EHRM, 25-06-2013, nr. 49570/11

The Government did not dispute that the contested deprivation of revenue had amounted to an interference with the applicant's right to property. However, in their view, this interference was prescribed by law and pursued the legitimate aims of satisfying society's sense of justice and of protecting the public purse. These aims of general interest were also recognised by the European Union which had initiated legislative steps (see paragraph 19 above) against excessive severance payments, as their amount often per se violated society's sense of justice and the remuneration policy applied in the financial sector to executive officers had contributed to the international financial crisis of the past years.

The Government were further of the opinion that, in order to achieve the above aims of general interest, taxation can, in a democratic society, be regarded as the most suitable regulatory means. In so far as the impugned tax could be seen as modifying the contents of the applicant's existing employment contract, they submitted that respect for contracts already concluded required that their modification or cancellation take place according to the laws, even if they contained seemingly lawful commitments at the expense of the State budget violating society's sense of justice.

The Government pointed out that by introducing the special tax the lawmaker had intended to strike a fair balance between the aim pursued and the limitation on the individual's rights — by paying, at the same time, due attention to the circumstance that, in the midst of a deep world-wide economic crisis, additional burdens should be borne not only by the State but also by other market participants and by senior civil servants, capable of influencing their own benefits. In the Government's view, a wide margin of appreciation should be left to the national authorities in this respect. Significantly high tax rates were not unknown under the various tax regimes.

The Government also emphasised that severance not exceeding HUF 3.5 million did not fall under the impugned Act (in this part, it was subject to the general personal income tax rate of 16%); therefore, the sharing of burdens should be regarded as fair and just. In this connection the Government submitted that this sum was approximately equivalent to sixteen months' average salary in Hungary in 2010.

The deprivation of revenue had not imposed an excessive individual burden on the applicant, either. She had not been deprived of an existing possession or income, therefore the payment of the tax, deducted by her employer from her severance pay, had not entailed intolerable hardships for her. The rate of the tax had not been excessive and — having regard to average Hungarian revenues, the social and economic situation and the amount of benefits received by the applicant — had not imposed a disproportionate burden on the applicant or endangered her subsistence.

The applicant argued that her severance pay had been prescribed by law and therefore it could by no means violate the society's sense of justice. In her view, the imposition of a 98% tax on her statutory benefits had amounted to an unjustified deprivation of her property. This measure had imposed an excessive individual burden on her and the Government had not struck a fair balance between the aims pursued and the protection of her property rights.

In the present circumstances, the nature of the ‘possession’ calls for a closer scrutiny in view of the fact that the applicant never actually possessed the entirety of the severance pay in question, the special tax having been directly withheld by the authorities.

The concept of ‘possessions’ in the first paragraph of Article 1 of Protocol No. 1 has an autonomous meaning which is not limited to the ownership of material goods and is independent from the formal classification in domestic law. In the same way as material goods, certain other rights and interests constituting assets can also be regarded as ‘property rights’, and thus as ‘possessions’ for the purposes of this provision. In each case the issue that needs to be examined is whether the circumstances of the case, considered as a whole, conferred on the applicant title to a substantive interest protected by Article 1 of Protocol No. 1 (see Iatridis v. Greece [GC], no. 31107/96, § 54, ECHR 1999—II; Beyeler v. Italy [GC], no. 33202/96, § 100, ECHR 2000-I; and Broniowski v. Poland [GC], no. 31443/96, § 129, ECHR 2004—V).

The Court points out that ‘possessions’ within the meaning of Article 1 of Protocol No. 1 can be either ‘existing possessions’ or assets, including claims, in respect of which an applicant can argue that he has at least a ‘legitimate expectation’ that they will be realised (see Gratzinger and Gratzingerova v. the Czech Republic (dec.) [GC], no. 39794/98, § 69, ECHR 2002—VII).

Thus, a ‘legitimate expectation’ of obtaining an asset may also enjoy the protection of Article 1 of Protocol No. 1. Thus, where a proprietary interest is in the nature of a claim, the person in whom it is vested may be regarded as having a ‘legitimate expectation’ if there is a sufficient basis for the interest in national law, for example where there is settled case-law of the domestic courts confirming its existence. However, no ‘legitimate expectation’ can be said to arise where there is a dispute as to the correct interpretation and application of domestic law and the applicant's submissions are subsequently rejected by the national courts (see Kopecký v. Slovakia [GC], no. 44912/98, § 50, ECHR 2004-IX; Centro Europa 7 S.R.L. and Di Stefano v. Italy [GC], no. 38433/09, § 173, ECHR—2012; Eparhija Budimljansko-Nikšićka and Others v. Montenegro (dec.), no. 26501/05, §§ 66 to 69, 9 October 2012).

In the present case, the Court finds that — irrespective of whether the applicant received part of the severance pay with the obligation to report it and to pay in due course the applicable tax or whether the tax is automatically deducted from the severance — the severance constitutes a substantive interest protected by Article 1 of Protocol No. 1. For the Court, it is undeniable that it ‘has already been earned or is definitely payable,’ which turns it into a possession for the purposes of that provision, especially since the Constitutional Court qualified this sum as one originating in an unconditional statutory entitlement (see paragraphs 12 and 16 above), not subject to any dispute or ulterior judicial finding, once the service relation is terminated.

Furthermore, the Court would add that the very fact that tax was imposed on this income demonstrates that it was regarded as existing revenue by the State, it being inconceivable to impose tax on a non-acquired property or revenue.

The Court would further point out that a statutory undertaking concerning severance can be amended in the event of a change of social policy and that in respect of such choices the State has a wide margin of appreciation — especially if assuming that the severance constitutes a ‘legitimate expectation’ rather than an ‘existing possession’. The Court will therefore respect the legislature's judgment as to what is ‘in the public interest’ unless that judgment be manifestly without reasonable foundation (see James and Others v. the United Kingdom, 21 February 1986, § 46, Series A no. 98). However, the Court emphasises that, in carrying out that scrutiny, consideration shall be given to the nature of the expectation in question. In the case of a civil servant, who comes under a specific legal regime and who willingly accepted limitations on some of his fundamental rights and a remuneration unilaterally dictated by law, as noted by the Constitutional Court (see paragraph 16 above), the statutorily stipulated severance represents a long-term expectation on the side of the civil servant and a commitment on the side of the State as employer. For the Court, such long-term expectations, reinforced by many years of unchanged statutory guarantees, cannot be lightly disregarded. The justification for the protection of legitimate expectations originating in a statutory undertaking is that the law should protect the trust that has been reposed in the undertaking made by legislation. For the Court, good government depends upon trust between the governed and the governor (see, mutatis mutandis, in the context of statutorily due subsidies, Plalam S.P.A. v. Italy, no. 16021/02, §§ 35 to 42, 18 May 2010). Unless that trust is sustained and protected, governments will not be believed and civil servants will not order their affairs on that assumption as required by their heightened loyalty.

In the particular case, the Court observes that the applicant civil servant rendered her services to the State trusting the latter that the services (including guarantees of severance) provided by the employer in consideration of the loyalty and work, would create a situation where the legitimate expectation would be further corroborated by the State's continued performance of those services — which in the Court's view cannot be set aside without appropriate reasons.

Furthermore, severance cannot be simply regarded as a pecuniary asset; given its social function, the entitlement to severance allowance must be rather seen as a socially important measure intended for workers who have been made redundant and who wish to remain in the labour market. The European Court of Justice considered this — although in a different context — to be an important policy goal in the European Union (see paragraph 19 above).

The Court further finds that a statutory scheme that provides for severance (both to civil servants and other employees) encompasses a statutory entitlement. Moreover, this is not a mere ex gratia entitlement but an acquired right that is statutorily guaranteed in exchange for the service rendered.

The Court would add per analogiam that where a Contracting State has in force legislation providing for the payment as of right of a pension — whether or not conditional on the prior payment of contributions — that legislation has to be regarded as generating a proprietary interest falling within the ambit of Article 1 of Protocol No. 1 for persons satisfying its requirements (see Carson and Others v. the United Kingdom [GC], no. 42184/05, § 64, ECHR—2010). For the Court, similar considerations apply to measures affecting severance. Just as much as with pension, it is of particular importance if the legislature afforded the affected employees a transitional period within which they would be able to adjust themselves to the new scheme (see, mutatis mutandis, Lakićević and Others v. Montenegro and Serbia, nos. 27458/06, 37205/06, 37207/06 and 33604/07, § 72, 13 December 2011).

The Court notes at this juncture that the Constitutional Court found that the taxation of severance paid before the tax year and already used had violated human dignity, in view of the difficulty of adjustment to the new burden by the person concerned (see paragraph 15 above) — although it must be noted that in the particular case this was not the applicant's precise situation.

In its judgment of 23 September 1982 in the case of Sporrong and Lönnroth v. Sweden, the Court analysed Article 1 as comprising ‘three distinct rules’: the first rule, set out in the first sentence of the first paragraph, is of a general nature and enunciates the principle of the peaceful enjoyment of property; the second rule, contained in the second sentence of the first paragraph, covers deprivation of possessions and subjects it to certain conditions; the third rule, stated in the second paragraph, recognises that the Contracting States are entitled, amongst other things, to control the use of property in accordance with the general interest (Series A no. 52, § 61). The Court further observed that, before inquiring whether the first general rule has been complied with, it must determine whether the last two are applicable (ibid.). The three rules are not, however, ‘distinct’ in the sense of being unconnected. The second and third rules are concerned with particular instances of interference with the right to peaceful enjoyment of property and should therefore be construed in the light of the general principle enunciated in the first rule (see, among many other authorities, James and Others, cited above, § 37).

Moreover, an interference, including one resulting from a measure to secure payment of taxes, must 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. The concern to achieve this balance is reflected in the structure of Article 1 as a whole, including the second paragraph: there must be a reasonable relationship of proportionality between the means employed and the aims pursued. The question to be answered is whether, in the applicant's specific circumstances, the application of the tax law imposed an unreasonable burden on her or fundamentally undermined her financial situation — and thereby failed to strike a fair balance between the various interests involved (see M.A. and 34 Others v. Finland (dec.), no. 27793/95, 10 June 2003; Imbert de Trémiolles v. France (dec.), nos. 25834/05 and 27815/05 (joined), 4 January 2008; Spampinato v. Italy (dec.), no. 69872/01, 29 March 2007; and Wasa Liv Ömsesidigt, Försäkringsbolaget Valands Pensionsstiftelse v. Sweden, no. 13013/87, Commission decision of 14 December 1988, Decisions and Reports 58, p. 186).

The Court recalls that in certain circumstances loss of ownership of property resulting from a legislative measure or from an order of a court will not be equated with a ‘deprivation’ of possessions: in the cases of AGOSI v. the United Kingdom (24 October 1986, Series A no. 108) and Air Canada v. the United Kingdom (5 May 1995, Series A no. 316-A), the forfeiture or other loss of ownership was treated as a ‘control of use’ of property within the meaning of the second paragraph of Article 1 Protocol No. 1. In Gasus Dosier- und Fördertechnik GmbH v. the Netherlands (23 February 1995, Series A no. 306-B), impoundment was considered as a measure securing the payment of taxes within the meaning of the second paragraph of Article 1 in fine, while in Beyeler (cited above), the interference with the applicant's property rights was examined under the first sentence of that Article.

The Court does not consider it necessary to rule on whether the second sentence of the first paragraph of Article 1 applies in this case. The complexity of the factual and legal position prevents the impugned measure from being classified in a precise category. The Court recalls that the situation envisaged in the second sentence of the first paragraph of Article 1 is only a particular instance of interference with the right to peaceful enjoyment of property as guaranteed by the general rule set forth in the first sentence (see, for example, Lithgow and Others v. the United Kingdom, 8 July 1986, § 106, Series A no. 102). The Court therefore considers that it should examine the situation complained of in the light of that general rule (cf. Beyeler, cited above, § 106).

In the Court's view, the classification of a general measure taken in furtherance of a social policy of redistribution as a ‘control of use’ of property rather than a ‘deprivation’ of possessions is not decisive in so far as the principles governing the question of justification are substantially the same, requiring both a legitimate aim and the preservation of a fair balance between the aim served and the individual property rights in question.

Furthermore, a legislative amendment which removes a legitimate expectation may amount in its own right to an interference with ‘possessions’ (see, mutatis mutandis, Maurice v. France [GC], no. 11810/03, §§ 67–71 and 79, ECHR 2005—IX; Draon v. France [GC], no. 1513/03, §§ 70–72, 6 October 2005; and Hasani v. Croatia (dec.), no. 20844/09, 30 September 2010).

In the present case, the Court notes that the parties agree that the impugned taxation represents an interference with the applicant's right to peaceful enjoyment of possessions.

The Court will examine the issue under the first paragraph of Article 1 of Protocol No. 1, subject to the specific rule concerning the payment of taxes contained in Article 1 in fine.

The applicant challenged the legitimacy of the aim pursued by the impugned measure. In this connection, the Court reiterates that, because of their direct knowledge of their society and its needs, the national authorities are in principle better placed than the international judge to appreciate what is ‘in the public interest’. Under the system of protection established by the Convention, it is thus for the national authorities to make the initial assessment as to the existence of a problem of public concern warranting measures of deprivation of property or interfering with the peaceful enjoyment of possessions. Here, as in other fields to which the safeguards of the Convention extend, the national authorities accordingly enjoy a certain margin of appreciation. Furthermore, the notion of ‘public interest’ is necessarily extensive (see Vistiņš and Perepjolkins, cited above, § 106).

The Court further reiterates that the levying of taxes constitutes in principle an interference with the right guaranteed by the first paragraph of Article 1 of Protocol No. 1 and that such interference may be justified under the second paragraph of that Article, which expressly provides for an exception in respect of the payment of taxes or other contributions. However, this issue is nonetheless within the Court's control (see paragraphs 41 and 44 above).

Moreover, it is naturally in the first place for the national authorities to decide what kind of taxes or contributions are to be collected. The decisions in this area will commonly involve the appreciation of political, economic and social questions which the Convention leaves within the competence of the States parties, the domestic authorities being better placed than the Court in this connection. The power of appreciation of the States parties in such matters is therefore a wide one (see Gasus Dosier- und Fördertechnik GmbH, cited above, § 60, and National etc., cited above, §§ 80–82).

However, as regards the Government's implied reference to European Commission Recommendation 2009/384/EC (see paragraphs 19 and 26 above), the Court finds that this consideration is immaterial in regard to the applicant. The measures envisioned in the Recommendation, which will be applicable in the future to restrict excessive payments in the financial sector, were conceived because ‘excessive risk-taking in the financial services industry and in particular in banks and investment firms has contributed to the failure of financial undertakings and to systemic problems in the Member States and globally.’ The Recommendation suggests national regulation that provides for performance-based components of remuneration based on longer-term performance and contains no reference to social justice expectations. For the Court, excessive risk-taking in the financial sector is irrelevant for civil servants who operate in a regulated environment of subordination.

Nevertheless, given the above margin of appreciation regarding the determination of what is ‘in the public interest’, granted to general measures interfering with the peaceful enjoyment of possessions, the Court accepts that the ‘sense of social justice of the population’, in combination with the interest to protect the public purse and to distribute the public burden satisfies the Convention requirement of a legitimate aim, notwithstanding its broadness. The Court has no convincing evidence on which to conclude that the reasons referred to by the Government were manifestly devoid of any reasonable basis (compare and contrast Tkachevy v. Russia, no. 35430/05, § 50, 14 February 2012).

However, serious doubts remain as to the relevance of these considerations in regard to the applicant who only received a statutorily due compensation and could not have been made responsible for the fiscal problems which the State intended to remedy. While the Court recognises that the impugned measure was intended to protect the public purse against excessive severance payments, it is not convinced that this goal was primarily served by taxation. As the Constitutional Court noticed, there was a possibility to change severance rules and reduce the amounts which were contrary to the public interest, but the authorities did not opt for this course of action. However, it is not necessary for the Court to decide at this juncture on the adequacy of a measure that formally serves a social goal, since this measure is in any event subject to the proportionality test.