In this article on the Florian Wallentin Case ruled by the EU Court of Justice (ECJ), we look in detail at the case and its possible ramifications.
On July 1, 2004 the European Court of Justice (ECJ) decided in the Florian W. Wallentin case (Case C-169/03) and determined that Sweden was obliged to grant the non-resident Mr Wallentin the same basic tax allowances it grants Swedish residents, since Mr Wallentin had no taxable income in his state of residence, Germany, where he could effect the German basic tax allowances.
Eight years ago, Mr Wallentin, a student at the time, received DEM650 (US$425 at the time) a month from his parents for living expenses and DEM350 a month from the German State for housing. This income was not taxable in Germany. From July 3-25, 1996, Mr Wallentin worked in Sweden for the Church of Sweden and received SEK8,724 (US$1,300) as remuneration. Mr Wallentin requested that Sweden taxed him as a resident, allowing him all the tax allowances that residents enjoyed, rather than taxing him at the fixed rate of 25 percent for non-residents staying in Sweden less than six months in a year. The tax authorities refused. Mr. Wallentin appealed to the Swedish court of first instance and won; the tax authorities appealed, and the Swedish court of appeal referred the following question to the ECJ:
"Is Article 39 of the EC Treaty to be interpreted as precluding a Member State's legislation which provides that natural persons who are not regarded as resident in the country for tax purposes but who receive income from employment in the country (restricted tax liability) are subject to a tax at source of such a nature that a basic allowance or other allowance or deduction for personal circumstances is not granted, whereas persons resident in the country are entitled to such an allowance or deduction at the time of ordinary assessment to income tax in respect of all income which they receive in the Member State and abroad (full tax liability), but where the first mentioned person's lack of right to a basic allowance is taken into account, inter alia, by means of a tax rate which is lower than the rate applicable for taxable persons resident in the country?"
Mr. Wallentin defended his case before the ECJ in person (which is unique) and was supported in his arguments by observations submitted by the E.U. Commission. Sweden was supported in its arguments by observations submitted by the French and the Finnish governments.
Three of the fundamental freedoms guaranteed by the EC treaty are the free movement of workers (Article 39 of the treaty), the right of establishment (Article 43) and the freedom to provide services (Article 49). The free movement of workers includes the abolition of any discrimination based on nationality (and thereby country of residence) and the right to move freely within the territory of member states and to stay in a member state for the purpose of employment. The right of establishment includes the right to take up and pursue activities as self-employed persons and to set up and manage agencies, branches or subsidiaries in the territory of any member state. Article 49 prohibits restrictions on the freedom to provide services within the European Union in respect of nationals of member states who are established in a State of the Community other than that of the person for whom the services are intended.
There are a number of relevant cases, preceding this particular one. These are:
Mr Schumacker lived in Belgium with his wife. He was employed in Germany from May 15, 1988 until December 31, 1989, although he continued to live in Belgium. Since 1989, Mr Schumacker's wages have been the household' s sole income. Since Mr Schumacker was not a German resident, he was denied certain tax allowances only made available to residents. The ECJ decided that the free movement of workers does allow Germany to treat a national of Belgium employed in Germany less favourably than one of its own nationals in the same situation, unless the Belgian national obtains his income entirely or almost exclusively from the work performed in Germany and does not receive sufficient income in Belgium to be subject to taxation there in a manner enabling his personal and family circumstances to be taken into account.
Mr Asscher was the director and sole shareholder of P.H. Asscher Beheer BV in the Netherlands. Mr Asscher also worked in Belgium as manager of Vereudia, a Belgian company. In May 1986, Mr Asscher left the Netherlands to live in Belgium; he continued to work in both the Netherlands and in Belgium. Mr. Asscher was insured with the Netherlands national insurance scheme until he moved to Belgium in May 1986. Since then, he was subject solely to the Belgian social security legislation. In June 1990 the salary received by Mr Asscher in the Netherlands was taxed at the rate of 25 percent in the first tax band. The first income tax band for residents was 13 percent (another 22.1 percent social security contributions was added to the first band for residents only).
The ECJ determined that the freedom of establishment precludes the Netherlands from applying to a Belgian national pursuing an activity as a self-employed person within its territory and at the same time pursues another activity as a self-employed person in its resident Member State, a higher rate of income tax than that applicable to residents pursuing the same activity where there is no objective difference between the situation of such taxpayers and that of taxpayers who are resident or treated as such to justify that difference in treatment.
Following the Schumacker case, Germany amended its tax rules such that a married taxable person who is not resident in Germany and who is an E.U. or EEA citizen is entitled to the other tax concessions accorded to German residents to take account of their personal and family circumstances (family expenses, welfare expenses and other outgoings which in general give rise to tax reliefs and rebates) where that person's spouse resides in one of those States and: n at least 90 percent of the total income of the spouses is subject to German income tax; or n their income not so subject does not exceed DEM24 000 (DEM12 000 for single persons) in the calendar year. Mr Gschwind, a Dutch national, lived with his wife in the Netherlands, close to the German border. In 1991 and 1992, he worked in Germany and his wife worked in the Netherlands. Mr Gschwind earned DEM 74 000 per annum, representing nearly 58 percent of the household's aggregate income. Since Mr Gschwind did not qualify under the criteria mentioned above, he ended up paying more tax in Germany than he would have, had he been resident in Germany.
The ECJ determined that the free movement of workers does not preclude the legislation in question, since it maintains the possibility for account to be taken of Mr Gschwind's personal and family circumstances in the Netherlands.
Mr Zurstrassen and his wife were Belgian nationals. Mr Zurstrassen worked in Luxembourg, where he lived, while his wife and their children continue to reside in Belgium for the schooling of their children. Almost the entire income of the household (98 percent) derived from Mr Zurstrassen's Luxembourg income.
In 1995 and 1996 Luxembourg taxed Mr Zurstrassen under tax bracket 1, a higher bracket for single persons. Mr Zurstrassen argued that this was discriminatory in that he and his wife were placed at a disadvantage, first, compared with spouses residing separately in Luxembourg, who are taxed jointly (and therefore benefit from a more favourable scale), and secondly, compared with non-residents who are married and not de facto separated where more than 50 percent of the earned income of their household is paid in Luxembourg and they both work in Luxembourg, inasmuch as they are treated as resident for tax purposes and are eligible for joint assessment.
The ECJ determined that Luxembourg is the only State which can take account of Mr Zurstrassen's personal and family circumstances since he is not only resident in that State but, additionally, is paid almost the entire earned income of the household there and taxing Mr Zurstrassen under bracket 1 was therefore an unjustifiable restriction on the free movement of workers.
Mr Gerritse, a Dutchman resident in the Netherlands, received the sum of DEM6,007.55 in 1996 for performing as a drummer at a radio station in Berlin. The business expenses occasioned by that performance amounted to DEM968.10. In the same year, Mr Gerritse also received gross income totalling around DEM55,000 in the Netherlands and in Belgium. Under the German/Dutch tax treaty and German national law, the fee of DEM6,007.55 was subjected to tax on a notional assessment of income, at the rate of 25 percent, which was deducted at source. Mr Gerritse argued that a wholly taxable resident in a situation comparable to his own would not be required to pay tax by reason of the non-taxable threshold amount limited to DEM12,095.
The ECJ determined that:
The ECJ then determined that it was up to the German court to establish whether the 25 percent tax rate applied to Mr Gerritse's income is higher1 than that which would follow from application of the progressive table and that it was necessary in that respect to add to the net income received by Mr Gerritse in Germany an amount corresponding to the tax-free allowance (since he also received a tax free allowance in Holland).
Building on the doctrine described in the above cases, the ECJ concidered that Mr Wallentin did not have any taxable income in Germany, since the monthly allowance from his parents and the grant paid to him by the German State did not constitute taxable income under German tax legislation. It then determined that the fact that the Swedish basic allowance is not granted to non-residents who receive no taxable income in their State of residence is prohibited by the free movement of workers. It also determined that the grant in the present case of the same tax allowance as that laid down for persons resident in Sweden throughout the tax year(in stead of only 1/12 for the period he stayed in Sweden) would not give Mr Wallentin an unjustified fiscal benefit since he has no taxable income in Germany which could confer entitlement to a similar allowance there.
The doctrine of the ECJ with regard to when non-resident individuals are entitled to be treated the same way as resident individuals has been clarified a little further. However, as always, some questions remain unanswered: