On July 4 2023, the Court of the European Free Trade Association (EFTA) issued its advisory opinion in RS v Steuerverwaltung des Fürstentums Liechtenstein. Liechtenstein’s Constitutional Court had already found in 2020 that a difference in tax rate on income for resident and non-resident employees was incompatible with the free movement of workers. Nonetheless, the Administrative Court of Liechtenstein found it necessary to refer the exact same issue to the EFTA Court, upon which the EFTA Court came to a similar conclusion as the Constitutional Court. The reason thereto? The Constitutional Court had suspended the annulment of the national law for reasons of legal certainty. The question consequently arose of how the national court should further proceed. Should it immediately give full effect to the law of the European Economic Area (EEA) by following the EFTA Court and disapplying the national legislation, or should it give priority to the findings of its own Constitutional Court and nonetheless apply the national legislation, even if that legislation breaches EEA law? How should the national court deal with this conflict of allegiance?
This blog post argues that, although certain differences may be distinguished, the overall approach of the EFTA Court heavily resembles the approach of the CJEU, despite the less far-reaching depth of integration of the EEA Agreement and the difference in ‘tools’ at its disposal. Arguably, the CJEU may in turn draw inspiration from the EFTA Court’s approach when it comes to the conditions under which national courts may temporarily suspend the annulment of national law held to be incompatible with EU law.
The deferral of annulment by Liechtenstein’s Constitutional Court
In 2020, the Constitutional Court of Liechtenstein had already ruled on the validity of the national legislation concerned, prior to the EFTA Court. To a large extent, the Constitutional Court’s reasoning is similar to the EFTA Court’s (see paras. 3 to 3.8). The Constitutional Court also relied on article 4 of the EEA Agreement, however, which enshrines a general principle of non-discrimination on the basis of nationality. The EFTA Court, on the other hand, explicitly excluded the applicability of that article since article 28(2) of the EEA Agreement provides a more specific expression of that principle with regard to the free movement of workers (para. 28). Nonetheless, both courts came to the same conclusion: the higher tax rate on income for non-residents compared to residents was contrary to EEA law.
More interesting, however, is the Constitutional Court’s decision to suspend the annulment of the national legislation for one year for reasons of legal certainty. The Constitutional Court argued that, if the national legislation were to be annulled immediately, persons with limited tax liability would have to pay only one third of the tax previously due. Moreover, the provisions of the national legislation were only contrary to EEA law insofar as the taxpayer was a so-called “quasi-resident” (i.e. employed in Liechtenstein but resident in another country), whereas the national legislation also concerned other taxable benefits than income from employment, benefits which do not necessarily involve “quasi-residents” (para. 5). The Constitutional Court therefore granted the legislator a period of one year to work away the unlawfulness. In the meantime, the legislation stayed in force (except in the main proceedings that led the Constitutional Court to annul the national provision concerned).
The EFTA Court’s response
Although qua substantive analysis the judgments of the EFTA Court and the Constitutional Court point in the same direction, the Constitutional Court thus put a temporal limitation on its findings. Since the facts of the domestic proceedings before the referring court partly took place during the period of suspension of the annulment, the EFTA Court had to clarify how the national court should deal with the temporal limitation of the annulment by the Constitutional Court (see paras. 22-26).
It was the first time the EFTA Court had to give its view on this issue. The CJEU had already dealt with similar issues before and it could lead the way for the EFTA Court. However, the CJEU’s case law mostly concerned to what extent the referring court itself may suspend annulment of national legislation incompatible with EU law, and not to what extent the referring court should neglect a judgment of its Constitutional Court in this regard (e.g. C‑41/11; C‑379/15; C‑597/17).
The EFTA Court found that national courts can only in very exceptional cases, for reasons of legal certainty, temporarily maintain the effects of a national rule that is contrary to EEA law, i.e. when those concerned have acted in good faith and when there is a risk of serious difficulties if the annulment would take force immediately (paras. 45-46). In casu, the EFTA Court found those cumulative conditions not to be fulfilled (paras. 47-49). Remarkably, the EFTA Court derived these conditions from the CJEU’s case law in which it temporally limits the effects of its own judgments (C‑73/08; C‑274/18), instead of relying on the seemingly more relevant case law on the suspension of the annulment of incompatible national legislation by national courts (C‑379/15; C‑597/17). Arguably, at first sight, it would not be a bad thing if the CJEU were to streamline its case law in this regard, and adopt a similar approach as the EFTA Court by extending the conditions for temporarily limiting its own judgments to the national context, since in both situations the full application of EU law is postponed. A sign in this direction may perhaps be distinguished in Hein (paras. 55-63).
Despite the above difference, a common thread runs through the reasoning of both courts: the primacy of EU law and implemented EEA law prevails, and the effects of incompatible national legislation may only be temporarily maintained in exceptional and very specific circumstances. In the EU, the principles of primacy of EU law and loyal cooperation run as a thread through the CJEU’s judgments on this issue (e.g. para. 36 of C‑379/15; para. 43 of C‑41/11). Although the EFTA Court could not make use of an equivalent principle of primacy of EEA law – such a principle does not exist in EEA law because of a lack of transfer of sovereign rights in the EEA (para. 52 of E-1/01) – it could resort to its own principle of “quasi-primacy”. The sole article of Protocol 35 to the EEA Agreement stipulates that the EFTA States shall introduce a statutory provision in their national law to the effect that implemented EEA rules take precedence over other, national statutory provisions. As a consequence, there is no “full-fledged” primacy of all provisions of EEA law over national law, but only of these provisions that are implemented in national law. Unimplemented EEA law thus remains outside the remit of the primacy principle, hence the term “quasi-primacy” (see for example Haukeland Fredriksen). For Liechtenstein, this distinction does not pose a particular problem since Liechtenstein is a monist country and EEA law automatically becomes part of its legal order (see Baur). As dualist countries, Norway and Iceland should, however, implement “secondary” EEA legislation in their national legal orders before individuals can benefit from the principle of quasi-primacy (see Petter Graver).
The EEA Agreement itself is part of Liechtenstein’s legal order in light of its monist nature, but also in Norway and Iceland, the EEA Agreement is incorporated in their national law. The EFTA Court’s reasoning in this case may thus perfectly be extended to both countries. Concretely, the EFTA Court found that article 28 EEA Agreement is sufficiently precise and unconditional, and therefore national courts should give full effect to EEA law by setting aside any provision of national law that is contrary to the principle of non-discrimination enshrined therein, irrespective of any deferral required by national law or the Constitutional Court (paras. 40-41). After all, national courts are required, in light of the principle of sincere cooperation, to provide the legal protection individuals derive from EEA law and to ensure that those rules are fully effective (para. 44). This duty corresponds to the duty national courts of the EU Member States enjoy by virtue of article 4(3) TEU to remedy all unlawful consequences resulting from a breach of EU law (see for example para. 43 of C‑41/11).
Stressing the duty to provide adequate legal protection of individuals, the EFTA Court furthermore ended its analysis with unmistakable wording, indirectly opposing Liechtenstein’s Constitutional Court. By temporally limiting the annulment of the national legislation, the EFTA Court found that the protection provided to individuals was …
“… incomplete and insufficient and does not constitute either an adequate or effective means of remedying violations of the rights of such individuals, in breach of EEA law” (para. 52)
What the EFTA Court left open, and what might require further clarification in a future case, is to what extent the Constitutional Court, as the highest national court, should inquire the EFTA Court on whether it is allowed to temporarily limit the annulment of national law. The CJEU ruled in Association France Nature Environnement that an apex court is, in principle, required to make a preliminary reference to the CJEU, so that the CJEU may assess whether, exceptionally, provisions of national law held to be contrary to EU law may be provisionally maintained. In application of its CILFIT doctrine, the CJEU held that that court is only relieved of that obligation when there is no reasonable doubt as to the interpretation and application of the relevant conditions. In light of the less far-reaching depth of integration of the EEA Agreement, the apex courts of Norway, Iceland and Liechtenstein are, however, not under an obligation to make a reference to the EFTA Court. They should nonetheless take into account their duty of loyal cooperation when deciding on whether to refer or not (paras. 57-58 of E-18/11). It is unclear and will require further clarification what this entails in the specific situation of an apex court deciding on the possible deferral of the annulment of national law which it finds to be contrary to EEA law.
Who to pledge allegiance to?
Concludingly, national courts may only under certain conditions, exceptionally, suspend the annulment of national law held to be incompatible with EEA law. If the conditions thereto are not fulfilled, a national court cannot postpone the annulment and should adhere to the requirements stemming from EEA law, even if this requires national courts to go against the verdict of their own Constitutional Court. The latter are after all equally bound by EEA law than any other national court. It is likely and desirable that similar considerations – albeit based on its full-fledged understanding of the primacy principle – would lead the CJEU to similar conclusions. At first sight, it seems furthermore recommendable that the CJEU removes the differences as to the conditions to be fulfilled for the temporal limitation of both its own judgments and the annulment of incompatible national law – comparable to the EFTA Court’s approach.
As part of their continuous judicial dialogue, the EFTA Court and the CJEU may therefore draw further inspiration from each other’s case law in order to further finetune and streamline the balance they aim to obtain between, on the one hand, the primacy of EU law and implemented EEA law, and, on the other hand, exceptions to that principle by allowing national courts to temporarily limit the annulment of national law held to be incompatible with EU or EEA law.