Decision

Fifty - three MPs from the 4 0 th National Assembly approached the Constitutional Court and drawing on Art . 149, para 1, subpara 2 of the Constitution of the Republic of Bulgaria challenged the constitutionality of Art . 3, para 2 of the Value Added Tax Act ( VAT Act ) ( DV , № 63/2006 with amendments ) , in particular the part containing the phrase ,,freelancers, including the private enforcing agents and notaries” (amended, DV, № 108 / 2007).

The challenge and the supplement to it that was presented to the Court following instructions to the MPs on grounds of lack of motives affecting the phrases ,,freelancers” and ,,notaries” claim that the text challenged which entered into force on 19 .12. 2007 is in contravention to the Preamble, Art. 4, para 1, Art. 6, para 2, Art. 19, para 2, Art. 56 and Art. 134 of the Constitution. It is claimed that fundamental principles of law have been ignored, as have been fundamental standards of proportionality and parity that are entrenched into the acquis communautaire, that the success of the reform in law enforcement in Bulgaria is at risk. It was explicated the activities of the professions lawyer , private enforcing agent and notary do not answer the description of an ,,independent economic activity ” in the VAT Act , that notaries and private enforcing agents perform functions that otherwise the Government would have to perform and therefore, they should be treated as Government bodies. Further, it is claimed that it is senseless to maintain different tariffs and tax rates for the same activity that either the Government or else actors to whom the Government has delegated that role perform as this is discriminatory and leads to unfair competition, that it constitutes a breach of the right to legal counseling and to a fair trial and that in the meaning of Art. 6 of the European Convention on the Protection of Human Rights and Fundamental Freedoms citizens will be deprived of fast and efficient law-enforcement as the higher charges will become unaffordable.

The Constitutional Court discussed the challenge and the supplement to it, considered the points in them and also the positions of the parties concerned and based its decision on the following:

1. On the admissibility of the challenge

Treated in the light of the provisions of Art . 25, para 2 of the Regulations of the Organization of the Activities of the Constitutional Court ( ROACC ), the argumentation of the Minister of Finance and of the National Revenue Agency vis -à- vis the inadmissibility of the challenge were discussed and found unsustainable. The Court saw that the filing of the challenge and the promulgation of the Act ( 19.12.2007 ) were on two successive dates and held its first sitting on 21.12.2007 , i.e. after the date of the promulgation. The return of the challenge, if at all, will not constitute an impediment to file it again, however, that would be unnecessary formality and would have no legal implications to Constitutional control.

The National Revenue Agency's arguments against the admissibility of the challenge as per Art. 56 of the Constitution on account of the existing procedures of defense are wrong and mix up Constitutional control that Art. 149, para 1, subpara 2 provides for with control of law conformity as per Art. 120 of the Constitution. The two types of control are independent and exercised by different institutions with specific competences.

2. On the merits of the challenge

The first Value Added Tax Act which entered into force on 01.04.1994 ( DV , № 90/1993), exempts from the VAT ( Art . 9, para 1, subpara 10) the transactions that constitute counseling in the sense of the Bar Act ( BA ) and in the sense of the Notary Act from 07.01.1997 ( DV , № 104 / 1996) . The next VAT Act which entered into force on 01.01.1999 ( DV , № 153 / 1998), again exempted from the VAT the legal service provided by lawyers, notaries and private enforcing agents, the latter group from 01.09.2005 , the date of the official institution of the profession, ( DV , № 43 / 2005), in the procedure of the Bar Act, the Act on Notaries and Notary Activities (ANNA, amended, DV, № 123 / 1997) and the Act on Private Enforcing Agents (APSA). Evidently, the two pieces of legislation treated the lawyers, notaries and private enforcing agents as taxpayers, however, the legislating authority treats their activities as transactions (deliveries) that are exempted of the VAT.

The original version of the existing VAT Act in force from 01.01.2007 defines the activities of freelancers, including the lawyers, notaries and private enforcing agents, as subject to VAT in the meaning of Art. 3, para 2 of the VAT Act and does not provide for any exemption. The Ombudsman of the Republic of Bulgaria approached the Constitutional Court with a challenge of this text – CC № 1/2007. The Constitutional Court ' s decision ruled that the phrase ,,freelancers , including private enforcing agents and notaries ” in Art . 3, para 2, sentence 1 of the VAT Act was dissonant with the Constitution as it essentially digressed from Art. 88, paras 1 and 3 of the Constitution. In view of the procedural nature of the breach, the Court did not take a position on the text of the VAT Act, nor did it rule on the merit of the challenge. After the Constitutional Court's decision went into effect, the National Assembly passed an act amending the VAT Act, including its Art. 3, para 2 – which is the subject of the challenge, and inserted a new text as subpara 5 into Art. 44, para 1, to exempt legal representation which enables the right to legal counseling of natural persons in the pretrial and trial phase and in administrative proceedings and arbitration.

As mentioned , the Constitutional Court was approached with a challenge of the constitutionality of an act, which was seen as discordant with Art. 149, para 1, subpara 2 of the Constitution, with the Preamble and with Art. 4, para 1; Art. 6, para 2; Art. 19, para 2; Art. 56 and Art. 134 of the Constitution. Without any limitation to the said Constitutional rationale ( Art . 22, para 1 of the Constitutional Court Act ) in view of the presented considerations and positions of contravention to or non - compliance with the EU law or practices of the European Court of Justice ( ECJ ), the Constitutional Court saw it necessary to make it clear that the latter cannot justify a ruling on the anticonstitutionality of an act in the procedure of the quoted Art. 149, para 1, subpara 2. Subparagraph 4 of the afore-said text reads that the Constitutional Court, if approached, shall rule on the compatibility of domestic laws with the international treaties to which Bulgaria is a party . In the meaning of Art. 15, para 2 of the Law on Normative Acts, in the event of conflict, the EU regulations shall have primacy over the Bulgarian pieces of legislation. Regarding the EU directive, its main principles and objectives make it binding on each member state to harmonize its domestic legislation to what it provides for ( Art. 249, paras 2 and 3 of the Treaty Establishing the European Communities). It is the domestic legislation that is subject to checks for compliance with the Constitution.

The reasons stated in the challenge and in the supplement to it are not defined in the light of the above-quoted texts from the Constitution. The top position in the enumeration of Constitution texts is taken by claims of contravention to the Constitution-sanctioned principle of the State committed to the rule of law (the Preamble and Art. 4, para 1 of the Constitution). That principle states that the State shall be governed by its Constitution and laws that are not discordant with the Constitution. It is in accordance with this principle and not against it that the National Assembly exercises its exclusive competence to impose taxes to generate revenue for the budget , to set the tax rates and to decide on who will be a taxpayer and of what tax. Within the scope of its legislating discretionary power and taxation policies the Parliament has the authority to decide on the burden of taxes, allow tax exemptions or surtaxes in the procedure as provided by Art. 60, para 2 and Art. 84, para 3 of the Constitution (Decision № 19 of 1998 on CC № 19/1998). Therefore, the National Assembly does not act in contravention to the Constitution with the passage of legislation that defines taxpayers, the notion ,,independent economic activity” or the type of freelance activities ( § 1 of the Additional Provisions of the Personal Income Tax Act) and the exemptions for legal representation as provided by Art. 44, para 1, subpara 5 of the VAT Act.

The challenge maintains that the Constitution-enshrined principle of the equality of citizens before the law has been violated (Art. 6, para 2). The equality of citizens before the law is an underlying principle of any democratic society and does not allow the legislating authority to pass curtailments of the rights of citizens or privileges arising from the attributes that are thoroughly enumerated in the quoted text. The challenged part of Art. 3, para 2 of the VAT Act is not discordant with the clearly defined and well-established principle as spelled out in Art. 6, para 2 of the Constitution. The text challenged does not provide for unequal treatment or privileges, nor does it have a bearing to any of the enumerated principles. The claim of inequality of citizens in view of the dualism in enforcement is not justified, as the claimant is free to choose an enforcing agent on the basis of his or her judgment and depending on what they can afford. It is true that in absolutely the same circumstances the defaulter may owe different sums as costs against his or her will. However, the defaulter shall not derive rights from his or her default in payment, which was the reason for the executory proceedings.

Regarding the VAT payable by a private enforcing agent, thoughts were expressed that Art. 19, para 2 of the Constitution is not complied with, viz. the non-provision of equal conditions for business and the generation of an environment in which he cannot be in fair competition with a state enforcing agent. The Constitution text advances a leading economic principle of free initiative and identical legal conditions for business. Indeed, Art. 19, para 2 of the Constitution pertains to individuals and corporate entities but in addition to those, to the State and the municipalities when these operate in a market environment. i.e. as private proprietors (Decision № 19/1993 on CC № 11/1993 and Decision № 9/1999 on CC № 8/1999). In the specific case, the legal standard is inapplicable in the comparison with the activity carried out by a Government institution in such a capacity.

The thoughts as expressed in the challenge, viz. that the text challenged conflicts with Art. 56 of the Constitution as it is seen as an infringement on the right to legal counseling and fair trial are finance-based. The right to legal counseling is a fundamental civil right intended to protect rights and interests of individuals. That right is universal. Generally, Art. 56 is applied jointly with other standards of the Constitution and the laws, though it may be applied on its own. The text provides for guarantees, particularly in relation to the procedural guarantees of that right, and the Legislature met this obligation by the passage of the Civil Procedure Code, the Administrative Procedure Code and the Tax and Social Insurance Procedure Code and some other pieces of legislation. The arguments adduced by MPs who insist it is a case of finance-based anticonstitutionality, are not tenable. Concerning the notary work, the increase or decrease of charges fall within the prerogatives of the State, which sets the tariffs regardless of the collection, or exemption of indirect tax. The idea of the freedom of choice in execution as earlier elaborated in this decision, shall apply to the claimants in executory proceedings. The fact that as a rule the expenses of the court are borne by the defaulter and paid to the claimant is not to be ignored. With respect to the counsel for the defense, the finance-based arguments are not justifiable for Art. 44, para 1, subpara 5 of the VAT Act grants exemption to legal counseling because of, inter alia, the availability of free aid and advice in legal matters in accordance with the Legal Aid and Advice Act.

The supplement to the MPs' challenge sees a conflict with Art. 134 of the Constitution and insists that the lawyers do not carry out an independent economic activity that generates added value which may become taxable under the VAT Act.

The Constitution makes it binding on lawyers to aid individuals and corporate entities in the protection of their rights and legitimate interests. The bar is an independent self-governing organization whose activities are treated in a law. Evidently, the State recognizes the specific nature of the activities of the bar in the legal counseling to individuals and defines it as a transaction that is exempted of the VAT. Understandably, the status of the bar as defined in the Constitution is not a reason to limit the National Assembly's discretionary exclusive powers without any infringement on the fundamental principles and standards in the Constitution and to treat lawyers or the bar association as taxpayers.

The reasons in the challenge of the constitutionality of Art . 6 of the European Convention on Human Rights in relation to the functions of private enforcing agents as discussed here are unjustified, however, in principle, they cannot make a law non-compliant with the Constitution. There has been no request to check the challenged text from the VAT Act for compliance with international law (Art. 149, para 1, subpara 4 of the Constitution).

In view of the above - stated reasons the Court found that the challenge of the constitutionality of Art . 3, para 2 of the VAT Act , in particular the part containing the phrase “ freelancers , including private enforcing agents and notaries ” was untenable and should be dismissed .

Председател: Румен Янков