AS TO THE ADMISSIBILITY OF
Application no. 53434/99
by Yrjo PAULOW
The European Court of Human Rights (Fourth Section), sitting on 14 February 2006 as a Chamber composed of:
Sir Nicolas Bratza, President,
Mr J. Casadevall,
Mr G. Bonello,
Mr M. Pellonpää,
Mr K. Traja,
Mr J. Borrego Borrego,
Ms L. Mijović, judges,
and Mr M. O’Boyle, Section Registrar,
Having regard to the above application lodged on 8 December 1999,
Having regard to the observations submitted by the respondent Government and the observations in reply submitted by the applicant,
Having deliberated, decides as follows:
The applicant, Mr Yrjö Paulow, is a Finnish national, who was born in 1928 and lives in Helsinki. He is represented before the Court by Mr G. O. Zacharias Sundström, a lawyer practising in Helsinki. The respondent Government are represented by Mr Arto Kosonen, Director in the Ministrty for Foreign Affairs.
A. The circumstances of the case
The facts of the case, as submitted by the parties, may be summarised as follows.
The applicant is a businessman and a trader. In the course of his trading activities the applicant has built up a considerable fortune by way of increasing the value of companies which he owns and operates. It is the sale of one of these companies, the Tex-Invest Oy (“T” hereinafter), and the tax levied on the transaction that has led to this application.
On 30 June 1988 the applicant sold the shares of T to a company called Traducon Oy to be further sold to a party to be later nominated by the buyer. The sales price of the shares was 137 million Finnish marks (FIM; approximately 23 million euros (EUR)). The buyer company went into liquidation approximately two months after the transaction. According to the applicant he in no way contributed to the financing of the transaction and did not own any joint undertakings with the buyer. The Government contended that the transaction had been given a form disguising its real nature as a transfer of assets (taseyhtiökauppa, skalbolagstransaktion). The Government maintained that the assets of T were transferred to another company also owned by the applicant and the company was allegedly sold at a price significantly exceeding the net amount of the company’s assets.
In the regular taxation for the year 1988 the applicant was taxed for the capital gains. The tax payable amounted to FIM 13,5 million (approximately EUR 2.27 million). The applicant paid in full the tax levied on him.
On 18 November 1992 the National Board of Taxation (verohallitus, skattestyrelsen) sent an internal letter titled “Abuses related to avoir fiscal tax rebates” to county tax offices (lääninverovirasto, länsskatteverk). In the letter it was held that the amount of tax refunds issued in probable abuse of the Avoir Fiscal Act (laki yhtiöveron hyvityksestä, lag om gottgörelse för bolagsskatt; 1232/1988, which entered into force on 1 January 1990) was significant in some regions for the tax year 1991. The county tax offices were prompted to select the most significant refund recipients so that possible abuses might be addressed in connection with the dividend recipients’ regular taxation. In an accompanying memorandum it was explained, inter alia, that dividend receiving companies were entitled to an avoir fiscal tax rebate and that if it was a loss-making company it would receive a tax refund. The avoir fiscal system was most commonly exploited in connection with so-called balance sheet company transactions, such a company having no tangible assets but only cash assets and receivables. Attention had to be paid to transactions whereby the company’s balance sheet and deferred tax liabilities were transferred to a buyer while the company’s actual business assets were transferred to a new company (often owned by the vendor). The buyer of the balance sheet obtained a tax refund which was paid over to the seller together with the dividends as part of the purchase price. Such transactions could be executed with the intention of not paying any tax.
From 16-18 November 1992, there was a tax inspection concerning the transfer of shares from the applicant’s company. On 7 June 1993, the applicant was sent a preliminary tax inspection report by the County Tax Office (verotoimisto, skattebyrån).
On 9 September 1993 the National Board of Taxation sent an internal memorandum titled “Transfer of assets arrangements and taxation” to, inter alia, county tax offices. In an accompanying letter it was explained that the memorandum discussed transfer of assets arrangements involving so-called balance sheet companies and various principles related to the tax treatment of those arrangements. In order to develop the said memorandum further, county tax offices were invited to express their views on the positions taken in the memorandum.
On 31 December 1993 the County Tax Office issued a final report. On the basis of that report, the Tax Office of Helsinki found on 18 May 1994 that there were no reasons to reassess the taxes paid by the applicant for the year 1988.
The competent tax agent of Helsinki (veroasiamies, skatteombudet; “the Agent” hereinafter) however considered that the nature of the above-mentioned transaction was not an “arm’s length” sale, but a transaction intended to benefit the applicant in violation of the Revenue’s right to tax. The Agent appealed on 17 June 1994 against the decision and recommended to the Tax Rectification Committee (verotuksen oikaisulautakunta, prövningsnämnden i beskattningsärenden) that a re-assessment of tax be imposed making the applicant liable for tax for the year 1988 to the extent of the full sales price of FIM 137 million on the grounds that the transaction was a disguised means of taking out dividends, i.e. benefit from the company.
On 15 August 1994 the applicant objected to the requests in written observations maintaining that the transaction was a true arm’s length transaction. The applicant, inter alia, criticised the Agent’s arguments insofar as the Agent had claimed that an affidavit made by a managing director of the bank responsible for the financial arrangements for the transactions (submitted by the applicant previously to the Tax Office of Helsinki) was unreliable. The applicant also rejected the Agent’s criticism of a statement by a tax expert also submitted previously by the applicant.
On 7 February 1995 the Tax Rectification Committee decided that arrangements violating the Taxation Act (verotuslaki, beskattningslag) had been undertaken in order for the applicant to be able to transfer the assets of the company to himself with as little tax consequences as possible. It held that the transfer of assets was in fact a disguised means of taking out dividends from company T. The Committee calculated the tax from the entire sales price to cover the amount considered to actually have benefited the seller, i.e. FIM 42 million (approximately 7,063,000 euros), on which a 10 per cent tax surcharge (veronkorotus, skatteförhöjning) was imposed. The tax surcharge totalled approximately EUR 3 million. The decision was based on sections 56, 57, 77 and 83 of the Assessment Act
On 11 April 1995 the applicant appealed to the County Administrative Court (lääninoikeus, länsrätten) of Uusimaa demanding quashing of the entire tax decision. The applicant maintained, inter alia, that no such changes had occurred in case law between the report of the tax auditors and the decision of the Tax Rectification Committee that would have provided the latter with a valid basis for viewing the reassessment of tax issue differently from the tax auditors or the Local Tax Office. The applicant also emphasised that no discussions took place in connection with the audit about the transaction at issue, and that he had only had an opportunity to provide his response after he received a preliminary report. The applicant further maintained that the Tax Rectification Committee had reviewed the matter more on the basis of impressions created by the preliminary report than by considering the actual facts of the case and had replaced facts with suppositions. The applicant also claimed that the chairman of the Tax Rectification Committee was biased. He further maintained that the Tax Rectification Committee had examined the matter on the basis of the tax authority’s treatment of abuses related to the avoir fiscal system and maintained that nothing was known about the avoir fiscal system and the opportunities it presented for gaining tax-related advantages in 1989. In that context he referred to the first guidelines on abuses being issued by the National Board of Taxation on 18 November 1992.
On 2 May 1995 the Tax Office submitted to the court a statement from the Agent, and on 17 May 1995 the applicant submitted his comments on the statement.
On 22 May 1995 the Tax Office submitted further documents.
On 29 May 1995, the applicant lodged further evidence.
On 9 June 1995 the County Administrative Court issued an order prohibiting the enforced collection of the taxes in question until the end of 1996 (later extended during 1997). This was as the Supreme Administrative Court was expected to give judgment in cases concerning the imposition of taxes in cases concerning the circumstances in which share transactions constituted a transfer of assets. The Supreme Administrative Court issued its decisions in these cases on 3 October 1997.
On 27 November 1997 the County Administrative Court rejected the applicant’s appeal without an oral hearing. It held that there had been no economic business grounds for the transaction at issue, that the measures did not comply with the actual nature and purpose of the matter and in reality the cash assets of the company had been used to pay the purchase price to the applicant. In the circumstances it had to be deemed that the arrangement had been undertaken in order to evade taxes contrary to sections 56 and 57 of the Assessment Act. It further concluded that the amount of surcharge to be paid was not unreasonable.
On 24 February 1998 the applicant sought leave to appeal to the Supreme Administrative Court (korkein hallinto-oikeus, högsta förvaltningsdomstolen) repeating his earlier requests and arguments and providing further observations on the findings of the County Administrative Court, in particular alleging that its decision was not consistent with legal precedent.
On 11 August 1998, the Agent submitted observations, as did the Tax Office of Helsinki on 31 August 1998. On the latter date the applicant was requested to submit his comments. Following an extension in the time-limit, the applicant submitted his further observations on 5 October 1998. The applicant emphasised, inter alia, that the whole proceedings were based on allegations and suppositions as the County Administrative Court operated on the basic premise that the matter had from the start involved bad faith although not the least shred of evidence has been produced in support of this presumed bad faith.
On 14 June 1999 the Supreme Administrative Court refused the applicant leave to appeal.
The tax imposed together with the tax surcharge and interest on arrears was in 2002 approximately EUR 11,600,000.
B. Relevant domestic law and practice
1. Taxation and tax surcharge
Section 56 of the Assessment Act (verotuslaki, beskattningslag; 482/1958, as in force up to and including 31 December 1993 (74/1987)) contained the general rule applicable to cases of tax evasion, under which taxes may be reassessed so as to correspond to the real nature of transactions, irrespective of their legal form. Pursuant to subsection 2, the tax payer must be given an opportunity to comment on each relevant point.
Section 57, as in force at the relevant time, provided for the taxation of assets taken out of a company as veiled dividends (peitelty osinko, förtäckt dividend).
Under section 77 (as in force at the relevant time and up to and including 31 December 1993 (74/1987)) a tax surcharge was to be imposed, inter alia, where the taxpayer had, knowingly or grossly negligently, given incorrect information in the tax return or otherwise given wrong information or documents, a surcharge of a maximum of 100 per cent was to be imposed. The tax surcharge was imposed on that income in respect of which defective or incorrect information had been provided. According to the provision there was no discretion as to the imposition of the tax surcharge in the described circumstances (see Government Bill 122/1993).
Section 77, subsection 3, (which was amended on 1 January 1994 (Act 963/1993) and which was for the first time applied to the assessment of taxes levied for the year 1993 and which Act was in force until and including 31 December 1996) provided, inter alia, that where the taxpayer had, knowingly or grossly negligently, given incorrect information in the tax return or otherwise given wrong information or documents, a surcharge of 5-30 per cent of the additional amount of taxes was to be imposed, if there were no particular reasons against the imposition of the tax surcharge. The amended provision enabled the local tax offices to use their discretion as to whether or not to impose the tax surcharge.
Section 83, as in force at the relevant time, provided that if a taxpayer, due to the fact that he had not given a tax return or he had given a defective, misleading or wrong tax return or other information or document, had not been taxed fully or taxed only in part, the tax which had not been levied for the said reason was to be levied with interest on the arrears and with a tax surcharge. The re-assessment could be conducted within five years from the beginning of the year which followed the termination of the taxation. If possible, the taxpayer was to be given an opportunity to be heard before the reassessment of tax. However, if the hearing of the taxpayer would probably not benefit the decision making, there was no need to give the taxpayer a possibility to be heard. The said section corresponds in substance to section 57 of the existing Act on Assessment Procedure (laki verotusmenettelystä, lag om beskattningsförfarande; 1558/1995, as in force as from 1 January 1996) with the exception of a strict obligation to give the taxpayer a possibility to be heard.
2. Appeal procedure
The provisions concerning appeal contained in Chapter 6 of the Assessment Act (as amended by Act 963/1993 effective as from 1 January 1994) were in substance the same as in the provisions in the existing Act on Assessment Procedure.
Under section 72a of the Assessment Act, as in force at the relevant time, an appeal against a decision on taxation shall, as a first instance, be made to the Assessment Adjustment Board. Appeal from the Board lay to the Administrative Court and then, with leave to appeal, to the Supreme Administrative Court.
In the appeals procedure the interests of the State or other tax recipients were represented by a tax agent (Act on Tax Administration, section 4(6): verohallintolaki, lag om skatteförvaltningen 1557/1995 as in force at the relevant time).
According to the reservation made by Finland in accordance with Article 64 of the Convention, as in force at the relevant time, Finland could not guarantee a right to an oral hearing in so far as the Finnish laws at the time of the events at issue did not provide such a right. This applied, inter alia, to proceedings which were held before the County Administrative Court, in accordance with Section 16 of the County Administrative Courts Act (laki lääninoikeuksista, lag om länsrätt) and proceedings before the Supreme Administrative Court, in accordance with Section 15(1) of the Supreme Administrative Court Act (laki korkeimmasta hallinto-oikeudesta, lag om högsta förvaltningsdomstolen) and in which the decision subject to appeal was rendered before 1 December 1996. The reservation was withdrawn on 1 April 1999.
1. The applicant complained under Article 6 § 1 of the Convention that he did not receive a fair hearing because:
(a) the length of the proceedings was excessive as his taxation in respect of the relevant transaction made in 1988 was changed almost seven years after its conclusion, in 1995, and it took over four years more until he received the Supreme Administrative Court’s final decision in this respect.
(b) he had not had access to court as the Tax Rectification Committee and the County Administrative Court of Uusimaa were not independent and impartial tribunals as they did not hold oral hearings with witnesses or allow the person subject to the proceedings to appear before them, the procedure was not adversarial and it was conducted in camera;
(c) there was no oral hearing before any of the domestic instances;
(d) there was no equality of arms as he was not able to mount an effective defence to challenge the authorities’ assessment of the “nature of the transaction” The domestic instances unquestioningly assumed the correctness of the Revenue’s assertion concerning the “nature of the transaction”.
2. The applicant complained, under Article 6 § 2 of the Convention, that both the tax surcharge and the high interest rate amounted to a penal sanction and that he was not presumed innocent as the burden of proof was on the applicant and the tax surcharge was automatically imposed following the reassessment of tax without any need for this decision to be reviewed by a court of law. The decision was also enforced prior to a final determination of his appeal.
3. The applicant also complained, under Article 1 of Protocol No. 1 to the Convention, that he was deprived of his property as the sales price he had received in exchange for his shares he had sold was confiscated from him without any compensation by means of an arbitrary taxation decision which failed to provide adequate procedural safeguards and which amounted to unlawful deprivation of his property through retroactive application of penal sanctions.
4. The applicant complained that he was not afforded an effective remedy within the meaning of Article 13 of the Convention as there were no adversarial proceedings, nor a possibility to be orally heard by a court.
5. The applicant complained that he was discriminated against on the basis of his wealth and was, thus, being treated for tax purposes differently from the general norm. He invoked Article 14 of the Convention in this respect.
6. In his letter of 14 April 2000 the applicant complained that the head of the Helsinki tax office was biased as he had submitted a statement to the Tax Rectification Committee, which allegedly de facto used the statement in its abridged reasoning. Furthermore, the same person acted as the chairman of the division of the Tax Rectification Committee which made the said decision.
7. In his observations of 15 May 2003 in reply to the Government’s observations the applicant complained under Article 7 of the Convention that based on the Government’s observations it appears that he was subjected to retroactive application of criminal sanctions by using legislation subsequent to and not in effect at the time of the events in question. He claimed that the internal Memorandum of the National Board of Taxation dated 9 September 1993 was an instruction to the tax authorities as to how to deal with the phenomenon of the so-called transfer of assets which for the first time defined a type of transaction that had become frequent in the wake of a certain changes in the law regarding tax credit in 1990 and which had previously not been subject to either tax in the normal taxation or to supplementary tax assessment.
8. In his letter of 30 March 2004 the applicant furthermore claimed, under Article 4 of Protocol No. 7 to the Convention, that the proceedings commencing in 1995 took place more than five years after the transaction in 1988 and hence the statute of limitations of section 83 of the Assessment Act had already operated.
I. ARTICLE 6 § 1 OF THE CONVENTION
The applicant complained that he did not receive a fair hearing in the tax proceedings due to their unreasonable length, a lack of access to court, a lack of any oral hearing or any equality of arms.
Article 6 §§ 1 and 3 of the Convention provides as relevant:
“ In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. ...
3. Everyone charged with a criminal offence has the following minimum rights:
(d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him; ...”
A. The parties’ observations
The Government argued that tax disputes fell outside the scope of Article 6 § 1 as the Finnish system treated a tax surcharge in all respects differently from a court-imposed sentence; surcharges were levied as taxes and subject to the same statute of limitations as taxes. There was no possible conversion into a prison sentence and in their view tax matters formed part of the hard core of public-authority prerogatives with a predominantly public nature. While the surcharge may have been deterrent in purpose, this was not decisive as the low rate (10%) and the amount in relative terms (2% of the total taxable income) was far from the very substantial level necessary to render the penalty criminal in nature. They distinguished Swedish cases where there was no upper limit to the surcharge imposable
Assuming it was applicable however, the Government submitted that the applicant had access to court in respect of his complaints about the taxation decisions. He was able to appeal to the County Administrative Court and the Supreme Administrative Court, the latter two having full jurisdiction on questions of fact and law and fulfilling the requirements of Article 6. The County Administrative Court examined the case in extensive detail and the Supreme Administrative Court gave reasons in refusing leave to appeal.
They submitted that the Tax Rectification Committee was an administrative body not a court to which Article 6 § 1 applied. According to the Finnish reservation in force at the time, no right to an oral hearing could be guaranteed before the County Administrative Court or Supreme Administrative Court. Although a hearing could be held, if deemed necessary, they pointed out that the applicant, who was represented by legal counsel, made no request for a hearing at any stage or any request to hear witnesses, thus waiving any right in that regard. He had had the opportunity which he had used to respond to all the tax authorities’ statements and memoranda. Further the county administrative judges were full time judges, under oath and subject to judicial tenure and disqualification rules, not administrative officials as asserted by the applicant. There were also provisions setting out administrative judicial procedure which were in force at the relevant time. The proceedings were adversarial as the Revenue were represented by a tax agent. Nor had they taken an unreasonable time, given the subject-matter and need to ensure consistency of case-law.
The applicant submitted that the administrative courts did not meet the requirements of Article 6 and he was denied access to an independent and impartial tribunal according the due guarantees under the first and third paragraphs. In particular they did not provide an adversarial procedure, with a right to be heard and to examine or cross-examine witnesses, there was no "other party" as such as the judicial component was drawn from officials of the district administration who did not take an oath of "judicial office" and ex officio took into account the public interest. While an appeal lay to the Supreme Administrative Court, access was limited and it was bound to follow the same procedural rules as the lower instances. The administrative procedure also ignored the presumption of innocence, with a reverse burden of proof. It was not possible to appear before the Tax Rectification Committee and there was only a theoretical right in the County Administrative Court at the time, which sat in camera reaching its decision on the basis of the views of the tax authority and the written submissions of the tax payer. There was also lack of equality of arms as written evidence or official documentation emanating from a public authority had public credence and as a starting point it was assumed to be true unless proof to the contrary could be shown; this presumption does not apply to the tax payer. The absence of a procedural code in the administrative court further added a significant element of uncertainty.
Further, the applicant argued that the proceedings had exceeded a reasonable time, commencing in June 1993 with the special tax inspection and dragging on to conclude some 11 years after the original transaction.
B. The Court’s assessment
1. The length of proceedings
For the purposes of the present case, the Court will proceed on the assumption that Article 6, in its criminal aspect, may be regarded as applicable to the proceedings by which the applicant was required to pay a substantial surcharge under provisions intended to be of deterrent and punitive effect.
As regards the length, criminal proceedings are said to begin with “the official notification given to an individual by the competent authority of an allegation that he has committed a criminal offence”, a definition that also corresponds to the test whether “the situation of the [suspect] has been substantially affected” (Eckle v. Germany, judgment of 15 July 1982, Series A no. 51, § 73). In the present case, the applicant may be regarded as being aware from the preliminary report sent to him in June 1993 that the transfer of assets was being investigated. The appeals against the eventual finding that the transfer was a sham concluded on 14 June 1999 when the Supreme Administrative Court refused leave to appeal, some six years later.
The reasonableness of the length of the proceedings must be assessed in the light of the particular circumstances of the case and having regard to the criteria laid down in the Court’s case-law, in particular the complexity of the case and the conduct of the applicant and of the relevant authorities. On the latter point, what is at stake for the applicant has also to be taken into account (see Philis v. Greece (no. 2), judgment of 27 June 1997, Reports of Judgments and Decisions 1997-IV, p. 1083, § 35).
As regards the importance of what was at stake for the applicant, considerable sums of money were in issue and the applicant faced the imposition of very large penalty assessments. The proceedings were undoubtedly of some complexity but nonetheless in the Court’s view proceeded with reasonable expedition in the circumstances of the case. The initial investigation ended with a report on 18 May 1994 and the Agent’s appeal was determined by the Tax Rectification Committee under a year later on 7 February 1995. While the County Administrative Court did not issue its judgment until 27 November 1997, this was because it was awaiting the decision of the Supreme Administrative Court in leading cases. Given the importance of ensuring the consistency of the case-law and interpretation of law in an area potentially affecting many and the fact that the County Administrative Court gave its own judgment within one month of the judgment of the Supreme Administrative Court, the Court is not persuaded that this discloses any unreasonable delay. It further notes that the Supreme Administrative Court issued its decision on the applicant’s appeal some sixteen months after the applicant had lodged it and that the applicant contributed to the length of this period by requiring an extension in the time-limit for his observations. The Court in the circumstances finds no problem with this stage of the proceedings.
The Court concludes that the applicant’s complaint as to the length of proceedings is manifestly ill-founded and must be rejected pursuant to Article 35 §§ 3 and 4 of the Convention.
2. Fairness and access to court issues
As concerns the applicant’s various complaints that he did not have access to an independent and impartial court conducting adversarial proceedings and did not enjoy equality of arms vis-à-vis the taxation authorities, the Court finds that these have not been substantiated. It would observe that the initial part of the proceedings was conducted before taxation administration bodies, in particular the Tax Rectification Committee, which did not purport to be a court. The requirements of access to court were in the circumstances of the case fulfilled by the proceedings before the County Administrative Court which the Court is not persuaded failed to present the requisite features of a judicial body and judicial procedure. It is apparent that the proceedings were adversarial in nature, the Agent being a party and the tax office participating throughout, with the applicant being given an opportunity to respond to their submissions. There is no indication that he did not have an effective opportunity to put forward his case or that the courts unquestioningly accepted the assertions of the tax authorities. These complaints are accordingly manifestly ill-founded.
As regards the lack of oral hearing, the Court notes that by its terms the scope of the Finnish reservation was, at the relevant time, limited to relieving, e.g., the County Administrative Court and Supreme Administrative Court from the obligation to hold an oral hearing and consequently finds that the reservation was valid and applicable to those bodies in the present case (see Helle v. Finland, judgment of 19 December 1997, Reports of Judgments and Decisions 1997-VIII, § 44; Tamminen and Tammelin v. Finland, (dec.) no. 33003/96, 28 September 1999). Insofar as the applicant refers to the inability to hear witnesses, this must be regarded effectively as part of the complaint as to a lack of oral hearing which is incompatible ratione materiae for the same reason.
The Court accordingly rejects this part of the application pursuant to Article 35 §§ 3 and 4 of the Convention.
II. ARTICLE 6 § 2 OF THE CONVENTION
The applicant complained that there had been a breach of the presumption of innocence in the taxation proceedings, invoking Article 6 § 2 of the Convention which provides:
“Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law.”
A. The parties’ submissions
The Government submitted that under Finnish law the imposition of a tax surcharge was not considered a penalty for the purposes of Article 6. However, in any event, surcharges were imposed at the relevant time on a scale of 0-100% and the authorities had wide discretionary powers enabling them to take into account the degree of negligence by, and personal circumstances of, the taxpayer. There was no automatic imposition of a surcharge as in Janosevic v. Sweden (no. 34619/97, ECHR 2002-VII). The tax authorities had to prove that the taxpayer had acted in a way justifying the tax surcharge. The report of the tax inspector was not binding on the tax office and in appeals against the tax authorities the administrative courts had full jurisdiction and the power to quash decisions. They examined cases on the basis of all the evidence presented and it was for the tax authorities to show that there were grounds under the relevant laws for imposing the tax surcharges. The applicant was afforded several opportunities to correct or amend the information which he had originally submitted for his tax assessment but he maintained throughout that this information was correct.
The Government also submitted that Article 6 did not exclude enforcement measures before decisions became final and that in this case the measures struck a fair balance as under Finnish law a successful appeal led to the immediate reimbursement of any amount paid with interest. The applicant only paid the first instalment in January 1998 after the CAC decision but before the SAC refused leave. They denied that any unusual interest rate was imposed in this case.
The applicant submitted that neither the Tax Rectification Committee nor the County Administrative Board respected the presumption of innocence nor was that presumption respected in any part of the judicial proceedings up to and including the final decision in the tax surcharge proceedings. He had no opportunity to call witnesses or examine witnesses against him .The tax authorities proceeded on the basis that he was guilty of tax evasion relying on assumptions that he could not refute as they were not explicit nor subject to an adversarial procedure. It was for him to prove the tax authorities wrong thus reversing the burden of proof. The Revenue effectively was free to make assumptions and to stick to those assumptions merely saying that the taxpayer had not discharged the burden of proof to counter the assumptions made.
The applicant also complained that the tax surcharge was enforced prior to a final decision in the taxation process and he had been obliged to pay retroactive interest from 1 January 1990 to 31 July 1994 of over EUR 2.8 million, ten per cent of which was interest from the surcharge.
B. The Court’s assessment
The Court recalls that, as a general rule, it is for the national courts to assess the evidence before them, while it is for the Court to ascertain that the proceedings considered as a whole were fair, which in case of criminal proceedings includes the observance of the presumption of innocence. Article 6 § 2 requires, inter alia, that when carrying out their duties, the members of a court should not start with the preconceived idea that the accused has committed the offence charged; the burden of proof is on the prosecution, and any doubt should benefit the accused (see Barberà, Messegué and Jabardo v. Spain judgment of 6 December 1988, Series A no. 146, pp. 31 and 33, §§ 67-68 and 77). Thus, the presumption of innocence will be infringed where the burden of proof is shifted from the prosecution to the defence (see John Murray v. the United Kingdom, judgment of 8 February 1996, Reports 1996-I, p. 52, § 54).
In the present case, the Court is satisfied that the burden lay, in legal terms, on the tax authorities to establish that the applicant had evaded the payment of taxes. In practical terms, it is also clear that once the tax authority made its assessment that the transfer of assets was a disguised means of taking dividends the applicant had to rebut their allegations. The Court does not find that the applicant was in that regard left without any means of defence. It notes in particular that the applicant was legally represented and that he made numerous submissions, lodging evidence on his behalf. In particular it was open to him to argue that the transaction was not a sham but a genuine commercial transaction executed in good faith and to put forward any matter relevant to his conduct or the circumstances of the case which would militate in favour of reducing the amount of the surcharge.
Insofar as the applicant has claimed that his right to be presumed innocent was breached also by the fact that the tax authority’s decisions concerning tax surcharges were enforced prior to the final determination of his liability to pay them, the Court recalls that the Administrative Court ordered that the enforcement of the surcharges be prohibited pending the determination of the lead cases in the Supreme Administrative Court. Once however it had rejected his appeal the applicant was required to begin payment by instalments while his appeal was still pending before the Supreme Administrative Court. The Court notes that while neither Article 6 nor, indeed, any other provision of the Convention can be seen as excluding, in principle, enforcement measures being taken before decisions on tax surcharges have become final, States are required to confine such enforcement within reasonable limits that strike a fair balance between the interests involved (Janosevic, cited above, § 106). In the present case, it is evident that under Finnish law, a successful appeal would have led to the reimbursement of any amount paid with interest. The Court finds no indication that the limits of reasonable early enforcement were exceeded to the detriment of the applicant in the present case and that the possibility of securing reimbursement of any amount paid constituted a sufficient safeguard of the applicant’s interests in the present case.
It follows that this part of the application must be rejected as manifestly ill-founded pursuant to Article 35 §§ 3 and 4 of the Convention.
III. ARTICLE 1 OF PROTOCOL NO. 1
The applicant complained that the decision imposing a tax surcharge amounted to an unlawful deprivation of property, invoking Article 1 of Protocol No. 1 which provides:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
A. The parties’ submissions
The Government acknowledged that the impugned measures interfered with the applicant’s possessions. The measures were a control of use in the general interest to secure the payment of taxes. The case-law indicated that the legislature’s assessment in tax matters was to be respected unless devoid of reasonable foundation. They recalled that a tax surcharge of 10% was levied, which together with increased taxes and interest etc amounted to EUR 8,430,818. As the tax authorities received regular instalments from the applicant without the need to resort to execution, the sum should be assessed in relative terms and was not excessive when seen in the context of the monetary value of the income which had not been declared.
The applicant submitted that he had been deprived of a significant part of his property by the Revenue. Due to the criminal nature of the surcharge, its retroactive application and the very significant size of the amount, the interference with his property imposed an excessive burden on him. The imposition of retroactive revenue laws to maximise revenue collection could not be seen as a valid public interest justifying violation of the right to property. The burden imposed on the applicant also prevented him, due to lack of funds, from conducting other business transactions or developing existing ventures. Nor could the measure be regarded as necessary to secure the payment of taxes as it was known to the authorities that the applicant had sufficient assets to meet his liabilities. It was also unreasonable that the applicant was left for five years with the belief that all his tax had been paid. It took a further five years for a final decision to issue, disclosing an excessively long period of uncertainty as to his position.
B. The Court’s assessment
The Court recalls that Article 1 of Protocol No. 1 guarantees in substance the right to property. It comprises three distinct rules. The first, which is expressed in the first sentence of the first paragraph and is of a general nature, lays down the principle of the peaceful enjoyment of possessions. The second, in the second sentence of the same paragraph, covers deprivation of possessions and makes it subject to certain conditions. The third, contained in the second paragraph, recognises that the Contracting States are entitled to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.
However, the three rules are not “distinct” in the sense of being unconnected: the second and the third rules are concerned with particular interferences 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, Gasus Dosier- und Fördertechnik GmbH v. the Netherlands, judgment of 23 February 1995, Series A no. 306-B, pp. 46–47 § 55).
Having regard to the fact that the background to the alleged deprivation of the applicant’s property was the tax authorities’ steps to recuperate, and impose penalties in respect of, evaded tax and the interest thereon it would appear to the Court to be the most natural approach to examine his complaints from the angle of a control of the use of property in the general interest “to secure the payment of tax”, which falls within the rule in the second paragraph of Article 1.
According to the Court’s well-established case-law (see, among many other authorities, Gasus Dosier- und Fördertechnik GmbH, cited above, p. 49, § 62), an interference, including one resulting from a measure to secure the 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 therefore be a reasonable relationship of proportionality between the means employed and the aims pursued.
In the present case, the Court has already found above that the applicant had access to court and the opportunity to put forward any submissions or evidence that he considered appropriate. It observes that the level of surcharge was set at a maximum of 10% and does not consider that this has been shown to impose a disproportionate burden on the applicant in the circumstances of this case.
While the applicant complains in particular that it was not until some five years afterwards that the tax position in respect of the share transfer was subject to investigation, the Court does not consider that this lapse of time is such as to render the tax authorities’ actions in pursuing their investigation and seeking to recuperate tax and penalties oppressive or unreasonable. It is inevitable that it will take time for fiscal bodies to review past transactions and it cannot be excluded that changing business practices or evolution in the interpretation of the law to those practices render it necessary to re-open tax assessments. There is no indication in the present case of any undue delay or bad faith on the part of the tax authorities which could have led the applicant to have any legitimate expectation that his past assessments had become final and unalterable.
Having found above that the proceedings took a reasonable time, the Court is not persuaded that any issues arise under this provision as regards any allegedly prolonged state of uncertainty on the part of the applicant.
It follows that there is no appearance of a violation of Article 1 of Protocol No. 1 and this complaint must be rejected as manifestly ill-founded pursuant to Article 35 §§ 3 and 4 of the Convention.
IV. ARTICLE 13 OF THE CONVENTION
The applicant complained that as he had not had access to a proper adversarial judicial procedure he had not had available to him an effective remedy for any of his complaints. Article 13 provides:
“Everyone whose rights and freedoms as set forth in [the] Convention are violated shall have an effective remedy before a national authority notwithstanding that the violation has been committed by persons acting in an official capacity.”
However, according to the Court’s case-law, Article 13 applies only where an individual has an “arguable claim” to be the victim of a violation of a Convention right (see Boyle and Rice v. the United Kingdom, judgment of 27 April 1988, Series A no. 131, § 52).
The Court has found above that the substantive complaints are manifestly ill-founded. For similar reasons, the applicant did not have an “arguable claim” for the purposes of Article 13.
It follows that this part of the application is also manifestly ill-founded within the meaning of Article 35 § 3 of the Convention and must be rejected pursuant to Article 35 § 4.
V. ARTICLE 14 OF THE CONVENTION
The applicant complained that he had been discriminated against on the ground of his wealth and as the retrospective review was not a general but a selective measure, invoking Article 14 of the Convention which prohibits discrimination in the enjoyment of the other rights and freedoms.
The Court finds that the applicant has not substantiated that he has been treated differently on the basis of his financial status or that he has been singled out in any way capable raising issues under this provision. It rejects this complaint as manifestly ill-founded pursuant to Article 35 §§ 3 and 4 of the Convention.
VI. ALLEGED BIAS
The applicant complained about the role of the head of the local tax office in the Tax Rectification Committee and that this official had been biased.
The Court notes that this complaint relates to the stage of the proceedings before the administrative authorities to which Article 6 does not apply. Nor is there any indication of any impact on the fairness and impartiality of the proceedings before the courts arising in this context.
It follows that this complaint must be rejected as manifestly ill-founded within the meaning of Article 35 §§ 3 and 4 of the Convention.
VII. ARTICLE 7 OF THE CONVENTION
The applicant complained that the tax authorities had applied a retrospective criminal sanction to the share transaction contrary to Article 7 of the Convention which provides as relevant:
“1. No one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence under national or international law at the time when it was committed. ...”
A. The parties’ submissions
The Government pointed out that the applicant had not as such been prosecuted for tax evasion. He had been obliged to declare his income and taxes paid on that basis in his tax return at the beginning of the year following the tax year. A failure to declare part of taxable income could result in a tax surcharge and a tax increase. The presumption was that tax payers were aware of the relevant legislation in force, which at the relevant time provided for the preconditions of the tax surcharge as well as the instructions as to how to avoid any such additional payment. If a taxpayer was unsure what the taxation result of a transaction would be, he/she could obtain a preliminary opinion from the tax authorities. Merely because the tax surcharge in this case was based on a subsequent interpretation by the tax authorities of the applicant’s transaction did not mean that it was not foreseeable. The applicant as an experienced investor should have informed himself, or sought legal advice, when such large amounts were at stake. They submitted that the memorandum issued to the tax offices did not constitute a new and retroactive legislative measure but set out, for the purpose of securing uniform treatment throughout the country, the stance that had taken shape during administrative and judicial proceedings in relation to certain types of transactions during the preceding years. This was typical in the interpretation of tax legislation. The memorandum was not legally binding on the authorities or courts and was generally available, now on the official website and at the time to interest groups and other interested taxpayers.
The applicant submitted that in 1988 when the act in question (the sale of the company) was carried out there was no legislation to criminalise it (i.e. no tax laws were violated at the time). There was no legislation or tax directive which could have subjected the transaction to tax other than the tax which in fact was assessed and paid. The tax authorities made decisions based on a change of the legal environment which occurred in 1992 and 1993 and applied them to the sale in 1988. The applicant was not aware of this change, the memorandum of 9 September 1993 only being published in 1999. He relied on the opinion of Professor Tikka (Professor in Tax Law at Helsinki University) that in 1988-1989 no legal precedent existed which would have indicated that in the case of a balance sheet company transaction it would have been possible to view the transaction in accordance with the general clause in the tax laws (section 56 of the Tax Assessment Act) as only in the year 1996 did the Supreme Administrative Court hand down a decision to that effect. The applicant did not take issue with any change in the law in 1992-1993 but with its retrospective application to events seven years before. The 1992-1993 memoranda, also not published until 1999, constituted definite instructions to review in retrospect and on a select basis certain cases already taxed in the normal tax procedure.
B. The Court’s assessment
The Court proceeds on the assumption that the surcharge in this case concerned a criminal penalty capable of falling within the scope of Article 7 § 1 of the Convention. However, it is not necessary to determine the substantive issues raised under that provision since it appears that this complaint has been raised out of time.
Article 35 § 1 of the Convention provides that the Court may only deal with a matter where it has been introduced within six months from date of the final decision in the process of exhaustion of domestic remedies. The object of the six month time limit under Article 35 § 1 is to promote legal certainty, by ensuring that cases raising issues under the Convention are dealt with in a reasonable time and that past decisions are not continually open to challenge. The rule also affords the prospective applicant time to consider whether to lodge an application and, if so, to decide on the specific complaints and arguments to be raised (see, for example, Worm v. Austria, judgment of 29 August 1997, Reports 1997–V, at p. 1547, §§ 32-33).
Normally, the six-month period runs from the final decision in the process of exhaustion of domestic remedies. Exceptionally, the period may run from the date of knowledge of the act or measure complained or its effect or prejudice on the applicant (see e.g. Hilton v. the United Kingdom, no. 12015/86, Commission decision of 6 July 1988, DR 57, p. 108).
In the present case, the Court recalls that the applicant first raised his complaint under Article 7 of the Convention in his observations in reply to the Government dated 15 May 2003. He claimed that it was not until receipt of the Government’s observations that he became aware that he had been subjected to a retroactive application of criminal sanctions through the application by the tax authorities of internal documents of which he had not been previously aware.
The Court would note however that the documents referred to by the applicant, namely the letter of 18 November 1992 and the memorandum dated 9 September 1993, gave, variously, instructions to the tax authorities concerning investigations into particular kinds of share transactions and an analysis of the possible tax consequences of such transactions: these documents were neither, in form nor substance, legislative acts. The applicant was subject to surcharge proceedings based on section 56 of the Assessment Act, a statutory provision in force at the time of the transaction. Insofar as the applicant alleges that he was unable to foresee in 1988 that this provision would apply to the share transaction in question and that such transactions had never previously been viewed as disguised transfers of assets for the purpose of evading tax, the Court would observe that he must have been aware of this position during the proceedings and thus had knowledge of the basic elements of the complaint raised under Article 7 at that time. Indeed the Court would note that the applicant referred to the letter of 18 November 1992 in his appeal to the County Administrative Court, while his petition dated 24 February 1998 to the Supreme Administrative Court expressly complained of the lack of prior legal precedent for the imposition of tax in his case. In these circumstances, the alleged subsequent discovery of the significance of internal tax documents does not provide any basis for suspending or modifying the application of Article 35 § 1. The Court concludes that the six month time-limit ran from the conclusion of the surcharge proceedings, namely the Supreme Administrative Court decision dated 14 June 1999, which is more than six months before the introduction of this complaint.
It follows that this complaint must be rejected pursuant to Article 35 §§ 1 and 4 of the Convention.
VIII. ARTICLE 4 OF PROTOCOL NO. 7
Finally, the applicant complained that the proceedings had been time-barred invoking Article 4 of Protocol No. 7 which provides the right not to be tried or punished twice for the same offence.
The Court recalls however that the applicant raised this complaint for the first time in his submissions of 30 March 2004 whereas the final decision concerning the matter for the purposes of Article 35 § 1 must be regarded as, at the latest, the Supreme Administrative Court decision of 14 June 1999. Since the applicant lodged this complaint on 30 March 2004 more than six months after this decision it follows that this part of the application must be dismissed as out of time pursuant to Article 35 §§ 1 and 4 of the Convention.
For these reasons, the Court unanimously
Declares the application inadmissible.
Michael O’Boyle Nicolas Bratza
PAULOW v. FINLAND DECISION
PAULOW v. FINLAND DECISION