ECJ Rules on the Extension of the Recovery Period to 12 years
Author/s:
Marnix Veldhuijzen
In the Netherlands, a maximum recovery period applies during which the Dutch Tax Authority (DTA) is allowed to levy back taxes concerning (deliberately) undisclosed assets and income. When the assets or the income are of foreign origin, the recovery period is longer (12 years), than in a strictly domestic situation (5 years). It has long been debated whether such a provision is in breach of the fundamental freedoms of the European Union, especially the freedom of capital (which extends also to third
parties, such as Switzerland) and the freedom of services.
On June 11, 2009, the European Court of Justice (ECJ) ruled on this issue in two cases, the X-case (C-155/08) and the Passenheim-van Schoot-case (C- 157/08). The ECJ concluded that, in principle, the extension of the recovery period constitutes a justifiable limitation of the basic freedoms. The reasoning behind this decision is that the extended recovery period seeks to combat tax evasion in a situation where the Netherlands cannot effectively gather the same information they would have in a strictly national The ECJ, however, does limit the use of an extended recovery period in situations where the DTA has evidence concerning taxable items located in another Member State which enables an investigation to be initiated. In that situation, the application by the Netherlands of an extended recovery period cannot be justified in all cases.
In conclusion, the DTA will, in general, be able to levy back taxes for undisclosed funds during the extended recovery period of 12 years. However, the ECJ has sent a clear warning to the DTA that they may not abuse this extended recovery period by applying it to situations where the tax assessment has been delayed for other reasons than the lack of exchange of information between Member States.
This article is one of several that appear in
Private Banking Newsletter, July 2009.