Strasbourg rules that excessive tax rates offend A1P1

16 May 2013 by

income taxN.K.M v. Hungary, ECtHR, 14 May 2013, read judgment

Those of a certain age will remember when top tax rates in the UK were 98%. This was the marginal rate of tax in this successful claim that such taxation offended Article 1 of the 1st Protocol (A1P1) – the peaceful enjoyment of possessions. But the very wealthy seeking to safeguard their bankers bonuses may not obtain too much comfort from the Strasbourg ruling, as the facts were fairly extraordinary.

The applicant had been a Hungarian civil servant for 30 years until her dismissal (with many others) in July 2011. Long-standing rules gave her 8 months severance pay. The 98% tax rate was introduced in 2010; it was then successfully challenged in the Hungarian Constitutional Court. On the day of the Court’s adverse judgment, the tax was re-enacted, but this time the 98% rate was applied to pay exceeding 3.5m forints – c. £10,000 – and, further, only where the earnings came out of specified categories of public sector employees.

A fresh challenge in the Constitutional Court annulled the retrospective effect of this law, but could not as a matter of jurisdiction review the substantive aspects of the tax. So the applicant went to Strasbourg to challenge the tax when deducted from her pay.

Interference with possessions

The parties agreed that the tax (even though deducted at source) did amount to an interference with the applicant’s possessions.  However, the Court wished to analyse this issue, and did so in terms of some importance. It attached significance to the fact that the tax related to severance pay.

In the case of a civil servant, who comes under a specific legal regime and who willingly accepted limitations on some of his fundamental rights and a remuneration unilaterally dictated by law…. the statutorily stipulated severance represents a long-term expectation on the side of the civil servant and a commitment on the side of the State as employer. For the Court, such long-term expectations, reinforced by many years of unchanged statutory guarantees, cannot be lightly disregarded.

– words which may be carefully scrutinised by the judges in this country smarting under the unilateral changes in their pension arrangements: see here, and [41] of this judgment on pension entitlements.

Severance pay was not simply a pecuniary asset – it must be seen

as a socially important measure intended for workers who have been made redundant and who wish to remain in the labour market

relying, interestingly on the EU Charter and case law to that effect: [20]-[21], [70].

Lawfulness of the interference

The question was whether the interference was prescribed by law and pursued the legitimate aims of satisfying society’s sense of justice and of protecting the public purse. In response to the applicant relying upon EU statements about the importance of severance pay, Hungary argued that the measure was justified by reference to EU rules about excessive severance pay – but the £10,000 point at which the 98% tax rate cut in was hardly in the bankers bonuses bracket.

The Court pointed out that the taxation had certain retroactive features about it – it applied to work which had been done prior to the coming into force of the legislation. It noted the conclusions of the first Constitutional Court, but concluded ultimately that the Act provided a proper legal basis for the measure.

Legitimate aim and proportionality

But a state has to do more than just show a legal basis for a measure. Although a little sceptical, the Court was satisfied that the measure carried a legitimate aim (protection of the public purse).

The real issue, as ever, was proportionality.

The Court noted that tax rates exceeding 50% had been found recently to be unconstitutional in Germany and France, though marginal rates of 75% were levied elsewhere – albeit starting at levels which clearly exceeded those at issue in Hungary. It also took Hungary’s point that the overall tax burden applicable to the severance pay (as opposed to that applicable to the top slice) was 52%. But even this tax was about 3 times the general personal income tax applicable in Hungary.

The Court ultimately thought that the applicant and the civil servants dismissed with her were bearing an excessive and disproportionate burden. Nor did the legislature afford any transitional period to the applicant to enable her to adjust to the new scheme. The tax was enacted 10 weeks before her dismissal.

This burden

is all the more evident when considering the fact that the measure targeted only a certain group of individuals, who were apparently singled out by the public administration in its capacity as employer. Assuming that the impugned measure served the interest of the State budget at a time of economic hardship, the Court notes that the majority of citizens were not obliged to contribute, to a comparable extent, to the public burden. [72]

As I have said, the Court accepted (just about) that the measure was meant to serve social justice. But that could not justify its precise terms:

It…. deprived her of the larger part of a statutorily guaranteed, acquired right serving the special social interest of reintegration. In the Court’s opinion, those who act in good faith on the basis of law should not be frustrated in their statute-based expectations without specific and compelling reasons. [75]

So the measure was not reasonably proportionate to the aim sought to be realised. The Court found for the applicant and awarded her just satisfaction of €11,000, as ever without showing how it had arrived at that sum.


One can readily see the gross unfairness of this measure. Belts have to be tightened. So you, the state, sack a tranche of civil servants and then tax them onerously so that you don’t have to pay them the severance pay to which they would have otherwise become entitled. And gross unfairness can, often, underpin a successful case in Strasbourg, even though its subject matter would otherwise seem to fall plumb within the wide socio-economic area where that Court treads warily.

At root, the case is about discrimination. And indeed the applicant did run the case that there had been discrimination between her position as a sub-category of civil servants and taxpayers generally which was in breach of Article 14 of the Convention. The Court simply found that the inequality of treatment had been taken account of  in the A1P1 violation, and therefore it was unnecessary to make a separate finding on this score.

Perhaps a more explicit finding of discrimination might have better confined this decision to its facts – there was ultimately no reason why the civil servants should have borne more of the burden than the rest, other than doubtless some nice populist headlines in the papers. Because, as it stands, I can see the judgment being much cited in rather less deserving cases – that can be the problem with A1P1 findings. Anyway, well worth a read.

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