POKER LIVE WINNINGS IN EU MEMBER STATES’ CASINOS MAY BE SUBJECT TO INCOME TAXATION WHERE THE SAME ACTIVITIES IN LICENSED NATIONAL CASINOS ARE EXEMPT ?

(Attorney-at-law member of the Rome Bar – Founder of EGLA)

On 24^th June 2013, a request for a preliminary ruling from the referring Italian tax court of Rome – Commissione tributaria provinciale di Roma has been lodged before the Court of the European Union (the “Court”) having as subject-matter the interpretation of the freedom to provide services under article 49 of the EC Treaty, now article 56 of the of the Treaty on the Functioning of the European Union (the “TFEU”) in light of a national legislation under which sums won in games of hazard arranged abroad are subject to income taxation[1].

The request refers to the Italian tax court main proceedings opposing M. Cristiano Blanco to the Taxation Agency – Agenzia delle Entrate whereby M. Blanco, poker player resident in Italy, has been required to declare for tax purposes, and to be liable for tax on poker tournament winnings occurred in other EU Member States casinos as provided for by Article 67(1)(d) of Presidential Decree No 917 of 22.12.1986 (the “TUIR”). The complainant appealed the Taxation Agency decision.

The referred question concerns the compatibility of this national provision with the above EU Treaty principle of freedom to provide services and if this national restrictive provision should be regarded as justified on grounds of public policy, public security or public health, pursuant to the article 46 of the EC Treaty, now article 52  of the TFEU.

In the case of reference, the Court will decide whether different taxation for gambling winnings of an Italian resident player obtained in another State member is allowed under the European regulations.

While the term to submit written observations has expired, the date of the hearing has not yet been fixed but should be reasonably expected before year end.

I. THE LEGAL NATIONAL FRAMEWORK AND RELEVANT CASE LAW

While winnings such as casino are taxed according to a withholding tax system provided by article 30 of the Presidential decree D.P.R. dated 29^th September 1973, n. 600 – with the licensed gambling operator chargeable to the tax and not the player – winnings occurred in other EU Member States casinos are considered as “further income” and are subject to player’s income taxation, according to the TUIR[2] and to the Taxation Agency recent notice dated 30^th December 2010[3].

In 2011, the Taxation Agency launched the “All In” operation towards several Italian resident players having regard to the winnings occurred in other State members of the European Union, attending poker tournaments.

Following this operation, many legal battles have started.

In February 2014, in the main proceeding opposing the Italian resident poker player M. Braccini to the Taxation Agency, the Tax Court of Perugia ruled that income taxation on foreign winnings are to be paid but no additional sanctions can be requested.

On the contrary, in March 2014, the Tax Courts of Treviso and Teramo rulings rendered null and void the Taxation Authority decisions against other Italian resident poker players, convicting the Authority to refund the legal expenses.

 

II. THE LEGAL EU FRAMEWORK AND THE COURT PRECEDENT

The principle of freedom to provide services prohibits any discrimination in respect of nationals of Member States who are established in a State of the EU other than that of the person for whom the services are intended as well as any restriction on or obstacle to freedom to provide services, even if they apply to national providers of services and to those established in other Member States alike.

In the matter of reference, the European Court of Justice will decide if said principle is precluding a Member State from applying rules under which winnings from poker tournaments winnings held in other Member States are regarded as taxable income of the winner chargeable to income tax, whereas winnings from poker tournaments within licensed national casinos in the Member State in question are exempt from tax.

A case on lotteries winnings taxation had been examined by the European Court of Justice and could constitute for the current analysis an important precedent.

Indeed, the case derived from a question referred for a preliminary ruling on the interpretation of Article 49 EC in the course of the main proceedings brought before the Court of Finland between Mrs. Lindman and the Skatterättelsenämnden (Taxation Verification Committee) concerning its rejection of her appeal against her assessment to tax on an amount of money which she had won as a result of a lottery draw held in Sweden.

That lottery win was regarded as earned income chargeable to income tax and was assessed to national tax payable to the Finnish State, to local tax payable to the municipality of Saltvik, to church tax for the benefit of the parish and to an additional sickness insurance premium levied under the Sickness insurance law.

With its judgment dated 13 November 2003[4], the Court stated that “Article 49 EC prohibits a Member State’s legislation under which winnings from games of chance organised in other Member States are treated as income of the winner chargeable to income tax, whereas winnings from games of chance conducted in the Member State in question are not taxable”.

First of all, the Court noted that, although direct taxation falls within the competence of the Member States, they must nonetheless exercise that competence consistently with Community law[5], now EU laws.

Secondly, in consistence with its previous case-law, the Court states that gambling activity such as lotteries falls within the scope of the EU Treaty principle of freedom to provide services[6].

Thirdly, the reasons which may be invoked by a Member State by way of justification to the restrictions of the above freedom must be accompanied by an analysis of the appropriateness and proportionality of the restrictive measure adopted by that State[7].

Interestingly the Finnish, Belgian, Danish and Norwegian Governments submitted that the Finnish legislation was compatible with Article 49 EC whereby: “any restrictions are justified by overriding reasons in the public interest relating to combating the pernicious consequences of games of chance, since if winnings from foreign lotteries were exempt, the public would be encouraged to participate in them”.

But the Court stated that the Finnish government did not adduce any sufficient and convincing evidence to justify the restrictive difference of treatment for tax purposes between foreign lotteries and Finnish lotteries – whereby only winnings from games of chance which are not licensed in Finland are regarded as taxable income, whereas winnings from games of chance organised in that Member State are not taxable income.

 

III. WHERE FROM HERE? AN OPEN DEBATE

In the Finnish case, the EC Commission argued that, in accordance with the principle of fiscal neutrality, a Member State may not treat a winner of a game of chance lawfully organised in another Member State less favorably than a winner who participated in a game organised in the first State.

Should we consider the previous case-law of the Court, then the restrictive and discriminatory character of the Italian legislation may come to light, as it taxes in a different manner the poker live winnings obtained in Italy than those occurred in another EU State member.

It follows that it is incumbent upon the Italian government to prove that the restrictive tax legislation is justified for overriding reasons in public interest, such as consumers protection or anti money laundering issues, as well as appropriate and proportional.

According to settled case-law of the European Court of Justice, the underlying objective of the measure shall be clearly identified and overriding reasons in public interest justifying the restrictive tax legislation shall obviously not be limited only to financial reasons[8].

But additional arguments could emerge in the debate.

One of this argument could be to consider live poker tournament activity as a game of skill and not a game of chance as the lotteries. A recent ruling of the Italian Supreme Court stated the prevalence of ability within live poker tournament “texas holdem” version[9] provided certain criteria are fulfilled – such as when the bet is limited to the initial registration fee amount. Even though the national case-law debate is still open[10], in this case, the similarity with the Court precedent could be questionable.

Another argument could be that the challenged Italian measure is justified by overriding reasons in the public interest relating to combating the pernicious consequences of these games, since they are not allowed in Italy outside the fourth licensed casinos. In both cases in which live poker tournament may be considered as a game of chance or game of skill, the current national provision states that its offer is criminally relevant if not managed by the State or by its licensees[11].

Therefore, should the winning of the Italian poker player have occurred in a location outside a casino, the Italian government may point out that offline poker tournaments are not yet allowed in Italy because a license system has not been settled[12].

A comparable factual and legal situations would be missing and the discriminatory character of the taxation imposed on foreign poker live winnings could be challenged. The Italian government could thus point out that for overriding reasons in public interest, offline poker tournaments winnings are taxed in order to discourage the public to participate in them.

Most assuredly, there is a great expectation of the Court’s ruling.