In my student days a couple of decades ago, we were taught that the law always needs explanation and is never self-evidently clear. After all, it is impossible for a law to be clear in all cases in practice. There are numerous ways of interpreting the law, in which conscience always plays an important role in the context of a “reasonable interpretation” of the law. Officials and judges, in this view, are never literalists, but always use their full intellect and conscience.
In these times of polarization, pressure and the accompanying culture of fear, I unfortunately see and hear more and more statements such as ‘the law does not allow us to do otherwise’ or ‘this is just the law’. In the public discourse, the Toeslagenaffaire or childcare benefits scandal has brought to light that our highest administrative judge believes that legal certainty, as the result of consistent application of the law, is the opposite of “customization”. For example, in its reflection report on the Toeslagencrisis, the Council of State observed that the administrative judge ‘is increasingly expected to find a good middle ground between uniformity and customization in his rulings’.
The Toeslagenaffaire, or childcare benefits scandal, involved the wrongful accusation of thousands of Dutch families for fraud, leading to severe financial and personal consequences. The scandal highlighted systemic issues in the Dutch tax system and resulted in public outrage and governmental resignations.
However, if the desire for ‘consistent application of the law’ (uniformity) is diametrically opposed to the ‘customization’ that should give priority to the requirements of reasonable application of the law, we have come a long way from the real practice of law, as was instilled in Groningen. It is precisely this practice that always and intrinsically, within the framework of consistent application of the law, looks at the relevant context of each case, in connection with the history of the law, the purpose of the legislator, reasonable application of the law, and so on. That is precisely what makes the law valid and meaningful.
In the view of the Council of State, legal certainty is the same as “letter-cutting,” as legal philosopher Pauline Westerman delicately summarizes: the unimaginative application of the letter of the law. The judge as AI blunt, without any conscience or sense of context.
In tax law, therefore, we more often see judges shying away from reasonable interpretation of the law while tax laws are increasingly crude and imperfect, and the government is happy to use fictions and lump sums to sprinkle rules on citizens. The legal scholar Paul Scholten wrote decades ago that adding assumed facts into a pure fiction is always impermissible. Fictions must be sincere in their intent, honest in their communication and just in their consequences to be acceptable.
Where the focus is required too much on materially complex tax law and its many details, a lack of attention to these kinds of general principles of good law and legal practice becomes manifest.
This explains why precisely European human rights as enshrined in the European Convention on Human Rights are increasingly influential in tax proceedings. If explanation of the law as such fails to materialize (but is applied through letter-cutting), there is always the question of whether that letter-cutting application violates European property fundamental rights.
Amsterdam Court of Appeal May 28, 2024 on family foundation of noble family
I experienced a fine example of this state of affairs surrounding such a tax fiction in the proceedings before the Amsterdam Court of Appeal in which judgment was rendered on May 28, 2024 (ECLI:NL:GHAMS:2024:1494). A family foundation from 1907 was suddenly regarded as a so-called Separated Private Estate – many years after the law came into force, by the way – with the consequence that a large group of family members who are related to the founder of that foundation up to the seventh degree would be confronted with income and inheritance tax assessments with regard to purely fictitious allocation of assets of the family foundation over which they have no control. According to the inspector and also the court, this is the result of the legislation on Afgezonderd Particulier Vermogen (“APV“), although it is evidently clear that this legislation was not written for this type of case. Only by deploying various anti-abuse provisions not written for this situation could one reach this result. It is not in dispute between the parties that there is no tax construction or avoidance of tax here (the combating of which is precisely the objective of the APV legislation).
The fact is that a crisis would break out in such a family if they were confronted with assessments and did not even have knowledge of the foundation’s assets; the foundation has a completely autonomous objective and governance and does not have any obligation to provide information to family members. Accordingly, a complex directional agreement was made with the tax authorities in order to be able to litigate the case without involving the family. Exclusively during the period of the proceedings, the assessments were formalized with the foundation (which as such is not taxable because it does not run a business) rather than with the family members, which, however, by its nature cannot be litigated against as the imposition of tax on the foundation is against the law. Therefore, an exception was made for the mother of the director of the foundation, who obviously did know about the state of affairs within the foundation through her son; her assessment was litigated whereby it is of course clear to the court that in fact the fate of the entire foundation is being judged.
Rather than to interpret the law in this particular case, the Court ruled that the assessment violated the mother’s human property right. This is the case when the levying of tax, although done on the basis of the law and serving a “legitimate purpose,” is not in a “fair balance” with the interests of the individual. Similar to the rulings on box 3 to this extent, the Court here finds that the legislator’s desire to counteract the existence of “floating wealth” and prevent a tax loophole cannot be invoked as a sufficient justification for the significant difference in treatment in situations such as this. In doing so, the Court also mentions that the legislature could also subject a domestic foundation that does not operate a business to taxation as a much less far-reaching solution.
The Court ruled that in cases like the present one (a purely domestic situation, where in the distant past assets were set aside without any tax motive, without obstructing the view of the facts), a person who is confronted with a levy such as the one at issue, while not being entitled to an actual distribution or any right thereto, this system leads to a violation of his or her rights guaranteed by Article 1 First Protocol in combination with Article 14 European Convention on Human Rights. Consequently, the assessment was reduced.
Cassation
The State Secretary of Finance appealed this ruling before the Supreme Court and argued in different tones that a judge is not allowed to judge the justice of the law, which assertion, however, is clearly contrary to article 94 of the Dutch Constitution. The European Convention on Human Rights takes precedence over national law. After 30 years of practice, I can be at once amazed and agitated that clear limits of general legal principles are so lightly contested. This shows a cage fighter mentality that we should not expect from government lawyers.
With that, I get the notion that the executive branch might consider judges to be in violation of article 120 0f the Dutch Constitution, which prohibits testing laws against the Constitution, by interpreting the law based on its objectives and reasonable interpretation. That too, however, is a fallacy; the Constitution is not necessary to interpret a law in accordance with its original objectives and integrity. As Professor Happé put it in 2011 in his essay “Tax Law and the Spirit of the Law,” “Both taxpayers and the government have an ethical duty of compliance. This means that one should refrain from constructions, of which one should know that the legislator, had he been aware of the construction when the law was drafted, would have proceeded to adapt the law.
We therefore not only defended against the State Secretary’s appeal (which by its nature only concerns the applicability of the European Treaty of Human Rights to this case as applied by the Amsterdam Court of Appeal), but also filed a broadly formulated incidental appeal in which we suggested to the Supreme Court that a reasonable outcome could be reached simply on the basis of the interpretation of the APV legislation; we detected as many as six possibilities. This does not require European law to be applied in this case. European law, from the principle of subsidiarity, should only be pulled out if a solution under national law proves impossible. In this way, European law retains its function of a “last resort” and its validity is also not unnecessarily called into question. In other words, if we start using European law for everything, because we have embraced systemic cowardice to make and explain laws reasonably ourselves, it then becomes easier to point the finger at European law as the ‘enabler’ of a different view. Integrity always begins and ends with yourself.
Incidentally, of course, we also added to the incidental cassation appeal that the tax authorities’ implementation of the law in this case is not “lawful” within the context of European law, a consideration that in my view is too often too quickly ignored. An act by the government is not lawful if that act is insufficiently consistent and insufficiently precise and its consequences are insufficiently foreseeable. By not limiting the scope of APV legislation to those situations it is intended to address and gradually interpreting the regulation more broadly than it was created for, the government acts in violation of the general principle of ‘détournement de pouvoir’. Also, the text and explanation of various parts of the APV legislation is unclear and internally contradictory, so that citizens do not know where they stand. The fact that the APV legislation is justified as ‘combating a levy leak’, while at the same time assuming it, is an invalid circular reasoning that certainly does not qualify as ‘lawful’.
We expect a ruling from the Supreme Court during 2025. It has now been announced that an Attorney General will issue a conclusion with an opinion to the Supreme Court. This is good news, now that we should by no means expect letter-cutting from an Attorney General.
¹ The Toeslagenaffaire, or childcare benefits scandal, involved the wrongful accusation of thousands of Dutch families for fraud, leading to severe financial and personal consequences. The scandal highlighted systemic issues in the Dutch tax system and resulted in public outrage and governmental resignations.
² Ars Aequi, April 2022 ‘The false opposition between uniform and tailored suit’.