Brussels, 26/03/2007 (Agence Europe) - On Monday, the European Commission sent reasoned opinions to both Germany and Austria, formally requesting them to change provisions in their direct taxation legislation. It criticises Germany for applying a withholding tax system on the income of certain categories of non-resident taxpayers - particularly artists and sportsmen. The Commission considers this system incompatible with the principle of freedom to provide services in the internal market. It calls on Austria to change the system whereby resident taxpayers with foreign income cannot benefit from full tax deduction of personal expenses, while residents with domestic income can. The Commission deems this system, too, to be incompatible with the principle of freedom to provide services in the internal market. Berlin and Vienna have two months to provide a “satisfactory” response to these reasoned opinions, after which time the Commission could refer the matters to the European Court of Justice.
Unlike resident taxpayers, who have to declare their income annually, Germany applies a withholding tax at source on income paid to certain categories of non-residents (artists, sportsmen, journalists or other similar categories). Non-resident taxpayers cannot deduct their business expenses. It is only in a subsequent refund procedure that the non-residents have the right to ask for reimbursement of overpaid tax. Moreover, only business expenses directly economically linked to the activity in Germany are deductible in the refund procedure. In the Commission's view, these tax provisions constitute a considerable obstacle to the cross-border provision of services. It points out that “prohibition of the deduction of business expenses from gross receipts and prohibition of the deduction of indirect expenditure in many cases result in an objectively unjustified higher taxation of such non-residents as compared with residents”. The Commission's opinion is supported by a number of judgments of the European Court of Justice.
According to Austrian tax law, certain personal expenses can be deducted from income when calculating income tax ("Steuerabsetzbeträge"). However, the same legislation limits this deduction to a pro rata amount of these expenses if the resident taxpayer has foreign income which is tax exempt but subject to progression, whereas a resident with only domestic income will receive the full allowances. The Commission considers that the rules on reducing the amounts deducted when foreign income is exempt from national tax, but subject to progression, impair the freedom of movement of workers and the freedom of establishment as guaranteed by the EC Treaty. Indeed, it points out, “they result in higher taxation in comparison to persons who have an exclusively domestic income”. The Commission's opinion is supported by a Court ruling (“de Groot” judgment of 12 December 2002 - case C-385/00). (ol)