Legal proceedings in the case on a norm establishing a greater amount of income subject to the personal income tax have been terminated
On 13 December 2011, the Constitutional Court adopted a decision to terminate proceedings in the case No. 2011-15-01 “On Compliance of Section 9 (1) Indent 19 Sub-Paragraph “c” (Wording of 22 November 2001) with Article 91 of the Satversme”.
Contested Norm
Section 9 (1) indent 19 sub-paragraph “c” of the Law on the Personal Income Tax (wording of 22 November 2001) established before 12 June 2007 that taxable income from sale of one’s property, except for income from sale of such immovable property that has been in the ownership of the person for less than 12 months shall not be included in the annual taxable income and the tax shall not be imposed upon.
Facts
The applicant, the Administrative Regional Court [Administratīvā apgabaltiesa] indicated that the Contested Norm is applied in a way that income is not imposed the tax even if a person sells several units of immovable property that have been in his or her ownership for more than 12 months. However, according to the Applicant, such regulatory framework infringes the principle of equality in respect to person who systematically sells immovable property with the purpose to gain profit by registering their economic activity and paying taxes.
Court Findings and the Ruling
Disregarding the fact that the applications includes a claim to assess compliance with the entire Article 91 of the Satversme, the Constitutional Court has concluded that the Contested Norm does not apply to the principle of prohibition of discrimination included in the second sentence of Article 91 of the Satversme; consequently, the Constitutional Court assessed compliance of the Contested Norm with the first sentence of Article 91 of the Satversme only that provides that “all human beings in Latvia shall be equal before the law and the courts”.
The Constitutional Court indicated that a decisive role in interpretation of the Contested Norm and establishment of the content thereof is played by administrative courts that assess lawfulness of decisions of the State Revenue Service [Valsts ieņēmumu dienests] (hereinafter – the SRS). However, re-assessment of interpretation and application of legal norms performed by courts of the general jurisdiction and public institutions, as well as re-assessment of evidence falls within the jurisdiction of the Constitutional Court pursuant to Article 85 of the Satversme and Article 1 and Article 16 of the Constitutional Court Law [7].
Since the opinion of participants of the case regarding the content of the Contested Norm differ considerably enough to establish whether it is necessary to assess constitutionality of the Contested Norm, the Court first of all established the true meaning of it [7].
By applying the historical interpretation method, the Constitutional Court concluded that the aim of the legislator in the context of the Contested Norm was to separate a legal situation when a person does not alienate its immovable property from the one when a person purchases immovable property with the purpose to alienate them and gain profit. Consequently, the Constitutional Court agreed with the opinion of the Saeima, namely, that circumstances giving ground to the regulatory framework of the Contested Norm show that the release from payment of the tax established therein does not apply to cases when persons sell several entities of immovable property and perform it systematically with a view to gain profit [8.2].
The Constitutional Court indicated that, when establishing the content of the term “own property”, it is necessary to take into account legal regulatory framework of economic activities included in the Law on Personal Income Tax. It can be concluded from it that cannot be regarded as “a good” in the meaning of Section 11 (2) indent 1 of the Law, namely, it is not an object of sale and intent of a person to keep it in his or her ownership for a long time can be applied thereto. However, income from the sale of “own property”, taking into account the definition of economic activity of a natural person included in Section 11 (1) indent 1 of the Law on Personal Income Tax, cannot be regarded as income from activities aimed at sale, namely, sale income [9.3].
Consequently, the Constitutional Court did not question what has been indicated by the Saeima, namely, that the personal income tax should not be paid from income from sale of such immovable property that was in the ownership of the person for more than 12 months in case if the person has not sold the property on systematic basis with the purpose to gain profit [9.5].
When performing audit of the personal income tax, the SRS shall first assess whether actions of a natural person in respect to alienation of the immovable property comply with characteristics of the economic activities. In case if such compliance is established, then the Contested Norm does not release the person from the duty to pay the personal income tax. Consequently, the Constitutional Court concluded that the Contested Norm has a different nature than that indicated in the application. Consequently, there is no reason to continue proceedings in the case and assess compliance of the Contested Norm with the first sentence of Article 91 of the Satversme because, in fact, the issue can be settled by performing interpretation and application of the Contested Norm in accordance with its purpose and the will of the legislator.
The Constitutional Court terminated proceedings in the case No. 2011-15-01 “On Compliance of Section 9 (1) Indent 19 Sub-Paragraph “c” (Wording of 22 November 2001) with Article 91 of the Satversme”.
The Decision of the case is final and not subject to appeal.
Linked case: 2011-15-01