EHRM, 02-07-2013, nr. 41838/11

The Court reiterates that Article 1 of Protocol No. 1 requires that any interference by a public authority with the peaceful enjoyment of possessions should be lawful: indeed, the second sentence of the first paragraph of that Article authorises the deprivation of possessions ‘subject to the conditions provided for by law’. Moreover, the rule of law, one of the fundamental principles of a democratic society, is a notion inherent in all the Articles of the Convention (see Former King of Greece and Others v. Greece [GC] (merits), no. 25701/94, § 79, ECHR 2000—XII, and Broniowski v. Poland [GC], no. 31443/96, § 147, ECHR 2004-V).

However, the existence of a legal basis in domestic law does not suffice, in itself, to satisfy the principle of lawfulness. In addition, the legal basis must have a certain quality, namely it must be compatible with the rule of law and must provide guarantees against arbitrariness.

It follows that, in addition to being in accordance with the domestic law of the Contracting State, including its Constitution, the legal norms upon which the deprivation of property is based should be sufficiently accessible, precise and foreseeable in their application (see Guiso-Gallisay v. Italy, no. 58858/00, §§ 82–83, 8 December 2005). The Court would add that similar considerations apply to interferences with the peaceful enjoyment of possessions.

As to the notion of ‘foreseeability’, its scope depends to a considerable degree on the content of the instrument in issue, the field it is designed to cover and the number and status of those to whom it is addressed (see, mutatis mutandis, Sud Fondi S.r.l. and Others v. Italy, no. 75909/01, § 109, 20 January 2009). In particular, a rule is ‘foreseeable’ when it affords a measure of protection against arbitrary interferences by the public authorities (see Centro Europa 7 S.r.l. and Di Stefano v. Italy [GC], no. 38433/09, § 143, ECHR—2012). Similarly, the applicable law must provide minimum procedural safeguards commensurate with the importance of the principle at stake (see, mutatis mutandis, Sanoma Uitgevers B.V. v. the Netherlands [GC], no. 38224/03, § 88, 14 September 2010; Vistiņš and Perepjolkins v. Latvia [GC], no. 71243/01, §§ 96–98, 25 October 2012).

The Court would, moreover, reiterate the finding in its settled case-law that the national authorities are in principle better placed than an international court to evaluate local needs and conditions. In matters of general social and economic policy, on which opinions within a democratic society may reasonably differ widely, the domestic policy-maker should be afforded a particularly broad margin of appreciation (see, for example, Stec and Others v. the United Kingdom [GC], no. 65731/01, § 52, ECHR 2006—VI).

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 (see National & Provincial Building Society, Leeds Permanent Building Society and Yorkshire Building Society v. the United Kingdom, 23 October 1997, §§ 75 to 83, Reports of Judgments and Decisions 1997—VII; OAO Neftyanaya Kompaniya Yukos v. Russia, no. 14902/04, § 559, 20 September 2011).

Moreover, since in the present case the interference with the applicant's peaceful enjoyment of possessions was incarnated by a tax measure, it is convenient to point out that retroactive taxation can be applicable essentially to remedy technical deficiencies of the law, in particular where the measure is ultimately justified by public-interest considerations. There is in fact an obvious and compelling public interest to ensure that private entities do not enjoy the benefit of a windfall in a changeover to a new tax-payment regime (see National etc., cited above, §§ 80 to 83).

However, no such deficiency of the law has been demonstrated in the circumstances of the present case. Therefore, the Court considers that particular caution is called for when assessing whether or not the impugned measure was ‘lawful’ for the purposes of Article 1 of Protocol No. 1.

The Court notes that the taxation of the severance pay in question was due after the enactment of the final version of the impugned legislation.

In the applicant's particular case, the tax was actually paid prior to that date, under the intermediary rules (see paragraph 7 above). In any case, the taxation complained of can be argued to have certain retroactive features. In particular, the taxed benefits themselves were generated on the applicant's dismissal on 1 July 2010 and were paid on 2 July 2010 (see paragraphs 6 and 7 above) — which preceded the entry into force of the final amendment of the Act on 14 May 2011 (see paragraph 16 above).

The Court cannot overlook the legislative process leading to the enactment of the law affecting the applicant. It observes that the Constitutional Court found, in its first decision (see paragraph 11 above), the measure unconstitutional for being confiscatory (especially in regard to statutorily provided severance pay to civil servants who could not be considered to have received it in violation of good morals or otherwise illegally).

In its second decision (see paragraphs 14 and 15 above) the Constitutional Court held that for the current tax year (that is, for 2010), the tax was not unconstitutional in regard to severance payments which were made before the entry into force of the Act, since it did not violate human dignity — which was the only basis for constitutional evaluation of a tax law after the reduction of the competences of the Constitutional Court. This did not, however, change the finding of substantive unconstitutionality of essentially identical provisions of the original Tax Act — only that the Constitutional Court could not review the slightly amended provisions of the Amendment.

The modified Tax Act was enacted on 9 May 2011, published on 13 May 2011 and entered into force the next day, 14 May 2011, being applicable to severance and related payments earned after 1 January 2010 (see paragraph 16 above). However, the applicant had received the severance payment in question more than ten months earlier.

The Court also notes that the rules under which the applicant paid the tax in question were subsequently annulled by the Constitutional Court and the missing legislation was substituted for only on 14 May 2011 (see paragraphs 14 and 16 above), which in the Court's eyes raises some doubts as to the presence of a proper legal basis. Moreover, the Court considers that the decisions of the Constitutional Court as such raise certain issues as to the constitutionality — and therefore the legality — of the impugned Act.

The Court nevertheless finds that the final amendment of the Act can be accepted as providing a legal basis for the measure in question, taking into account the degree of additional deference and latitude afforded in this field (see paragraph 39 above). It considers that it is not necessary to take a position on the legality of the impugned tax measures, which concerned the applicant's employment and severance pay, both having occurred long before the entry force of the Act, since this issue is taken into consideration under the proportionality test (see paragraphs 54 to 62 below).

Even if it has taken place subject to the conditions provided for by law — implying the absence of arbitrariness — and in the public interest, an interference with the right to the peaceful enjoyment of possessions must always strike a ‘fair balance’ between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights. In particular, there must be a reasonable relationship of proportionality between the means employed and the aim sought to be realised by the impugned measure (see Scordino v. Italy (no. 1) [GC], no. 36813/97, § 93, ECHR 2006-V, and also paragraph 31 above).

In determining whether this requirement is met, the Court reiterates that the State enjoys a wide margin of appreciation with regard both to choosing the means of enforcement and to ascertaining whether the consequences of enforcement are justified in the general interest for the purpose of achieving the object of the law in question (see Chassagnou and Others v. France [GC], nos. 25088/94, 28331/95 and 28443/95, § 75, ECHR 1999-III, and Herrmann v. Germany [GC], no. 9300/07, § 74, 26 June 2012). Nevertheless, the Court cannot abdicate its power of review and must therefore determine whether the requisite balance was maintained in a manner consonant with the applicant's right to the peaceful enjoyment of possessions, within the meaning of the first sentence of Article 1 of Protocol No. 1 (see Jahn and Others v. Germany [GC], nos. 46720/99, 72203/01 and 72552/01, § 93, ECHR 2005-VI). In the determination of the proportionality of the measure, the Court did in the past also consider the personal situation of the applicants, including their good faith (see Vistiņš and Perepjolkins, cited above, § 120).

In order to assess the conformity of the State's conduct with the requirements of Article 1 of Protocol No. 1, the Court must conduct an overall examination of the various interests at issue, having regard to the fact that the Convention is intended to guarantee rights that are ‘practical and effective’, not theoretical or illusory. It must go beneath appearances and look into the reality of the situation at issue, taking account of all the relevant circumstances, including the conduct of the parties to the proceedings, the means employed by the State and the implementation of those means. Where an issue in the general interest is at stake, it is incumbent on the public authorities to act in good time, and in an appropriate and consistent manner (see Fener Rum Erkek Lisesi Vakfı v. Turkey, no. 34478/97, § 46, 9 January 2007, and Bistrović v. Croatia, no. 25774/05, § 35, 31 May 2007).

In the context of tax collection, the Court considers that the suitability of methods is a consideration in the establishment of proportionality of a measure of interference (see, in the context of exercise of the State's right of pre-emption, Hentrich v. France, 22 September 1994, § 48, Series A no. 296 A).

Although Article 1 of Protocol No. 1 contains no explicit procedural requirements, in order to assess the proportionality of the interference the Court looks at the degree of protection from arbitrariness that is afforded by the proceedings in the case (see Hentrich, cited above, § 46). In particular, the Court examines whether the proceedings concerning the interference with an applicant's right to the peaceful enjoyment of possessions were attended by basic procedural safeguards. It has already held that an interference cannot be legitimate in the absence of adversarial proceedings that comply with the principle of equality of arms, enabling argument to be presented on the issues relevant for the outcome of a case (see Hentrich, cited above, § 42; and Jokela v. Finland, no. 28856/95, § 45, ECHR 2002—IV). A comprehensive view must be taken of the applicable procedures (see AGOSI, cited above, § 55; Hentrich, cited above, § 49; and Jokela, cited above, § 45).

As it transpires from its case-law, in the area of social and economic legislation including in the area of taxation as a means of such policies States enjoy a wide margin of appreciation, which in the interests of social justice and economic well-being may legitimately lead them, in the Court's view, to adjust, cap or even reduce the amount of severance normally payable to the qualifying population. However, any such measures must be implemented in a non-discriminatory manner and comply with the requirements of proportionality.

In particular, as regards the existence of a ‘reasonable relationship of proportionality between the means employed and the aim sought to be realised’, the Court notes at the outset that the Constitutional Court's first decision can be understood to characterise the tax in question as amounting to a confiscatory measure. Moreover, tax rates exceeding 50% have been found unconstitutional in Germany, a Member State of the Council of Europe (see paragraph 19 above). However, in several European countries — such as Sweden, Belgium, the Netherlands, Portugal and Italy — personal income tax rates reached about 75% in the past — although those rates were usually applicable only to the highest income brackets, related to revenues clearly exceeding the amount that is contemplated in the context of the present case. It is also to be noted that the OECD average of top combined statutory personal income tax rates was 65.7% in 1981, 50.6% in 1990, 46.5% in 2000 and 41.7% in 20108..

The applicable threshold in the present case was HUF 3.5 million, the amounts of severance pay falling below this limit being subject to the general personal income tax rates (a maximum of 32% in the period, see paragraph 7 above). By contrast, a tax rate of 98% was applied to that part of severance pay which exceeded the threshold.

In the instant case, the Court takes into consideration in the proportionality analysis that the tax rate applied exceeds considerably the rate applicable to all other revenues, without determining in abstracto whether or not the tax burden was, quantitatively speaking, confiscatory in nature. For the Court, given the margin of appreciation granted to States in matters of taxation, the applicable tax rate cannot be decisive in itself, especially in circumstances like those of the present case.

The Court observes that the applicant, who was entitled to severance pay according to his labour contract and whose acting in good faith has never been called into question, was subjected to the impugned measure notwithstanding the fact that the severance pay served the specific and recognised social goal of labour reintegration.

Moreover, to the extent that the Government may be understood to argue that certain senior managers of State-owned enterprises were capable of influencing their own benefits, which phenomenon could only be countered by targeted taxation (see paragraph 27 above), the Court is satisfied that — although the benefits in question were stipulated in the labour contract between the applicant and his employer — there is nothing in the case file to corroborate such an assumption of abuse in the case of the applicant, who in any event was not an executive of that enterprise. In particular, the Court notes that the applicant, having been in the service of the employer for about eleven years, was statutorily entitled to three months' severance pay under the Labour Code (see paragraph 7 above), and acquired only one additional month's amount under the labour contract.

As regards the personal burden which the applicant sustained on account of the impugned measure, the Court notes that he had to suffer a substantial deprivation of income in a period of presumable considerable personal difficulty, namely subsequent to the loss of employment. The Court would observe in this context that Article 34 of the Charter of Fundamental Rights of the European Union (see paragraph 18 above) endorses benefits providing protection in the case of loss of employment, and that according to the European Court of Justice, the aim pursued by severance pay — that is, helping dismissed employees find new employment — belongs within legitimate employment policy goals (see paragraph 18 above).

Moreover, the Court cannot overlook the fact that the applicant received the benefits in question, reduced by the then applicable taxes, several months before the change in the revenue rules, and might have disposed of it already, unaware that subsequently he would have to surrender this money, almost in its entirety, in the levying of an additional tax. For the Court, this element — that is, the absence of a transitional period within which to adjust himself to the new scheme — is likely to have exposed the applicant to substantial personal hardships. In this connection the Court recalls that taxation at a considerably higher tax rate than that in force when the revenue in question was generated could arguably be regarded as an unreasonable interference with expectations protected by Article 1 of Protocol No. 1 (see M.A. and 34 Others, cited above). The tax complained of was not intended to remedy technical deficiencies of the pre-existing law, nor had the applicant enjoyed the benefit of a windfall in a changeover to a new tax-payment regime (compare and contrast, National etc., cited above, §§ 75 to 83).

Against this background, the Court finds that the measure complained of entailed an excessive and individual burden on the applicant's side. This is all the more evident when considering the fact that the measure targeted only a certain group of individuals, who were apparently singled out as having been paid, directly or indirectly, out of the public purse. Assuming that the impugned measure served the interest of the State budget at a time of economic hardship, the Court notes that the majority of citizens were not obliged to contribute, to a comparable extent, to the public burden.

The Court concludes that the specific measure in question, as applied to the applicant, even if meant to serve social justice, cannot be justified by the legitimate public interest relied on by the Government. It affected the applicant being in good-faith standing and deprived him of the larger part of an acquired right (statutorily guaranteed to a large extent), serving the special social interest of labour-market reintegration. In the Court's opinion, those who act in good faith on the basis of law or contracts should not be frustrated in their expectations without specific and compelling reasons. Therefore the measure cannot be held to be reasonably proportionate to the aim sought to be realised.

The foregoing considerations are sufficient to enable the Court to conclude that there has been a violation of Article 1 of Protocol No. 1.