Public International Law and European Union Law rarely intersect with tax law and insolvency law. However, a case currently before the European Court of Justice) directly addresses this intersection, thereby offering a valuable opportunity to explore the interplay between these areas of law.
The case before the German Federal Court of Justice
The case that gave rise to the dispute concerns an insolvency administrator who contested two payments totalling 5.7 million zlotys (1.36 million euros), which the insolvency debtor made to the Polish state just a month after filing for insolvency in Germany. The payments were related to tax liabilities arising from the debtor’s operation of a logistics centre in Poland. The insolvency administrator sought to recover these payments, but both the Regional Court and the Higher Regional Court dismissed the claim. Notwithstanding the courts’ judgment, which established that the claim for repayment was principally a civil law matter, both courts found that tax collection was a sovereign act of the Polish state. Accordingly, both courts determined that they could not adjudicate the matter as to do so would be contrary to the principle of sovereign immunity. Following the insolvency administrator’s appeal, the German Federal Court eventually referred the case to the ECJ for a preliminary ruling (Art. 267(1)(b)(3) Treaty on the Functioning of the European Union).
The question referred to the ECJ for Preliminary Ruling
The legal dispute revolves around the interpretation of Article 6 (1) of the EU Insolvency Regulation (EUIR). It grants the courts of the Member State in which the insolvency proceedings are opened jurisdiction over actions arising from those proceedings and actions closely linked with them. The German Federal Court consulted the ECJ to determine whether Art. 6(1) EUIR implies a waiver of sovereign immunity by Member States for actions brought by insolvency administrators concerning the debtor’s legal acts, including tax payments.
If the answer to this question is negative, payments on tax liabilities made to foreign states within the EU would be excluded from insolvency avoidance. However, the German Federal Court suggested that Art. 6(1) EUIR may be understood as an implicit waiver of sovereign immunity, alleging that state immunity has “evolved from an absolute to a relative right […], largely due to the growing commercial nature of state authorities’ cross-border activities.”
The legal and economic ramifications of the ECJ’s pending decision
If the ECJ were to consider the principle of state immunity applicable, the claim before German courts would fail. At the same time, an action brought before Polish courts would be inadmissible since German courts would still have jurisdiction (Art. 6(1) EUIR). Although this deficit in legal protection could theoretically be compensated for via secondary insolvency proceedings in Poland (Art. 34 EUIR), this possibility is practically not viable in insolvencyrelated matters because of the procedural costs. A ban on the avoidance of tax payments would therefore have substantial ramifications for financial stability within the European Single Market.
Public international law foundations
The principle of sovereign equality of states, as enshrined in Art. 2 (1) of the UN Charter, entails non-interference in the exercise of sovereign powers of foreign states and gives rise to the principle of state immunity. It means that states do not sit in judgment over one another (par in parem non habet imperium).
The extent to which the principle of non-interference is binding on Poland and Germany is not clear. Notwithstanding the fact that the Convention on the Immunity of States and their Property from Jurisdiction is yet to come into effect, Germany has neither signed nor ratified this Convention. At the same time, the 1972 European Convention on State Immunity, which Germany has signed, has not been ratified by Poland. Although both states are not bound by virtue of signing a joint convention, Germany should still respect the principle of state immunity as part of the customary international law.
The legal Classification of Taxes in the Context of State Sovereignty
However, in order for the principle of state immunity to apply, the state invoking this principle of state immunity has to exercise sovereign powers (acta iure imperii) as opposed to non-sovereign (i.e. private) acts (acta iure gestionis). Due to the absence of an international definition of sovereign acts vis à vis private acts, this distinction is currently based on the applicable national law, which was German law in the matter brought before the ECJ. According to previous decisions by both the Federal High Court of Justice and the Federal Constitutional Court, an action is deemed to be a sovereign act if it is of “public law nature”. Recognised sovereign acts include the exercise of military or police power, as well as legislative activities. The same applies to the imposition of taxes. Since the Egyptian Nile customs duty, the prevailing approach to tax collection has always been establishing unilateral obligations determined by the state (obligato ex lege): a sovereign act. Thus, a blocking effect of state immunity vis-à-vis the German insolvency courts would seem to be possible.
The influence of insolvency law on the legal categorisation of payments on tax liabilities
However, the insolvency restitution claim is a civil law matter, not directly related to the tax assessment. Accordingly, insolvency law may even supersede tax law to ensure the best possible distribution of the insolvency estate to all creditors (Section 143 of the German Insolvency Code). The reason for this is the overarching principle of insolvency law, which is that all creditors, including the tax office, are to be treated equally (par conditio creditorum). This could suggest that insolvency law may take precedence over tax law. This in turn gives rise to the question whether the contestation of tax payments should be regarded as a private act although the act of tax collection is a sovereign act. Dogmatically, this distinction makes sense as insolvency claims are independent claims established by law and contingent upon the initiation of insolvency proceedings.
Yet, it can hardly be denied that the repercussions of the insolvency avoidance extend to the authority of the Polish state to carry out its tax collection, albeit indirectly. In fact, the Polish tax authorities’ power would be factually devalued if the payment had to be returned. German courts would effectively influence the whereabouts of tax revenue in the foreign treasury. As a result, the German Federal Court appears to be concerned that a German court could violate international law.
Risk of circumvention arising from a distinction between payments on tax liabilities and other liabilities
When denying the claim of the insolvency administrator, it is assumed that the whereabouts of tax funds need to be assessed differently from other funds. If the debtor had entered into a rental agreement with a state-owned enterprise, it is probable that the court would permit insolvency avoidance actions, even though the claim would be inherited by the state. Thus, the line between these claims is unclear. Additionally, the act of tax collection is organised differently. While most foreign states usually enforce tax collection themselves, some delegate this role, as seen with Italy’s Agenzia Entrate Riscossione. While one could argue that the assignment of the claim to a private entity alters their qualification as public debt, it is more convincing to assume that this has no influence on the legal quality of the debt. Otherwise, the success of an insolvency challenge would depend on whether the tax claim was assigned to another entity, which could lead to the circumvention of the contestation of tax debts.
The resolution of the conflict with reference to rules and principles of European Law
The EUIR itself suggests that tax authorities are subject to the same rules as all other creditors. The lower instance courts deemed Art. 6(1) EIR to contain nothing but a regulation on the jurisdiction. Yet, the Federal Court of Justice has set out various arguments as to why Art. 6(1) could imply a waiver. Recital 63 of the EUIR allows any creditor to lodge claims in EU insolvency proceedings. Similarly, Art. 2 of the EUIR includes tax authorities in its definition of “foreign creditors”, implying that there is no privilege for tax authorities (effet utile, Art. 4 TEU). The EUIR assumes that it is incumbent on the liquidators to explore possibilities for a restructuring plan (Art. 57 EUIR), which may also include tax liabilities (Art. 32 (1) EUIR). Despite limiting the avoidance in Art. 16 EUIR, the EUIR does not impose additional restrictions on tax authorities, suggesting that no limits were intended (argumentum e contrario).
Conclusion and outlook for a harmonised European approach to tax liabilities
Since the ECJ’s interpretation of Art. 6(1) EUIR will have a significant impact on cross-border insolvencies involving tax authorities, at least in Europe, the decision must be eagerly awaited. If the court rules that sovereign immunity does not prevent insolvency avoidance actions against tax payments, it would align with the broader aim of the EUIR to ensure efficient insolvency proceedings. Although the European Commission has not indicated any plans to restrict insolvency avoidance vis-à-vis tax authorities, it is recommended that the Commission addresses this issue in order to harmonise and protect the European Single Market, particularly in consideration of the uncertainties surrounding non-European tax policies.
Alina Holze is a graduate lawyer from Germany and a PhD Candidate at the Leibniz Universität Hannover. She recently conducted a research stay at the Lauterpacht Centre for International Law, where she finalized her PhD thesis.