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November 02, 2011 The Tax Lawyer

Something Rotten in the Netherlands: The Case of X and Passenheim-van Schoot and the Demise of EU Taxpayer Rights Under the EU Treaty

Vol. 64, No. 3 - Spring 2011

Danielle Gill


    Today’s borderless economic world allows both taxpayers and capital unprecedented mobility. However, while the mobility of capital and persons knows few bounds, state power remains confined to each state’s own territory. This disconnect between the limited scope of state power—and nearly unlimited mobility of taxpayer assets—has proven especially troublesome for national tax authorities, who face increasing recovery problems particularly when their national taxpayers are resident abroad or conceal assets abroad.

    Though most nations are constrained only by their legislative imaginations in adopting measures to combat tax evasion, the EC Treaty (the Treaty) limits what measures European Union (EU) member states may pursue. The Court of Justice of the European Communities (the ECJ) has regularly found national direct tax provisions incompatible with the Treaty. In so doing, the ECJ has acted with the goal of protecting EU taxpayers’ Treaty-guaranteed freedoms—seeking to balance EU citizens’ rights with states’ legitimate needs. As an inescapable consequence of this balancing act, however, the court’s decisions have limited the administrative and enforcement tools available to member states.

    Recently, the ECJ departed from this taxpayer-protective path. In its opinion in X & Passenheim-van Schoot v. Staatssecretaris van Financiën, the court widened the avenues available to member states to combat tax evasion and promote effective fiscal supervision. Specifically, the court dramatically expanded the grounds on which member states may justify, and thus legitimize, legislation contravening treaty freedoms. This indicates the court’s willingness, even eagerness, to accept state legislation in contravention of the EU Treaty. While the departure is welcome news for member states, who have long chafed at the ECJ’s interference with their domestic tax policy, it is troubling news for EU citizens. Without a judicial guardian of European rights, taxpayer rights are in grave danger.

    Part II of this Note discusses the legal framework on which Passenheim-van Schoot was decided, and provides background about the ECJ and its direct taxation jurisprudence. Part III presents the Passenheim-van Schoot case itself, looking at the facts and the ECJ’s opinion. Part IV.A examines errors of the court’s decision, noting its substantial departure from long-settled precedent. Finally, Part IV.B explores the negative effects this decision could have on taxpayers’ rights.

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