2009/04/21 - Pl. ÚS 29/08: Real Estate Transfer tax

21 April 2009

HEADNOTES

Tax

is a general burden that is binding on all residents, according to

their income, property, and purchasing power, to finance the general

purposes of the state. the state’s authority to tax under certain

precisely defined conditions was institutionalized precisely for the

purpose of gathering funds to secure public assets.

Under

Art. 11 par. 5 of the Charter, taxes and fees can be imposed only on

the basis of law. This provision makes it impossible for the executive

branch to impose taxes. On the contrary, taxes are a prerogative of the

Parliament, which has the exclusive authority to impose taxes. Art. 11

par. 5 is also the constitutional authorization for Parliament to

legitimately limit property rights through statutes it adopts. Thus, the

public authorities are permitted to interfere in the individual’s

autonomous sphere, which is also defined by property rights, on the

grounds of constitutionally approved public interest, the essence of

which, in the case of taxes, is the collection of funds for securing

various types of public assets. The legitimacy of taxes comes from,

among other things, the fact that the results of taxation are used to

protect and create conditions for the development of ownership, and this

protection and creation of conditions must, of course, be paid for.

However, this is not the only purpose of taxation; tax interference in

the property and legal sphere of the individual is justified by the

equality of allocation of these burdens.

Thus,

in the case of taxes, this involves review of the limitation of the

fundamental right to property guaranteed by Art. 11 par. 1 of the

Charter on the grounds of public interest in meeting the state budget,

approved by Art. 11 par. 5 of the Charter, for purposes connected with

fulfilling the functions of the state.

The

Constitutional Court states that, in reviewing the constitutionality of

the contested provisions, it does not intend to deviate from its case

law, and therefore will take as its starting point the modified version

of the principle of proportionality, and will review possible violation

of the ban on extreme disproportionality in connection with the criteria

that arise from the constitutional principle of equality. It is

precisely review of the matter in terms of observing the constitutional

safeguards of accessory and non-accessory equality that permits applying

the requirement that the legislature not be able to impose tax on

completely irrationally chosen conduct, actions, or behavior of persons,

because by doing so it would obviously, or willfully violate the

constitutional principle of equality; we must point out that violation

of accessory equality is conceptually tied to violation of another

fundamental right.

As

indicated by the decision-making practice of the Constitutional Court,

making distinctions that lead to violation of the principle of equality

is impermissible in two ways: it may function as an accessory principle

that forbids discriminating against persons in the exercise of their

fundamental rights, and as the non-accessory principle, enshrined in

Art. 1 of the Charter, which consists of ruling out arbitrariness by the

legislature when distinguishing the rights of certain groups of

subjects. In other words, the second case involves the principle of

equality before the law, which is a component of the Czech

constitutional order.

The

question that the Constitutional Court could not avoid is whether the

Constitutional Court is competent to review the real estate transfer tax

in terms of the function of taxes. In the Constitutional Court’s

opinion reviewing taxes is within the competence of the democratically

elected legislature. If the Constitutional Court did so, it would enter

the field of individual policies whose rationality cannot be reviewed

very well in terms of constitutionality. As a rule the Constitutional

Court also does not review the effectiveness of taxes, with the

exception of those cases where the inefficiency of a particular tax

would establish obvious inequality in the tax burden on individual

residents. The Constitutional Court is only competent to review whether

particular tax measures interfere in an owner’s constitutionally

guaranteed property substratum, or whether they can be considered to

unjustifiably conflict with the principle of equality, i.e. whether they

are arbitrary.
The Constitutional Court will not use its evaluation

of the suitability of public policy to replace the evaluation of the

democratically elected legislature, which has wide scope for discretion

in the sphere of public policy, and also bears political responsibility

for any failure of its choices. In other words, the legislature may also

take irrational steps in the tax sphere, but that is not yet a reason

for the Constitutional Court to intervene. The Court will intervene only

if property rights are limited in an intensity with a “strangulatory”

effect or if there is violation of the principle of equality, in either

the accessory (here in connection with other fundamental rights) or

non-accessory form.


 

CZECH REPUBLIC

CONSTITUTIONAL COURT

JUDGMENT


IN THE NAME OF THE CZECH REPUBLIC

 

On

21 April 2009, the Plenum of the Constitutional Court, consisting of

Stanislav Balík, František Duchoň, Vlasta Formánková, Vojen Güttler,

Pavel Holländer, Ivana Janů, Vladimír Kůrka, Dagmar Lastovecká, Jiří

Mucha, Jan Musil, Jiří Nykodým, Pavel Rychetský, Eliška Wagnerová (judge

rapporteur) and Michaela Židlická, ruled on a petition from the Supreme

Administrative Court, submitted under Art. 95 par. 2 of the

Constitution of the Czech Republic seeking a declaration of

unconstitutionality of § 8, 9, 10 and 15 of Act no. 357/1992 Coll., on

Inheritance Tax, Gift Tax, and Real Estate Transfer Tax, in the version

in effect before amendment by Act no. 420/2003 Coll., with the

participation of the Chamber of Deputies of the Parliament of the Czech

Republic and of the Senate of the Parliament of the Czech Republic as

parties to the proceeding, as follows:
 

I.

The petition to declare unconstitutional § 8 par. 1 let. a), § 9 par. 1

let. a), § 10 let. a) first sentence and § 15 of Act no. 357/1992

Coll., on Inheritance Tax, Gift Tax, and Real Estate Transfer Tax, in

the version in effect before amendment by Act no. 420/2003 Coll., is

denied.

II. The remainder of the petition is denied.


REASONING


I.
Recapitulation of the Petition
 

1.

On 9 October 2008, the Constitutional Court received a petition from

the Supreme Administrative Court (the “SAC”) seeking a declaration of

unconstitutionality of § 8, 9, 10 and 15 of Act no. 357/1992 Coll., on

Inheritance Tax, Gift Tax, and Real Estate Transfer Tax, in the version

in effect before amendment by Act no. 420/2003 Coll.

2. The

petitioner did this after, in connection with its decision-making

activity, in accordance with Art. 95 par. 2 of the Constitution of the

Czech Republic (the “Constitution”) and § 48 par. 1 let. a) of Act no.

150/2002 Coll., the Administrative Procedure Code, it concluded that §

8, 9, 10 and 15 of Act no. 357/1992 Coll., on Inheritance Tax, Gift Tax,

and Real Estate Transfer Tax, in the version in effect before amendment

by Act no. 420/2003 Coll., are inconsistent with Art. 3 par. 1, Art. 4

par. 4 and Art. 11 par. 1, 4 and 5 of the Charter of Fundamental Rights

and Freedoms (the “Charter”).

3. In the cited matter, file no. 2

Afs 178/2006, the SAC is deciding on a cassation complaint from the

complainant Ing. M. P. against a decision by the Regional Court in Brno

of 26 May 2006 ref. no. 29 Ca 129/2004-22, in which he claims that § 15

of Act no. 357/1992 Coll., on Inheritance Tax, Gift Tax, and Real Estate

Transfer Tax, conflicts with the constitutionally guaranteed property

right enshrined in Art. 11 of the Charter of Fundamental Rights and

Freedoms and also in Art. 1 of the Protocol to Art. 1 of the Convention

for the Protection of Human Rights and Fundamental Freedoms (the

“Convention”). The decision of the Regional Court in Brno denied his

complaint against the Financial Directorate in Brno of 2 March 2004,

ref. no. 8069/03/FŘ 140, which denied teh complainant’s appeal against a

tax assessment by the Financial Office in Brno III of 8 August 2003,

ref. no. 144773/03/290961/1675. This decision assessed the complainant

real estate transfer tax of CZK 3,120, from the sale of real estate in

the land registration area Soběšice by the husband and wife P., the

company NDL, s. r. o., and the company DPN, s. r. o., to the husband and

wife B.

4. The SAC interrupted the proceeding in the matter, and

submitted a petition to the Constitutional Court, seeking a declaration

that the provisions in question are unconstitutional, because it thinks

that the real estate transfer tax itself is unconstitutional. In its

petition, the SAC seeks only a declaration that the relevant statutory

provisions are unconstitutional, not annulment of them, because the

amendment implemented by Act no. 420/2003 Coll. amended all these

provisions, and within a specific review of norms the SAC has active

standing only to submit a petition seeking a declaration of

unconstitutionality of those statutory provisions, and in the version,

that it is required to apply. In the SAC’s opinion (the SAC here

referred to decision of the SAC of 13 March 2008, file no. 5 Afs 7/2005,

in: no. 1575/2008 Coll. SAC), in proceedings that take place before

administrative courts, an interpretative verdict from the Constitutional

Court (a declaration that an already derogated, or amended, legal norm

is unconstitutional) has the same significance and meaning as a verdict

that annuls a legal regulation. As regards the Constitutional Court’s

competence to declare an already derogated, or amended, legal norm

unconstitutional, the SAC refers to the Constitutional Court’s settled

case law from the most recent period [above all judgment file no. Pl. ÚS

38/06 of 6 February 2007 (N 23/44 SbNU 279; 84/2007 Coll.), which

stated the opinion that, under Art. 95 par. 2 of the Constitution, the

Constitutional Court is competent to review on the merits the

constitutionality of a contested provision, even if it was already

annulled (amended), on the condition that the addressee of the claimed

grounds for unconstitutionality is a public authority, and not a subject

of private law].

5. The SAC also asked itself a question about

the Constitutional Court’s ability to substantively review the

constitutionality of a tax law, because imposing a particular tax must

be viewed in the context of the state’s budget policy, and it is

primarily up to political representatives, what to tax, and what form

and level of tax to impose (this is a typical “political question”).

According to Constitutional Court judgment file no. Pl. ÚS 33/01 of 12

March 2002 (N 28/25 SbNU 215; 145/2002 Coll.) as well, “the concept of

tax policy is a matter for the state, which determines what the tax

burden of particular taxes on taxpayers will be.” The Constitutional

Court most recently attempted to define certain referential criteria in

its judgment file no. Pl. ÚS 24/07 of 31 January 2008, promulgated as

no. 88/2008 Coll. [but see also judgment file no. Pl. ÚS 3/02 of 13

August 2002 (N 105/27 SbNU 177; 405/2002 Coll.) and judgment file no.

Pl. ÚS 12/03 of 10 March 2004 (N 37/32 SbNU 367; 300/2004 Coll.)], under

which the legislature has “wide discretion to decide on the subject,

degree and scope of taxes, fees, and monetary fines” and bears primarily

political responsibility for its decisions. Although tax is a required

financial performance to the state under public law, and thus is

interference in the property right of an obligated subject, it does not,

in the absence of other circumstances, affect property positions

protected by the constitutional order. In these cases the Constitutional

Court also specified the content of constitutional review, which

includes reviewing observance of the safeguards arising from the

constitutional principle of equality, both non-accessory and accessory,

and formulated the concept of strangulatory (suffocating) effect. The

judgment published as no. 18/2008 Coll. (file no. Pl. ÚS 50/06 of 20

November 2007) was characterized by the Court’s restraint in political

questions, when it referred the petitioner to the resources of political

competition. Based on analysis of the case law, the SAC concludes that

it is possible to designate as unconstitutional a tax that would (1)

unjustifiably violate the principle of equality and/or (2) have

confiscatory effects. Nevertheless, the SAC believes that a third

criterion must be added to these criteria: (3) the legitimacy of the tax

obligation imposed. In the SAC’s opinion, a tax must be described as

unconstitutional if, while it does not have a discriminatory or

strangulatory effect, is nonetheless not based on any legitimate and

rational reason. Only a tax that also withstands the test of legitimacy

and rationality is constitutional. The legitimacy of a tax is not drawn

exclusively from the manner in which it was adopted and a reason,

consisting of meeting the state budget. In this context the SAC refers

to the rationality test, which is a standard component of the

Constitutional Court’s case law in recent years [judgment file no. Pl.

ÚS 61/04 of 5 October 2006 (N 181/43 SbNU 57; 16/2007 Coll.) or judgment

file no. Pl. ÚS 83/06 of 12 March 2008, promulgated as no. 116/2008

Coll.].

6. In the next part of its petition, the SAC considers

generally the function and purpose of taxes. Citing specialized

literature, the SAC describes three primary functions of taxes –

allocative (exercised when the market is ineffective in resource

allocation), redistributive (important because people do not consider a

particular distribution of pensions and wealth to be just) and

stabilizing (its purpose is to mitigate the effects of cyclical

fluctuations in the economy). Based on quotations from the works of the

philosopher Jan Sokol and Adam Smith, the SAC summarizes the

fundamentals of fair taxex in several points, equality, certainty,

convenience for taxpayers, and the least possible burden for the

citizenry in comparison to the income that they bring to the ruler (the

state). The SAC also analyzes other definitions of taxes, consisting of

distinguishing their (1) primary functions (i.e. fiscal, where the

interest in maximizing tax revenue comes first) and (2) regulatory

function (where social or economic-political purposes come first). In

connection with these deliberations, the SAC states that only a tax can

be considered constitutional if its legitimate and rational, i.e. that

setting the tax does not contravene the basic rules for the functioning

of state power in the context of a democratic state governed by the rule

of law, the principle of proportionality and the principle of the ban

on abuse of the law.

7. The SAC briefly analyzes the significance

of the real estate transfer tax in public finance. According to data

from the Ministry of Finance, we can see a gradual increase in revenue

from this tax, the total level of which is not even one per cent of the

state’s total tax income. The collection efficiency of the tax in 2004

was 2.85%, which means that the direct administrative costs incurred for

collection of the tax were 2.85% of the total revenue. Although this is

a relatively high value in comparison with other property taxes, with

other taxes the collection efficiency is significantly below 2%. As a

whole, the significance of the real estate transfer tax in terms of

total budgetary income is quite marginal. Collection of it is efficient,

but not to the same degree as with other kinds of taxes.

8. The

core of the SAC’s arguments is the test of constitutionality of the real

estate transfer tax, which the SAC considers unconstitutional as a

whole. The SAC conducted (1) a test, in which it investigated the

confiscatory (“suffocating”) nature of this tax. According to the SAC,

this tax does not have a strangulatory effect, because its level is not

disproportionately high. According to the SAC this tax would be

unconstitutional only if it made disposition of property, as an

inseparable part of the property right, impossible, or at least limited

it. The SAC does not see the unconstitutionality of the real estate

transfer tax in the level at which it is set, because it is not

convinced that it would be disproportionately high (strangulatory, or

confiscatory).

9. Nonetheless, according to the SAC the tax does

not pass (2) the minimum test of rationality (the rational basis test),

because the solution selected does not lead to the aim pursued. The SAC

sees several grounds for illegitimacy and lack of rationality.

Primarily, according to the SAC, the tax is discriminatory, because this

kind of property tax burdens only one of the cases of property

transfer. In the case of the real estate transfer tax, the SAC finds

completely lacking a reason why the legislature chose to tax this one

particular kind of property. In a state governed by the rule of law the

legislature may not proceed arbitrarily, but must have a strong and

rational reason for its activity.

10. If every tax is to have

its function, then with the real estate transfer tax both functions

(i.e. the primary and the regulatory) are ruled out. The regulatory

function is ruled out because in a market environment a real estate

transfer tax of any amount causes the price of real estate to increase

by the amount of the tax. However, the need for housing is not

comparable to the need to own ordinary items for personal consumption.

The increase in real estate prices caused by the state leads to limiting

the market and making them less affordable. The real estate transfer

tax does not produce social balance or a greater degree of justice, but

quite unjustifiably and disproportionately limits the freedom of the

people, because it limits work force mobility, limits business, worsens

the social situation of the population, etc. Income from this tax is

thus completely devaluated by these effects that the tax has. Although

precise data do not exist, the amount of income obtained certainly does

not reach the real expenses for undesirable externalities directly or

indirectly caused by the tax. The real estate transfer tax also cannot

have a redistributive function, whose essence is to produce social

peace, because this tax does not burden only “luxury” real estate. The

tax burdens all social groups to a comparable degree. In that context,

the subsequent state actions, such as state support for savings for

housing, for which the state paid in 2006 more than twice what it

collected in real estate transfer tax in that same year, appear

completely irrational. Thus, this is a paradox, because on the one hand

the state massively supports meeting housing needs, and on the other

hand, at the same time, it significantly burdens the satisfaction of

those needs by the existence of this tax. No rational and legitimate

grounds for the existence of this tax can be derived from the state’s

fiscal policy. Nor is it a relevant reason that the nature of the tax as

budgetary income of the state comes from the ease of inspecting real

estate transfers and enforcing payment of the tax. There are similar

evidentiary systems for other things that are not subject to a transfer

tax, and they are generally subject only to a fee [the purpose of which

is different, because fees are imposed in such a manner so as to at

least partly cover the expenses connected with activities that result

from the activities of these individuals (sic – ed. comment)]. In the

case of real estate transfers, the state imposes payments both for

administrative tasks performed in these cases (a fee for registration in

the real estate register), and the transfer itself, based on the value

of the real estate transferred. The SAC also points out that the real

estate transfer tax is a new tax in our system, and it was introduced as

a replacement for the notarial fee for real estate transfers, effective

1 January 1993. There is no reason why the state should simultaneously

subject the transfer of this kind of property both to a fee obligation

and to a tax obligation.

11. According to the SAC, the

discriminatory and irrational nature of this tax has another dimension

in the overall context of the current [apartment] housing market. The

housing market includes, in addition to apartments that are individually

owned, a considerable number of cooperative apartments, where the

transfer of cooperative membership rights to an apartment is not subject

to any tax. Thus, it is more advantageous to be merely a member of a

cooperative than an apartment owner, which is a significant distortion

of the housing market. The tax must also be seen in connection with the

whole tax system. Because, under § 4 let. b) of Act no. 586/1992 Coll.,

on Income Taxes, income from the sale of real estate, among other

things, is tax exempt, if the length of time between acquiring and

selling it exceeds five years, so in the context of the real estate

transfer tax, this regulation means that if real estate is sold within 5

years from acquiring it, the sale is subject not only to the real

estate transfer tax, but also to income tax, the basis of which is the

difference between the two prices. Thus, there is double taxation of the

same income, which, in the context of the whole problem, has

unconstitutional consequences. In the context of the whole tax system we

cannot forget that even ownership of real estate is itself taxed. The

chain of taxes reaches unconstitutional intensity in that the taxpayer

receives certain income, which is of course subject to income tax, for

that income buys real estate, which is subject to real estate tax, and

knows very well that the subsequent sale of that real estate is subject

to real estate transfer tax, or, again, income tax.

12. For all

these reasons, the SAC concludes that the real estate transfer tax is

unconstitutional, as it is nothing more than taxation of the change of

one form of ownership into another form of ownership, i.e. it is not

taxation of growth in value, and the tax is completely outside all the

standard functions that taxes ordinarily have. This tax is asocial,

demotivational, unequal in terms of ownership of various kinds of

property, limits flexibility in the real estate market, and as a result

also slows down the flexibility of the labor market, and its

consequences also negatively interfere in family life. For the foregoing

reasons the SAC proposes that the Constitutional Court declare in a

judgment that § 8, 9, 10 and 15 of Act no. 357/1992 Coll., on

Inheritance Tax, Gift Tax, and Real Estate Transfer Tax, in the version

in effect before amendment by Act no. 420/2003 Coll., which amends Act

no. 357/1992 Coll., on Inheritance Tax, Gift Tax, and Real Estate

Transfer Tax, as amended by later regulations, and related statutes, was

inconsistent with Art. 3 par. 1, Art. 4 par. 4 and Art. 11 par. 1, 4

and 5 of the Charter of Fundamental Rights and Freedoms.
 

 



II.
Responses from the Parties to the Proceedings


II. A) The Chamber of Deputies of the Parliament of the Czech Republic
 

13.

Under § 42 par. 4 and § 69 par. 1 of Act no. 182/1993 Coll., on the

Constitutional Court, as amended by later regulations, (the “Act on the

Constitutional Court”) the Constitutional Court sent the petition to the

Chamber of Deputies. In his response of 10 November 2008, the Chairman

of the Chamber of Deputies of the Parliament of the Czech Republic, Ing.

Miloslav Vlček, recapitulates the process of adoption of Act no.

357/1992 Coll., on Inheritance Tax, Gift Tax, and Real Estate Transfer

Tax, in the version in effect before amendment by Act no. 420/2003

Coll., which amends Act no. 357/1992 Coll. He points out that the draft

act was proposed as part of approved principles of tax reform, under

which these taxes were to replace notarial fees for inheritance, gifts

and transfer of real estate.
 


II. B) The Senate of the Parliament of the Czech Republic
 

14.

Under § 42 par. 4 and § 69 par. 1 of the Act on the Constitutional

Court, the Constitutional Court also sent the petition to the Senate of

the Parliament of the Czech Republic. In the response of 12 November

2008, the Senate Chairman, MUDr. Přemysl Sobotka, stated that the

petitioner did not consider how Art. 11 par. 1 of the Charter of

Fundamental Rights and Freedoms, which provides that property rights

have the same content and enjoy the same protection, would be fulfilled

if the Constitutional Court ruled as requested in the proposed verdict,

and so a situation arose where the provision regulating real estate

transfer tax, in the wording “before amendment by Act no. 420/2003

Coll.” were declared unconstitutional, if this were not also declared to

apply to the situation “after the amendment” introduced by that

statute. The Senate also pointed out that it cannot provide a statement

on the matter that would arise out of direct discussion and adoption of

the provisions in the original version of Act no. 357/1992 Coll.,

because it did not begin its activities until 1996.

15. The

Constitutional Court asked the parties for a statement as to whether

they agree to waive a hearing. The parties consented, under § 44 par. 2

of the Act on the Constitutional Court.
 


III.
Position of the Ministry of Finance
 

16.

Under § 48 par. 2 of the Act on the Constitutional Court, the

Constitutional Court also called on the Ministry of Finance to respond

to the petition. The Minister of Finance, Ing. Miroslav Kalousek, in his

letter of 22 October 2008 ref. no. 05/99 838/2008-261 disagreed with

the opinion of the SAC on the unconstitutionality of the real estate

transfer tax.

17. In the opinion of the Ministry of Finance the

real estate transfer tax is a historic tax, and a supplemental element

of the tax system. The Ministry of Finance points out that imposing

taxes or fees on the transfer or devolution of property rights to real

estate was always of a nonequivalent nature, i.e. that of a tax, as

immediately after paying the fee or tax the taxpayer was not provided

any services or other performance by the recipients, the administrators

of the public budget. This is a tax where the subject matter taxed can

be clearly proved, because it is collected for a paid transfer or

devolution of ownership of real estate. It is a one-time property tax.

The amount of the tax depends on the price (value) of the transferred

real estate. At the present time, the income to the state budget from

this tax is about CZK 9 billion. Taxing of a paid devolution or transfer

of property rights to real estate is practiced in all European Union

countries except Slovakia.

18. The Ministry explains that the

reason why only one kind of property is burdened by the transfer tax is

the difference between immoveable things and other things in their

character, value, and economic importance. Compared to moveable things

[personal property], real estate represents considerable value. Ever

piece of real estate is well invested capital, because it produces a

return. The economic importance of land is non-replaceable. The owners

of houses or apartments for purposes of their own housing have income

from their ownership (so-called imputed rent), unlike persons who live

in rental housing. If real estate is to be used, it cannot exist

separately from the infrastructure. The state expends considerable

financial resources from the state budget of the Czech Republic to

create the infrastructure. Property must also be secured from external

threats, a police system must be built, etc., and the resulting needs

must be financed. Various kinds of property also require various kinds

of protection, which leads to differentiated taxation of personal

property and real estate. The owner of real estate has an advantageous

position, economic advantages. Property taxes are very important

stabilizing taxes, so-called “economically neutral,” which is their main

advantage, because they influence the economic decision making and

behavior of subjects considerably less than other kinds of taxes.

19.

The Ministry of Finance also addressed the functions that the real

estate transfer tax fulfills. The allocative function of this tax can be

seen as part of the financial relationships that arise upon creation of

income, drawing away certain parts of the revenues of legal entities

and individuals, and the subsequent distribution of them to where they

are used most efficiently, which is done through the state budget. Funds

obtained from tax revenues are allocated primarily to the state budget,

where they are designated to secure public goods. The redistributive

function consists of redistribution from real estate owners toward

non-owners, i.e. from the more well-off to the less well off. It is also

insurance against tax evasion. The real estate transfer tax also

fulfills a regulatory function, because the tax burden on individual

taxpayers is derived from the value of the owned and transferred real

estate, and so the differences in the revenues of individual persons are

mitigated. From the point of view of ownership, property is distributed

unequally in society. The real estate transfer tax does not fulfill the

stabilizing function automatically, but it can fulfill it through the

decision of political representatives to adjust the rate, or to create

an exemption, with regard to cyclical fluctuations in the economy.

20.

As regards the connection between the amount of the real estate

transfer tax and the level of real estate prices, the ministry pointed

to the trend in apartment prices from 2001 to 2007, which shows that

after reducing the tax rate from 5% to 3%, prices increased anyway in

2004. The supply and demand for apartments are influenced primarily by

circumstances such as apartment rent levels, state support for housing

(e.g. contributions to housing savings), demographic trends in the

population, the purchasing power of potential buyers, and especially the

credit policies of banks.

21. In the opinion of the Ministry of

Finance, there is certainly a relationship between the real estate

transfer tax and workforce mobility and limitation on business, but in

view of the amount of the tax this influence is minimal. The real estate

transfer tax, as a property tax, has a tendency to supplement the

redistributive effect of the tax system. In view of the supplemental

nature of the tax, extensive statutory exemption from tax, and

especially in view of its low rate, the ministry does not have specific

studies focused on the relationships to other economic categories;

nevertheless, during the time the law was in effect, no negative effects

were registered of this tax on the real estate market, workforce

mobility, the influence of the real estate transfer tax on limiting

business, or influence worsening the social situation of the population.

The ministry points to the research paper of the Research Institute for

Labor and Social Affairs entitled “The State and Structure of

Employment and Trends in the Demand for Work – a Comparison of the State

of the Employment Structure and Trends in the Czech Republic and the

European Union in 2004,” according to which influences that

substantially limit workforce mobility include a non-functioning real

estate market (the price of real estate is around five times the average

annual employment income), household transportation expenses, and

social psychological factors such as an unwillingness to move. An

important influence on workforce mobility is the structure of

economically active people; e.g. with people under 30 higher mobility is

caused more by their willingness to commute or move for work, but it is

not in anyway related to real estate transfers. The ministry also

points to the fact that any negative influence of the real estate

transfer tax on the development of the business environment in the Czech

Republic is not mentioned at all in, for example, in the summary expert

study of the Czech real estate market, Trend Report 2008, published by

the Association for Development of the Real Estate Market.

22.

The Ministry of Finance also addressed the reason for the administrative

fee for registration in the real estate register, which is collected

for an act by an administrative body – the land registry. The fee is CZK

500. The purpose of the fee is to cover expenses connected with the

administrative proceedings of the real estate office when deciding on

registration in the real estate register. Expenses for the register are

paid from fees for services provided. The reason why registration in the

real estate register is subject to a fee, in addition to the real

estate transfer tax, is that the fee is a monetary equivalent for

services provided by the public sector, whereas the real estate transfer

tax is a non-equivalent payment, for which a direct counter-value is

not provided, and is one of the basic budget incomes that are

redistributed through the state budget and used to cover the expenses of

the state budget.

23. According to the Ministry of Finance, the

legal framework also undoubtedly indicates a difference between

ownership rights to an apartment and the obligations of a cooperative

member. The members of a cooperative have membership rights and

obligations connected with membership in a housing cooperative. The

rights and obligations connected with membership in a housing

cooperative are transferred on the basis of an agreement on the transfer

of membership rights and obligations. An agreement on the transfer of

rights and obligations does not mean that a new member automatically

enters into the rights and obligations arising from the lease agreement

concluded by the previous cooperative member. The Ministry of Finance

also points out that transfers of apartments from housing cooperatives

to the members of the cooperatives are exempt from the real estate

transfer tax. However, if a cooperative member acquires ownership of an

apartment from a housing cooperative (becomes its owner), or another

person acquires ownership of an apartment from a developer, and

subsequently sells the apartment, the transfer of ownership for payment

is subject to the real estate transfer tax and is not exempt from it.

24.

As regards the fact that, in a real estate sale, in addition to the

real estate transfer tax, the income from the sale of the real estate

can also be subject to income tax, the ministry states that this

taxation happens only if this income is not exempt from tax under the

Act on Income Taxes. Taxation of income from the sale of real estate

through income tax has a clear anti-speculative character. If the owner

of real estate sold it in a period of less than five years, or, with a

family house or apartment, two years, sold the real estate for a higher

price than the acquisition price, income tax applies only to the

difference between the higher selling price and the lower purchase

price, unless it is exempt from tax based on the relevant statutory

provisions. If individuals and legal entities that keep accounting

records sell real estate, their income is increased by the revenue, i.e.

the price for which the real estate is sold, and reduced by the

residual value (if the property was depreciated) or the purchase price

(if the property was not depreciated). The income, just like the basis

for income tax, is also reduced by the amount of the real estate

transfer tax.

25. The Ministry of Finance also addressed the

reason for reducing the tax from 5% to 3%, which was done by Act no.

420/2003 Coll. This reduction was a political decision, and some

political parties had the reduction in the tax rate in their election

platforms.

26. The Ministry of Finance also believes that

guaranteeing the elimination of a strangulatory (suffocating) effect of

this tax is ensured by the low rate of the tax. The Act includes a

series of exemptions (in housing, in business, support for persons doing

business in agriculture, remedying the consequences of natural

disasters and the taxpayers difficult financial situation under the Act

on Administration of Taxes and Fees), so one cannot say that there is a

considerable tax burden.

 

IV.
Position of the Ministry for Regional Development
 

27.

The Constitutional Court, under § 48 par. 2 of the Act on the

Constitutional Court, also called on the Ministry for Regional

Development to respond to the petition. The first deputy prime minister

and Minister for Regional Development, Jiří Čunek, in his letter of 17

December 2008, ref. no. 38943/2008-77, stated his opinion that he

considers teh influence of the real estate transfer tax on workforce

mobility and on the housing market to be marginal and insignificant.

28.

The Ministry for Regional Development addressed the connection between

the real estate transfer tax and workforce mobility. It referred to the

conclusions of the research study by the Sociology Institute of the

Academy of Sciences of the Czech Republic entitled “Analysis of Housing

Policy Measures Aimed at Supporting Labor Flexibility in the CR.” The

study’s conclusions state that the effect of repealing the real estate

transfer tax cannot be completely reliably estimated. Housing owners

largely stay in their current housing for reasons other than payment of

the real estate transfer tax, and repealing the tax would have other

consequences for the housing market, which would not necessarily be

positive from the state’s point of view (greater price volatility,

market instability).

29. In the opinion of the Ministry for

Regional Development it is not possible to clearly determine how the

real estate transfer tax affects the housing market, if one also takes

into account the existence of apartments that are owned, under the Act

on Ownership of Apartments, and the existence of cooperative apartments.

The higher price of owned apartments, compared to cooperative

apartments, is affected primarily by the different management of these

apartments, because, for example, an owner can, in his discretion, rent

an apartment, or subject it to a lien or an easement.
 


V.
The Text of the Contested Provisions
 

30.

The Petitioner seeks a pronouncement of unconstiuttionality of teh

contested provisions of Division Three in Part One (§ 8, 9 and 10) and §

15 of Act no. 357/1992 Coll., on Inheritance Tax, Gift Tax, and Real

Estate Transfer Tax, in the version in effect before amendment by Act

no. 420/2003 Coll. The individual contested provisions read:

The

provision of § 8 of Act no. 357/1992 Coll., on Inheritance Tax, Gift

Tax, and Real Estate Transfer Tax, in the version in effect before

amendment by Act no. 420/2003 Coll.
Paragraph One
The payer of the real estate transfer tax is
a) the transferor (seller); in that case the transferee is the guarantor,
b)

the transferee, in the case of acquisition of real estate through

enforcement of a decision or execution under a special legal regulation,

expropriation, bankruptcy, settlement, adverse possession or in a

public auction, or acquisition of real estate in connection with the

dissolution of a legal entity without liquidation, or in connection with

the distribution of a liquidation remainder in the event of dissolution

of a legal entity with liquidation,
c) the entitled party under an easement or other performance similar to an easement,
d)

the transferor and the transferee, in the event of exchange of real

estate; in that case the transferor and transferee are jointly and

severally liable for payment of the tax.

Paragraph Two

in the event of transfer or devolution of ownership to real estate from

the joint co-ownership of spouses or to the undivided joint ownership

of spouses, each spouse is considered an independent taxpayer, and their

shares are considered equal, unless agreed or specified otherwise. In

the case of co-owners by shares each co-owner is an independent taxpayer

and pays the tax according to the size of his share.

The

provision of § 9 of Act no. 357/1992 Coll., on Inheritance Tax, Gift

Tax, and Real Estate Transfer Tax, in the version in effect before

amendment by Act no. 420/2003 Coll.

Paragraph One
The subject matter of the real estate transfer tax is
a) a paid transfer or devolution of ownership to real estate, including settlement of co-ownership by shares,
b) unpaid establishment of an easement or other performance analogous to an easement when acquiring real estate by gift.
 

Paragraph Two

The subject matter of the real estate transfer tax is also a paid

transfer of ownership to real estate in a case where an agreement is

subsequently rescinded, and the agreement is thereby void ab initio.
 

Paragraph Three

If real estate is being exchanged, the transfers in exchange are

considered one transfer. Tax is collected on the transfer of that piece

of real estate on which the transfer tax is higher.
 

Paragraph Four
The provision of § 3 par. 2 applies analogously.

The

provision of § 10 of Act no. 357/1992 Coll., on Inheritance Tax, Gift

Tax, and Real Estate Transfer Tax, in the version in effect before

amendment by Act no. 420/2003 Coll.
 

The base for the real estate transfer tax is
a)

the price determined according to a special regulation, payable on the

day the real estate is acquired, including if the price of the real

estate set by agreement is lower than the determined price; the

difference in prices is not subject to gift tax. However, if the agreed

price is higher than the determined price, the tax base is the agreed

price,
b) the price (§ 16) of an unpaid, established easement or other performance analogous to an easement,
c)

in the event of adverse possession, the price determined according to a

special regulation, valid on the day when certification of adverse

possession is recorded in the form of a notarial deed or the day when a

court decision on adverse possession goes into effect,
d) the price

determined according to a special regulation, valid on the day the real

estate is acquired on the basis of an agreement on financial leasing,

with subsequent purchase of the leased property,
e) in the event of

an auction of the real estate in enforcement of a decision, in

execution, or in a public auction, the tax base is the price obtained at

auction. The tax is not assessed if the party proposing voluntary

auction is a person exempt from the real estate transfer tax,
f) the agreed price in the event of transfer of real estate from ownership by a municipality.

The

provision of § 15 of Act no. 357/1992 Coll., on Inheritance Tax, Gift

Tax, and Real Estate Transfer Tax, in the version in effect before

amendment by Act no. 420/2003 Coll.
The tax is 5% of the tax base.

31.

As part of the specific review of norms, the review of the

unconstitutionality of a statute or its individual provisions is part of

the resolution of an ongoing lawsuit, and therefore, within this review

of norms, the constitutionality is reviewed only of a legal norm that

really was and is supposed to be applied in the further proceedings.

Therefore, the Constitutional Court must first pose the question of

whether the contested provisions were and are supposed to be applied in

the proceeding. As the attached file shows, in this case a purchase

agreement concluded on 29 November 2002 between the spouses P., the

company NDL, s. r. o., and the company DPN, s. r. o., on one side, and

the spouses B. (the buyers) on the other side, transferred the ownership

of real estate in the registration area Soběšice, municipality of Brno,

district Brno-City. The taxpayer, Ing. M. P., was assessed a tax of CZK

3,120 for transfer of the real estate, which was jointly owned by the

spouses P.; the determined price of the real estate in question was not

higher than the agreed price, so the tax was assessed on the determined

price. From this information we can conclude that in this matter, in the

proceeding on a cassation complaint before the SAC, only certain

provisions of Act no. 357/1992 Coll., on Inheritance Tax, Gift Tax, and

Real Estate Transfer Tax, in the version in effect before amendment by

Act no. 420/2003 Coll. were and are to be applied, specifically § 8 par.

1 let. a) [The payer of the real estate transfer tax is the transferor

(seller); in this case the transferee is a guarantor,], § 9 par. 1 let.

a) (The subject matter of the real estate transfer tax is the paid

transfer of ownership of the real estate), § 10 let. a) first sentence

(The base for the real estate transfer tax is the price determined under

a special regulation, in effect on the day the real estate is acquired,

including in the event that the agreed price for the real estate is

lower than the determined price; the difference in the prices is not

subject to gift tax.) and § 15 (The tax is 5% of the tax base.). The

remaining parts of § 8, 9 and 10 of Act no. 357/1992 Coll., on

Inheritance Tax, Gift Tax, and Real Estate Transfer Tax, in the version

in effect before amendment by Act no. 420/2003 Coll., were not and will

not be applied in the matter, and therefore the SAC does not have active

standing to submit a petition to declare them unconstitutional. For

that reason, the Constitutional Court could not review the

unconstitutionality of these provisions, and had to deny that part of

the SAC’s petition under § 43 par. 1 let. c) in connection with § 43

par. 2 let. b), as a petition submitted by a clearly unauthorized party

[cf., e.g., Constitutional Court resolution file no. Pl. ÚS 39/2000 of

23 October 2000 (U 39/20 SbNU 353) or judgment file no. Pl. ÚS 43/05 of 2

December 2008, promulgated as no. 62/2009 Coll., and many other

decisions].

32. Another question that the Constitutional Court

had to pose in resolving this case is the question of the scope of

review of contested norms. So, for example, in point 44 in the judgment

of 22 January 2008 file no. Pl. ÚS 54/05 (promulgated as no. 265/2008

Coll.) the Constitutional Court stated: “In proceedings on the abstract

review of norms the debate/discussion principle does not apply, and thus

the Constitutional Court is not bound by the reasoning of the petition,

but, on the contrary, is also required to review the contested

provision in terms of its consistency with other constitutional

regulations than those on the basis of which the petitioners contest

it.” This approach in reviewing petitions discussed in proceedings on

the review of norms is also practiced by other constitutional courts;

e.g., the German Federal constitutional Court, in one of its judgments

concerning tax matters, stated that in proceedings on specific review of

norms it is not limited, when verifying the constitutionality of a

contested norm, only by the arguments of the submitting court. The

subject matter of the proceedings is the norm that was submitted for

review by a justified petitioner, and it is reviewed from various points

of view. “Such detailed, supplemental constitutional law review is

appropriate precisely if the submitting court considers tax law

provisions unconstitutional because they affect various groups of

affected persons in a way that is incompatible with the principle of

equality” (decision of the second panel of 22 June 1995, 2 BvL 37/91,

let. C point I.).
 


VI.
Description of the Legislative Process of Adopting the Contested Provisions of the Act
 

33.

The Constitutional Court is also, in accordance with § 68 par. 2 of the

Act on the Constitutional Court, in proceedings to annul statutes and

other legal regulations, required to review whether the contested

statute, or part thereof, was adopted and issued within the bounds of

constitutionally provided competence and in a constitutionally

prescribed manner. Act no. 357/1992 Coll., on Inheritance Tax, Gift Tax,

and Real Estate Transfer Tax, was adopted in 1992, i.e. before the

Constitution, which provides the referential criterion for reviewing the

constitutionality of legislative procedure for adopting legal

regulations, became valid and effective. Nonetheless, some of its

provisions were later amended, before Act no. 420/2003 Coll. was

adopted. The provisions of § 10 and 15 of Act no. 357/1992 Coll., on

Inheritance Tax, Gift Tax, and Real Estate Transfer Tax, in the version

in effect before amendment by Act no. 420/2003 Coll., were duly adopted

on 2 December 1993 at the 15th Session of the Chamber of Deputies of the

Parliament of the Czech Republic. Therefore, the Constitutional Court

states that the statutes containing the contested provisions were

adopted and issued within the bounds of constitutionally provided

competence and in a constitutionally prescribed manner.
 


VII.
Review of the Competence of the Constitutional Court to Review the Petition
and the Petitioner’s Active Standing
 

34.

The Constitutional Court also had to consider whether it is authorized

to review the petition on its merits, because the petitioner does not

seek annulment of the contested provisions, but merely a statement that

they are unconstitutional. The fact that the petitioner’s proposed

verdict seeks only a statement that the contested provisions are

unconstitutional is a logical consequence of the fact that on 5 November

2003 the Parliament of the Czech adopted Act no. 420/2003 Coll., which

amends Act no. 357/1992 Coll., on Inheritance Tax, Gift Tax, and Real

Estate Transfer Tax, as amended by later regulations, and Related Acts,

which amended all the contested provisions. Under Art. 95 par. 2 of the

Constitution, if a court concludes that a statute that is to be applied

in resolving a matter is inconsistent with the constitutional order, it

shall submit the matter to the Constitutional Court for review. This

provision of the Constitution connects to § 64 par. 3 of the Act on the

Constitutional Court, under which a court is also authorized to submit a

petition seeking annulment of a statute or its individual provisions in

connection with its decision making activity under Art. 95 par. 2 of

the Constitution. In this case it is not decisive that the contested

provisions were amended by Act no. 420/2003 Coll. As follows from the

principle of legal certainty and protection of the citizen’s confidence

in the law, or from the ban on retroactivity of legal norms, all bodies

applying the law (including the courts) must use legal regulations in

the form in effect at the time that the decisive legal facts occurred.

Therefore, if an ordinary court has doubts about their

constitutionality, it cannot, in a system with a specialized and

concentrated constitutional judiciary, decide on its own, but has an

obligation to turn to the Constitutional Court. In the Constitutional

Court’s opinion, Art. 95 par. 2 of the Constitution implicitly contains

the Constitutional Court’s obligation to fulfill its role and, in

response to a petition from an ordinary court, decide on the

constitutionality or unconstitutionality of the statutory provision that

the ordinary court is to apply, regardless of whether the statute was

later amended. In this case, breaching the principle of review

exclusively of effective legal regulations in the interest of preserving

constitutionality is completely legitimate, because this implicitly

provides protection to the fundamental rights of a party to proceedings

before the ordinary court [cf. judgment file no. Pl. ÚS 33/2000 of 10

January 2001 (N 5/21 SbNU 29; 78/2001 Coll.)]. In the present matter

this procedure will undoubtedly be applied because the contested and

reviewed norms are of a public law nature, and so are sovereign

interference in the rights of individual persons [cf. judgment file no.

Pl. ÚS 38/06 of 6 February 2007 (N 23/44 SbNU 279; 84/2007 Coll.)].

Therefore, the Constitutional Court concludes that it is authorized to

accept the petition as a petition that is subject to review and decision

on the merits.
 


VIII.
Referential Viewpoints for Reviewing the Petition


VIII. A)

The Right to Property
 

35.

Under Art. 11 par. 1 of the Charter everyone has the right to own

property and each owner’s property right shall have the same content and

enjoy the same protection. The need to protect property rights arises

from the fact that property rights are an important prerequisite for the

self-realization of a person for whom they provide independence, and

thus create space for the exercise of his freedom. This function of

property rights was reflected by the foremost creators of the present

liberal democratic states, which the Czech Republic joined after 1989.

So, for example, the effort to ensure the right to property is at the

very foundation of the intellectual efforts of one of the main builders

of representative democracy and a constitutional state, John Lock, who

thought that the purpose of the state is protection of property, by

which he understood protection of property, life and freedom (cf.

similarly Klokočka, V., Ústavní systémy evropských států. [The

Constitutional Systems of European States] Prague: Linde, 1996, p. 35).

The subsequent development of liberal political thought, which stands at

the very foundations of the system of values and norms of modern

societies, led to a recognition that property rights are not seen as

illimitable in principle. However, it is necessary that constitutionally

acceptable grounds exist for limiting it.

36. The

Constitutional Court has repeatedly considered the essence of property

rights and accorded them special importance. In its opinion, property

rights are the core of an individual’s personal autonomy in relation to

the public authorities. By their nature, property rights of course

belong in the category of classic fundamental rights and freedoms of

individuals (core rights), and in the liberal tradition, on which the

foundations of modern politics and modern law are based, and which was

also present at the birth of the modern ideas of fundamental rights and

freedoms, property rights are an all-inclusive category of the

autonomous position of the individual vis-à-vis public authority (cf.

e.g. Komárková, B.: Původ a význam lidských práv. [The Origin and

Importance of Human Rights] SPN, Prague 1990, p. 103: “Locke charges the

state with protection of the earthly values of life, personal freedom,

and material ownership. Later he includes all these values in the

concept of property …”) (see judgment of the Constitutional Court file

no. II. ÚS 268/06, available at nalus.usoud.cz/). Nonetheless,

like other fundamental rights, property rights can also be limited, in

the event of conflict with another fundamental right or in the event of

necessary support for a constitutionally approved public interest.

37.

In other judgments, the Constitutional Court interpreted the

fundamental right to property as an institutional guarantee and as a

guarantee of a certain legal status (cf. judgment of the Constitutional

Court file no. I. ÚS 643/06 available at nalus.usoud.cz/). One

can speak of property as an institutional guarantee because the freedom

to own property is a legally constituted freedom, and therefore the

legislature has relatively wide discretion to regulate the acquisition

of property, its use, and disposition of it. Property as a guarantee of a

certain legal status of a person limits the public authorities in

interference in already constituted ownership. Interference in the

guarantee of property as a fundamental right is possible only through an

imperative statutory regulation, which is subject to requirements that

correspond to those of the proportionality test. Such a legal regulation

must also meet the requirements that arise from the principle of a

state governed by the rule of law, and so must be clear and accessible;

its consequences must be foreseeable, it must limit executive

discretion, and there must be a possibility for review of decisions by

the executive branch on interference in property by independent and

impartial courts.
 


VIII. B)

Taxes in the Constitutional Order of the Czech Republic
 

38.

The role of the state, as a particular expression of a political

society is “to maintain the validity of the law, provide common

propserity and public order, and manage public affairs” (Maritain, J.

Člověk a stát. [Man and the State] Prague: Triáda, 2007, p. 15). In

order for the state to be a good instrument in the service of human

beings, it must have sufficient resources for its activities, most of

which it obtains precisely through the institutionalization of the

obligatory public law payment of taxes. It is this purpose – managing

the income of the state budget – authorizes the state to require from

certain, precisely defined subjects these public law amounts, if certain

legally defined conditions are met. Under the case law of the German

Constitutional court, tax is “a general burden that is binding on all

residents, according to their income, property, and purchasing power, to

finance the general purposes of the state” [cf. decision of the German

Constitutional Court of 22 June 1995 – 2 BvL 37/91, let. C, point II.

a)]. The funds collected through the tax system are a transfer of actual

resources in the form of private assets to public assets. In other

words, the state’s authority to tax under certain precisely defined

conditions was institutionalized precisely for the purpose of gathering

funds to secure public assets. In order to determine the offer of public

assets and to allocate expenses for them, it is not possible to set tax

contributions on a voluntary basis, but the compensation for the

expression of preferences expressed through the market is represented by

decision making on the basis of voting (cf. Musgrave, R. A., Musgrave,

P. B. Veřejné finance v teorii a praxi. [Public Finance in Theory and

Practice] Prague: Management Press, 1994, p. 6n.). In democratic

political systems this authority is traditionally ascribed to the

legislature (in English history it is directly tied to the creation of

the modern parliament). As tax policy considerably affects the position

of subjects obligated to pay tax, the legislature has an important power

to develop and promote necessary innovations of the state’s tax policy

so that it can estimate and the effects of the chosen policies and then

explain them to the voters, including in the light of their

constitutionality. The state also attempts, through tax policy, to

balance out social differences and provide a just social order as

conditions for the exercise of the fundamental rights of persons who

come under its jurisdiction.

39. Under Art. 11 par. 5 of the

Charter, taxes and fees can be imposed only on the basis of law. This

provision makes it impossible for the executive branch to impose taxes.

On the contrary, taxes are a prerogative of the Parliament, which has

the exclusive authority to impose taxes. The constitutional principle of

the separation of powers (Art. 2 par. 1 of the Constitution), as well

as the constitutional definition of the legislative branch (Art. 15 par.

1 of the Constitution), give the legislative relatively wide discretion

to decide on the subject matter, degree and scope of taxes [cf.

judgment of the Constitutional Court file no. Pl. ÚS 7/03 of 18 August

2004 (N 113/34 SbNU 165; 512/2004 Coll.)]. Although the permitted degree

of the state’s decision making on the subject matter, degree and scope

of taxes is basically very wide, it is nonetheless not unlimited,

because when imposing taxes and fees, protection of the property rights

guaranteed in Art. 11 par. 1 of the Charter must be taken into account.

However, property ownership protected by the constitutional order cannot

be affected without meeting other conditions (cf. judgment of the

Constitutional Court file no. Pl. ÚS 7/03).

40. As regards its

purpose, Art. 11 par. 5 of the Charter is a constitutionally approved

limitation on property rights, which may be legitimately limited for

purposes of setting, assessing and collecting taxes (cf. judgment of the

Constitutional Court file no. IV. ÚS 29/05, N 113/37 SbNU 463). Art. 11

par. 5 is also the constitutional authorization for Parliament to

legitimately limit property rights through statutes it adopts. Thus, the

public authorities are permitted to interfere in the individual’s

autonomous sphere, which is also defined by property rights, on the

grounds of constitutionally approved public interest, the essence of

which, in the case of taxes, is the collection of funds for securing

various types of public assets. The legitimacy of taxes comes from,

among other things, the fact that the results of taxation are used to

protect and create conditions for the development of ownership, and this

protection and creation of conditions must, of course, be paid for.

However, this is not the only purpose of taxation; tax interference in

the property and legal sphere of the individual is justified by the

equality of allocation of these burdens (similarly. the decision of the

German Constitutional Court of 22 June 1995, 2 BvL 37/91).

41.

Parliament is given a wide authority to tax, in order to fulfill the

state budget; a particular statutory framework defines the fundamental

requirements of a specific personal relationship of legal obligation.

The subject matter of tax is certain income, thing, task or property,

based on which a subjective obligation arises for a particular person

vis-à-vis the state in the form of a tax obligation. “The legal reason

(grounds) for tax are given by a special statute, based on which an

obligation for a particular person toward the state is created. The tax

obligation arises when certain statutorily defined legal facts have been

met, conditions, which create an entitlement to tax on the part of the

state, and a tax obligation on the part of the person. Finally, tax is

enforceable (it is collected on the basis of law), the law precisely

defines the facts that establish a tax obligation, the amount and time

of payment” [cf. judgment of the Constitutional Court file no. Pl. ÚS

14/2000 of 10 January 2001 (N 4/21 SbNU 17; 43/2001 Coll.)]. However,

unlike fees, tax are monetary performances that are not collected as a

settlement for individual advantage, which tax theory express as the

fact that tax is a performance to the public budget that is

characterized by being non-self-serving and non-equivalent. In other

words, a tax is imposed as a unilateral obligation without the taxpayer

being entitled to a particular counter-performance on the part of the

state. However, this non-equivalence of taxes is not absolute, because

“paying taxes is a contribution to the creation of a material basis for

providing public assets, from which, based on the solidarity principle,

the interests of the population can be satisfied, including those of the

person who, by paying taxes, suffered a detriment to assets” (Mrkývka,

P. Finanční právo a finanční správa [Finance Law and Finance

Administration] Part 2. Brno: MU, 2004, p. 5).

 


VIII. C)

The Methodology of Review in Previous Case Law Concerning Taxes
 

42.

Under Art. 1 par. 1 of the Constitution, the Czech Republic is a

democratic state governed by the rule of law, founded on respect for the

rights and freedoms of the human being and the citizen. We can derive

basic rules for the functioning of state power from the principle of a

law-based state; among them is the principle of proportionality. This

principle is based on the premise that interference in fundamental

rights or freedoms, even if the constitutional framework for them does

not presuppose it, may take place if they conflict with each other or if

they conflict with another constitutionally protected value that is not

of the nature of a fundamental right or freedom (a public good) [cf.

judgment of the Constitutional Court file no. Pl. ÚS 15/96 of 9 October

1996 (N 99/6 SbNU 213; 280/1996 Coll.)]. Thus, in the case of taxes,

this involves review of the limitation of the fundamental right to

property guaranteed by Art. 11 par. 1 of the Charter on the grounds of

public interest in meeting the state budget, approved by Art. 11 par. 5

of the Charter, for purposes connected with fulfilling the functions of

the state.

43. The Constitutional Court spoke on the application

of suitable methodology for reviewing the constitutionality of statutory

regulation of taxes, fees, or other statutorily imposed obligatory

payments, as well as monetary penalties, in a judgment in the matter of

reviewing conditions and rates for statutory employer liability

insurance for work-related injuries or occupational illnesses, where it

applied the structure of the proportionality principle in a narrower

sense, i.e. the proportionality principle in the sense of ruling out

only extreme disproportionality [see judgment of the Constitutional

Court file no. Pl. ÚS 7/03 of 18 August 2004 (N 113/34 SbNU 165;

512/2004 Coll.)]. In that judgment however, the Constitutional Court

primarily stated that “constitutional review of taxes, fees and monetary

penalties also includes [apart from the abovementioned maxim of ruling

out extreme disproportionality] review in terms of observance of the

safeguards arising from the constitutional principle of equality, both

non-accessory (Art. 1 of the Charter), i.e. arising from the requirement

to rule out arbitrariness in distinguishing subjects and rights, as

well as accessory, in the scope defined in Art. 3 par. 1 of the

Charter.”

44. In judgment file no. Pl. ÚS 24/07, promulgated as

no. 88/2008 Coll., the Constitutional Court then systematized several

groups of decision on questions of the constitutionality of taxes and

fees. The first group of Constitutional Court decisions consists of case

law on the interpretation and application of Art. 11 par. 5 of the

Charter in connection with Art. 79 par. 3 and Art. 104 par. 3 of the

Constitution in matters of sub-statutory legal regulation of taxes and

fees [see, especially, judgment file no. Pl. ÚS 3/95 of 11 October 1995

(N 59/4 SbNU 91; 265/1995 Coll.), judgment file no. Pl. ÚS 63/04 of 22

March 2005 (N 61/36 SbNU 663; 210/2005 Coll.), and judgment file no. Pl.

ÚS 20/06 of 20 March 2007 (N 55/44 SbNU 701; 164/2007 Coll.)]. The

second group consists of review of the constitutionality of the legal

framework of taxes, fees, or other similar statutorily imposed required

payments, as well as monetary penalties (file no. Pl. ÚS 3/02,

promulgated as no. 405/2002 Coll., file no. Pl. ÚS 12/03, promulgated as

no. 300/2004 Coll., file no. Pl. ÚS 7/03, promulgated as no. 512/2004

Coll.). Finally, the third group of decisions on questions of the

constitutionality of the legal framework of taxes, fees, or other

similar statutorily imposed required payments consists of judgment of

the Constitutional Court of the CSFR file no. Pl. ÚS 22/92 (Collection

of Decisions of the Constitutional Court of the CSFR, no. 11, p. 37),

which set for the the points of view for review of tax equality, or tax

proportionality.

45. Here the Constitutional Court finds it

appropriate to point out the case law of the German Federal

Constitutional Court, which, when addressing property taxes, pointed out

the need to observe the imperative that property tax may not lead to

creeping confiscation of property and may not interfere in the essence

of the property. In these case one must consider the fiscal interest in

preserving the sources of taxes, as well as the individual interest in

preserving one’s own property. It is also important that economic assets

that provide a living for the owner and his family. These assets permit

the existence of free discretion for forming one’s personal sphere of

life on one’s own responsibility. From these postulates the Federal

Constitutional Court concludes that the taxing legislature may not, by

further taxation, reduce beyond a certain limit property that functions

as the taxpayer’s basis for forming his individual life. This economic

basis for personal life develops according to the economic and cultural

living standards in a particular society (cf. decision of the Federal

Constitutional Court of 22 June 1995, 2 BvL 37/91). Justifying the

existence of the basic minimum living income arises from fundamental

law, and at the same fundamental objective constitutional values in the

form of human dignity, which obligates the state to leave, or ensure

for, each citizen the basic needs for dignified human existence. In

another decision in tax law the Federal Constitutional Court also

addressed the interpretation and application of the equality principle

in this legal area. That principle requires that a tax law burden

taxpayers – legally and de facto – equally (cf. decision of the Federal

Constitutional Court of 9 March 2004, 2 BvL 17/02). The principle of

equality requires that every resident be equally connected, based on his

capacity, into financing the tasks of the state.
 


VIII. D)

The Methodology of Review Proposed by the Supreme Administrative Court
 

46.

The foregoing indicates that the Charter itself presupposes limitation

of property rights in the case of taxes, because it contains a

constitutional authorization to tax, given to the legislature, to which

it gives wide discretion to decide on the subject, degree and scope of

taxes. Precisely for that reason, the Constitutional Court reviews the

constitutionality of taxes using a modified version of the

proportionality test, aimed only at ruling out extreme

disproportionality and verifying whether the principle of equality was

not violated. The question of suitability and necessity of a particular

tax measure is fundamentally left to the will of the legislature, which

bears political responsibility for its decision. Nonetheless, this does

not give the legislature absolute arbitrariness, because in order for a

tax to be found constitutional, it may not be inconsistent with the

constitutional principle of accessory and non-accessory equality. It is

apparent that accessory equality can be connected with any fundamental

right guaranteed by the constitutional order.

47. In the SAC’s

opinion, discrimination is only one of the possible ways in which a tax

obligation can be illegitimate, and therefore it proposes expanding the

review of constitutionality of taxes. In its filing, the SAC proposes

another test, under which a tax would be unconstitutional not only if it

violated the principle of equality or had confiscatory effects, but

also if it did not withstand the minimal test of legitimacy and

rationality. Under the SAC’s proposed test, a tax would also be

considered unconstitutional if it was not discriminatory and did not

have strangulatory effects, but was not based on any legitimate and

rational grounds. This proposed test of legitimacy and rationality is

inspired by the “rational basis” test, which has in recent times also

become one of the Constitutional Court’s methodological instruments [see

Constitutional Court judgment file no. Pl. ÚS 39/01 of 30 October 2002

(N 135/28 SbNU 153; 499/2002 Coll.), judgment of the Constitutional

Court file no. Pl. ÚS 6/05 of 13 December 2005 (N 226/39 SbNU 389;

531/2005 Coll.), judgment of the Constitutional Court file no. Pl. ÚS

83/06, promulgated as no. 116/2008 Coll., and judgment of the

Constitutional Court file no. Pl. ÚS 1/08, promulgated as no. 251/2008

Coll.]. Although in its judgment file no. Pl. ÚS 6/05, promulgated as

no. 531/2005 Coll., the Constitutional Court identified the rational

basis test with the test of impermissiblity of extreme

disproportionality, the logic of the minimum test of legitimacy and

rationality proposed by the SAC differs substantially from the logic of

the test of impermissiblity of extreme disproportionality.

48.

Regarding the rational basis test, the Constitutional Court adds that

this is a test of American provenance, which represents the least

intensive form of review. The American Supreme Court annulled tax laws

only in a situation where it found the classification of taxpayers and

taxable subject matter to be arbitrary, which happened only in a limited

number of cases. In other words, a legal framework may not arbitrarily

establish discrimination. Comparative studies that the Constitutional

Court has at its disposal indicate [cf. Ordower, Henry. “Horizontal and

Vertical Equity in Taxation as Constitutional Principles: Germany and

the United States Contrasted.” (September 6, 2005). bepress Legal

Series, Working paper 728, online text:

law.bepress.com/expresso/eps/728], that the German Federal

Constitutional Court is far more active in tax cases and has already

found many times that tax laws conflicted with constitutional

principles, which is something that happens only rarely in the United

States of America. The cause of this difference must apparently be tied

to the different interpretation of fundamental rights in the USA and in

Europe. Whereas in the USA fundamental rights are interpreted only as

negative rights (the state is obligated to respect fundamental rights),

the European standard is to also interpret fundamental rights as

positive rights (the state has an obligation to protect fundamental

rights).

49. The Constitutional Court states that, in reviewing

the constitutionality of the contested provisions, it does not intend to

deviate from its case law, and therefore will take as its starting

point the modified version of the principle of proportionality, and will

review possible violation of the ban on extreme disproportionality in

connection with the criteria that arise from the constitutional

principle of equality. It is precisely review of the matter in terms of

observing the constitutional safeguards of accessory and non-accessory

equality that permits applying the requirement that the legislature not

be able to impose tax on completely irrationally chosen conduct,

actions, or behavior of persons, because by doing so it would obviously,

or willfully violate the constitutional principle of equality; we must

point out that violation of accessory equality is conceptually tied to

violation of another fundamental right. The state has relatively wide

discretion to impose taxes, but even here “the state may decided to

provide fewer advantages to one group that to another, but it may not

proceed arbitrarily, and it must be evident from its decision that it is

doing so in the public interest” [cf. Constitutional Court judgment

file no. Pl. ÚS 2/02 of 9 March 2004 (N 35/32 SbNU 331; 278/2004

Coll.)]. Thus, it is the criteria of accessory and non-accessory

equality, which, in some respects, overlap with certain components of

the legitimacy and rationality tests proposed by the SAC, that prevent

obvious willfulness by the legislature. At the level of review of a

substantive tax legal norm, the principle of equality becomes concrete

in relation to the nature of the tax. A tax, as a general burden,

binding residents to finance state policy, based on their income,

property, or purchasing power, is justified by the equality of

allocating these burdens (see decision of the Federal Constitutional

Court of 22 June 1995, 2 BvL 37/91). Nonetheless, other components of

the legitimacy and rationality test cannot be introduced, because they

exceed the definition of points of view for review of the

constitutionality of tax statutes in a degree that would no longer

observe the constitutionally established competence of the legislature

to impose taxes, which implies that the legislature basically has wide

discretion in its choice of instruments, i.e. in the choice of the

subject matter, degree and scope of taxes. Evaluating the suitability

and necessity of individual components of tax policy is left to the

discretion of the democratically elected legislature as long as the

effect of taxes on persons does not have a strangulatory effect (is not

extremely disproportional) and does not violate the principle of

accessory and non-accessory equality. In the Constitutional Court’s

opinion these constitutional requirements for the legal regulation of

taxes fully ensure (in the context of constitutional authorization to

impose taxes), that the reviewed provisions, if they withstand the test,

can be described as legitimate.
 


VIII. E)

Inspiration from Other Sources: The Practice of the ECHR
 

50.

The Constitutional Court points out that the right to property is also

protected by Art. 1 of the Protocol to the Convention for the Protection

of Human Rights and Fundamental Freedoms, under which every natural or

legal person is entitled to the peaceful enjoyment of his possessions.

Nonetheless, even under the Convention property rights are not absolute,

because Art. 1 of the Protocol to the Convention allows a person to be

deprived of property under certain conditions (paragraph 1), and the

second paragraph recognizes that states have the right to enforce such

laws as they deem necessary to control the use of property in accordance

with the general interest or to secure the payment of taxes. In order

for the obligation to pay tax to be in accordance with the Convention,

it must pursue the general interest; nonetheless, states have freedom to

define what they consider necessary. According to the European Court of

Human Rights, collecting taxes, except in the case of a discriminatory

tax regime, can violate article 1 of the Protocol only if it imposes an

intolerable burden on a taxpayer or disrupts his financial situation.

(cf. Sudre, F. Mezinárodní a evropské právo lidských práv.

[International and European Human Rights Law] Brno: Supplement, 1997, p.

217). In view of the text of the Convention, the European Court of

Human Rights reviews taxes only in terms of the safeguards arising from

accessory equality (Art. 14 of the Convention), not in terms of equality

before the law.
 


IX.
The Constitutional Court’s Own Review

IX. A)

The Nature of the Real Estate Transfer Tax
 

51.

The real estate transfer tax is a traditional historical tax that

completes the tax system. As the Ministry of Finance states in its

response, at present the revenue from it is ca. CZK 9 billion, and this

is after the rate was reduced from 5% to 3% (point 17). Virtually all

European countries (with the exception of Slovakia) have one or another

form of property transfer tax. Usually the tax on transfers for payment

applies only to real estate; in some countries other commodities are

also taxed (ships, planes, etc.). In some countries, instead of a

property transfer tax, a tax is collected on the registration of

property transfer, known as “stamp duty,” or the property transfer tax

is replaced by a tax on legal acts (cf. Radvan, M. Zdanění majetku v

Evropě. [Property Taxation in Europe] Prague: C. H. Beck, 2007, p.

236n.). The real estate transfer tax, together with gift tax and

inheritance tax, is one of the transfer taxes. All transfer taxes apply

to the acquisitions and transfers of property that occur primarily on

the basis of sales, inheritance, or gifts (cf. Bakeš, M. and collective

of authors. Finanční právo. [Finance Law] Prague: C. H. Beck, 2006, p.

323). These are taxes that are paid irregularly, because the taxation of

property occurs on a one-time basis when the owner changes. The

specialized economic literature says that the function of the real

estate transfer tax is to prevent tax evasion on gift tax, which

taxpayers could avoid by fictitious agreements on the sale of property,

and in the end also on inheritance tax (see Kubátová, K. Daňová teorie a

politika. [Tax Theory and Policy] Prague: ASPI, 2003, p. 235). If one

of these taxes does not exist, there is a danger that because of it

there will be efforts to circumvent the law. The distinguishing element

of the real estate transfer tax, unlike the other transfer taxes, is the

fact that the subject matter of the real estate transfer tax is paid

transfer or devolution of real estate ownership. The legislature’s

intent is to burden the value of the transferred real estate, i.e. the

financial revenue from the real estate obtained by the transferor, or,

as the case may be, obtainable financial revenue from the sale of real

estate, if the agreed prices is lower than the determined price (cf.

Constitutional Court judgment file no. IV. ÚS 500/01, N 51/30 SbNU 47).

Transfers are registered through the registration of property rights to

particular real estate based on Act no. 265/1992 Coll., on Registration

of Ownership and Other Substantive Rights to Real Estate, as amended by

later regulations.

52. Although the SAC objects not only to the

rate of tax or the definition of the circle of taxpayers, its legitimacy

and rationality text consists of several components, because the SAC

claims that the real estate transfer tax is (a) a discriminatory tax,

which (b) will not stand when compared against the basic functions that

tax theory normally applies to taxes (allocative, redistributive,

stabilizing), (c) is inconsistent with the need for housing and leads to

significant distortion of the housing market, and (d) because of its

institutionalization, leads to chaining of taxes which, because of its

irrationality and demotivating effects, reaches an unconstitutional

intensity. In contrast, the SAC does not consider the rate of the real

estate transfer tax to be grounds for unconstitutionality. Insofar as

the SAC, as part of the evaluation conducted through the legitimacy and

rationality test, claims that the real estate transfer tax is a

discriminatory tax, in the Constitutional Court’s opinion this is a

clear case of a petition to review the tax in terms of the safeguards

arising from the constitutional principle of accessory and non-accessory

equality. Nonetheless, in further analysis the Constitutional Court

will also address other objections raised by the SAC.
 


IX. B)

The Test of Ruling Out Extreme Disproportionality
 

53.

As already stated, the legislature has wide discretion in what tax to

choose in order to collect funds to secure its functions and policies,

but it may not interfere in property rights so much that the property

relationships of the affected taxpayer fundamentally change so much that

it would lead to “defeating the very essence of property,” i.e. to

“destroying the property base” of the taxpayer (cf. judgment Pl. ÚS

3/02, promulgated as no. 405/2002 Coll.), or so that “the limit of

mandatory public law financial performance by the individual vis-à-vis

the state would reach strangulatory, suffocating levels” (Pl. ÚS 7/03,

promulgated as no. 512/2004 Coll.). In other words, we can say tha the

tax assessed may not limit the taxpayer’s property rights in a manner

that would conflict with Art. 4 par. 4 of the Charter.

54.

However, that is definitely not the case with a real estate transfer tax

set at 5%. Karel Engliš writes that “the tax should not destroy the

sources from which it flows” (Engliš, K. Národní hospodářství. [The

National Economy] Prague: Nakladatelství Fr. Borový, 1928, p. 347), and

that really is not the case with the real estate transfer tax. After

all, even the SAC states in its petition that the tax is not

disproportionately high (strangulatory, suffocating), including in the

sense that it would markedly limit the very essence of property rights

(see point 8), and the Constitutional Court agrees with this assessment,

because it is quite obviously, and there is no need to verify it

further. However, one can generally imagine individual cases where the

combination of several relevant factors (e.g. the loss of employment and

the need to sell mortgaged real estate), especially at the present

time, during a financial crisis, could mean that the obligation to pay

the tax has exceptionally difficult consequences for the taxpayer.

Nonetheless, the law offers other institutions to mitigate those

consequences, and although the Constitutional Court believes they are

imperfect (the basic lack of entitlement of a decision to excuse taxes

under § 55a of Act no. 337/1992 Coll., on the Administration of Taxes

and Fees, as amended by later regulations, and a decision to excuse a

tax shortfall under § 65 of Act no. 337/1992 Coll., on the

Administration of Taxes and Fees, as amended by later regulations), it

cannot review them in terms of constitutional law, because these

provisions are not and cannot be contested by the present petition.
 

 
IX. C)

Equality
 

55.

At the beginning of reviewing whether the real estate transfer tax is

inconsistent with the safeguards arising from the principle of accessory

equality, the Constitutional Court considers it appropriate to state

the opinion that “All decision-making in all three branches of power all

the time is about establishing and enforcing different decisions for

different situations. In this sense, there is nothing wrong with

“discriminating” [i.e. perceiving and stating differences] unless the

“specific establishment of differences” pertains to what in

constitutional law we call a “suspect class” such as the classes

taxatively enumerated in Article 14 of the European Convention on Human

Rights. … These suspect classes, it is well to point out, are simply an

exception to the general rule which permits all kinds of differentiated

decision-making for other non-suspect classes. Prohibition of

discrimination – enforcing distinction – is thus an exception rather

than the rule.” (see the dissenting opinion of Judge Boštjan Zupančič in

the case of Burden v. the United Kingdom, no. 13378/05 of 29 April

2008, in Reports of Judgments and Decisions of the European Court of

Human Rights 6/2008, p. 319).

56. As indicated by the

decision-making practice of the Constitutional Court, making

distinctions that lead to violation of the principle of equality is

impermissible in two ways: it may function as an accessory principle

that forbids discriminating against persons in the exercise of their

fundamental rights, and as the non-accessory principle, enshrined in

Art. 1 of the Charter, which consists of ruling out arbitrariness by the

legislature when distinguishing the rights of certain groups of

subjects. In other words, the second case involves the principle of

equality before the law, which is a component of the Czech

constitutional order through Art. 26 of the International Covenant on

Civil and Political Rights [see judgment file no. Pl. ÚS 36/01 of 25

June 2002 (N 80/26 SbNU 317; 403/2002 Coll.)]. According to the

petitioner, taxing the transfer of only one type of property was an

exercise of arbitrariness, because “there must be a very strong and

rational reason why [the legislature] chose the transfer of this one

kind of property to be taxed.” We must add to this opinion that taxing

the transfer of real property will not be considered arbitrary if it is

possible to identify substantial differences in the transfer of this

type of property (i.e., real property) and other types of property

(personal property_, that make the transfers of property in both groups

non-comparable. It is not possible, in contrast, although again because

of observing the principle of equality, to set up the same regime for

things that are not the same and processes that are not the same. Here

we must emphasize that from the point of view of the law, the legal

existence of real property is tied to registration in the real estate

register, and lack of that makes it impossible to exercise property

rights. Personal property does not require such registration for its

existence, and if some personal property is nevertheless registered in

certain databases, that registration does not have a constitutive

significance for their legal existence. Dividing things into real and

personal property is fundamentally important not only for private law,

but the legislature also ties significant public law consequences to it.

Real estate also has an irreplaceable economic significance and is, of

course, well invested capital. The state supports the ability to really

make use of all the functions of real estate by fulfilling its

obligations, e.g. in creating and protecting the public order, or

supporting the development of the general well-being. As the Ministry of

Finance states in its response, real estate cannot exist separately

from the infrastructure, the quality of which is also substantially

decisive for the price of real estate. The state spends not

insignificant amounts of money for infrastructure and for protection of

property from external dangers (see point 18). Because real estate

owners thus receive a certain benefit from the activities of the state,

it is not possible to say that taxing them, in various ways, is

illegitimate (the primary means of this taxation is, of course, the real

estate tax). The reason why the legislature chose to tax real estate

transfers arises precisely from the difference of this form of property,

and we cannot overlook the fact that the transfer of personal property

is subject to different kinds of taxation, which, in contrast, do not

apply to real property. The difference in taxation on the transfers of

personal property and real property comes from the substantial

differences between real property and personal property, and therefore

the different tax regime for transfer of them does not conflict with the

principle of non-accessory equality. Because of these cited substantive

differences, from the point of view of the taxpayer taxing the transfer

of real estate cannot be seen as unjust, because the difference regime

cannot be seen to disproportionately take away a good from one subject

compared to another subject when, as stated above, both these subjects

are not in comparable situations.

57. The foregoing also refutes

the petitioner’s claim that the tax in question unjustifiably

discriminates against direct owners of apartments compared to owners of

cooperative apartments. As indicated by the abovementioned position of

Judge Zupančič, virtually every legal framework makes distinctions,

which implies that it affects somebody negatively. Distinguishing

between the transfers of these two categories of apartments can be

accepted, because there is undoubtedly a difference between ownership

rights to an apartment and the rights and obligations of a cooperative

member. A different framework for different situations is not ruled out

in principle. Under judicial decision-making practice, a cooperative

apartment can be defined as “an apartment located in a building owned or

co-owned by a housing cooperative, which serves to satisfy the housing

needs of members of that housing cooperative.” The cooperative then

rents the cooperative apartments to its members, who can transfer only

their shares in the cooperative. The subject of transfer, in the case of

an agreement to transfer membership in a housing cooperative, under §

230 of the Commercial Code, is the membership rights and obligations,

even though legal practice also uses the term membership share or

cooperative share. The main reason for acquiring membership rights and

obligations on the part of the transferee will of course be the interest

in acquiring the right to rent the cooperative apartment that is

connected with that membership. The foregoing indicates that with

cooperative apartments there is a different legal relationship than in

the case of directly owned apartments. Even though the function of

directly owned apartments and cooperative apartments is comparable in

practice, upon taking a closer look it must be stated that the positions

of an owner of real estate and the “owner” of membership rights are

markedly different, which is most clearly visible on the example of the

ability to dispose of a thing or with membership rights. In any case,

the Constitutional Court’s case law has already stated that the two

forms are different [cf. judgment of the Constitutional Court file no.

Pl. ÚS 42/03 of 28 March 2006 (N 72/40 SbNU 703; 280/2006 Coll.)].

Therefore, a different tax regime is also justified.
 


IX.

D) Other Objections
 

58.

The question that the Constitutional Court could not avoid is whether

the Constitutional Court is competent to review the real estate transfer

tax in terms of the function of taxes, which are discussed in

specialized economic literature to which the SAC refers in its petition.

The SAC’s petition indicates that the Constitutional Court should

review the unconstitutionality of taxes in terms of three basic

functions of taxes and the tax system, the allocative, distributive, and

stabilizing function (this typology can be found in many publications –

cf. Musgrave, R. A., Musgrave, P. B. Veřejné finance v teorii a praxi.

[Public Finance in Theory and Practice] Prague: Management Press, 1994,

p. 6n., Kubátová, K., Vítek., L. Daňová politika. [Tax Policy] Prague:

CODEX, 1997, p. 12, Kubátová, K. Daňová teorie a politika. [Tax theory

and Policy] Prague: ASPI, 2003, p. 19, Peková, J. Veřejné finance, úvod

do problematiky. [Public Finance, and Introduction to Issues] Prague:

ASPI, 2005, p. 323). However, in the Constitutional Court’s opinion

reviewing taxes in terms of these criteria is within the competence of

the democratically elected legislature. If the Constitutional Court did

so, it would enter the field of individual policies whose rationality

cannot be reviewed very well in terms of constitutionality. As a rule

the Constitutional Court also does not review the effectiveness of

taxes, with the exception of those cases where the inefficiency of a

particular tax would establish obvious inequality in the tax burden on

individual residents. The Constitutional Court is only competent to

review whether particular tax measures interfere in an owner’s

constitutionally guaranteed property substratum, or whether they can be

considered to unjustifiably conflict with the principle of equality,

i.e. whether they are arbitrary.

59. In the Constitutional

Court’s opinion, it is also necessary to consider that all taxes form

one system (see points 45 and 51). It follows from that, that if the

Constitutional Court wanted to address the question of the legitimacy

and rationality of the real estate transfer tax, it would also have to

address the connection of the real estate transfer tax with other taxes.

If the Constitutional Court decided to speak on the question of whether

the real estate transfer tax is an appropriate and necessary element of

the tax system, it would authoritatively, but without constitutional

justification, enter into a debate where even the specialized economic

and legal community is not in agreement, as regards petitions de lege

ferenda: e.g., a compendium on the perspectives of tax policy identifies

a change in the budgetary determination of the real estate transfer tax

as an optimal alternative (Kubátová, K., Vybíhal, V. and collective of

authors. Optimalizace daňového systému ČR. [Optimization of the Czech

Republic Tax System] Praha: Eurolex Bohemia, 2004, p. 152), i.e., it is

preferred to preserve it in a modified version, rather than in the

current version, or rather than repealing it completely. If there is no

consensus among the experts in the field, it is not the role of the

Constitutional Court to speculate on the correct answer. The

Constitutional Court is aware of the importance of decision-making on

the tax system in the context of competition between political parties,

or in the context of the wishes and preferences of members of the

political society in relation to the degree of social consideration in

state policies, which find their response in election results, and

therefore it is necessary to leaves these questions to the consideration

of the political majority that was created by elections. Karel Engliš

observed that “the fight for political power in the state is a fight for

directing the ideal which the state pursues, for directing the public

good. To the same degree as the construction of expenses and income are

related, the political battle is also a fight for the system of public

revenues, primarily the tax system.” (Engliš, K. Finanční věda.

[Financial Science] Brno: Polygrafie, 1929, p. 101). The Constitutional

Court does not intend to enter into this political competition, and is

prepared to intervene only if it found tax regulations to be

unconstitutional to the extend described above.

60. The

Constitutional Court also does not intend to review the consistency of

the tax policy with other policies, e.g. housing policy, as the SAC

proposed, because it would find itself on the thin ice of economic

analyses, not always provable, whose results should be evaluated and

political consequences derived, by the democratic legislature, which

must whether a tax regulation is appropriate and necessary from that

point of view as well. In its petition, the SAC also concluded that the

price of real estate increases by the amount of the contested tax, and

of course the statistics provided indicated that the relationship

between these two variables is not as direct as the SAC finds (point

20). Some authors are even more skeptical about the relationship between

the real estate transfer tax and limitation of the housing market,

mobility of the population, and other negative social consequences: “It

is also not certain that removing this tax will necessarily have an

effect on housing policy, that it would fundamentally increase the

mobility of the population or indirectly reduce unemployment. (Radvan,

M. Zdanění majetku v Evropě. [Taxation of Property in Europe] Prague: C.

H. Beck, 2007, p. 353). Because more exact economic analyses do not

exist, and the SAC did not support its petition with them, but only

bases its conclusions on a claims that should be “obvious from the

nature of the matter” (although any social science explanation should

work with complex multi-factor explanations), the Constitutional Court

does not intend to authoritatively decide on the connections between the

cited variables and perhaps others, when, moreover, the analyses that

the Constitutional Court has at its disposal do not indicate that the

real estate transfer tax is the main hindrance to the development of the

relevant policies, and that its influence on workforce mobility,

business, or worsening the social situation would be in any way

fundamental (see point 21). The Constitutional Court will not use its

evaluation of the suitability of public policy to replace the evaluation

of the democratically elected legislature, which has wide scope for

discretion in the sphere of public policy, and also bears political

responsibility for any failure of its choices. In other words, the

legislature may also take irrational steps in the tax sphere, but that

is not yet a reason for the Constitutional Court to intervene. The Court

will intervene only if property rights are limited in an intensity with

a “strangulatory” effect or if there is violation of the principle of

equality, in either the accessory (here in connection with other

fundamental rights) or non-accessory form.

61. Another group of

objections is aimed against the fact that in the case of real estate

transfers both administrative acts and the transfer itself are taxed.

The solution to this problem must be sought in the aims that these

individual payments pursue. The interpretation of the relevant legal

norms indicates that the real estate transfer tax and the fee for

registration in the real estate register have different functions,

because the need to pay a fee for registration in the real estate

register comes from the need to cover the expenses connected with the

administrative proceedings conducted before the real estate office

during decision-making on the registration in the real estate register,

whereas the real estate transfer tax pursues balanced tax burdens in

terms of the value of the transferred real property.

62. The SAC

proposes reviewing taxation in the context of other issues, because, in

its opinion, chaining tax obligations must be considered

unconstitutional. Another objection that appears in the SAC’s petition

is directed at the problem of double taxation of the same income in the

case of real estate sold within 5 years of acquiring it (point 11),

which, according to the SAC, has unconstitutional consequences. The

Constitutional Court does not share this opinion. This exception was

intended to prevent speculative purchases and sales of apartments in a

period of transformation, which was and is accompanied by incompletely

worked out housing policy. Moreover, the intensity of tax chaining in

the form of unconstitutional consequences is also prevented by an

extensive number of exemptions contained in Act no. 586/1992 Coll., on

Income Taxes, and the fact that only the profit obtained by selling real

estate is taxed, not the entire income. It is also necessary to

consider the time factor, because application of the tax obligation

occurs with the real estate transfer tax considerably randomly in

connection with the sale of real estate by its owner, whereas the real

estate tax, in contrast, is a tax that is paid regularly, yearly, which,

after subsequent sale of real estate, can not longer be applied in

relation to the original owner. Tax chaining cannot be considered

unconstitutional if the individual links in the chain do not necessarily

connect to each other, but the application of further taxation is tied

to the exercise of ownership through disposition of it.

63. The

Constitutional Court states that it did not find grounds to grant the

SAC’s petition to declare unconstitutional the provisions of the

contested Act cited in the introduction, and therefore the petition was

denied in the scope of § 8 par. 1 let. a), § 9 par. 1 let. a), § 10 let.

a) first sentence and § 15 of Act no. 357/1992 Coll., on Inheritance

Tax, Gift Tax, and Real Estate Transfer Tax, in the version in effect

before amendment by Act no. 420/2003 Coll., under § 70 par. 2 of the Act

on the Constitutional Court, and the rest was denied under § 43 par. 1

let. c) in connection with § 43 par. 2 let. b), as a petition submitted

by a person clearly without standing (see point 31).