C-279/93

OPINION OF MR LÉGER — CASE C-279/93

OPINION OF ADVOCATE GENERAL LÉGER delivered on 22 November 1994 "

1. The four questions referred to the Court tax, hereinafter 'the EStG'), persons who for a preliminary ruling by the Bundesfinanz­ have no residence in Germany or do not hof in the present case bear an affinity with habitually reside there are 'subject to limited 1 the series of cases Commission v France taxation' (beschränkt einkommensteurer- 2 3 (the 'tax credit' case), Biehl, Bachmann, pflichtig) on the part of their income arising 4 5 Commission v Belgium, Commerzbank, in Germany, whereas residents are subject to 6 9 Halliburton Services and, above all, Wern- 'unlimited taxation'. 7 er, the factual and legal aspects of which are very similar. They concern a key question of Community law: what is the impact on domestic income-tax legislation of the Com­ munity principle of the free movement of persons as implemented by Article 48 of the EEC Treaty? 4. Those two categories of taxpayers are subject to very different tax regimes.

2. The relevant tax legislation is as follows. 5. The second are taxed by the German rev­ enue authorities on the totality of their income whilst the first are taxed only on income received within German territory.

3. Pursuant to paragraph 1.4 of the Einkom­ mensteuergesetz (German law on income

6. Applying the principle that the personal * Original language: French. and subjective situation of a non-resident — 1 — Case 270/83 [1986] ECR 273. 2 — Case C-175/88 [1990] ECR 1-1779. Followed by Treay- who is therefore subject to limited taxation infringement proceedings by the Commission against the — will be taken into account by his State of Grand Duchy of Luxembourg in Case C-151/94, pending. 3 — Case C-204/90 [1992] ECR 1-249. 4 — Case C-300/90 [1992] ECR 1-305. 5 — Case C-330/91 [1993] ECR 1-4017. 6 — Case C-l / 93 [1994] ECR 1-1137. 8 — BGBl I 1987, 657; BStBl I 1987, 274. 7 — Case C-l 12/91 [1993] ECR 1-429. 9 — Paragraph 1.1, first sentence, of the 1987 EStG.

national, Mr Schumacker, against the Finanzamt Köln-Altstadt.

10 — 3 3 2b ani1 26b Cį"" ?™?" °f the EstG. Under the 'splitting tar­ iff, the overall income of the spouses is aggregated, notion- ally allocated to each spouse as to 50% and then taxed accordingly. If the income of one of them is high and that of the other low, the splitting evens out the taxable amount 12. In response to a complaint from Mr and mitigates the progressive effect of the income-tax rates. Without the benefit of splitting, married non-resident Schumacker, the Finanzamt, by decision of employees arc subject to the same treatment as single per­ sons. 22 June 1989, refused to calculate the amount 11 — For example, vocational training expenses (paragraph F B F 33a.2 of the EStG). 12 — Such as the allowance for a dependent child under para­ graph 32.6 of the 1987 EStG. See also the fifth sentence of 15 — His wife received unemployment benefit in Belgium, but paragraph 50.1 of the 1987 EStG. only, it seems, for 1988. 13 — Paragraph 42, 42a and -16 of the 1987 EStG. 16 — Convention of 11 April 1967, based on the OECD model. 14 — Paragraph 7 of the Opinion of Advocate General Darmon 17 — If the statement of the plaintiff in the main proceedings is in Werner, cited above. For a detailed examination of the assumed to be correct, under the limited taxation regime he differences beween the limited-taxation regime and the has to pay DM 16 559.64 more than he would have had to unlimited-taxation regime, see the Commission's observa­ pay if he had lived in Germany (plaintiff's observations, tions, at I, 3. part one, at II).

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The first question 18. Does this issue thus fall outside the scope of Community law?

15. Can Article 48 of the EEC Treaty restrict the right of a Member State to levy tax on the income of a citizen of another Member State? 19. Let me say first of all that under Article 100 of the EC Treaty, those rules are subject to harmonization by unanimous action by the Member States if they have a direct impact on the establishment or functioning 23 of the common market. Taxation is 16. Noting that direct taxation falls within excluded from the scope of Article 100a, the exclusive powers of the Member States, which allows harmonizing measures to be the national court expresses doubts as to the adopted by a qualified majority. Unlike VAT, possibility of applying Article 48 to national direct taxation is at a purely embryonic stage 24 legislation in this sphere. In particular it of harmonization. states that '... nowhere does the EEC Treaty confer express authority to harmonize the 19 direct taxes of the Member States.' In any event, the case-law is not, in its view, suffi­ ciently explicit regarding the existence of a 20 relationship between those provisions.

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21. Thus, even in areas in which they have 24. Social security, direct taxation or, for exclusive powers, the Member States may example, the conditions for the award of uni­ not adopt measures which, without justifica­ versity diplomas are matters for the Member tion, hamper the free movement of workers States. They are nevertheless required to (Article 48), members of the professions adopt, in those areas, rules which respect the (Article 52), 26 services (Article 59) or capital great freedoms laid down by Community (Article 73). law.

22. The application of those principles is not subject to the precondition of approximation of national laws. As pointed out by Advo­ cate General Mancini in his Opinion in Case 25. But it is only to the extent to which such 270/83 Commission v France, 27 'delay on the rules have an impact on those freedoms that part of the Community legislature does not they come within the scope of Community suspend the Member States' obligation to law. apply their tax laws in a non-discriminatory way'.

23. In that case, the Court upheld the fol­ lowing principle: 26. Thus, any tax legislation which intro­ duces discrimination, whether overt or con­ cealed, based on nationality must fall to be examined in the light of Article 48, 52 or 59.

'... the fact that the laws of the Member States on corporation tax have not been har­ monized cannot justify the difference of treatment in this case' (based on Article 52 of 2 the EEC Treaty). 8

28. Moreover, Article 7 of Regulation (EEC) No 1612/68 on freedom of movement for 30 workers within the Community requires that all workers who are nationals of a Mem­ ber State enjoy in the territory of other 31. Finally, the rights granted to Commu­ Member States the same tax benefits as nity nationals under Articles 48, 52 and nationals working there. The Council has 59 are unconditional. Observance of them thus applied the principle of equal treatment cannot depend, in particular, on the content to the sphere of taxation. of a double taxation treaty between two 33 Member States.

29. In Biehl, the Court held: 32. If further evidence were needed of the fact that tax legislation is subject to obser­ vance of the great freedoms embodied in the Treaty, Article 73d of the EC Treaty could be cited. Article 73b having laid down the prin­ ciple that all restrictions on capital move­ ments between Member States and between 'The principle of equal treatment with regard Member States and non-member countries is to remuneration would be rendered ineffec­ prohibited, Article 73d provides that the tive if it could be undermined by discrimina­ Member States are entitled 'to apply the rel­ 31 tory national provisions on income tax'. evant provisions of their tax law which dis­ tinguish between taxpayers who are not in

29 — Page 24. 30 — Council Regulation of 15 October 1968, OJ, English Spe­ 32 — Case C-20/92 [1993] ECR 1-3777, paragraph 19. cial Edition 1968 (II), p. 475. 33 — Sec paragraph 26 of the judgment in Case 270/83 Commis- 31 — Paragraph 12. sion v France, cited above.

35. The criterion of residence is the main pillar of international tax law. Chosen by 33. A preliminary observation is called for: almost every State in the world, it is given it is true that, by contrast with Werner, this precedence over nationality 'which involves case certainly comes within the scope of taxation by a State of persons who may have Community law. A German national work­ lost all links, in particular those of an eco­ 36 ing in the Federal Republic of Germany nomic nature, with that State'. where he acquired his professional qualifica­ tions, Mr Werner never exercised the free­ doms conferred by the Treaty, particularly that of establishing himself in another Mem- ber State. The only foreign element was the fact that he resided in the Netherlands. In this case, Mr Schumacker, a Belgian national 36. The logic of the distinction between resi­ who acquired his qualifications and profes­ dents and non-residents is clear: by choos­ sional experience elsewhere than in the Fed­ ing to reside in a particular State, a person 34 eral Republic of Germany, exercised the assumes the obligation to contribute to the right of freedom of movement for workers costs of public administration and the public laid down in Article 48 of the Treaty in order services made available to him by that State. to go to Germany and take up employment It is therefore logical that that State should there. The situation is therefore not purely tax the entirety of his income, on a compre­ 35 internal to a Member State. hensive basis. It is also that State, where the taxpayer has focused his family life, which will grant him allowances and reliefs. There

'...the rules regarding equality of treatment forbid not only overt discrimination by rea­ son of nationality but also all covert forms of discrimination which, by the application of 39. Application of the principle of non­ other criteria of differentiation, lead to the discrimination to the sphere of taxation calls 40 same results'. for great circumspection. As has been observed,

42. The Court has recognized that a distinc­ tion based on residence, although applicable 'To anyone who is somewhat familiar with without distinction to nationals and non- tax law, it is clear that the concept of de facto nationals, should be viewed in the same way non-discrimination could very easily result in the disintegration of national tax systems. Even were the Court to limit itself to the 38 — Vanistendael, F.: 'The Limits to the New Community Tax Order', CML Rev., 1994, p. 293 (emphasis added). 39 — Case 152/73 [1974] ECR 153, paragraph 11. 40 — Paragraph 13. See also, with regard to Article 52, paragraph 37 — See in particular Article 4(1) of the model convention of 14 of the judgment in Commerzbank and paragraph 15 in September 1992. Halliburton Services.

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as a distinction based on nationality where free movement of workers did not infringe the non-residents are in the main non- Article 48 of the Treaty provided that it was nationals. 41 justified 'by the need to safeguard the cohe­ 45 sion of the tax system at issue'.

45. A tax provision based on the criterion of residence and having discriminatory effects does not encroach upon the principle of free­ dom of movement for workers provided that 47. Since the judgments in Bachmann and it pursues an objective in the public interest Commission v Belgium, the Court has held (such as upholding the coherence of the that national rules which are discriminatory national tax system) and is strictly necessary within the meaning of Article 48(2) may, in order to achieve that aim. In its judgment 44 despite such discrimination, be justified for in Commission v Belgium, the Court rec­ overriding reasons of public interest. The ognized that a tax provision restricting the exceptions to the principle of non­ discrimination laid down by that article are not merely those referred to in paragraphs 41 — Paragraph 14. See also paragraph 9 of Bachmann and para­ 3 and 4 thereof. graph 15 of Commerzbank. 42 — Paragraph 19. 43 — Paragraph 19 of the judgment in Case 270/83 Commission v France, cited above. 44 — Cited above, footnote 4. 45 — Paragraph 21.

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48. The Court thus applies the 'rule of rea­ 52. But it is also necessary, at the very out­ son' to discriminatory tax rules intended to set, for there to be a clear indication of dis­ temper the effects of bringing within the crimination. scope of Articles 48 and 52 national rules which apply without distinction and prevent 46 or hamper the free movement of workers.

53. As we know, 'discrimination consists solely in the application of different rules to comparable situations or in the application 48 of the same rule to differing situations'. 49. Those are the principles which, I suggest, should be applied in the present case.

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which were not available to non-residents in ness expenses (Werbungskosten), and so the same tax situation. forth. That is the centre of the taxpayer's essential interests.

56. It is therefore necessary to verify in this case whether 'similar situations' are 'treated 50 59. On the other hand, a person 'subject to differently'. limited taxation' (here, a non-resident) is taxed in the Federal Republic of Germany only on the part of his income arising there. He is taxed objectively, regardless of his per­ sonal circumstances, according to the princi­ ple that those circumstances will be taken into account by the tax administration in his 57. Having regard to the procedures and State of residence, which knows him better, conditions for the taxation of income, is in accordance with the rules of international there an objective difference of circumstances 54 tax law. As the national court observed, 'It 51 which could justify different treatment? is thus not the taxpayer personally who is linked with the national territory, but the 55 work done by him'.

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61. It is only in his State of residence that one subject to limited taxation because they the 'splitting' approach can be used, which are not in comparable circumstances. Taxa­ presupposes that all the income obtained by tion of the former's worldwide income can­ both spouses, both at home and abroad, is not be compared to the taxation of the latter, taken into account. which is limited to the income received in the State of employment. Different situations are treated differently. The abovementioned Article 24 of the OECD Model Convention is very clear in that respect: residents and non-residents are not in the same situation and a distinction may be drawn between them with regard to taxation without the lat­ 62. It is a cohesive system: if the Federal ter having any right to invoke the principle Republic of Germany took account of the of non-discrimination. personal circumstances of a taxpayer subject to limited taxation — which it could do only in respect of the income earned there — those circumstances would be taken into account twice, by the State of employment and by the State of residence, leading to an unjustified tax benefit. The different systems 64. It cannot therefore be contended that a to which residents and non-residents are non-resident subject to limited taxation is, in subject make it possible to avoid duplication principle, taxed 'more heavily' than a resi­ 58 of benefits. That is why, under Article 24(3) dent subject to unlimited taxation. The 59 of the OECD model convention on double basis of taxation is not the same and the taxation, a contracting State is not obliged to individual circumstances of the person con­ grant residents of another contracting State cerned may be taken into account under very the personal deductions, reliefs and rebates favourable conditions by his State of resi­ 57 which it grants its own residents. dence.

66. Not being subject to taxation in his State 69. That situation is reminiscent of the Biehl of residence, where he does not receive suf­ case, in which the Court emphasized that ficient income, a taxpayer in the circum­ breach of the principle of equal treatment stances of the plaintiff in the main proceed­ was particularly clear where the non-resident 60 ings — he is subject to limited taxation in taxpayer received income only in the Grand 61 his State of employment — will not have his Duchy of Luxembourg. personal circumstances taken into account in any State: the State of residence does not tax him at all and his State of employment regards him as subject to limited taxation and disregards his personal circumstances. 70. A national of a Member State who exer­ cises his right of freedom of movement under Article 48, to work in another Mem­ ber State (where he receives all his income) whilst continuing to reside in his State of origin, will have to pay tax on the income 67. This sort of 'negative conflict' of juris­ received in his State of employment without diction between the State of employment his personal circumstances and his family and the State of residence (which both refuse responsibilities being taken into consider­ to grant tax relief in respect of personal and ation. family responsibilities) leads to 'overtaxa­ tion' of non-residents. Does this constitute discrimination?

71. This leads to clear discrimination at the expense of the non-resident, who is subject to a different tax regime from that applicable to residents, where 'the income liable to ... 68. The practical importance of the question should be emphasized: frontier workers — in

76. I consider that, in the absence of such 'the free movement of persons may be rules, only an appraisal of the facts — falling impeded by personal income tax arrange­ to the national court — will make it possible ments which have the effect of imposing a to determine the threshold as from which the heavier tax burden on non-residents than on income in the State of residence is sufficient 6 residents in comparable situations'. 4 The for the personal circumstances of the person former must not, 'where the preponderant concerned to be taken into account by the part of their income is received in the coun­ tax authorities of that State. Only the resi­ try of activity, be deprived of the tax reliefs dents of that State who have not reached that 65 and deductions enjoyed by residents'. threshold can be placed on the same footing as residents of the State of employment where they receive the major part of their income. 62 — Paragraph 19 of the judgment in Case 270/83 Commission v France, cited above. 63 — OJ 1994 L 39, p. 22. 64 — Second recital, emphasis added. 65 — Sixth recital, emphasis added. 66 — Article 2(1) and (2).

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77. What justification might 'save' the Ger­ State is limited by Article 8(1) of that direc­ man rules in the light of Article 48 of the tive), « and Directives 79/1070/EEC and 71 Treaty? 91/12/EEC which amended it.

81. Relying on those directives, the Court 78. Where one encounters discriminatory rejected the argument that it was difficult for tax rules, one examines very rigorously any a tax administration to gather the informa­ grounds for justification. Thus, a tax disad­ tion necessary for the taxation of a person 72 vantage is not necessarily justified by the fact established in another Member State. that it may be balanced out by an advan­ 67 tage.

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essary and, where appropriate, from refusing 74 German residents, in particular the benefit to allow deduction where such proof is not of 'splitting'. Subsequently, the German leg­ n forthcoming'. islature brought the treatment of all non­ residents receiving at least 90% of their over­ all income in Germany into line with that of residents of that State, apart from the benefit 75 of 'splitting'.

(b) The cohesion of the tax system precludes treating non-residents in the same way as residents in such circumstances

74 — Law of 21 October 1980 on the implementation of the Additional Protocol of 13 March 1980 to the Convention of 16 June 1959 between the Federal Republic of Germany and the Kingdom of the Netherlands (AGGrenzg NL , 84. That being so obviously the case, the BGBl I 1980, 1999, BStBl I 1980, 725). It should also be noted that, reciprocally, Netherlands tax law treats in the Federal Republic of Germany initially same way as persons subject to unlimited taxation those adjusted its tax rules so as to bring frontier who receive at least 90% of their worldwide income in the Netherlands but do not reside there ('Resolutie' of the Sec­ workers from the Netherlands who received retary of State for Finance of 21 December 1976, No 27-621 782, and of 28 December 1989, No DB 89/2184, at least 90% of their worldwide income in BNB 1990/100 and, since 1 January 1990, Wet op de In­ Germany within the tax regime applicable to komstenbelasting 1964, Articles 53a and 53b). See also paragraph 11.5 of the Commission's observations. 75 — Gesetz zur einkommensteuerlichen Entlastung von Grenz- pendlcrn und anderen beschränkt steuerpflichtigen natürlich Personen und zur Änderung anderer gesetzlicher Vorschriften (Grenzpendlergesetz) of 24 June 1994, BGBl, I 73 — Paragraph 20 of Bachmann, emphasis added. No 39, p. 1395.

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tained by the Bundesfinanzhof in a judgment 89. What is the position regarding 'splitting', of 20 April 1988: 76 of which the benefit is withheld from non­ residents by the Grenzpendlergesetz?

90. There is no risk in this case of the tax­ 'It would be contrary to paragraph 3 of the payer's personal circumstances being taken Basic Law to treat frontier workers from into account twice, because he is not taxed in other neighbouring States differently from his State of residence. those from the Netherlands'.

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94. However, spouses residing together in 98. Let me emphasize, in conclusion, that Germany are subject to unlimited taxation the distinction between residents and non­ and 'splitting' is systematically available to residents is not absolute. The tax rules of them. Moreover, it is apparent from the find­ several Member States deem certain persons ings of the national court that a married cou­ who do not live there to be residents and ple residing at the same time in both Ger­ subject them to unlimited taxation. Para­ many and Belgium could also qualify for graph 1(2) of the EStG, which is concerned 79 it. with non-resident civil servants, or the Ger­ man tax regime for people with dual resi­ dence are two examples of this.

95. I conclude from this that, for application of the tax by progressive rates, the income of a spouse, whether or not resident, may be 80 The fourth question taken into consideration.

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who are subject to limited taxation — do not 104. In that case, a taxpayer who left the qualify for any such adjustment: the sum Grand Duchy of Luxembourg during a year of the monthly deductions at source consti­ was unable, unlike residents, to receive a tutes the definitive taxation. refund at the year end of any overpayment received by the tax administration as a result of deductions at source. Finding that taxpay­ ers who leave their State of employment (or establish themselves there) during the course of a year are mainly nationals of other Mem­ ber States, the Court identified disguised dis­ 84 crimination. 101. Whilst the non-resident may thus be 83 able to avoid possible retroactive taxation, the important point is that he is deprived of the possibility of claiming for exceptional expenditure or extraordinary financial bur­ dens which might give rise to a tax refund. He is placed at a particular disadvantage if he leaves his State of employment in the course of a year (or if he takes up work there during 105. In the present case, by depriving non­ the course of a year, as in the case of the residents of the right to annual adjustment of plaintiff in the main proceedings in 1988). deductions at source, the German tax rules deprive them of a benefit, namely the right to the refund of any overpayment (where the monthly deductions exceed the total amount of tax due for the year in question), which, by contrast, residents may claim.

102. Provided that the non-resident's situa­ tion is comparable to that of the resident, in other words he receives all or almost all his income in the State of his employment, is such a difference of treatment compatible with Article 48 of the Treaty? 106. The obligation to grant the nationals of another Member State the same tax benefit as nationals extends to procedural rules and arrangements for recovering tax. The Court has already taken the view that the mere pos­ sibility of an administrative appeal against a tax decision which is considered unfair could 103. That question was, in my view, settled not justify maintaining a discriminatory pro­ 85 cedural tax provision. by the judgment in Biehl.

'(1) Tax rules which apply to residents and non-residents different conditions regarding income tax may fall within the scope of Article 48 of the EC Treaty.

(2) In principle, that article does not preclude a non-resident employed person from being taxed by the State of employment more heavily than a resident in the same employment where they are not in comparable situations from the tax point of view.

(3) On the other hand, that article prohibits a Member State A from fixing, in the case of a worker residing within the territory of a Member State B, who is in

86 — Question No 2579/91 (OJ 1993 C 16, p. 1).

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