The retroactive cancellation of a first home purchase tax exemption due to the buyers moving to another home did not violate their property rights
JUDGMENT
Bežanić and Baškarad v. Croatia 19.05.2022 (app. no. 16140/15 and 13322/16)
SUMMARY
The applicants bought their first home and benefited from the tax exemption. The applicants moved to other houses 2 years after the purchase. After an audit carried out by the competent authorities, the tax exemption was canceled and the corresponding transfer tax was confirmed to them. They filed a complaint for violation of their right to property.
The Court pointed out that states have the right to enforce the laws they deem necessary to ensure the payment of taxes.
In the present case, the ECtHR found that a law providing for the tax exemption was granted to persons who wished to meet their housing needs. National case law has shown that the tactic of annulment of a tax exemption decision has been consistently used by domestic authorities in cases where it was found that citizens who had benefited from the exemption had not used the purchased real estate for their residence. Those decisions were sufficiently predictable to the applicants.
The Court, taking into account domestic law and practice, namely that: (a) the transfer tax was levied for a legitimate aim; a tax rate of 5% on the value of the property did not burden them excessively, it concluded that the intervention was legal and did not violate Article 1 of the First Additional Protocol.
PROVISION
Articl 1 of the First Additional Protocol
PRINCIPAL FACTS
The applicants, Aleksandar Bežanić and Stipica Baškarad, are Croatian nationals who were born in
1973 and 1966 respectively and live in Rijeka.
The case concerns the obligation to pay real estate transfer tax on two properties that the applicants
bought separately, after they were initially exempt from paying that tax as first-time buyers. The
exemptions in their cases were annulled by the authorities, which stated that the applicants had no
longer met the conditions.
They rely on Article 1 of Protocol No. 1 (protection of property) to the European Convention on
Human Right.
THE DECISION OF THE COURT…
(a) Whether there was an interference with the applicants’ property rights
The Court considers that the domestic authorities’ decision ordering the applicants to pay a certain amount of money in real estate transfer tax constituted an interference with their property rights guaranteed by Article 1 of Protocol No. 1, it being understood that such an interference is to be examined from the standpoint of the rule in the second paragraph of Article 1 of Protocol No. 1 under which the States have the right to enforce such laws as they deem necessary to secure the payment of taxes.
It remains to be considered whether the interference was lawful and was compatible with the proportionality principle inherent in that provision, having regard to the wide margin of appreciation enjoyed by the State in the tax sphere.
(b) Whether the interference was lawful
When speaking of “law”, Article 1 of Protocol No. 1 alludes to the very same concept as that to which the Convention refers elsewhere when using that term – a concept that comprises statutory law as well as case-law and implies qualitative requirements (notably those of accessibility and foreseeability) .
The Court has acknowledged in its case-law that however clearly drafted a legal provision may be, in any system of law there is an inevitable element of judicial interpretation. There will always be a need for the elucidation of doubtful points and for adaptation to changing circumstances. Again, while certainty is highly desirable, it may bring in its train excessive rigidity and the law must be able to keep pace with changing circumstances. Accordingly, many laws are inevitably couched in terms which, to a greater or lesser extent, are vague and whose interpretation and application are questions of practice. The role of adjudication vested in the courts is precisely to dissipate such interpretational doubts as remain.
Furthermore, in so far as the tax sphere is concerned, the Court’s well‑established position is that States may be afforded some degree of additional deference and latitude in the exercise of their fiscal functions under the lawfulness test.
In the present case the tax authorities initially exempted the applicants from paying real estate transfer tax, finding that they had complied with the statutory conditions to that account. A few years later they annulled their decisions and ordered the applicants to pay the relevant amounts in real estate transfer tax, holding that changing domicile less than five years after purchasing the real estate had triggered the loss of their right to tax exemption under section 11(10) of the Real Estate Transfer Tax Act.
The Court observes that at the time of purchasing their flats in 2007 and 2008 and changing their respective domiciles in 2009, the primary legislation in force did not expressly prohibit a person from changing his or her domicile. An express prohibition to change domicile was inserted into the Real Estate Transfer Tax Act in 2011 and it is undisputed that the 2011 provision was inapplicable to the applicants’ case.
The tax brochures and manuals published between 2006 and 2009 did not expressly warn against changing one’s domicile either. The domestic judgments referred to by the Government were delivered several years after the applicants had changed their domicile and could thus not have served as guidance for them. There is no evidence that the administrative authorities’ decisions issued in similar cases were published and therefore accessible to the applicants.
However, the Court notes that the tax exemption in question was intended to benefit persons aiming to resolve their housing needs by purchasing their first real estate.
In that connection it notes that the interference with the applicants’ rights had been based on section 11(9) and (10) of the Real Estate Transfer Tax Act, which allowed the tax authorities to verify whether citizens who had been granted tax exemption had indeed purchased the real estate for the purpose of resolving their housing needs, and to collect real estate transfer tax from them if it was determined that they had not.
This was made clear not only by section 11(9) of the Real Estate Transfer Tax Act (which provided that tax exemption was to be granted only to persons who purchased real estate for the purpose of resolving their housing needs and who, inter alia, registered as their domicile the address of the purchased real estate), but also by section 11(10) of the same Act (which provided for the possibility of subsequently collecting the real estate transfer tax in respect of which an exemption had been granted in the event of it being found that the conditions for the tax exemption had not been complied with).
The available domestic case-law indicates that the power to annul a decision granting a tax exemption and to order the payment of real estate transfer tax had consistently been used by the domestic authorities in situations where it had been established that citizens who had benefitted from the exemption had not used the purchased real estate for accommodation purposes. In a number of rulings, the administrative courts, the Supreme Court and the Constitutional Court held that the fact that a citizen had moved out of a flat less than five years after acquiring it, changed his domicile and/or rented the flat to third persons indicated that the citizen had not used the purchased real estate for the purpose of resolving his or her housing needs. Although the latter consistent rulings post-dated the applicants’ situation), they demonstrate that the law could have been reasonably interpreted in the particular manner in question.
In the present case the first applicant himself admitted that some two years after purchasing his flat he had moved out and had established his family life in another flat owned by his wife. Even though the second applicant contended that his wife and children had remained living in the purchased flat , the Government submitted proof that they had never registered their domicile there. The applicants never argued that their moving to a different address had been temporary and that they had intended to return to the purchased flats. In that connection the Court takes note of the definition of “domicile” and the relevant domestic case-law and the position of legal scholars on the topic referred to. The applicants’ cases must therefore be distinguished from the factually particular situation which arose in the Constitutional Court’s decision of 17 July 2015.
The Court furthermore notes that the applicants had a full opportunity to defend their interests and put forward all necessary evidence and arguments, which were examined by the domestic authorities, including the Constitutional Court, which found no arbitrariness in the administrative authorities’ and the Administrative Court’s conclusions . In this connection, the Court reiterates that it is primarily for the national authorities, notably the courts, to interpret and apply domestic law and to establish the facts of the case.
On the strength of the above, the Court concludes that in the present case there existed a sufficiently clear legal basis for annulling the decisions granting the applicants tax exemption and ordering them to pay real estate transfer tax. Such decisions were not arbitrary and were adequately foreseeable for the applicants.
(c) Whether the interference pursued a legitimate aim
The Court considers that the domestic authorities’ decisions pursued an aim that was in the general interest – that is to say to secure the payment of taxes, as envisaged by legislation, in an area where the State has a wide margin of appreciation.
(d) Whether the interference was proportionate to the legitimate aim pursued
The Court is satisfied that, subject to its findings in respect of the lawfulness of the decisions delivered by the domestic authorities, ordering the applicants to pay real estate transfer tax constituted a proportionate measure that was undertaken in pursuance of the legitimate aim of securing the payment of taxes.
The tax rate amounted to 5% of the market value of the purchased real estate. It was therefore not particularly high.
Furthermore, by the decisions of 28 March 2007 and 13 March 2009 the applicants were made aware of the amount of money they would be required to pay in tax should they cease to qualify for the tax exemption.
Lastly, in the Court’s view, the payment of the tax had not affected the applicants’ financial situation seriously enough for the measure to be considered as having imposed an individual and disproportionate burden on them as such .
(e) Conclusion
Having regard to the above considerations and the wide margin of appreciation enjoyed by the State in the tax sphere, the Court considers that the decisions ordering the applicants to pay real estate transfer tax were lawful and did not amount to a disproportionate burden on them.
There has accordingly been no violation of Article 1 of Protocol No. 1 to the Convention in the present case.
