Constitutional Court to decide on taxation of special pensions

The Constitutional Court of Romania (CCR) may pronounce its decision on Tuesday on the complaints of the People’s Advocate and High Court of Cassation and Justice of Romania regarding the law on the new system of taxation of service pensions. This system provides for the 85 percent tax rate on pensions that exceed RON 7,000 (approximately EUR 1,400). CCR has postponed the decision on this issue several times, Romanian news agency hotnews.ro reports.

On June 17, the Chamber of Deputies voted to amend and supplement the Law 227/2015 in the Fiscal Code, which regulates the taxation of incomes and allowances related to age. According to one of the amendments, pensions under RON 2,000 (EUR 410) are not taxed, and those between RON 2,000 and 7,000 are taxed by 10 percent. Pensions that exceed RON 7,000 are subject to an 85 percent tax rate, but only on the amount above RON 7,001.

This amendment was attacked by the People’s Advocate and High Court of Cassation and Justice of Romania (ICCJ), and on June 18, the Joint Chambers of ICCJ challenged the law at the Constitutional Court. The High Court claims that the Law amending and supplementing Law 227/2015 in the Fiscal Code is unconstitutional as a whole because it violates several articles of the Constitution.

ICCJ also shows in its complaint sent to the Constitutional Court that one of the five principles of taxation, regulated by the Fiscal Code, aims at “tax justice or fiscal equity” to “ensure that the fiscal burden of each taxpayer is established based on their contributory power, depending on the size of their income or properties.”

“To impose fair and equal fiscal burdens is one of the components of the rule of law, which defines the Romanian state via Art. 1 para. (3) of the Constitution. […] In the jurisprudence of the Constitutional Court, it was constantly evaluated that the state has a large margin of deliberation in the development of fiscal policy and that the determination of the amount of the tax falls within the exclusive competence of the legislators, as well as to make exception or exemptions from these obligations,” the ICCJ statement shows.

The High Court also mentions that with this new law, the legislators have created a “new tax system that is applicable only for some revenue, namely for income from pensions and/or elderly allowances received on the basis of special laws/statutes.” According to ICCJ, based on the new law, the special pensions would be subject to double taxation: Both the pension income tax and the newly established tax would apply to them. “This results in the pensions included in this law being subject to double taxation, contrary to the principle of non-discrimination and the principle of fair and equitable establishment of the tax burden,” ICCJ explains.

According to the High Court, this new tax is not only discriminatory but is also calculated per the net income from pensions, which would lead, from a certain level, to a taxation calculated at 95 percent of a gross pension. “In these conditions, due to the high amount, the tax imposition measure is a real confiscation and is likely to affect the very substance of the law. The option promoted by the law in question is a subterfuge that affects the very substance of the pension right,” ICCJ points out.

The High Court also adds that by establishing the RON 7,000 barrier, the special taxation would affect only a small category of taxpayers that receive pensions or allowances based on special laws. The High Court also states there is a violation of the principle of clarity, calculability and predictability of the law, of the principle of independence of judges, and of the principles of Art. 1 of Protocol no. 1 of the ECHR.

Another argument against the amendments was the fact that the Senate was the first to discuss and adopt the amendments, and the Chamber of Deputies was the decisive forum. However, this contradicts constitutional norms that establish another procedure regarding the regulations of the status of judges and prosecutors.

Title image: The Constitutional Court of Romania. Photo: CCR

Author: Orsi Sarány