Luxembourg, 11/09/2007 (Agence Europe) - On Tuesday 11 September, the Court of Justice gave its ruling in the case between Mr and Mrs Schwarz and their tax office in Germany (C-76/05). The Court ruled against the German provision allowing parents to deduct from the taxable amount 30% of the net price paid by them for attendance by a dependent child at a private school, provided the school fulfils certain conditions. One such condition is that the school should be located in Germany. According to the Court, this is in breach of freedom of movement and the freedom to provide services.
Mr and Mrs Schwarz had chosen to send two of their children to a private school, the Cademuir International School in Scotland. The Finanzamt de Bergisch Gladbach (Germany) did not, however, accept the couple's request to allow part of the school expenses to be deducted from their taxes, saying that the school in question did not meet the criteria necessary to be eligible for tax relief, as stipulated by the German taxation law, the “EStG” (Einkommensteuergesetz, BGB1. 1997 I, p.821). In particular, the school is not recognised as a “substitute” school by the relevant German Land, in this case Rhineland Westphalia, as it is not located in Germany.
Mr and Mrs Schwarz brought action before the Finanzgericht Köln which referred to the Court of Justice on the subject of the compatibility of EStG provisions with Community law. The Court ruled in favour of Mr and Mrs Schwarz. First of all, the German regulation is to the disadvantage of children from German families that have simply exercised the freedom of movement conferred upon them by the EC Treaty. Also, schools of other member states are placed at a disadvantage if they wish to propose their services to parents residing in Germany. Their German rivals have a practical advantage over them in tax terms, at least from the point of view of the parents. This obstacle to the free provision of services is also in breach of the EC Treaty, the Court states.
The Court refuted all the arguments put forward by the German government. It is true that the freedom to provide services does not imply an obligation to extend the privileged tax treatment granted to certain schools under the educational system of a member state to those of another member state. In the case in hand, however, it is not a matter of the tax treatment of schools but of the advantages given directly to parents. Furthermore, the Court does not agree that the German restrictions should be recognised as necessary to prevent a loss of tax revenue. It is true that private schools abroad may be far more expensive than German schools, as the fees for the latter are subject to restrictions under national law. Therefore, the German treasury loses more revenue from the tax-deduction of 30% of the fees of a Scottish boarding school than it would lose from the tax deduction of the same percentage of the fees of a cheaper, German school. The Court, however, maintained that total exclusion of foreign schools, simply because they are not in Germany, is a disproportionate measure. It would, for example, be possible to simply limit the total tax deduction allowed for each pupil.
After the Finanzgericht Köln introduced this preliminary question, the Commission brought proceedings against Germany for having failed in its obligations arising from the freedom of movement of citizens of the Union and of workers, from the freedom of establishment and from the freedom to provide services (Case C-318/05). Apart from these obstacles found in the Schwarz case, the Court stated that infringement particularly disadvantages employees and self-employed persons who have transferred their normal place of residence to Germany or who work there and whose children continue to attend a fee-paying school situated in another member state. Those workers do not enjoy tax relief, whereas they would have this advantage if their children attended a school situated in Germany.
Among the 20,000 pupils attending British private schools, nearly 10% have parents resident in Germany, according to the Independent Schools Council, a private schools association in the United Kingdom. (cd)