Strasbourg Observers

N.K.M. v. Hungary: Heavy Tax Burden Makes Strasbourg Step In

June 10, 2013

This guest post was written by Ingrid Leijten, Ph.D. researcher and teaching assistant at the Leiden University Faculty of Law, Department of Constitutional and Administrative Law.

The debate on the future of the European Court of Human Rights is often phrased in terms of the individual justice/constitutional justice dichotomy. In the recent case of N.K.M. v. Hungary the tension between both aims once again becomes very clear. In this case the Court held that the property rights of the applicant, who was confronted with a 98% tax over a part of her severance payment, were unjustifiably interfered with. In order to argue why in this specific case individual relief was necessary, however, the Court came up with several arguments that seem to invite future (mis)use by applicants whose interests the Court is probably not willing to protect. Was the Court right in making an ‘exception’ for the individual at hand, or should the probable effects of a perceived change in the Court’s approach to tax issues have prevented it from doing so?

Facts and, very important, figures

The applicant in N.K.M. had been a civil servant for thirty years when she was dismissed in 2011. This dismissal was part of a wave of similar measures throughout the entire civil service. Next to two months’ salary, she was statutorily entitled to severance pay amounting to eight months’ salary. To the extent that they exceeded 3.5 million Hungarian forints (HUF; approx. 12,000 Euros) – in the applicants’ case this concerned approximately 8,300 Euros – these benefits were taxed at 98%. Overall, the tax burden amounted to 52%, whereas the general personal income tax rate at that time was 16%.

It appears that these figures – and especially the 98% rate, see also the header of the press release – triggered the Court’s attention. They moreover played an important part in grounding the conclusion that the measure was not reasonably proportionate to the aim sought to be realised, namely to protect the public purse and create a ‘sense of social justice of the population’. Nevertheless, in order to conclude on a violation the Court had to do more – foremost it also had to argue why in this instance a matter relating to a tax rate required Strasbourg fundamental rights review in the first place. In doing so the Court more or less despairingly comes up with multiple, somewhat startling arguments, that arguably weaken rather than strengthen its reasoning.

The imposition of taxes and the question of proportionality

The second paragraph of Article 1 of Protocol No. 1 (protection of property) holds that this right does not ‘impair the right of a State to enforce such laws as it deems necessary to … secure the payment of taxes’. Although the levying of tax in principle constitutes an interference with property rights, this phrase has generally withheld the Court from reviewing tax issues in the first place. Taxing is considered a national prerogative par excellence, and in the light of a particularly broad margin tax issues usually do not pass the admissibility test.  In the present case, however, the Court mentions several reasons for why the interest at stake does allow for review under the right to protection of property. First, it stresses that irrespective of the concomitant obligation to pay the applicable tax the severance payment that originated from an unconditional statutory entitlement was ‘already earned’ and therefore a possession. It then adds that ‘the very fact that tax was imposed … demonstrates that is was regarded as existing revenue by the State, it being inconceivable to impose tax on a non-acquired property of revenue’ (para. 36). Also the fact that the case concerned a civil servant apparently added to the proprietary nature of the payment: because a civil servant ‘willingly accepted limitations on some of his fundamental rights and a remuneration unilaterally dictated by law … severance … represents a long-term expectation on the side of the civil servant and a commitment on the side of the State as employer’ (para. 37). Good government, according to the Court, ‘depends upon trust between the governed and the governor’. It then goes on stating that severance payments are of a special character because of their socially important aim to help workers who become redundant remain in the labour market. Finally, the Court makes an analogy with the protection of pension payments under the Convention, arguing that also when it comes to measures affecting severance, a transitional period – in N.K.M. the legislation affecting the applicant’s interest had only been enacted 10 weeks before termination of the civil servant relationship – is of particular importance. Having said all this, but after leaving open the question of whether the taxation amounted to a deprivation of possessions or a measure controlling the use thereof, the Court moves on to examining the case under Article 1 P1.

The Court – and this it does not often do – also uses lengthy considerations in reflecting upon the lawfulness and public interest criterions. With regard to the latter the Court does not agree with the Government where it argues that the measure is in the general interest as it is in line with European Commission Recommendation 2009/348/EC on remuneration policies in the financial services sector. The Court was smart enough to recognise that, as was commented elsewhere, ‘the … point at which the 98% tax rate cut in was hardly in the bankers bonuses bracket’. Regardless of its lengthy reflections however, the Court concludes that the public interest as well as lawfulness hurdle are sufficiently taken. As was in fact clear from the outset, the matter is therefore one of proportionality.

Reiterating the tax percentages and comparing them to (unconstitutionally) high tax rates in France and in Germany, the Court stressed the extraordinary situation it was dealing with. It moreover emphasised the importance of labour reintegration and the difficult personal situation (plausibly) resulting from the high taxing of the severance payments. The proportionality analysis culminates in a consideration that could have also featured in an Article 14 judgment:

‘[T]he Court finds that the measure complained of entailed an excessive and individual burden on the applicant’s side. This 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’ (para. 72).

Thus, the Court unanimously finds a violation of Article 1 P1.  Regarding the complaint under Article 14 it holds that – indeed – this ‘has been sufficiently taken into account in the above assessment that has led to the finding of a violation of Article 1 of Protocol No. 1 taken separately’.


I think the concurring opinion of Judge Lorenzen, joined by Judges Raimondi and Jočienė, actually says it all. Apparently feeling somewhat uncomfortable with the Court’s reasoning in N.K.M., these judges find it necessary to stress that the judgment should not be understood as altering the Court’s approach to tax issues, and that the imposition of taxes as a general rule is still for the State to decide save when tax measures are arbitrary or devoid of reasonable foundation. They also add that to the extent the judgement addresses the issue of retroactivity it must be kept in mind that the Convention does not contain a general prohibition on legislation with retroactive effect. In the opinion of Lorenzen, Raimondi and  Jočienė, the case should not have been dealt with by the Second Section but should rather have been relinquished to the Grand Chamber.

I cannot but agree that the reasoning in N.K.M. reflects that the Court had some trouble dealing with this case. The reasoning to me is not that convincing as in order to make it appear that way, the Court actually ‘says too much’. Whereas it might have felt that minimalist reasoning in this case would not do the trick, I am not sure whether its approach was the right one. Most problematic is the reasoning under the header ‘Whether there were “possessions” within the meaning of Article 1 of Protocol No. 1’. One plausible reading of the arguments could lead to the conclusion that everything that can be taxed is a possession for purposes of the Convention, and that the fact that an issue concerns a civil servant and the trust they put in the government is a reason for reviewing a case. Also, prospective applicants could infer from the judgment that in any case the taxing of severance payments – regardless of the height of the tax rate – allows for Convention review. On the other hand, the reasoning signals that in N.K.M. the tax percentage played a crucial role in concluding that the protection of property applied. But does this mean that when the percentage had been lower, there would not have been “possessions”?

The reasoning in this case is confusing, although many would probably accept its outcome. The extent to which one is inclined to criticize the judgment might depend on whether one favours an ‘individual justice’ or rather a more ‘constitutional’ approach of the Strasbourg Court. It is true that what the Court did here was providing for individual relief. Indeed, the case flagged severe Hungarian measures with consequences for the applicant that appear unreasonable. Combined with the fact that the legislation had changed only weeks before the applicant was dismissed, this creates the feeling that something must be wrong here. It can hence be argued that the Court did what it had to do, namely providing a safety net for individuals who become the victims of unreasonable acting by their States. On the other hand, the Court is to set clear human rights standards, provide for principled reasoning and guidelines that enable States to act in accordance with the Convention on their own. This means that although the outcome of a case can hinge upon the specific circumstances, the general considerations grounding this outcome should nevertheless be clear and appropriate for repeated use. As I argue elsewhere, especially when dealing with the question of what exactly constitutes a property rights issue, the Strasbourg case law could in this regard benefit from some improved reasoning.

Would it have been a good idea for the Court to – in order to somewhat ease the property rights issue – deal with N.K.M. under Article 14? After all, it was clear that the measures were ‘discriminatory’ in the sense that only a small group of civil servants was heavily burdened. However, thinking over this option cannot but bring one to the conclusion that it would not have been smart at all to review a tax issue under Article 14. Arguably, the Court at any cost wanted to avoid the impression that the categories laid down in tax legislation deserve to be reviewed under the Convention, as this would probably lead to an unwanted flood of cases concerning matters the Court can and should not go into. Reviewing the case under Art. 1 P1 was therefore the only plausible option the Court had. But based on what was said above, I would be happy to see it being dealt with again by the Grand Chamber, in the hope that this will result in a more clear and convincing judgment.

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