Brev | Dato: 03.04.2001
EFTA Surveillance Authority
Rue de Trèves 74
00/81 SA tur/KR
Dear Mr. Hammermann,
Letter of Formal Notice regarding tax exemption of lottery prizes in Norway
Reference is made to your letter of 18 December 2000 regarding alleged discriminatory tax exemption of lottery prizes in Norway and your letter of 7 March 2001 regarding extension of the time limit to reply. The Norwegian Government submits the following observations:
1. EC- or EEA-regulations on lotteries and sportsbetting
Within the EC- or EEA-market there is no harmonisation regarding regulations on lotteries or sportsbetting. However, the European Court of Justice (ECJ) has stated that the exercise of lotteries and gaming constitutes the provision of services within the meaning of the EC Treaty, see case 275/92 (the Schindler case) paragraph 25. In the same case, the Court states that the peculiar nature of lotteries justify national restrictions, as regards Article 49 (previous 59) of the EC Treaty, which may go so far as to prohibit lotteries in a Member State, see paragraph 59 of the mentioned decision. In the subsequent two paragraphs the Court states the following distinction between EC free trade regulations and national lottery regulations:
60 First of all, it is not possible to disregard the moral,
religious or cultural aspects of lotteries, like other types of
gambling, in all the Member States. The general tendency of the
Member States is to restrict, or even prohibit, the practice of
gambling and to
prevent it from being a
private profit. Secondly,
lotteries involve a
high risk of
crime or fraud, given the size of
the amounts which can be staked and of the winnings which they can
hold out to the players, particularly when they are operated on a
large scale. Thirdly, they are an incitement to spend which may
damaging individual and social
consequences. A final ground which is not without relevance,
although it cannot in itself be regarded as an objective
justification, is that lotteries may make a significant
contribution to the financing of benevolent or public interest
activities such as social works, charitable works, sport or
61 Those particular factors justify national authorities having a sufficient degree of latitude to determine what is required to protect the players and, more generally, in the light of the specific social and cultural features of each Member State, to maintain order in society, as regards the manner in which lotteries are operated, the size of the stakes, and the allocation of the profits they yield. In those circumstances, it is for them to assess not only whether it is necessary to restrict the activities of lotteries but also whether they should be prohibited, provided that those restrictions are not discriminatory."
The European Court of Justice concluded similarly in the cases C-124/97 (the Läärä case) and C-67/98 (the Zenatti case). In both cases the Court states that it is up to each Member State to find necessary and sufficient restrictions on the practice of gambling and lottery activities, see paragraph 35 to 37 (Läärä).
2.Lottery activities and sportsbetting in Norway
Norway has a long tradition in having a strict regulation on lottery activities and money games. During the last century, the restrictions have become more lenient, allowing money games for the purpose of charity benefits and non-profitable organisations. The authorities accept that there is an interest for lotteries and games in the society, but prefer the population’s interest for lotteries and games and the economic exploitation of such activities to be directed into channels where they can be controlled. The authorities also want to prevent that the exploitation of people’s interest for lotteries and games can be used to commit crime or fraud. To organise money games and sportsbetting through state owned companies has been considered the most appropriate way to ensure that such activity is practised in a satisfactory way, being subject to public control and inspection within the legislation in force.
In Norway the Ministry of Culture is responsible for the National Lottery Act of February 24 1995 no. 11, which states that all lottery activity in Norway needs permission, and can only be held by and for the benefit of non-profitable organisations.
The Ministry of Culture is also responsible for regulations through the National Act of August 28 1992 no. 106 concerning Gaming Schemes, regulating mainly TV-drawn lotto, but also National scratchcard lotteries and sportsbetting for the benefit of cultural, sports and scientific purposes. These lotteries and betting opportunities are held by the state owned company Norsk Tipping AS. The Ministry of Agriculture is responsible for regulations through the National Act concerning betting by Totalizator of July 1 1927 no. 3, allowing horsebetting through the foundation Norsk Rikstoto, for the benefit of equestrian sports and horse-breeding.
Betting or gaming is not allowed for commercial purposes. Casinos are not allowed in Norway.
Figures for turnover from gaming and sportsbetting in 2000
The National Totalizator Act of July 1 1927 no. 32,6 bill nkr
The National Act on Gaming Schemes of August 28 1992 no. 1067,5 bill nkr
The National Lottery Act of February 24 1995 no. 11 11,9 bill nkr
Norwegian lotteries and games are subject to restrictions as regards the manner in which they are operated and the way prizes are paid out, to reduce the possibility of money laundering of money gained from illegal activities.
In the Norwegian lotteries and money games it is also regulated how much of the sales that can be held out as prizes to the players. The prizes of Norwegian lotteries and money games are on a moderate level compared to several European countries.
The Norwegian legislation determines distinct regulations on how lotteries and money games must be constructed and organised. Through regulations safeguarding that profit from all Norwegian lotteries and money games only should be allocated to humanitarian or socially useful purposes (social works, charitable works, sport, culture and scientific research), the authorities prevents that lotteries and money games can be arranged for the purposes of private and commercial profit.
The tax legislation on lottery prizes in Paragraph 2 of Section 5-50 of the Norwegian Tax Act must be regarded as a substantial part of the Norwegian legislation on lotteries. The fiscal regulation must be regarded as a necessary precaution to complete the regulation of lottery activities in Norway. The lotteries comprised by Paragraph 2 of Section 5-50 of the Norwegian Tax Act have been exposed to indirect taxation due to the financing of purposes determined by legislation by a stipulated share of the lottery sales.
Viewed in the light of the Norwegian legislation on lotteries, the prizes in such lotteries are held on a moderate level, and a considerable part of the lottery sales are allocated to non-profit purposes in advance. It therefore follows that the prizes have been subject to a kind of gross taxation before they are paid out to the winners, and it is thus not correct to consider the prizes as exempted from taxation.
When it comes to lotteries and money games established abroad, the national authorities have no possibility to set conditions to ensure that the intentions of the national legislation on lotteries are safeguarded. Such lotteries and games may operate with prizes up to 95 % of the total lottery sales and with no other purposes than to create large prizes and being a source of private profit for the person in charge of the arrangement. Consequently, the winners are liable to income tax on prizes or winnings from foreign lotteries or money games.
3. The basis for the Norwegian legislation
The Schindler case states that the national authorities have a sufficient degree of latitude to decide whether they should determine regulations on lottery activities, and in that case, to determine more explicitly which limitations should apply. Such regulations are justified due to the moral, religious and cultural aspects of lotteries and money games. The establishment of regulations to protect the players, the manner in which lotteries are operated, the size of the stakes and the allocation of the profits they yield, fall within this latitude.
The moral aspects of lotteries and money games have always been considered to be of great importance for the legislation on lotteries and money games in Norway. There has been a broad political agreement that the opportunity to operate lotteries and money games should be regulated and have authority in law.
The justification for the Norwegian legislation is to prevent that lotteries and money games can be arranged for the purposes of private and commercial profit.
Furthermore, the Norwegian regulations on lottery and gaming activities have been based on doctrines stating that money games may cause gambling addiction and social problems. In order to protect the players against such undesirable consequences from money games, the authorities wish to reduce the opportunity to play for money.
The Norwegian regulations on how much of the sales that can be held out as prizes to the players, imply that the share of the sales that goes back to the players not being as high as the players might wish. In this manner prizes are held on a moderate level, and the regulations also contribute to avoid large prizes, which may have damaging individual and social consequences.
This scheme must be regarded in its entirety. It regulates the market of lotteries and money games by moderating people’s interest for lotteries and preventing damaging high prizes. The inhabitants interest in participating in foreign lotteries is reduced as the taxation of prizes from foreign lotteries prevent them from being substantial more profitable than the Norwegian lotteries or money games. If the winners were not liable to income tax on lottery prizes, there is also a well-founded risk that the problem of money laundering would increase. Winner coupons might be bought by persons who need to prove to the taxation authorities that money is gained in a legal way.
The tax legislation on lottery prizes in Paragraph 2 of Section 5-50 of the Norwegian Tax Act must be considered to fall within the latitude of national authorities according to the ECJ’s statement in the Schindler case. These lotteries make a significant contribution to the financing of benevolent or public interest activities such as social works, sport and culture. The Norwegian Government does not regard the allocation to non-profit purposes as an objective justification for the Norwegian legislation. However, the scheme must be regarded as a rational, efficient and effective way to impose tax on national lotteries and money games.
Within this perspective and the statements of the European Court of Justice that are mentioned above, it must be up to each contracting party in the EEA Agreement to provide protection for national players against foreign gambling and gaming offers also through tax exemptions, unregarded that such tax regulations also protect the financing of benevolent or public interest activities such as social works, charitable works, sport or culture.
As far as the Norwegian Government has been informed, this perspective is also dominant in several EU Member States in the sense that tax exemptions for the benefit of national lottery prizes are a part of current tax regulation.
According to Section 4 of the Danish National Act on Tax of 10 April 1922 no 149, lottery prizes are subject to income tax as a principal rule. The provision apply mainly foreign lottery prizes, as the Danish legislation make tax exemptions for almost all legal Danish money games and lotteries. National lottery prizes and prizes from national sportsbetting and lotto are not subject to income tax. Instead, the operator of the game or lottery is obliged to pay an excise duty to the state. As an example on such legislation, see to Paragraph 2 of Section 8 of the Danish National Act no. 454 on Horse- and Dog-racing of 31 May 2000, which states that prizes from such activities are exempted from income tax. The operator (Dansk Tipstjeneste) must pay 15 % of the amount of the prize that exceed 200 Dkr. as an excise duty to the exchequer. For prizes regulated by the Danish National Act no. 765 on games, lotteries and betting of 14 August 2000, identical provisions are determined in Section 6.
In Finland, national lottery prizes are exempted from income tax. Reference is made to the Finish National Act on Income Tax of 30 December 1992 no. 1535 Section 85 which states that prizes from lotteries comprised by Section 2 of the Finish National Act on Taxation of Lotteries of 26 June 1992 no. 552, are not subject to income tax.
Also Swedish legislation make tax exemptions for national lottery prizes. Pursuant to Section 3 of Chapter 8 of the Swedish National Act on Income Tax of 16. December 1999 no 1229, prizes from Swedish lotteries are not subject to income tax. Section 25 of Chapter 42 determines that prizes from foreign lotteries are subject to income tax if the prize exceeds 100 Skr.
On the basis of the above, the Norwegian Government respectfully submits that the Norwegian Tax Act is not contrary to Article 36 of the EEA Agreement.
Deputy Director General