The tax rates set in Section 6 of the law “On Solidarity Tax” also with respect to employers are incompatible with the principle of equality enshrined in the Satversme

16.11.2017.

On 16 November 2017, the Constitutional Court pronounced judgement in case No. 2016-16-01 “On Compliance of Section 3, Section 5 and Section 6 of the law “On Solidarity Tax” with the First Sentence of Article 91 of the Satversme of the Republic of Latvia”.

The Contested Norms

Section 3 of the law “On Solidarity Tax”:

“The tax object shall be the income, which has been defined in Section 14 and Section 202[1] of the law On State Social Insurance and exceeds the maximum amount[2] of the object of mandatory state social insurance contributions (hereinafter – object of mandatory contributions).”

Section 5 of the law “On Solidarity Tax”:

 “Taxpayers shall be employers, employees, domestic employees at a foreign employer, foreign employees at a foreign employer and self-employed persons, who are subject to state social insurance and whose income in the respective taxation year exceeds the maximum amount of the object of mandatory contributions as defined in the law On State Social Insurance.”

Section 6 of the law “On Solidarity Tax”:

“The tax rate shall correspond to the rate of mandatory contributions defined pursuant to Section 18 of the law On State Social Insurance[3].”

 The Norm of Higher Legal Force

The first sentence of Article 91 of the Satversme:

 “All human beings in Latvia shall be equal before the law and the courts”.

The Facts

The applicants are nine legal persons – employers that employ employees, whose income from salary annually exceeds the maximum amount of the compulsory contributions. Thus, pursuant to the contested norms, the employer’s obligation to pay the solidarity tax in the amount set in the law “On Solidarity Tax” arises.

The applicants hold that the employees’ and not the employers’ obligation to pay the solidarity tax follows from the purpose of the contested norms to decrease the regressivity of the taxes and supplement the basic state budget for financing expenditure of social nature. However, the largest part of the total burden of the solidarity tax is said to be paid by the employers. Moreover, the applicants hold that the legislator has not examined alternatives that would be less restrictive upon the employers’ rights.

It is maintained that the contested norms restrict the applicants’ fundamental rights defined in the Satversme, since they envisage differential treatment of employers, who are in similar and comparable circumstances. Allegedly, the contested norms worsen the situation of those employers, who employ highly qualified specialists, by placing them in a disadvantageous situation compared to such employers, who do not employ such employees. The applicants also hold that the contested norms envisage differential treatment of all those employers, who play the solidarity tax, with respect to application of tax rates. Allegedly, the legislator, without objective grounds, has established differential rate of solidarity tax, depending upon the social insurance risks that the employee is subject to.

The Court’s Findings and Ruling

On connection of the case with case No. 2016-14-01

The Constitutional Court noted that it already expressed its considerations regarding the content of Article 91 of the Satversme concerning the solidarity tax in Case No. 2016-14-01[4]. The conclusions made in this judgement are applicable also to the case under review, insofar a similarity exists as regards the content of the obligation to pay the solidarity tax. [12.]

On the content of the obligation set for the employer to pay the solidarity tax and the compliance thereof with the purpose of the law “On Solidarity Tax”

The Constitutional Court established that the solidarity tax consisted of both that part of tax payment, which was calculated and deducted from the employee’s gross remuneration, and that part of tax payment, which was calculated and paid from the employer’s resources. To decrease the regression of labour force’s tax, the legislator introduced a new type of tax – the solidarity tax. Thus, pursuant to the purpose of the law “On Solidarity Tax”, the burden of labour tax was levelled out both for employees and employers. [13.1., 13.2.]

On groups of persons, who, with respect to the obligation of paying the solidarity tax, are in similar and comparable circumstances

The Constitutional Court noted that the common feature, according to which the groups of persons, which are in similar and comparable circumstances, should be identified in the case, was the object of solidarity tax, i.e., the amount of income, to which the solidarity tax was applied. Those employers, who employ such employees, whose annual income does not reach the limit, at which the obligation to pay the solidarity tax sets in, do not have this feature. Thus, these employers, essentially, cannot be compared to those employers, who employ such employees, whose income exceeds this limit. Whereas all those employers, who have the obligation to pay the solidarity tax, are in similar and comparable circumstances. [15.1., 15.2.]

On terminating legal proceedings in the part regarding compliance of Section 3 and Section 5 of the Law on Solidarity Tax with the first sentence of Article 91 of the Satversme

The Constitutional Court recognised that in this case, as in the case No. 2016-14-01, the subject and the object of tax per se did not create a violation of the equality principle. I.e., the differential treatment of comparable groups could follow only from the established tax rates. Therefore the Constitutional Court found that Section 3 and Section 5 of the Law on Solidarity tax were not to be examined in the framework of the first sentence of Article 91 of the Satversme, since they did not cause a restriction on fundamental rights. The Constitutional Court decided to terminate legal proceedings in this part. [16.]

On incompatibility of Section 6 of the law “On Solidarity Tax” with the first sentence of Article 91 of the Satversme

The Constitutional Court noted that for those employers, who are paying the solidarity tax, the rates thereof differ, depending on  the social risks, against which the employed persons are insured. Thus, Section 6 of the Law on Solidarity Tax establishes differential treatment of employers, who are in similar and comparable circumstances. [17.]

The Constitutional Court drew attention to the fact that with respect to the issue, whether the differential treatment had been established by a legal norm that had been introduced in the procedure defined by the Satversme, the facts of the case and the legal substantiation were identical to the ones examined in the framework of the case No. 2016-14-01. In its judgement in case No. 2016-14-01, the Constitutional Court recognised that the solidarity tax rates had been established by a law, which had been adopted in due procedure. Therefore, there was no need to examine repeatedly the procedure, in which the contested norm had been adopted, and, thus, in this case the differential treatment has been established by law. [18.]

In its judgement in case No. 2016-14-01, the Constitutional Court already examined the matter concerning the legitimate aim of the differential treatment established in Section 6 of the law “On Solidarity Tax” and noted that the simplicity of tax administration could not be the sole legitimate aim in establishing differential treatment of comparable groups of payers of solidarity tax. Likewise, the significant amount of budget revenue (the fiscal effect of the tax) or the small number of payers of solidarity tax per se cannot be used to substantiate the restriction on the principle of equality that has been established in the Satversme. In view of the above, there was no need for the Constitutional Court to re-examine such considerations. The Constitutional Court found that the differential treatment of the employers, which had been established by Section 6 of the law “On Solidarity Tax”, lacked a legitimate aim, and therefore this contested norm was incompatible with the first sentence of Article 91 of the Satversme. [19.]

On the force of the judgement by the Constitutional Court in time

The Constitutional Court noted that in this case, similarly to case No. 2016-14-01, it was necessary and admissible to leave Section 6 of the law “On Solidarity Tax”, which is incompatible with the Satversme, in force for a certain period to give the legislator the possibility to adopt new legal regulation in compliance with the principle of equality. In view of the fact that the legislator needs a reasonable period of time for adopting new legal regulation and that the respective amendments must be aligned with the general taxation policy and that the stability of the state budget must be ensured, Section 6 of the law “On Solidarity Tax” is to be recognised as being invalid as of 1 January 2019. [20.]

The Constitutional Court held:

1) to terminate legal proceedings in the case in the part regarding compliance of Section 3 and Section 5 of the law “On Solidarity Tax” with the first sentence of Article 91 of the Satversme of the Republic of Latvia;

3) to recognise Section 6 of the law “On Solidarity Tax as being incompatible with the first sentence of Article 91 of the Satversme of the Republic of Latvia and invalid as of 1 January 2019.

The judgement by the Constitutional Court is final and not subject to appeal, it shall enter into force on the day of its publication.

The text of the judgement [in Latvian] is available on the homepage of the Constitutional Court:
http://www.satv.tiesa.gov.lv/wp-content/uploads/2017/11/2016-16-01_Spriedums.pdf


[1] […] The object of mandatory contributions by an employer and an employee is all income calculated in paid employment, from which personal income tax must be deducted, without deducting untaxable minimum, tax reliefs and eligible expenditure, for which the tax payer has the right to decrease the taxable income. […]

[2] From 9 December 2014 to 23 August 2016 the maximum amount of the mandatory state social insurance contributions  was set as 48 600 euro annually (Para 1.1  in the Cabinet Regulation  of 9 December 2014 No. 756 “Amendments to the Cabinet Regulation of 17 December 2013 No. 1478 “Regulation on the Minimum and Maximum Amount of the Object of Mandatory and Voluntary State Social Insurance Contributions””). From 23 August 2016 the maximum amount of the mandatory state social insurance contributions  was set as 52 400 euro annually (Para 5 in the Cabinet Regulation of 17 December 2013 No. 1478 “Regulation on the Minimum and Maximum Amount of the Object of Mandatory and Voluntary State Social Insurance Contributions”).

[3] The rate of mandatory contributions, if the employee is insured for all types of social insurance, is 34.09 per cent, of which 23.59 per cent are paid by the employer and 10.50 per cent – by the employee. (Section 18 (1) of the Law “On State Social Insurance). See also: The rate of mandatory contributions and break-down according to types of insurance. A table published on the website of the State Social Insurance Agency, in which the different rates of mandatory social insurance contributions set for the employers and employees according to the type of social insurance can be seen [Available on the website of the State Social Insurance Agenc]y:
http://www.vsaa.lv/lv/pakalpojumi/stradajosajiem/iemaksas/iemaksu-likmes-apmers-un-sadalijums-pa-apdrosinasanas-veidiem (accessed on: 16.11.2017.)]

[4] On 19 October 2017 the Constitutional Court pronounced the judgement in the case No. 2016-14-01 “On Compliance of Section 3, 5, 6, 7 and 9 of the law “On Solidarity Tax” with the First Sentence of Article 91 and Article 109 of the Satversme of the Republic of Latvia”. Judgement in the case No. 2016-14-01 [in Latvian] availble here. Press release on the judgement in the case No. 2016-14-01 availble here.

Linked case: 2016-16-01