Lt

On the taxation of pensions received from foreign states

Case No. 47/03

 

THE CONSTITUTIONAL COURT OF THE REPUBLIC OF LITHUANIA

RULING

ON THE COMPLIANCE OF ITEM 1 (WORDING OF 29 SEPTEMBER 1998) OF PARAGRAPH 1 OF ARTICLE 2 OF THE REPUBLIC OF LITHUANIA’S PROVISIONAL LAW ON INCOME TAX OF NATURAL PERSONS WITH THE CONSTITUTION OF THE REPUBLIC OF LITHUANIA

 

22 December 2006

Vilnius

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court: Armanas Abramavičius, Toma Birmontienė, Egidijus Kūris, Kęstutis Lapinskas, Zenonas Namavičius, Ramutė Ruškytė, Vytautas Sinkevičius, Stasys Stačiokas, and Romualdas Kęstutis Urbaitis

The court reporter—Daiva Pitrėnaitė

The Constitutional Court of the Republic of Lithuania, pursuant to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Article 1 of the Law on the Constitutional Court of the Republic of Lithuania, in its public hearing, on 21 December 2006, considered case No. 47/03 subsequent to the petition of the Lithuanian Supreme Administrative Court, the petitioner, requesting an investigation into whether the provision “Income tax shall not be levied on: (1) pensioners’ pensions <…> paid by foreign states, which are taxed in those states” of Paragraph 1 (wording of 29 September 1998) of Article 2 of the Republic of Lithuania’s Provisional Law on Income Tax of Natural Persons was not in conflict with Paragraph 1 of Article 29 of the Constitution of the Republic of Lithuania.

The Constitutional Court

has established:

I

The Supreme Administrative Court of Lithuania, the petitioner, considered an administrative case. By its ruling, the said court suspended the consideration of the case and applied to the Constitutional Court with the petition requesting an investigation into whether the provision “Income tax shall not be levied on: (1) pensioners’ pensions <…> paid by foreign states, which are taxed in those states” of Paragraph 1 (wording of 29 September 1998) of Article 2 of the Provisional Law on Income Tax of Natural Persons (hereinafter also referred to as the Law) was not in conflict with Paragraph 1 of Article 29 of the Constitution.

II

The petition of the petitioner is based on the fact that the pension of the pensioners who receive pensions from the Republic of Lithuania state social insurance funds and state and municipal budgets is not taxed by income tax of natural persons, while the pension of the pensioners who receive pension from foreign states is not taxed with this tax only in the case when it was taxed in those foreign states. However, old age pensions received by both groups of pensioners are the income of the same kind, they are intended to ensure the minimum standard of living for the persons who are unable to work due to their old age, thus, if some of them are taxed, while others are not, the groups of persons having the same features find themselves in different positions. In the opinion of the petitioner, such legal regulation discriminates the recipients of pensions from foreign states in comparison with pensioners, who receive pensions from the Republic of Lithuania state social insurance funds and state and municipal budgets, and, thus, Paragraph 1 of Article 29 of the Constitution, wherein it is prescribed that all persons shall be equal before the law, the court, and other state institutions and officials, is violated.

III

In the course of the preparation of the case for the Constitutional Court’s hearing, written explanations were received from A. Butkevičius, the representative of the Seimas, the party concerned, wherein it is stated that the impugned provision of the Law is not in conflict with the Constitution. The position of the representative of the party concerned is based on the following arguments.

1. The Lithuanian tax system virtually coincides with the tax systems of most states of the world where taxation is established according to the place of residence: the state has the right to tax all the income of its permanent residents irrespective of the place of its source, taking account of the taxes paid in foreign states and other circumstances. In deciding whether the situation of the tax payers is the same, account should be taken of the fact whether their income is the same or whether it is different. Income is grouped according to its kind and source. It is considered to be the same if it coincides under both of these criteria.

In the discussed situation, the income coincides according to its kind (pensions) but not according to its source (it is either paid by Lithuania or by a foreign state). Thus, it is impossible to state that the situation of the tax payer who receives a pension from Lithuania is equal to the situation of the one who receives a pension from a foreign state.

2. Taxation according to the place of residence means that permanent residents of a state pay taxes from the income received not only in the said state (state of residence), but also abroad (state of the source of income). Foreign states can also tax such income, thus, it may be taxed twice. The impugned provision established equal taxation for the tax payers who receive the same income—pensions from Lithuania or pensions from a foreign state—thus, it did not permit taxing the pensions received from foreign states with which Lithuania has not signed international treaties concerning the avoidance of double taxation.

IV

In the course of the preparation of the case for the Constitutional Court’s hearing, written explanations were received from D. Grybauskaitė, the Minister of Finance of the Republic of Lithuania, P. Koverovas, State Secretary of the Ministry of Justice of the Republic of Lithuania, D. Kriaučiūnas, Director General of the European Law Department under Ministry of Justice of the Republic of Lithuania, J. Gurauskas, the First Deputy Head of the State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania and B. Černiuvienė, Deputy Head of the same inspectorate and V. Valeckaitė, Deputy Director of the Law Institute.

The Constitutional Court

holds that:

I

1. The petitioner requests an investigation into whether the provision “Income tax shall not be levied on: (1) pensioners’ pensions <…> paid by foreign states, which are taxed in those states” of Paragraph 1 (wording of 29 September 1998) of Article 2 of the Provisional Law on Income Tax of Natural Persons was not in conflict with Paragraph 1 of Article 29 of the Constitution.

2. The petitioner doubts, whether the legal regulation when the pension of the pensioners who receive pensions from the Republic of Lithuania state social insurance funds and state and municipal budgets is not taxed by income tax of natural persons, while the pension of the pensioners who receive pension from foreign states is not taxed with this tax only in the case when it was taxed in those foreign states does not discriminate the recipients of pensions from foreign states, in comparison with the pensioners who receive pensions from the Republic of Lithuania state social insurance funds and state and municipal budgets, and whether it was not in conflict with Paragraph 1 of Article 29 of the Constitution.

While impugning the compliance of the said provision with the Constitution, the petitioner doubts only as regards its compliance with Paragraph 1 of Article 29 of the Constitution and does not impugn its compliance with other provisions of the Constitution.

3. While deciding whether the impugned provision was not in conflict with Paragraph 1 of Article 29 of the Constitution, it should be noted that under Article 52 of the Constitution, the state shall guarantee to citizens the right to receive old age and disability pensions as well as social assistance in the event of unemployment, sickness, widowhood, loss of the breadwinner, and in other cases provided for by law. Lithuanian residents may receive pensions and various other benefits also from other states, however, if there are no corresponding agreements between states, they are not considered as benefits which are paid while implementing the duties to the state which arise from Article 52 of the Constitution. The basis for granting such benefits, inter alia, pensions, and payment thereof is established by legal acts of other states. From the standpoint of the Constitution of the Republic of Lithuania, they are of different nature than the pensions and other benefits paid to the Lithuanian residents while implementing the provisions of Article 52 of the Constitution.

4. The establishment of taxes is the exceptional constitutional competence of the legislature (Articles 67 and 127 of the Constitution). The taxed objects may be very different. The legislature, who has the duties arising from the Constitution to establish what is taxed, also has discretion to decide whether to tax various benefits received from foreign states, inter alia, pensions. Taking account of the Constitution, the legislature also has the right to amend the established legal regulation on taxes. While establishing taxes, the legislature must heed the norms and principles of the Constitution, inter alia, the constitutional principles of justice, reasonableness and proportionality. While establishing taxes, the legislature is also bound by the state obligations arising from the international treaties of the Republic of Lithuania (inter alia, from the bilateral and multilateral agreements on avoidance of double taxation of income and/or capital), as well as by the requirements arising from the Lithuanian membership in the European Union.

5. Having held that benefits from other states, inter alia, pensions, if there are no corresponding agreements between states are, from the standpoint of the Constitution of the Republic of Lithuania, of different nature than the pensions and other benefits paid to the Lithuanian residents while implementing the provisions of Article 52 of the Constitution and that the legislature has the discretion to decide whether to tax pensions received from foreign states, it should also be held that there are no legal grounds to state that the provision “Income tax shall not be levied on: (1) pensioners’ pensions <…> paid by foreign states, which are taxed in those states” of Paragraph 1 (wording of 29 September 1998) of Article 2 of the Law was in conflict with Paragraph 1 of Article 29 of the Constitution.

6. Taking account of the arguments set forth, the conclusion should be drawn that the provision “Income tax shall not be levied on: (1) pensioners’ pensions <…> paid by foreign states, which are taxed in those states” of Paragraph 1 (wording of 29 September 1998) of Article 2 of the Provisional Law on Income Tax of Natural Persons was not in conflict with Paragraph 1 of Article 29 of the Constitution.

Conforming to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Articles 1, 53, 54, 55 and 56 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania gives the following

ruling:

To recognise that the provision “Income tax shall not be levied on: (1) pensioners’ pensions <…> paid by foreign states, which are taxed in those states” of Paragraph 1 (wording of 29 September 1998, Official Gazette Valstybės žinios, 1998, No. 90-2481) of Article 2 of the Republic of Lithuania’s Provisional Law on Income Tax of Natural Persons was not in conflict with Paragraph 1 of Article 29 of the Constitution of the Republic of Lithuania.

This ruling of the Constitutional Court is final and not subject to appeal.

The ruling is pronounced in the name of the Republic of Lithuania.

Justices of the Constitutional Court:            Armanas Abramavičius

                                                                                 Toma Birmontienė

                                                                                 Egidijus Kūris

                                                                                 Kęstutis Lapinskas

                                                                                 Zenonas Namavičius

                                                                                 Ramutė Ruškytė

                                                                                 Vytautas Sinkevičius

                                                                                 Stasys Stačiokas

                                                                                 Romualdas Kęstutis Urbaitis