CELEX: 62006CJ0104
Language: en
Date: 2007-01-18 00:00:00
Title: Judgment of the Court (Eighth Chamber) of 18 January 2007. # Commission of the European Communities v Kingdom of Sweden. # Failure of a Member State to fulfil obligations - Tax legislation - Deferral of taxation on capital gains arising on sale of residential property - Articles 18 EC, 39 EC and 43 EC - Articles 28 and 31 of the European Economic Area Agreement. # Case C-104/06.

Case C-104/06
      Commission of the European Communities
      v
      Kingdom of Sweden
      (Failure of a Member State to fulfil obligations – Tax legislation – Deferral of taxation on capital gains arising on sale of residential property – Articles 18 EC, 39 EC and 43 EC – Articles 28 and 31 of the European Economic Area Agreement)
      Judgment of the Court (Eighth Chamber), 18 January 2007 
      Summary of the Judgment
      Freedom of movement for persons – Workers – Freedom of establishment – Citizens of the European Union – Tax legislation
      (Arts 18 EC, 39 EC and 43 EC; EEA Agreement, Arts 28 and 31)
      A Member State which adopts and maintains in force tax provisions which make entitlement to deferral of taxation on capital
         gains arising from the sale of a private residential property or of a right to reside in a private cooperative property conditional
         on the newly-acquired residence also being in national territory fails to fulfil its obligations under Articles 18 EC, 39
         EC and 43 EC and under Articles 28 and 31 of the EEA Agreement.
      
      A taxable person who decides to sell a residential property that he owns in that Member State in order to transfer his residence
         to another Member State and to purchase a new property there for the purposes of his accommodation, in the exercise of the
         right of every citizen of the Union to move and reside freely within the territory of the Member States, which finds specific
         expression in Article 43 EC with regard to freedom of establishment and in Article 39 EC with regard to freedom of movement
         for workers, but also of rights conferred by Article 28 of the EEA Agreement in relation to the free movement of workers and
         by Article 31 of the EEA Agreement on the freedom of establishment, is thereby subjected to less favourable tax treatment
         than that enjoyed by a person who maintains his residence in the Member State concerned.
      
      The need to maintain the coherence of a tax system cannot justify that difference in treatment since, for an argument based
         on such a justification to succeed, a direct link must be established between the tax advantage concerned and the offsetting
         of that advantage by a particular tax levy.
      
      Since the provisions of the Treaty and the EEA Agreement on freedom of movement for persons preclude such legislation, there
         is no need for a separate examination of that legislation in the light of Article 56(1) EC and Article 40 of the EEA Agreement
         concerning the free movement of capital
      
      (see paras 15, 22, 26, 35, 37, operative part)
JUDGMENT OF THE COURT (Eighth Chamber)
      18 January 2007 (*)
      
      (Failure of a Member State to fulfil obligations – Tax legislation – Deferral of taxation on capital gains arising on sale of residential property – Articles 18 EC, 39 EC and 43 EC – Articles 28 and 31 of the European Economic Area Agreement)
      In Case C-104/06,
      ACTION under Article 226 EC for failure to fulfil obligations, brought on 22 February 2006,
      Commission of the European Communities, represented by L. Ström van Lier and R. Lyal, acting as Agents, with an address for service in Luxembourg,
      
      applicant,
      v
      Kingdom of Sweden, represented by A. Kruse, acting as Agent,
      
      defendant,
      THE COURT (Eighth Chamber),
      composed of E. Juhász, President of the Chamber, G. Arestis (Rapporteur) and J. Malenovský, Judges,
      Advocate General: Y. Bot,
      Registrar: R. Grass,
      having regard to the written procedure,
      having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,
      gives the following
      Judgment
      1       By its application, the Commission of the European Communities seeks a declaration from the Court that, by adopting and maintaining
         in force tax legislation by virtue of which the deferral of taxation on capital gains realised on the sale of a residence
         occupied by its owner when he or she acquires a new residence is only granted where both the residence sold and the newly-acquired
         residence are situated on Swedish territory, the Kingdom of Sweden has failed to fulfil its obligations under Articles 18
         EC, 39 EC, 43 EC and 56(1) EC and under Articles 28, 31 and 40 of the Agreement on the European Economic Area of 2 May 1992
         (OJ 1994 L 1, p. 3, hereinafter ‘the EEA Agreement’).
      
       Legal context
       The EEA Agreement
      2       Article 28 of the EEA Agreement provides:
      ‘1.      Freedom of movement for workers shall be secured among EC [European Community] Member States and EFTA [European Free Trade
         Association] States.
      
      2.      Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of EC Member
         States and EFTA States as regards employment, remuneration and other conditions of work and employment.
      
      3.      It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health:
      (a)      to accept offers of employment actually made;
      (b)      to move freely within the territory of EC Member States and EFTA States for this purpose;
      (c)      to stay in the territory of an EC Member State or an EFTA State for the purposes of employment in accordance with the rules
         governing the employment of nationals of that State laid down by law, regulation or administrative action;
      
      (d)      to remain in the territory of an EC Member State or an EFTA State after having been employed there.
      4.      The provisions of this Article shall not apply to employment in the public service. 
      5.      Annex V contains specific provisions on the free movement of workers.’
      3       Article 31 of the EEA Agreement is worded as follows:
      ‘1.      Within the framework of the provisions of this Agreement, there shall be no restrictions on the freedom of establishment of
         nationals of an EC Member State or an EFTA State in the territory of any other of these States. This shall also apply to the
         setting-up of agencies, branches or subsidiaries by nationals of any EC Member State or EFTA State established in the territory
         of any of these States.
      
      Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and
         manage undertakings, in particular companies or firms within the meaning of Article 34, second paragraph, under the conditions
         laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions
         of Chapter 4.
      
      2.      Annexes VIII to XI contain specific provisions on the right of establishment.’
       National legislation
      4       Chapter 47 of the law on income tax (1999:1229) (inkomstskattelagen (1999:1229), hereinafter ‘the IL’), headed ‘Deferral of
         taxation’, contains provisions on the deferral of taxation on the sale of a private residential property or of a right to
         reside in a private cooperative property and the treatment of that deferral on subsequent sale.
      
      5       Article 2 of Chapter 47 of the IL, on the conditions for deferral of taxation, provides:
      ‘A taxpayer may benefit from a deferral of taxation where he or she:
      (1)      declares a capital gain on the sale of a previous residence,
      (2)      has acquired or intends to acquire a replacement residence and 
      (3)      lives or intends to live in the replacement residence.’
      6       Under Article 3, first paragraph, of Chapter 47 of the IL, previous residence means a private residence situated in Sweden
         which at the date of sale is the permanent residence of the taxpayer.
      
      7       Article 5 of Chapter 47 of the IL, as amended by Law 2003:1206 (lagen om ändring i inkomstskattelagen 1999:1229), appears
         in the part of that chapter which is headed ‘Replacement residence’, and provides as follows:
      
      ‘Replacement residence means an asset situated in Sweden and which, on purchase, comprises:
      (1)      a house with a parcel of land forming a residential unit,
      (2)      a house on land belonging to another, 
      (3)      a house adapted for one or two families with its parcel of land within an agricultural unit, 
      (4)      land on which a house such as that referred to in paragraphs 1 or 3 is being built, or
      (5)      housing in a private housing association.’
       Pre-litigation procedure 
      8       The Commission considered that the provisions of Chapter 47 of the IL and, in particular, those of Articles 2 to 5 of that
         chapter, which make the deferral of taxation on capital gains arising from the sale of a private residential property or of
         a right to reside in a private cooperative property conditional on the purchase of a new residence (called a ‘replacement
         residence’) being on Swedish territory, infringe the Kingdom of Sweden’s obligations under Articles 18 EC, 39 EC, 43 EC and
         56(1) EC and under Articles 28, 31 and 40 of the EEA Agreement, and by letter dated 1 April 2004, gave that Member State formal
         notice to submit its observations.
      
      9       Essentially, the Swedish authorities recognised that the system of deferral of taxation, such as that which results in particular
         from the application of the combined provisions of Articles 2 to 5 of Chapter 47 of the IL, represents an obstacle to the
         free movement of persons and capital. However, they considered that the provisions at issue are justified by overriding requirements
         in the general interest and, more particularly, the need to maintain the coherence of the national tax system.
      
      10     Since it was not convinced by the arguments invoked by the Swedish authorities, the Commission issued a reasoned opinion on
         5 July 2005 in which, firstly, it reiterated its complaint that the provisions of Chapter 47 of the IL in dispute undermine
         the free movement of both persons and capital and, secondly, it called upon the Kingdom of Sweden to adopt the measures necessary
         to comply with that opinion within a period of two months from its notification.
      
      11     Since, in their reply to that reasoned opinion, the Swedish authorities essentially maintained their position that the provisions
         of Chapter 47 of the IL at issue are justified by the need to maintain the coherence of the national tax system, the Commission
         decided to bring the present action.
      
       The action
      12     It must be borne in mind, first of all, that, according to settled case-law, although direct taxation is a competence of the
         Member States, they must none the less exercise it consistently with Community law (see Case C-334/02 Commission v France [2004] ECR I-2229, paragraph 21, and Case C-446/03 Marks & Spencer [2005] ECR I-10837, paragraph 29).
      
      13     It is necessary to examine whether, as the Commission submits, the provisions of Chapter 47 of the IL and, in particular,
         the combined provisions of Articles 2 to 5 of that chapter, represent restrictions on the free movement of persons and of
         capital enshrined in Articles 18 EC, 39 EC, 43 EC and 56(1) EC and in Articles 28, 31 and 40 of the EEA Agreement.
      
       Free movement of persons
      14     In connection with this complaint, the Commission submits that the Kingdom of Sweden has failed to fulfil its obligations
         under Articles 18 EC, 39 EC and 43 EC.
      
      15     Article 18 EC, which sets out in general terms the right of every citizen of the Union to move and reside freely within the
         territory of the Member States, finds specific expression in Article 43 EC with regard to freedom of establishment and in
         Article 39 EC with regard to freedom of movement for workers (Case C-345/05 Commission v Portugal [2006] ECR I-0000, paragraph 13).
      
      16     It is therefore necessary to consider, firstly, whether Articles 39 EC and 43 EC preclude national legislation such as that
         represented by the provisions of Chapter 47 of the IL in dispute.
      
      17     The provisions of the Treaty on freedom of movement for persons are intended to facilitate the pursuit by Community nationals
         of occupational activities of all kinds throughout the Community, and preclude measures which might place Community nationals
         at a disadvantage when they wish to pursue an economic activity in the territory of another Member State (see Case C-464/02
         Commission v Denmark [2005] ECR I-7929, paragraph 34 and the case-law cited).
      
      18     Rules which preclude or deter a national of a Member State from leaving his country of origin in order to exercise his right
         to freedom of movement therefore constitute an obstacle to that freedom even if they apply without regard to the nationality
         of the workers concerned (see Case C-209/01 Schilling and Fleck-Schilling [2003] ECR I-13389, paragraph 25, and Commission v Denmark, paragraph 35).
      
      19     It is clear from the case-law of the Court that, even if, according to their wording, the rules on freedom of movement for
         workers are intended, in particular, to ensure that foreign nationals and companies are treated in the host Member State in
         the same way as nationals of that State, they also preclude the State of origin from obstructing the freedom of one of its
         nationals to accept and pursue employment in another Member State (Case C-385/00 De Groot [2002] ECR I-11819, paragraph 79).
      
      20     The same also applies to the rules concerning freedom of establishment. According to the case-law, even if, according to their
         wording, those rules are intended to ensure that foreign nationals and companies are treated in the host Member State in the
         same way as nationals of that State, they also prohibit the Member State of origin from hindering the establishment in another
         Member State of one of its nationals or of a company incorporated under its legislation (Case C-9/02De Lasteyrie du Saillant [2004] ECR I-2409, paragraph 42, and Case C-471/04 Keller Holding [2006] ECR I-2107, paragraph 30).
      
      21     In the present case, even though the provisions of Chapter 47 of the IL in dispute do not prevent a person liable to income
         tax in Sweden from pursuing employment in another Member State or generally exercising his right of establishment, they are
         none the less likely to restrict the exercise of those rights by having, at the very least, a deterrent effect on taxable
         persons wishing to sell their real property in order to settle in a Member State other than the Kingdom of Sweden.
      
      22     It is clear that a taxable person who decides to sell a residential property that he owns in Sweden in order to transfer his
         residence to another Member State and to purchase a new property there for the purposes of his accommodation is, in the exercise
         of the rights conferred by Articles 39 EC and 43 EC, subject to less favourable tax treatment than that enjoyed by a person
         who maintains his residence in Sweden.
      
      23     That difference in treatment in relation to the deferral of taxation of capital gains realised may affect the assets of a
         taxable person who wishes to transfer his residence outside Sweden and, as a consequence, is likely to deter him from proceeding
         with such a transfer.
      
      24     It follows that, by making entitlement to the deferral of taxation on capital gains arising from the sale of a private residential
         property or of a right to reside in a private cooperative apartment conditional on the new residence being on Swedish territory,
         the combined provisions of Chapter 47 of the IL, and in particular Articles 2 to 5 of that chapter, are liable to impede freedom
         of movement for workers and freedom of establishment, as guaranteed by Articles 39 EC and 43 EC.
      
      25     According to well-established case-law, however, national measures which are liable to hinder the exercise of fundamental
         freedoms guaranteed by the Treaty or make it less attractive may nevertheless be allowed if they pursue a legitimate objective
         in the public interest, are appropriate to ensuring the attainment of that objective, and do not go beyond what is necessary
         to attain the objective pursued (see, De Lasteyrie du Saillant, paragraph 49, and Case C-470/04 N [2006] ECR I-0000, paragraph 40).
      
      26     Moreover, whilst the Court has recognised that the need to maintain the coherence of a tax system can justify a restriction
         on the exercise of the fundamental freedoms guaranteed by the Treaty, for an argument based on such a justification to succeed,
         a direct link must be established between the tax advantage concerned and the offsetting of that advantage by a particular
         tax levy (see, to that effect, Keller Holding, paragraph 40 and the case-law cited). 
      
      27     However, in the present case, not only does the Kingdom of Sweden not advance any specific arguments before the Court seeking
         to establish that the provisions of the IL in dispute are justified by the need to ensure coherence of the tax system concerning
         the deferral of taxation on capital gains, but, moreover, in its defence, it admits the failure to fulfil obligations of which
         it is accused. Further, it submits that, in order to fulfil its obligations under Community law, it is studying a reform of
         the complex rules on deferral of taxation.
      
      28     According to the case-law, whether a Member State has failed to fulfil its obligations must be determined by reference to
         the situation prevailing in the Member State at the end of the period laid down in the reasoned opinion, and the Court cannot
         take account of any subsequent changes (see, inter alia, Case C-388/02 Commission v Ireland [2003] ECR I-12173, paragraph 6).
      
      29     In those circumstances, the provisions of Chapter 47 of the IL in dispute must be held to be contrary to Articles 39 EC and
         43 EC.
      
      30     Secondly, with regard to persons who are not economically active, the same conclusion applies, for the same reasons, to the
         complaint relating to Article 18 EC.
      
      31     The Commission also claims that the Kingdom of Sweden has failed to fulfil its obligations under Articles 28 and 31 of the
         EEA Agreement, relating respectively to freedom of movement for workers and freedom of establishment.
      
      32     It is to be noted, in the present case, that the rules prohibiting restrictions on the freedom of movement and the freedom
         of establishment laid down in Articles 28 and 31 of the EEA Agreement are essentially identical to those established by Articles
         39 EC and 43 EC.
      
      33     Therefore, in the light of the conclusion reached in paragraph 29 of the present judgment, the provisions of Chapter 47 of
         the IL in dispute are also contrary to Articles 28 and 31 of the EEA Agreement.
      
      34     The Commission’s action must accordingly be considered to be well founded as far as the complaint alleging infringement of
         the rules on freedom of movement for persons in the EEA Agreement is concerned.
      
      35     It must therefore be held that, by adopting and maintaining in force tax rules, such as those in Chapter 47 of the IL, which
         make entitlement to deferral of taxation on capital gains arising from the sale of a private residential property or of a
         right to reside in a private cooperative building conditional on the newly-acquired residence also being on Swedish territory,
         the Kingdom of Sweden has failed to fulfil its obligations under Articles 18 EC, 39 EC and 43 EC and under Articles 28 and
         31 of the EEA Agreement.
      
       Free movement of capital
      36     In addition, the Commission seeks a declaration from the Court that the Kingdom of Sweden has failed to fulfil its obligations
         under Article 56(1) EC and Article 40 of the EEA Agreement.
      
      37     Since the provisions of the Treaty and the EEA Agreement on freedom of movement for persons preclude the contested legislation,
         there is no need for a separate examination of that legislation in the light of Article 56(1) EC and Article 40 of the EEA
         Agreement concerning the free movement of capital (see Commission v Portugal, paragraph 45).
      
       Costs
      38     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 applied for the Kingdom of Sweden to be ordered
         to pay the costs and the latter has been unsuccessful, it must be ordered to pay the costs.
      
      On those grounds, the Court (Eighth Chamber) hereby:
      1.      Declares that, by adopting and maintaining in force tax provisions, such as those in Chapter 47 of the law on income tax (1999:1229)
            (inkomstskattelagen (1999:1229)), which make entitlement to deferral of taxation on capital gains arising from the sale of
            a private residential property or of a right to reside in a private cooperative property conditional on the newly-acquired
            residence also being on Swedish territory, the Kingdom of Sweden has failed to fulfil its obligations under Articles 18 EC,
            39 EC and 43 EC and under Articles 28 and 31 of the EEA Agreement;
      2.      Orders the Kingdom of Sweden to pay the costs.
      [Signatures]
      * Language of the case: Swedish.