ECJ Rules on Spain’s Discriminatory Gaming Tax

The European Court of Justice ruled Tuesday that Spanish legislation exempting certain domestic lotteries and gambling winnings from tax while taxing the winnings derived from all foreign providers represents a restriction on the freedom to provide services under Article 49 of the EC Treaty.

Under Spanish law, winnings from lotteries and betting are tax free where such games are organised by the state-controlled Loterías y Apuestas del Estado (LAE), bodies of the Autonomous Communities, the Spanish Red Cross or by ONCE, the national association for the blind. Winnings from foreign providers meanwhile are subject to progressive rates of income tax.

The European Commission brought the case against Spain after the country refused to amend its tax policy following a formal notice in April 2006 and a Reasoned Opinion in December 2006. Spain argued that its policy was justified on the grounds of consumer protection and social policy.

The Commission argued that Spain’s law on income tax was discriminatory because it made the provision of services between another member state and Spain more difficult than the provision of the same service within Spain, contrary to its obligations under Article 49 of the EC Treaty and Article 36 of the EEA Agreement.

The Commission said that although member states have discretion on how they treat gambling, that does not justify the exemption from income tax, noting that such an exemption is an inappropriate means of attaining Spain’s objective of discouraging participation in games of chance, since that exemption is more likely to encourage individuals to participate in them.

Spain’s argument that its policy helped to combat money laundering and tax evasion was also challenged by the Commission, which said that on the contrary, combating those activities could perhaps justify the removal of the tax exemption, but not its retention.

In its ruling Tuesday, the ECJ said that “although a certain number of overriding reasons in the public interest have been recognised by the Court’s case-law, such as the objectives of consumer protection and the prevention of both fraud and incitement to squander money on gambling, as well as the general need to preserve the social order, which may justify a restriction on the freedom to provide services, the fact remains that those objectives cannot be relied upon to justify discriminatory restrictions”.

On the issue of preventing money laundering and combating tax evasion, the court ruled that it is not justifiable for the authorities of a member state to assume, in a general way and without distinction, that bodies and entities established in another member state are engaging in criminal activity.

With regard to the prevention of gambling addiction and ensuring the public health, the court found that Spain had produced no evidence to establish that such an addiction has reached the point amongst the Spanish population at which it could be considered to constitute a danger to public health.

The ECJ added that the tax exemption was also likely to encourage consumers to participate in the lotteries, games of chance and betting that benefited from such an exemption, which therefore meant that it is not a suitable and coherent means of ensuring the attainment of the objective supposedly pursued.