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O P I N I O N O F ADVOCATE GENERAL LÉGER delivered on 20 June 2002 1

1. Since direct taxation is a matter falling I — Community law within the competence of the Member States alone, a Community national who receives a salary in the State in which he resides and also in another Community State risks having his income taxed both in the latter State — the State of employ- ment — and in his State of residence. 4. It is provided in Article 48(1) and (2) of the Treaty that freedom of movement for workers is to be secured within the Com- munity and must entail the abolition of any 2. Although the abolition of double tax- discrimination based on nationality ation is one of the aims of the Treaty, 2 between workers of the Member States as Community law does not establish the most regards employment, remuneration and appropriate method of achieving it. It is for other conditions of work and employment. the Member States to adopt the provisions necessary to realise that objective.

3. In the present case, the Court of Justice is asked whether provisions under which an employee, owing to the fact that in the same year he has derived income both in his 5. Article 7 of Regulation No 1612/68 pro- State of residence and in another Member vides, in particular: State, loses, in the calculation of his income tax liability in the State of residence, the benefit of part of his tax allowances, are compatible with Article 48 of the EC Treaty 3and Article 7 of Regulation (EEC) No 1612/68 of the Council. 4

1 — Original language: French. 2 — Article 220 of the EC Treaty (now Article 293 EC). ' 1 . A worker who is a national of a 3 — Now, after amendment, Article 39 EC. Member State may not, in the territory of 4 — Regulation (EEC) No 1612/68 of the Council of 15 October 1968 on freedom of movement for workers within the another Member State, be treated differ- Community (OJ, English Special Edition 1968 (II), p. 475). ently from national workers by reason of

6. The national law is composed of the bilateral conventions concluded by the 7 — The Convention between the Kingdom of the Netherlands and the United Kingdom of Great Britain and Northern Kingdom of the Netherlands with the Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income Federal Republic of Germany, 5the French and capital gains, signed at The Hague on 17 November Republic 6 and the United Kingdom of 1980 (Tractatenblad 1981, 54 and 108; 1983, 128; 1989, 128, and 1991, 12 to 14 inclusive). 8 — These are the Decree on the Avoidance of Double Taxation of 21 December 1989 (Staatsblad 1989, No 594, which came into force on 1 January 1990), as amended by the 5 — The Convention between the Kingdom or the Netherlands Decree of 23 December 1994 (Staatsblad 1994, 694, which and the Federal Republic of Germany for the avoidance of came into force on 1 January 1995) (hereinafter 'the 1989 double taxation in the field of taxes on income and capital Decree') and the Income Tax Law of 16 December 1964, as as well as various other taxes and for the settlement of other last amended by the Law of 24 December 1994 (Staatsblad matters in the field of taxation, signed at The Hague on 1993, 760) (hereinafter 'the Law of 1964'). 16 June 1959 (Tractatenblad 1959, 85), as subsequently amended (Tractatenblad 1960, 107; 1980, 61 and 200; 9 — That method, the 'exemption with progression' method, is a 1991, 95; 1992, 14 and 1994, 81). variant of the exemption method, which is itself one of the two standard methods for avoiding double taxation in the 6 — The Convention between the Kingdom of the Netherlands State of residence, the principle of which is laid down in and the French Republic for the avoidance of double Articles 23A and 23B of the Model Convention of the taxation and the prevention of tax evasion with regard to Organisation for Economic Cooperation and Development taxes on income and capital, signed in Paris on 16 March (OECD). However, those provisions, in particular 1973 (Tractatenblad 1973, 83), as subsequently amended Article 23A relating to the exemption method, do not (Tractatenblad 1974, 41). specify how the methods should be implemented.

10 — The method of calculating the exemption is laid down in Article 3 of the Decree of 1989, to which reference is made in the Convention concluded between the Kingdom of the 11 — The fraction is called 'the proportionality factor'. Netherlands and the United Kingdom, cited above, in the 12 — In the Explanatory Memorandum to the Decree of following terms: 'The exemption (to be granted under the 7 November 1991 amending the 1989 Decree it is stated: convention for the avoidance of double taxation) is applied 'This formula has been chosen in order to take account of by granting a reduction equivalent to the amount of certain deductions which, in the opinion of the Nether- income tax which would be clue (under the Law of 1964) lands legislature, affect tax capacity but are not attribu- without the application of (the convention). That reduc- table to specific sources of income either in the tion is equal to the amount which is in the same proportion Netherlands or abroad. Because those deductions are not to the tax which would be payable (under the Law of connected with specific sources, it can be assumed that 1964) as the foreign gross income is to the gross income, those expenses must be defrayed from the income as a taking into account the reductions and increases provided whole. By taking the gross income as the denominator in for in Chapter II, sections 5A, 5B, 5C and 7 of that law and the proportionality factor and multiplying by that factor reduced by the losses to be offset on the basis of Chapter the total amount of tax which would be payable if this IV of that law in so far as they consist of negative gross decree were not applied, it is ensured that such expenses income.' The conventions concluded by the Kingdom of are charged proportionally against the foreign part of the the Netherlands with the French Republic and the Federal income and against that part of the income which is Republic of Germany contain calculation methods ident- taxable in the Netherlands (a procedure known as appor- ical to that set out in the Decree of 1989. tionment)'.

16. As the national court states, it follows that a portion, which is proportional to the proportionality factor, of the amount of the personal tax allowances which Mr de Groot could claim, did not result in effec- tive reduction of the Netherlands tax pay- 13. During the same year, he made main- able. As a consequence, Mr de Groot tenance payments of NLG 43 230 and, on received less in tax advantages on account 26 December 1994, paid a lump sum of of his maintenance obligations and was

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able to take less advantage of the tax-free Member State without account being allowance than would have been the case if taken of the employee's personal and he had received his total earned income in family circumstances, loses in his State 1994 in the Netherlands. 13 of residence a proportional part of the advantage of his tax-free allowance and personal advantages?

17. Mr de Groot lodged an appeal in cassation against the ruling of the Gerechts- hof te Amsterdam (Regional Court of 2. If Question 1 is answered in the affirm- Appeal, Amsterdam), Netherlands, con- ative, do specific requirements then firming the decision of the Netherlands arise from Community law with regard Taxation Authorities to calculate his taxes to the manner in which the personal in the manner described above. and family circumstances of the employee must be taken into account in his State of residence?'

IV — The questions referred for a prelimi- nary ruling V — Assessment

21. It should be remembered that, although direct taxation is a matter for the Member States, they must exercise their powers in 24. The Court has also held, on several that respect in a manner consistent with occasions, that Article 48 of the Treaty Community law. 15 It follows that the implements a fundamental principle con- Member States, in the exercise of their tained in Article 3(c) of the EC Treaty retained competence, must not infringe the (now, after amendment, Article 3(c) EC), fundamental freedoms guaranteed by the which states that, for the purposes set out Treaty, such as the freedom of movement in Article 2 of the EC Treaty (now, after for workers. 16 amendment, Article 2 EC), the activities of the Community shall include the abolition, as between Member States, of obstacles to freedom of movement for persons. 19

29. I agree with the Commission and the German Government that Article 48 of the Treaty precludes the application of the 26. It has inferred from that that nationals contested legislation. of Member States have in particular the right, which they derive directly from the Treaty, to leave their country of origin to enter the territory of another Member State and reside there in order to pursue an economic activity. 2 1 30. That assessment is based on the follow- ing considerations: first, the legislation has caused Mr de Groot — and is likely to cause a certain number of taxpayers — a genuine disadvantage; second, that dis- 27. It follows that provisions which pre- advantage is not attributable to disparities clude or deter a national of a Member State between the tax schemes of the Member from leaving his country of origin in order States but is a consequence of an obstacle to exercise his right to freedom of move- to the free movement of workers, and, ment therefore constitute an obstacle to third, the reasons put forward to justify the that freedom even if they apply without obstacle cannot, in my view, be upheld. regard to the nationality of the workers concerned. 2 2

31. Firstly, with regard to evidence of the 28. In the present case, the parties agree disadvantage caused by the legislation in that, under the contested legislation, Mr de question, I note that the Advocate General of the national court estimated at NLG 27 341 the reduction obtained by Mr de Groot in respect of his personal allowances 20 —Case 143/87 Stanton [1988] ECR 3877, paragraph 13; Singh, cited above, paragraph 16; and Case C-415/93 and at NLG 70 055 the reduction he would Bosman (1995] ECR I-4921, paragraph 94. have received if those allowances had been 21 — Case C-363/89 Roux [1991] ECR I-273, paragraph 9: Singh, cited above, paragraph 17, and Bosman, cited above, paragraph 95. 22 — Case C-10/90 Masgio [1991) ECR I-1119, paragraphs 18 and 19, and Bosman, cited above, paragraph 96. 23 — See point 16 of this Opinion.

32. Also, since the tax-free allowance and the personal allowances are taken into consideration in the Netherlands only in proportion to the income received in that State, it is clear, as the Commission states, 2 6 that the more of his income a 34. The Netherlands Government main- taxpaying Netherlands resident receives in tains that it took Mr de Groot's personal another Member State the greater will be and family circumstances into account, in the tax disadvantage he suffers in the accordance with the requirements laid Netherlands. 2 7 As the Advocate General down by the Court in the Schumacker of the national court points out, a taxpayer judgment, cited above. It claims that the who has received the main part of his disadvantage he suffered is the result of the income abroad and whose income in the method applied in the case in order to Netherlands is just enough to be taxed in avoid double taxation and is attributable to that State, will experience 'a very severe the tax system in the States of employment fiscal disadvantage' because he will lose a which did not take account of his personal very large part of the benefit of the allow- and family circumstances. According to ances relating to his personal and family that Government, the situation in the circumstances. 2 8 present case is comparable to that which gave rise to the judgment in Gilly. 29 Furthermore, the contested legislation cul- minated in the same result as the other method of eliminating double taxation, the 'credit method', 30 which was at issue in 33. Secondly, I think that, contrary to what that judgment, in that a resident who has the Netherlands Government maintains, exercised his right to freedom of movement may have to bear a heavier tax burden.

37. According to the Court of Justice it is, on the contrary, for the State of residence, in principle, to grant a taxpayer all the tax 36. It should be emphasised that, in this allowances relating to his personal and particular case, the States of employment family circumstances. The Court held that were not under a duty to take account of that State is the best placed to assess the Mr de Groot's personal and family circum- taxpayer's financial situation since that is stances. No such requirement was imposed the place where his personal and financial either in the applicable bilateral conven- interests are centred. 34 It pointed out that tions or in their national legislations. 3 1 international tax law and, in particular, the Also, it is apparent from the Schumacker OECD Model Tax Convention accepted judgment, cited above, that a State of that solution. 35 employment has that duty only if the taxpayer derives the main part of his taxable income from an activity exercised in that State and receives no significant income in the State of his residence, so that the State of his residence is not in a position to grant him the benefits resulting from the 38. That assessment has been confirmed on taking into account of his personal and several occasions, in the judgments in family circumstances. 32 The Court held Asscher, 36 Gschwind 37 and Zurstrassen, that, in that case, there is no objective cited above. 3 8 difference between the situations of such a non-resident and a resident engaged in comparable employment, such as to justify different treatment as regards the taking into account for taxation purposes of the 39. In the present case, I consider that the Netherlands Government is not justified in 31 —The Netherlands Government maintains (point 34 of its observations) that in the United Kingdom Mr de Groot maintaining 39 that the tax authorities took qualified for two personal exemptions, the first, a 'per- account of Mr de Groot's personal and sonal allowance' which in 1993/1994 was GBP 3 444, and the second a maintenance allowance of GBP 1 720. I family circumstances as they are required consider that that statement, which was disputed by Mr de to do by the position adopted by the Court Groot at the hearing, cannot rebut the findings of the national court that, in order to calculate the tax payable by Mr de Groot in each of the three States of employment, the maintenance payments he had made were not taken into account, and that none of those States grants to non- 33 — Ibidem, paragraph 37. resident taxpayers the same allowances relating to per- sonal and family circumstances as to resident taxpayers 34 — Ibidem, paragraph 32. (see paragraphs 3.1 and 3.10 of the order for reference). In 35 — Idem. any event, tne statement would only apply to the United Kingdom, so that, as the Netherlands Government itself 36 — Case C-107/94 Asscher [1996] ECR I-3089, paragraph 44. acknowledges, the questions referred for a preliminary 37 — Case C-391/97 Gschwind [1999] ECR I-5451, paragraphs ruling would still be fully relevant in respect ofthe income 22 and 24. received by Mr de Groot in Germany and France. 38 — Paragraph 21. 32 — Paragraph 36. 39 — See point 38 of its observations.

41. The disadvantage suffered by Mr de 44. As the Court pointed out, 41 any unfa- Groot cannot therefore be attributed to the vourable consequences entailed for Mrs tax regime of the States of employment, but Gilly by the contested tax credit mechanism rather to the methods by which the King- are the result in the first place of the dom of the Netherlands applied to the differences between the tax scales of the taxpayer the allowances relating to his Member States concerned, and, in the personal and family circumstances. absence of any Community legislation in the field, the determination of those scales is a matter for each of those Member States alone. As regards the effect on the amount of the tax credit of the fact that the taxpayer's personal and family circum- 42. I therefore deduce that the situation in stances are taken into account in the State the present case is not comparable to that which led to the judgment in Gilly, cited above. 40 — In accordance with the Opinion of Advocate General Ruiz-Jarabo Colomer, the Court held that Article 48 of the Treaty did not preclude the application of such a tax credit mechanism (paragraph 54). It considered that the object of a convention such as that applicable in this case was simply to prevent the same income from being taxed in each of the two States. It was not to ensure that the tax to which the taxpayer is subject in one State is no higher than that to which he or she would be subject in the other (paragraph 43. In that judgment, Mrs Gilly had been 46). taxed in Germany on income received in 41 — Paragraph 47.

49. What is conclusive, in the present case, is that the disadvantage suffered by Mr de 46. Furthermore, as pointed out by Advo- Groot derives from the fact that he was cate General Ruiz-Jarabo Colomer in his deprived, by his State of residence, of part Opinion in the Gilly case, cited above, 43 it of the reductions provided for by the was only necessary for the German auth- legislation of that State. orities to lower their tax rate or the French authorities to increase theirs for the tax credit mechanism to work in Mrs Gilly's favour. The unfavourable nature of that system is therefore too uncertain to dis- suade a worker from exercising his freedom of movement between the two Member 50. If the States of employment concerned States in question. had taken account of Mr de Groot's personal and family circumstances, he might also have had to bear a heavier tax burden than if he had received his total income in the Netherlands. That might have been the case if the allowances relat- 47. It is clear that there is no such uncer- tainty in the present case since, under the applicable bilateral conventions, their 44 — The Netherlands Government refers, in particular, to the last sentence of Article 23B(1) of the OECD Model Tax national law and the case-law, the Member Convention which provides that, under the credit system, the tax paid in the State of employment is deducted from the tax payable in the State of residence up to the limit of 'that part of the income tax or capital tax. as computed before the deduction is given, which is attributable, as the 42 — Paragraph 49. case may be, to the income or the capital which may be 43 — Points 61 and 62. taxed in [the State of employment]'.

51. That is not the situation in the present case. In my view, the fact that the Member 54. Thirdly, I consider that the reasons put States in which Mr de Groot worked did forward to justify the obstacle at issue not take account of his personal and family cannot be upheld. circumstances when taxing the income which he received in those States placed the State of residence under a duty to grant him the benefit of all the allowances to which his circumstances entitled him and 55. In the first place, the national court which he would have received if he had raises the question 46 of the validity of the exercised all of his activity in the Nether- arguments stated in the reasons for the lands. 4 5 Netherlands legislation in relation to the proportionality factor. According to that argument, the allowances concerned are used for determining the taxpayer's finan- cial means and, therefore, should not be applied only to the income received in the State of residence. 47 52. The allocation, by the Netherlands tax authorities, of part of Mr de Groot's personal allowances to the income which he received in the other Member States had

56. I do not consider that that argument 45 — Sec to this effect the judgment in Zurstrassen, cited above. can justify the obstacle found to exist in the In that judgment the Court held that the Grand Duchy of Luxembourg should take the taxpayer's personal and present case. Indeed, even though, from the family circumstances into consideration, even though his wife had retained her residence in another Member State, and not tax Mr Zurstrassen as a single taxpayer without dependants, because he not only resided in the Grand Duchy but was paid almost the entire earned income of the 46 — See paragraph 3.10 of the order for reference. household there. The Court pointed out that the Grand 47 — See the Explanatory Memorandum to the Decree of Duchy of Luxembourg was the only State which could do 7 November 1991 amending the 1989 Decree, cited in so (paragraph 23). footnote 12 of this Opinion.

57. Furthermore, unlike the Belgian Gov- ernment, I do not consider that it necess- 59. Secondly, contrary to what the Nether- arily follows from that assessment that the lands and Belgian Governments maintain, State of residence has to bear a dispropor- the obstacle at issue cannot be justified, in tionate burden. It should be remembered that, in the present case, the Kingdom of the Netherlands, as regards the taxation of 49 — In the judgments in Case C-204/90 Bachmann [1992) ECR I-249, paragraphs 21 to 28, and Case C-300/90 Commis- Mr de Groot's income, has collected higher sion v Belgium [1992] ECR I-305, paragraphs 14 to 21, the Court acknowledged that the Belgian legislation refusing taxes because of the effect of the progress- to allow life insurance premiums to be deducted from the ive increases in its taxation scale. More- taxable income if the premiums had been paid abroad was justified by the need to ensure the cohesion of the tax over, it has been held on a number of regime concerned. There was a link between the deducti- bility of contributions and the liability to tax of sums occasions that the loss of tax revenue can payable by the insurers in fulfilment of the contracts. The never constitute a reason for restricting the Court held that that set-off between the deductibility of contributions and the taxing of sums payable could not be exercise of a fundamental freedom. 4 8 ensured since the payments linked to the exempt con- tributions would be made by a foreign insurer, abroad, where their liability to tax would be uncertain. 50 — In that regard, the Netherlands Government cannot use the OECD Model Tax Convention as an argument, because Article 23A does not contain any provision concerning allowances relating to a taxpayer's personal and family circumstances. Similarly, paragraphs 40 to 43 of the comments on that Article (see Vogel, K., 'Double Taxation Conventions', Kluwer Law International, 1997, 3rd ed., 58. Finally, I consider that the proportional p. 1177), also cited by that Government, cannot justify the credit system at issue is not necessary to obstacle at issue. On the contrary, it is stated, in paragraph 43: 'In view of the wide variety of fiscal policies and ensure the cohesion of the exemption with techniques in the different States regarding the deter- mination of tax, especially deductions, allowances and similar benefits, it is preferable not to propose an express and uniform solution in the Convention, but to leave each State free to apply its own legislation and technique. 48 — Case C-264/96 ICI [1998] ECR I-4695, paragraph 28, and Contracting States which prefer to have special problems Case C-307/97 Saint-Cobain ZN [1999) ECR I-6161, solved in their convention are, of course, free to do so in paragraph 51. bilateral negotiations...'.

60. With regard to the consequences of being taxed in various Member States, it is true that the taxation without progression, 63. In the light of the above, I therefore in Germany, France and the United King- suggest that the Court reply to the first dom, of income received in those States question that Article 48 of the EC Treaty may have the effect that the average rate of must be interpreted as meaning that it tax on the whole of the taxpayer's income precludes the application of provisions is lower than it would be if the taxpayer under which a taxpayer loses, for the had obtained all of his income in the calculation of his income tax liability in Netherlands. his State of residence, part of the advantage of his tax-free allowance and personal tax advantages, owing to the fact that, during the year in question, he also received income in another Member State which was taxed in that State without his personal and family circumstances being taken into account.

The second question 65. In the light of the reply which I proposed should be given to the first question, I consider it unnecessary to adopt a position on that point. As the Court ruled as early as 4 December 1974 in Van 67. By its second question, the national Duyn, 5 4 Article 48 of the Treaty has direct court asks whether Community law con- effect in the legal orders of the Member tains specific requirements with regard to States and confers on individuals rights the manner in which the personal and which the national courts must protect. It is family circumstances of an employee who also settled case-law that every national has also carried on an activity in another court must apply Community law in its Member State must be taken into account entirety and protect rights which the law in his State of residence. confers on individuals, where necessary disapplying any provision of national law which may conflict with it. 5 5 As we have seen in point 22 of this Opinion, the same must apply to a bilateral international convention which proves to be contrary to 68. It is apparent from the grounds of the Article 48 of the Treaty. 56 order for reference 58 that the national court wishes to know whether, in the present case, the Kingdom of the Nether- lands is required to grant Mr de Groot an effective reduction equal to that which he would have been entitled to claim had he earned his whole income in his State of residence. 66. Accordingly, the question whether or not the obstacle at issue falls within the scope of A r t i c l e 7 of R e g u l a t i o n No 1612/68, used to implement Article 48 of the Treaty, and also constitutes indirect 69. For the reasons stated above, in par- ticular in points 51 and 65, Iconsider that 54 — Case 41/74 Van Duyn [1974] ECR 1337, paragraph 1 of Mr de Groot is entitled to receive the same the operative part. 55 — Case 106/77 Simmenthal [1978] ECR 629, paragraph 21, and Terhoeve, cited above, paragraph 56. 56 — See also to this effect, in respect of a convention concluded 57 — See to this effect the judgment in Terhoeve, cited above, with a third country, the judgment in Gottardo, cited paragraph 41. above, paragraphs 32 to 34. 58 — Paragraph 3.10.

(1) Article 48 of the EC Treaty (now, after amendment, Article 39 EC) must be interpreted as meaning that it precludes the application of provisions contained in bilateral conventions and in national legislation under which a taxpayer loses, for the calculation of his income tax liability in his State of

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residence, part of the advantage of his tax-free allowance and personal tax advantages, owing to the fact that, during the year in question, he also received income in another Member State which was taxed in that State without his personal and family circumstances being taken into account.

(2) Community law does not lay down specific requirements with regard to the manner in which the personal and family circumstances of an employee who has also carried on an activity in another Member State must be taken into account in the State of residence. However, the conditions as to that taking into account must not constitute discrimination, either direct or indirect, on grounds of nationality, or an obstacle to the exercise of a fundamental freedom guaranteed by the Treaty.

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