in respect of which no tax had been received before, because the buildings were occupied by persons or institutions who were exempt from tax. Contrary to what the Belgian Government submitted, the introduction of the tax was accordingly not neutral.

17. In addition, in contrast to private commercial tenants, the Communities were not able to deduct rent and ancillary costs for tax purposes, which meant that these constituted a comparatively higher burden for the Community. In terms of tax, the lease of buildings to the Communities thus conferred upon Belgium a particularly noticeable advantage. Specifically, if an undertaking leased a building, the tax received would be balanced out by the deduction by the tenant of rent and ancillary costs from its own taxes. By contrast, if the Communities leased a building, the Region of Brussels Capital received the disputed tax on the one hand, without the tenant being allowed to deduct the disputed tax from its total taxes on the other. The advantage was therefore particularly significant where both property tax (‘précompte immobilier’) and the disputed tax were reimbursed to the taxpayer-owner by the Community.

18. As regards the comparison between the disputed tax and property tax (‘précompte immobilier’) it was not in dispute that until now the institutions had not taken any legal proceedings to challenge the property tax. However, a mere practice could not amend the rules in the Treaty and it followed that the Commission was by no means obliged in the present case to take the same position as it did in relation to property tax. In any event, the comparison was inappropriate, because property tax was a tax which had existed as such before the European Communities had established themselves in Brussels and accordingly had not been introduced for the purpose of circumventing the Communities’ fiscal immunity. Nor was the basis of taxation comparable, property tax relating to the income received from property and the taxpayer being the owner of the property. As regards the disputed tax, however, the same result was achieved, in that the taxpayer was either the occupier or the owner. The regional legislature was required to choose who should be the taxpayer in a manner consistent with its obligation of loyal cooperation with the Communities, and in doing so to ensure that tax receipts paid into the Communities’ funds were not redirected to the treasury of a State in which the Community institutions had their seat; otherwise, that State would receive an unjustified advantage from the fact that the Community had its seat within its territory.

19. Moreover, the regional legislature could have exempted buildings leased by the Community from the tax, as was the case in respect of buildings leased by the European Parliament. In any event, the Region of Brussels Capital should have consulted with the institutions pursuant to Article 19 of the Protocol, in order to find a solution which was in conformity with the EC Treaty.

20. The European Communities’ immunity under Article 3 of the Protocol confirmed and illustrated the general rule of public international law provided for in Article 23 of the Vienna Convention. Article 3 of the Protocol is an expression of longstanding custom and practice based on the principles of sovereignty and equality of States. Whereas Article 23 of the Vienna Convention expressed only a minimal version of fiscal immunity, under Article 3 of the Protocol not only buildings but also all assets, revenues and other property were to be exempt from all direct taxes, as broadly and as comprehensively as possible, and without making any exception for taxes payable by a person who had entered a contract with the Community but borne indirectly by the Community. In addition, Article 3 of the Protocol provided for immunity from all indirect taxes.

21. The case-law of the Court on the Protocol also tended to give a broad interpretation to the European Communities’ fiscal immunity.

22. Commission v Belgium ( ) was worthy of mention in that it could provide an analogy to the present case as regards the transfer of the financial burden from owner to tenant. However, it was materially different in that, by contrast to the institutions whose fiscal immunity was in dispute in the present case, Community officials did not enjoy a comprehensive fiscal immunity. Moreover, in the present case the Commission had not applied for a ‘contractual transfer of fiscal immunity’, but was merely of the opinion that the Belgian authorities should have added to the tax exemptions available to owners one for buildings occupied exclusively by the Communities.

23. In summary, it was clear that a legal provision which, without expressly imposing a tax on the Communities, had the object or effect of imposing a tax burden on the Communities indirectly was incompatible with the principle of fiscal immunity.

B – The Belgian Government

24. The Belgian Government began by observing that the European Communities were outside the scope of application of the Regional Order in that the Protocol exempted them from this tax whether they were occupiers or owners or lessees. It followed that it could not be said that the European Communities were liable for the disputed tax.

25. To the extent that it did not infringe the Commission’s fiscal immunity, the tax did not infringe the principle of public international law that treaties should be performed in good faith. There was no tax liability but instead a contractual obligation owed to the taxpayer-owner. On that point the Belgian Court of Cassation had decided that the passing on of the tax burden was founded on a contract governed by private law, and that it would accordingly be disproportionate to allow an international organisation to demand exemption from a part of the rent that related to a general tax increase.

26. Given that the payment disputed by the Commission arose from the provisions of a contract governed by private law, it was also immaterial that the disputed tax had been introduced after the contracts which passed on the burden of certain taxes to the tenant had been concluded. This contractual obligation was binding on all private and public persons at the time the contract was concluded and thereafter. In addition the parties to the contract could easily change the contractual provision which passed on the tax burden to the tenant.

27. The Vienna Convention, in particular Article 23(2) thereof, also provided that exemption from taxation did not extend to taxes payable by a person who had entered a contract with the Communities as is the case, for example, here. The fact that the owner’s tax liability was passed on to the international organisation in the form of additional rent or ancillary costs did not ipso facto transform that rent or those ancillary costs into tax. It followed that the Vienna Convention precluded fiscal immunity being applied to the contractual passing on of a tax burden. The Vienna Convention, as an expression of customary international law, was part of general public international law and as such had to be observed by the Community in the exercise of its powers.

28. As regards the case-law relied upon by the Commission, it was clear that the Court had never expressed an opinion on the fiscal immunity claimed for the Community in the context of a tax imposed on the owner of property leased to the Community but passed on to the Community. However, the case-law concerning the Protocol confirmed generally the purely ‘functional’ role of the rights and immunities conferred by the Protocol on the Communities, which were intended to ensure the functioning and the independence of the Community.

29. As regards the case-law on Article 13 of the Protocol, ( ) the Commission was of the view that it applied by analogy to Article 3 of the Protocol, but had not made the relationship between these two provisions clear or explained the differences between their respective purposes and the matters and persons which they governed. In AGF Belgium ( ) the Court had expressly differentiated between the case-law concerning Article 13 and the case-law concerning Article 3 of the Protocol. In addition, in that case the Court had concluded from the binding nature of the disputed levy that it was within the scope of the Community’s fiscal immunity under Article 3(1), whereas in the present case there was no statutory payment obligation on the Commission. Furthermore, the conclusions the Commission drew from the case-law on Article 13 of the Protocol were erroneous. ( )

30. The disputed tax also complied with the principle of fiscal neutrality. The fiscal immunity provided for in Article 3 of the Protocol in favour of international institutions was not intended to reduce rents paid by international organisations. Within the scope of its tax-raising powers the regional Brussels legislature was entitled to introduce new taxes and was free to determine who was liable to pay them and any exemptions. In the present case the Regional Order provided that the taxpayer was the person who had the real property right, which meant that international institutions were not affected in any particular way. Thus, the Region of Brussels Capital was not obtaining any fiscal advantage from the fact that international organisations had their seat within its territory, because the disputed tax was payable by the owner regardless of whether the building was leased to an institution or a natural person, or indeed was not leased at all. In addition, since the tax year 2004 regional taxes were no longer deductible from general tax. If the disputed tax were not charged when the Community leased a building, this would endanger the equal treatment of owners, because owners who leased their buildings to the Community would have an advantage by comparison with other owners.

31. In addition, the Commission had not shown the extent to which the disputed tax constituted an obstacle to the functioning and independence of the European Communities.

32. In seeking immunity from the disputed tax, the Commission also ignored the principle of loyal cooperation laid down in Article 10 EC, which not only obliged the Member States to take all appropriate measures to ensure the validity and effectiveness of Community law but also imposed on the Community institutions corresponding obligations of loyal cooperation with the Member States.

V – Analysis

33. In the present case it is necessary to define more clearly the scope of application of the Communities’ fiscal immunity under Article 3 of the Protocol.

34. The first point to clarify is the extent to which Article 23 of the Vienna Convention is relevant to the interpretation of Article 3 of the Protocol in the present case.

35. There is no doubt that, in exercising its powers, the Community must observe public international law. ( ) The Vienna Convention is a public international law convention to which all the Member States of the Community, but not however the Community itself, are contracting parties. It was concluded by the Member States acting under their powers to enter into diplomatic relations with one another and with third States. ( )

36. In principle, the Vienna Convention concerns bilateral relationships between States (sending and receiving States) and not, as in the present case, the relations between the Community (an international organisation) and the country in which an institution of that organisation has its seat (Belgium). ( )

37. It follows that the Vienna Convention is not of decisive importance in the present case. The Communities’ fiscal immunity under Article 3 of the Protocol is to be regarded as a fiscal immunity designed according to the Communities’ characteristics, and as such is to be interpreted primarily by reference to Community law.

38. To date the Court has given an interpretation of Article 3 of the Protocol only once, ( ) in AGF Belgium, ( ) stating that the Protocol defined the tax exemption in very broad terms. ( ) The Court held that the wording and purpose of Article 3 was intended to ensure not only that the Communities, their assets, revenues and other property should be exempt from all direct taxes, but also that the Member States were to remit or refund the amount of indirect taxes or sales taxes included in the price of substantial purchases made by the Communities for their official use. ( ) Subject solely to the reservations mentioned in the second and third paragraphs of Article 3 of the Protocol, that immunity covered all types of taxation, whether direct or indirect. ( )

39. That case showed that the fiscal immunity conferred by Article 3 of the Protocol is not to be interpreted exclusively by reference to that article’s wording; its spirit and its purpose are the deciding factors. ( ) Thus, the broad interpretation given to the fiscal immunity conferred by Article 3 of the Protocol was based on observance of the general principles underlying the Communities’ fiscal immunity.

40. The tax exemption is, on the one hand, conferred in order to ensure the Communities’ independence with regard to the Member States and their proper functioning. ( ) This ‘functional’ character of the rights and immunities of the Communities has been recognised in the case-law relating to various other provisions of the Protocol. ( )

41. On the other hand, a broad interpretation of the provision should prevent the host State from gaining an unjustified advantage by diverting to the national treasury funds contributed to the budget of the Communities. ( ) That justification derives from the principle of sovereign equality ( ) between States. All the Member States do in fact together provide the funds necessary for the functioning of the Community and it would accordingly be unfair if the State where an institution of the Communities has its seat could obtain financial advantages from the fact that that seat is within its territory by taxing the Communities. ( ) It follows that the fact that the Communities’ have a seat within the territory of a State must be fiscally neutral for the latter.

42. In the case-law relating to Article 13 of the Protocol, ( ) on the basis of those principles the Court has repeatedly concluded that any direct or indirect taxation was intended to be prohibited. ( ) Otherwise the practical effectiveness of the tax exemption conferred by Article 13 of the Protocol would be endangered. ( )

43. However, the indirect nature of the tax burden in the present case is unusual. Specifically, the regional Brussels legislature introduced a tax structure which, although not directly affecting the Communities, can lead to an indirect burden on the Communities’ assets by means of a general, contractual passing on of the burden of tax agreed by the contracting parties. The question thus arises as to whether such an indirect tax burden falls within the Community’s fiscal immunity under Article 3 of the Protocol.

44. It is clear that the Community does not directly bear the tax, since the Regional Order does not impose a direct tax liability on the Communities. However, closer examination of the provision raises the question whether Belgium enacted the disputed provision in order to circumvent the Communities’ fiscal immunity.

45. The first point worth mentioning is the historical development of the disputed tax. The provision in force prior to 1992 imposed a tax in principle on occupiers of buildings. By reason of the fiscal immunity under Article 3 of the Protocol the Community was exempted from this tax in so far as it was the occupier of buildings it leased. The 1992 Regional Order amended the content and chargeable event of the disputed tax to the effect that in the event of business occupancy of a building with more than a certain floor area the owner became the taxable person instead of the occupier.

46. Thus, the disputed tax continues to be directed primarily at occupancy of buildings, which means that, logically, the taxpayer in respect of the disputed tax should be the occupier, and this was indeed the case until 1992. The fact that the tax is on occupancy is confirmed by the point emphasised by the Commission that the exceptions to the disputed tax provision depend solely on circumstances related to the occupier and not to the owner, and the exemptions available to an owner depend on the characteristics of the occupier and the nature of its business occupancy (for example, buildings used for educational, religious or social purposes).

47. The chargeable event is also the decisive difference between the disputed tax and property tax (‘précompte immobilier’). The latter is primarily a tax on the income the owner derives from the building and not, as is the case with the disputed tax, a tax on occupancy of the building. Property tax (‘précompte immobilier’) is not a disguised tax on the Communities, even if the burden of it may be transferred to the Communities by contract.

48. By contrast, in terms of its effect the disputed tax appears more like a measure which has the object, or at least the effect, that the Communities indirectly contribute to the budget of the Region of Brussels Capital. Contrary to the Belgian Government’s claim, the disputed tax clearly increases the tax receipts of the Region of Brussels Capital. Originally, under the previous provision, none of the buildings leased by the Community or other international organisations which had their seat in Brussels brought in any tax, because the occupier was exempt from tax. By contrast, the 1992 Regional Order increased the number of buildings liable to tax at a stroke, by all those leased by international organisations, including the Communities. This increase in tax receipts involved a not insignificant burden on the Community’s budget, such that the question arises as to whether such a burden is incompatible with the purpose of the fiscal immunity under Article 3 of the Protocol as explained above.

49. Nor is it possible in the present case to draw a clear distinction between a tax liability on the one hand and a contractual obligation on the other, as the Belgian Government seeks to do. The passing on of the tax liability results directly from a private law contract and is therefore, in theory not generally applicable. However, the widespread practice of including a passing-on of tax clause in leases means that generally the tax burden is passed on to the Communities and the Communities’ fiscal immunity is thereby circumvented. It follows that, given its legal and factual context, the effect of the measure is equivalent to that of a direct tax on the Communities. As is apparent from the statements made by the Minister for Finance, the Budget and the Civil Service in relation to the disputed tax which appear in the travaux préparatoires and which were relied upon by the Commission, the Brussels legislature did not overlook that fact when it introduced the disputed measure.

50. If the Belgian Government’s view were accepted, every State in which a Community institution has a seat would be tempted to transform direct tax burdens from which the Communities are exempt into indirect tax burdens, in order to circumvent the Communities’ fiscal immunity and to undermine permanently its practical effectiveness.

51. Finally it is to be observed that, although the Belgian State is entitled to exercise its autonomy in fiscal matters freely, it must do so in a manner which is compatible with its obligations under Community law, including its obligation of loyal cooperation under Article 10 EC. It is difficult to reconcile that obligation with the structure of the disputed tax, which undoubtedly has the effect of obtaining tax receipts in respect of buildings leased by the Communities where this was not previously the case, indirectly and at the cost of the Communities. In addition, the Region of Brussels Capital was under an obligation under Article 19 of the Protocol to consult with the institutions in order to ensure that the Communities’ fiscal immunity was not infringed and in any event to find a solution which was compatible with the EC Treaty.

52. In the light of the foregoing considerations it should be held that the disputed tax is not compatible with the fiscal immunity provided for by Article 3 of the Protocol. Thus, by subjecting the Communities to a tax by virtue of the Regional Order which, although imposed directly on the contracting partner of the Communities, is nevertheless borne indirectly by the Communities because of the general factual and legal context, the Kingdom of Belgium has disregarded the fiscal immunity.

53. Accordingly, the Commission’s complaint is well founded.

VI – Costs

54. Under Article 69(2) of the Rules of Procedure the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has been successful, the Kingdom of Belgium should be ordered to pay the costs.

VII – Conclusion

55. For the foregoing reasons I would suggest to the Court that it should:

– declare that, by enacting national tax legislation which provides for a direct tax on persons who conclude contracts with the Communities but which indirectly has the object or at least the effect that the real burden of the tax is borne by or passed on to the Communities, the Kingdom of Belgium has failed to fulfil its obligations under Article 3 of the Protocol;

– order the Kingdom of Belgium to pay the costs of the proceedings.