Finanzamt Köln-Altstadt v. Roland Schumacker (Case C-279/93)

Before the Court of Justice of the European

Communities

ECJ

(Presiding, RodrÍguez Iglesias P.; Schockweiler ( Rapporteur), Kapteyn and

Gulmann PP.C.; Mancini, Kakouris, Moitinho de Almeida, Murray, Edward,

Puissochet and Hirsch JJ.) Mr Philippe Léger, Advocate General

14 February 1995

Reference from Germany by the Bundesfinanzhof (Federal Finance Court) under

Article 177 EEC. Taxation. Member States. Obligations. Although, as Community law stands at present, direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law. [21] Re Nationality of Fishermen: E.C. Commission v. United Kingdom and Northern Ireland (C-246/89): [1991] I E.C.R. 4585, [1991] 3 C.M.L.R. 706, followed. Taxation. Income tax. Discrimination. Nationality. Article 48(2) EEC requires the abolition of any discrimination based on nationality between workers of the Member States as regards, inter alia, remuneration. That principle would be rendered ineffective if it could be undermined by discriminatory national provisions on income tax. [22] & [23] Biehl v. Administration des Contributions du Grandeduche de Luxembourg (175/88): [1990] I E.C.R. 1779, [1990] 3 C.M.L.R. 143, followed. Taxation. Income tax. Frontier workers. Discrimination. Nationality. Article 48 EEC is capable of limiting the right of a Member State to lay down conditions concerning the liability to taxation of a national of another Member

State and the manner in which tax is to be levied on the income received by him within its territory, since that article does not allow a Member State, as regards the collection of direct taxes, to treat a national of another Member State employed in the territory of the first State in the exercise of his right of freedom of movement less favourably than one of its own nationals in the same situation. [24] Discrimination. Indirect. Frontier workers. Residence. Tax advantage. *451 The rules regarding equal treatment forbid not only overt discrimination by reason of nationality but also all covert forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result. National rules which apply irrespective of the nationality of a taxpayer, but which draw a distinction on the basis of residence in that non-residents are denied certain benefits which are, conversely, granted to persons residing within national territory, are liable to operate mainly to the detriment of nationals of other Member States, given that non-residents are in the majority of cases foreigners. Thus tax benefits granted only to residents of a Member State may constitute indirect discrimination by reason of nationality. [26], [28] & [29] Sotgiu v. Deutsche Bundespost (152/73): [1974] E.C.R. 153, followed. Taxation. Income tax. Tax advantage. Frontier workers. Discrimination. Residence. The fact that a Member State does not grant to a non-resident worker certain tax benefits which it grants to a resident is not, as a rule, discriminatory since those two categories of taxpayer are not in a comparable situation. Accordingly, Article 48 EEC does not in principle preclude the application of rules of a Member State under which a non-resident working as an employed person in that Member State is taxed more heavily on his income than a resident in the same employment. [34] & [35] Taxation. Income tax. Tax advantage. Frontier workers. Discrimination. Residence. Article 48 EEC precludes the application of rules of a Member State under which a worker who is a national of, and resides in, another Member State and is employed in the first State is taxed more heavily than a worker who resides in the first State and performs the same work there, when the national of the second State obtains his income entirely or almost exclusively from the work performed in the first State and does not receive in the second State sufficient income to be subject to taxation there in a manner enabling his personal and family circumstances to be taken into account. Such discriminatory rules are not justified by the need for the consistent application of the tax regime of the first State, nor by the administrative difficulty for the first State of ascertaining the income which the worker receives outside its territory. [39]-[45], [47]

Bachmann v. Belgium (C-204/90): [1992] I E.C.R. 249, [1993] 1 C.M.L.R. 785, distinguished. Taxation. Income tax. Reimbursement. Procedure. Frontier workers. Discrimination. Residence. Article 48 EEC requires equal treatment at procedural level for non-resident Community *452 nationals and resident nationals. Refusal to grant non-resident Community nationals the benefit of annual adjustment procedures for the refund of overpayments of income tax which are available to resident nationals constitutes unjustified discrimination. The requirements of Article 48 are not satisfied by the fact that a non-resident worker may rely upon an equitable procedure adopted by the tax administration for the reassessment of his liability to tax. [56]-[58] S, a Belgian national, worked in Germany while continuing to reside in Belgium with his wife and children. Under the terms of a double taxation agreement between Belgium and Germany, S was taxed at source on the wages he received in Germany under German law. German income tax legislation drew a distinction between resident and non-resident taxpayers, with non-residents being subject to taxation only on that part of their income obtained in Germany. Certain benefits based on a taxpayer's personal and family circumstances were only available to resident taxpayers, on the principle that, in the case of non-residents, these factors would be taken into account under the taxation scheme of their own State of residence. S, however, earned over 90 per cent of his income in Germany and was not subject to taxation in Belgium as he did not earn sufficient income there. Moreover, S, as a non-resident, was unable to rely on certain procedures available under the German legislation for the reimbursement of overpaid taxes. S sought to have his tax reassessed on an equitable basis before the German courts, subject to the same benefits that resident taxpayers received. On a preliminary reference, the Court held that: (1) Article 48 EEC limited the right of a Member State to enact legislation on direct taxation which treated a national of another Member State employed in the territory of the first State less favourably than one of its own nationals in the same situation; (2) Article 48 did not in principle preclude the application of a Member State's rules under which a non-resident working as an employed person in that State was taxed more heavily on his income than a resident in the same employment since the two categories of taxpayer were generally not in a comparable situation; (3) the position was different where the non-resident received no significant income in his own State of residence and, like a resident taxpayer, obtained the major part of his taxable income from an activity performed in his State of employment, with the result that discrimination arose from the fact that his personal and family circumstances were taken into account in neither his State of residence nor his State of employment; (4) the discriminatory treatment S received was not justified by the need to ensure the cohesion of the German tax regime nor by any administrative difficulty; (5) the fact that non-resident taxpayers were not entitled to rely on the adjustment procedures for the repayment of overpaid taxes was

also contrary to Article 48. Representation *453 D. Deutgen, Leitender Regierungsdirektor of the Finanzamt Köln-Altstadt and V. Nickel, Regierungsdirektor, Oberfinanzdirektion Köln, acting as Agents, for the applicant. W. Kaefer, Rechtsanwalt, Aachen, and G. Saβ, Avocat and Tax Adviser, Tervuren, for Roland Schumacker. P. Biering, Legal Adviser to the Ministry of Foreign Affairs, acting as Agent, for the Danish Government. E. Röder, Ministerialrat in the Federal Ministry of the Economy, C.D. Quassowski, Regierungsdirektor in the same Ministry, acting as Agents, and J. Sedemund, Rechtsanwalt, Cologne, for the German Government. D. Raptis and P. Kamarineas, both State Legal Advisers and I. Chalkias, Assistant State Legal Adviser in the State Legal Service, acting as Agents, for the Greek Government. C. de Salins, Assistant Director in the Legal Directorate in the Ministry of Foreign Affairs and J.-L. Falconi, Secretary for Foreign Affairs in the Legal Directorate in the same Ministry, acting as Agents, for the French Government. A. Bos, Legal Adviser in the Ministry of Foreign Affairs and J.W. de Zwaan, Assistant Legal Adviser in the same Ministry, acting as Agents, for the Netherlands Government. A. Moses Q.C., instructed by J.E. Collins , Assistant Treasury Solicitor, acting as Agent, for the United Kingdom. J. Grunwald and E. Traversa, of the Legal Service of the E.C. Commission, acting as Agents, assisted by B. Knobbe-Keuk, Professor at the University of Bonn, for the Commission. Cases referred to in the judgment: 1. E.C. Commission v. United Kingdom and Northern Ireland (C-246/89), 4 October 1991: [1991] I E.C.R. 4585, [1991] 3 C.M.L.R. 706 . 2. Biehl v. Administration des Contributions du Grandduche de Luxembourg (175/88), 8 May 1990: [1990] I E.C.R. 1779, [1990] 3 C.M.L.R. 143 . 3. Sotgiu v. Deutsche Bundespost (152/73), 12 February 1974: [1974] E.C.R 153. 4. Bachmann v. Belgium (C-204/90), 28 January 1992: [1992] I E.C.R. 249, [1993] 1 C.M.L.R. 785. Further cases referred to by the Advocate General: 5. E.C. Commission v. France (270/83), 27 January 1986: [1986] E.C.R. 273, [1987] 1 C.M.L.R. 401. 6. E.C. Commission v. Belgium (C-300/90), 28 January 1992: [1992] I E.C.R. 305, [1993] 1 C.M.L.R. 785. 7. R. v. Commissioners for Inland Revenue, Ex parte Commerzbank (C-330/91),

13 July 1993: [1993] I E.C.R. 4017, [1993] 3 C.M.L.R. 457 . 8. Halliburton Services BV v. Staatssecretaris Van Financiën (C-1/93), 12 April 1994: [1994] I E.C.R. 1137. 9. Hans Werner v. Finanzamt Aachen-Innenstadt (C-112/91), 26 January 1993: [1993] I E.C.R. 429 *454 . 10. Rijksinstituut voor de Sociale Verzekering der Zelfstandigen (RSVZ) v. Heinrich Wolf and NV Microtherm Europe (154-155/87), 7 July 1988: [1988] E.C.R. 3897. 11. E.C. Commission v. Italy (193/80), 9 December 1981: [1981] E.C.R. 3019. 12. Hubbard v. Peter Hamburger (C-20/92), 1 July 1993: [1993] I E.C.R. 3777. 13. Kraus v. Land Baden-Württemberg (C-19/92), 31 March 1993: [1993] I E.C.R. 1663. 14. Firma A. Racke v. Hauptzollamt Mainz (283/83), 13 November 1984: [1984] E.C.R. 3791. 15. Uberschar v. Bundesversicherungsanstalt für Angestelle (810/79), 8 October 1980: [1980] E.C.R. 2747. TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Opinion of Mr Advocate General Léger 1. The four questions referred to the Court for a preliminary ruling by the Bundesfinanzhof in the present case bear an affinity with the series of cases E.C. Commission v. France [FN1] (the "tax credit" case), Biehl, [FN2] Bachmann, [FN3] E.C. Commission v. Belgium, [FN4] Commerzbank, [FN5] Halliburton Services [FN6] and, above all, Werner, [FN7] 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 Community principle of the free movement of persons as implemented by Article 48 EEC? FN1 Case 270/83: [1986] E.C.R. 273, [1987] 1 C.M.L.R. 401. FN2 Case C-175/88: [1990] I E.C.R. 1779, [1990] 3 C.M.L.R. 143 . Followed by Treaty-infringement proceedings by the Commission against the Grand Duchy of Luxembourg in Case C-151/94, Still Pending. FN3 Case C-204/90: [1992] I E.C.R. 249, [1993] 1 C.M.L.R. 785. FN4 Case C-300/90: [1992] I E.C.R. 305, [1993] 1 C.M.L.R. 785. FN5 Case C-330/91: [1993] I E.C.R. 4017, [1993] 3 C.M.L.R. 457. FN6 Case C-1/93 : [1994] I E.C.R. 1137. FN7 Case C-112/91: [1993] I E.C.R. 429.

2. The relevant tax legislation is as follows. 3. Pursuant to paragraph 1.4 of the Einkommensteuergesetz (German Act on income tax, hereinafter "the EStG"), [FN8] persons who have no residence in Germany or do not habitually reside there are "subject to limited taxation" (beschränkt einkommensteurerpflichtig) on the part of their income arising in Germany, whereas residents are subject to "unlimited taxation" . [FN9] FN8 [1987] I BGB1 657; [1987] BStB1 274 *455 . FN9 Section 1.1 of the 1987 EStG. 4. Those two categories of taxpayers are subject to very different tax regimes. 5. The second are taxed by the German revenue authorities on the totality of their income whilst the first are taxed only on income received within German territory. 6. Applying the principle that the personal and subjective situation of a non-resident--who is therefore subject to limited taxation--will be taken into account by his State of residence, the German tax regulations withhold from him certain benefits which are available to resident taxpayers: only the latter can benefit from the preferential rates for married couples (the "splitting tariff"). [FN10] Certain deductions [FN11] or reliefs linked, in particular, with their family situation [FN12] are reduced or eliminated for non-residents. Moreover, the latter are subject to deductions at source from their wages, without any adjustment at the year end. [FN13] FN10 Sections 26 and 26b of the EStG. Under the "splitting tariff", the overall income of the spouses is aggregated, notionally allocated to each spouse as to 50 per cent 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 and mitigates the progressive effect of the income-tax rates. Without the benefit of splitting, married non-resident employees are subject to the same treatment as single persons. FN11 For example, vocational training expenses (section 33a.2 of the EStG). FN12 Such as the allowance for a dependent child under section 32.6 of the 1987 EStG. See also the fifth sentence of section 50.1 of the 1987 EStG. FN13 Sections 42, 42a and 46 of the 1987 EStG. 7. Taxpayers subject to limited taxation are thus taxed objectively, "as in the case of indirect taxation". [FN14] FN14 Para. 7 of the Opinion of Darmon A.G. in Werner, cited above. For a detailed examination of the differences between the limited-taxation regime and the unlimited-taxation regime, see the Commission's observations, at I, 3.

8. The question of the compatibility of those provisions with Community law has arisen in proceedings brought by a Belgian national, Mr Schumacker, against the Finanzamt Köln-Altstadt. 9. Mr Schumacker has always lived with his family in Belgium. Initially employed in Belgium, he was subsequently employed in Germany--from 15 May 1988 to 31 December 1989--whilst continuing to live in Belgium. [FN15] FN15 His wife received unemployment benefit in Belgium, but only, it seems, for 1988. 10. The right to impose income tax on Mr Schumacker's wages for that period is vested in Germany, the State where he works, under Article 15(1) of the double taxation treaty between Germany and Belgium. [FN16] FN16 Convention of 11 April 1967, based on the OECD model. 11. Under sections 1.4 and 39d of the 1987 EStG, he is subject to limited taxation and his wages are subject to a deduction calculated in accordance with taxation class I (applicable to German single persons and non-residents, regardless of family status). [FN17] FN17 If the statement of the plaintiff in the main proceedings is assumed to be correct, under the limited taxation regime he has to pay 16,559.64 DM more than he would have had to pay if he had lived in Germany (plaintiff's observations, part one, at II). 12. In response to a complaint from Mr Schumacker, the Finanzamt, *456 by decision of 22 June 1989, refused to calculate the amount of tax "on an equitable basis" [FN18] by reference to taxation class III (applicable to married residents and based on the splitting tariff). FN18 Pursuant to section 163 of the 1977 Abgabenordnung. 13. The Finanzgericht upheld Mr Schumacker's claim: it ordered the Finanzamt to reassess the tax on his wages for 1988 and to assess that tax for 1989 on the basis of taxation class III. 14. In an appeal on a point of law brought by the tax administration, the Bundesfinanzh of has referred the following questions to the Court of Justice for a preliminary ruling: 1. Does Article 48 EEC restrict the right of Germany to levy income tax on a national of another EEC Member State? If so: 2. Does Article 48 EEC allow Germany to impose a higher level of income tax on a natural person of Belgian nationality, whose sole permanent residence and usual abode is in Belgium and who has acquired his professional qualifications and experience there, than on an otherwise comparable person resident in

Germany, if the former commences employment in Germany without transferring his permanent residence to Germany? 3. Does it make any difference if the person of Belgian nationality referred to in question 2 derives almost all (that is 90 per cent) of his income from Germany and the said income is also taxable in Germany, in accordance with the Double Taxation Agreement between Germany and Belgium? 4. Is it contrary to Article 48 EEC for Germany to exclude natural persons who have no permanent residence or usual abode in Germany and in that country derive income from employment from the annual wages tax adjustment and also to deny them the possibility of being assessed for income tax with account being taken of earnings from employment?

The First Question 15. Can Article 48 EEC restrict the right of a Member State to levy tax on the income of a citizen of another Member State? 16. Noting that direct taxation falls within the exclusive powers of the Member States, the national court expresses doubts as to the possibility of applying Article 48 to national legislation in this sphere. In particular it states that "... nowhere does the EEC Treaty confer express authority to harmonise the direct taxes of the Member States". [FN19] In any event, the case law is not, in its view, sufficiently explicit regarding the existence of a relationship between those provisions. [FN20] FN19 See the order for reference, at II.B.1. FN20 ibid. 17. The EEC Treaty contains no provisions similar to those of Article 95 in relation to direct taxation. Article 220 aside, attention has often been drawn to its all but absolute silence in that regard. [FN21] It is *457 undisputed that the adoption of rules on income tax is a matter left to the Member States. [FN22] FN21 See Wouters, J., "The Case law of the European Court of Justice on Direct Taxes: Variations upon a theme", 1994 Maastricht Journal of European and Comparative Law Vol. 1, No. 2, PP. 179-180 . FN22 See in that connection para. 10 of Darmon A.G.'s Opinion in Biehl. 18. Does this issue thus fall outside the scope of Community law? 19. Let me say first of all that under Article 100 E.C., those rules are subject to harmonisation by unanimous action by the Member States if they have a direct impact on the establishment or functioning of the Common Market. [FN23] FN23 Harmonisation is compulsory only in the sphere of indirect taxation (Article 99 E.C.).

Taxation is excluded from the scope of Article 100a, which allows harmonising measures to be adopted by a qualified majority. Unlike VAT, direct taxation is at a purely embryonic stage of harmonisation. [FN24] FN24 See Council Directive 77/799 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation ([1977] O.J. L336/15), amended by Directive 79/1070 ([1979] O.J. L331/8). See also the Council Directives of 23 July 1990, 90/434 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States ([1990] O.J. L225/1) and 90/435 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States ([1990] O.J. L225/6). 20. Secondly, in order to attain the objectives which it sets itself in Article 2 E.C., the Community is to establish "an internal market characterised by the abolition, as between Member States, of obstacles to the free movement of goods, of persons, of services and of capital" . [FN25] FN25 Article 3(c) E.C. (my emphasis). 21. Thus, even in areas in which they have exclusive powers, the Member States may not adopt measures which, without justification, hamper the free movement of workers (Article 48), members of the professions (Article 52), [FN26] services (Article 59) or capital (Article 73). FN26 See, e.g., para. [13] in Case 154/87, RSVZ v. Wolf and Others: [1988] E.C.R. 3897. 22. The application of those principles is not subject to the precondition of approximation of national laws. As pointed out by Mancini A.G. in his Opinion in Case 270/83 , E.C. Commission v. France, [FN27] "delay on the part of the Community legislature does not suspend the Member States' obligation to apply their tax laws in a non-discriminatory way". FN27 End of para. 6. On this issue, see Case 193/80, E.C. Commission v. Italy: [1981] E.C.R. 3019, para. [17]. 23. In that case, the Court upheld the following principle: ... the fact that the laws of the Member States on corporation tax have not been harmonised cannot justify the difference of treatment in this case (based on Article 52 EEC). [FN28] FN28 Para. [24]. See also para. [11] in bachmann: "... such harmonisation (of the laws of the Member States) cannot constitute a condition precedent to the application of Article 48 of the Treaty".

24. Social security, direct taxation or, for example, the conditions for the award of university diplomas are matters for the Member States. They are nevertheless required to adopt, in those areas, rules which respect the great freedoms laid down by Community law. *458 25. But it is only to the extent to which such rules have an impact on those freedoms that they come within the scope of Community law. 26. Thus, any tax legislation which introduces discrimination, whether overt or concealed, based on nationality must fall to be examined in the light of Articles 48, 52 or 59. 27. More specifically, Article 48(2), by providing for the abolition of all discrimination on grounds of nationality as between workers of the Member States as regards remuneration, outlaws any discriminatory tax provision having the effect of undermining the principle of equal treatment in that area. As the plaintiff in the main proceedings summarises the position in his written observations: ... it is unlawful to convert equal gross wages into unequal net wages by means of higher taxation. [FN29] FN29 p. 24. 28. Moreover, Article 7 of Regulation 1612/68 on freedom of movement for workers within the Community [FN30] requires that all workers who are nationals of a Member State enjoy in the territory of other Member States the same tax benefits as nationals working there. The Council has thus applied the principle of equal treatment to the sphere of taxation. FN30 Council Regulation of 15 October 1968 ([1968] II O.J. Spec. Ed. 475). 29. In Biehl, the Court held: The principle of equal treatment with regard to remuneration would be rendered ineffective if it could be undermined by discriminatory national provisions on income tax. [FN31] FN31 Para. [12]. 30. Clearly, direct taxation, like taxation in other areas within the competence of the Member States, is an area in which the fundamental freedoms laid down in the Treaty must be observed: it is appropriate to cite the Court's words in Hubbard [FN32] in connection with Article 59: The effectiveness of Community law cannot vary as between the various areas of national law on which it has an impact. FN32 Case C-20/92: [1993] I E.C.R. 3777, para. [19]. 31. Finally, the rights granted to Community nationals under Articles 48, 52 and 59 are unconditional. Observance of them cannot depend, in particular, on the

content of a double taxation treaty between two Member States. [FN33] FN33 See para. [26] in Case 270/83, E.C. Commission v. France, cited above. 32. If further evidence were needed of the fact that tax legislation is subject to observance of the great freedom embodied in the Treaty, Article 73d E.C. could be cited. Article 73b having laid down the principle that all restrictions on capital movements between Member States and between Member States and non-member countries is prohibited, Article 73d provides that the Member States are entitled "to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to the *459 place where their capital is invested", going on to say, in paragraph 3, that such measures "shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments ..." .

The Second Question 33. A preliminary observation is called for: it is true that, by contrast with Werner, this case certainly comes within the scope of Community law. A German national working in Germany where he acquired his professional qualifications, Mr Werner never exercised the freedoms conferred by the Treaty, particularly that of establishing himself in another Member State. The only foreign element was the fact that he resided in the Netherlands. In this case, Mr Schumacker, a Belgian national who acquired his qualifications and professional experience elsewhere than in Germany, [FN34] exercised the right of freedom of movement for workers laid down in Article 48 of the Treaty in order to go to Germany and take up employment there. The situation is therefore not purely internal to a Member State. [FN35] FN34 See the Order from the national court. FN35 It cannot of course be contended that freedom of movement for workers applies only where a worker has transferred his residence to his State of employment. See Article 1 of Council Regulation 1612/68. 34. That point having been clarified, I shall reformulate the second question in the following terms. May the tax legislation of a Member State, without infringing Article 48 of the Treaty, tax a non-resident employed in that State more heavily on his income than a resident in the same employment? 35. The criterion of residence is the main pillar of international tax law. Chosen by almost every State in the world, it is given precedence over nationality "which involves taxation by a State of persons who may have lost all links, in particular those of an economic nature, with that State". [FN36] FN36 Opinion of Darmon A.G. in Commerzbank, cited above, para. 37.

36. The logic of the distinction between residents and non-residents is clear: by choosing to reside in a particular State, a person assumes the obligation to contribute to the costs of public administration and the public services made available to him by that State. It is therefore logical that that State should tax the entirety of his income, on a comprehensive basis. It is also that State, where the taxpayer has focused his family life, which will grant him allowances and reliefs. There is a personal link between the taxpayer and his State of residence. 37. Conversely, the State of employment taxes the non-resident in a quasi objective manner only on his income arising in its territory. The taxpayer, indeed, has no other link with that State than the economic activity which he carries on there. *460 38. Thus, clearly, tax law draws a distinction between residents and non-residents because they are not, objectively, in the same situation. That distinction, moreover, is to be found at the heart of the OECD model double taxation convention on income and capital. [FN37] FN37 See in particular Article 4(1) of the model convention of September 1992. 39. Application of the principle of non-discrimination to the sphere of taxation calls for great circumspection. As has been observed, To anyone who is somewhat familiar with tax law, it is clear that the concept of de facto non-discrimination could very easily result in the disintegration of national tax systems. Even were the Court to limit itself to the elimination of the differences in tax treatment between taxpayers based on nationality or on residence, the resulting chaos in income tax would be considerable. [FN38] FN38 Vanistendael, F.: "The Limits of the New Community Tax Order", [1994] C.M.L.Rev. 293. (my emphasis). 40. In order to guarantee freedom of movement for workers within the Community, Article 48(2) prohibits all discrimination on grounds of nationality between workers of Member States regarding, in particular, remuneration. 41. Citing Sotgiu, [FN39] the Court held in Biehl: ... the rules regarding equality of treatment forbid not only overt discrimination by reason of nationality but also all covert forms of discrimination which, by the application of other criteria of differentiation, lead to the same results. [FN40] FN39 Case 152/73: [1974] E.C.R. 153, para. [11]. FN40 Para. [13]. See also, with regard to Article 52, para. [14] in Commerzbank and para. [15] in Halliburton Services. 42. The Court has recognised that a distinction based on residence, although applicable without distinction to nationals and non-nationals, should be viewed in the same way as a distinction based on nationality where the non-residents are in the main non-nationals. [FN41]

FN41 Para. [14]. See also para. [9] of Bachmann and para. [15] of Commerzbank. 43. The Court concluded from this that Article 48 precludes legislation which deprives a taxpayer who is a resident for only part of the year of the right to reclaim overpayments of tax where permanent residents are entitled to such repayment. [FN42] FN42 Para. [19]. 44. However, the possibility cannot be excluded "that a distinction based on the ... place of residence of a natural person may, under certain conditions, be justified in an area such as tax law". [FN43] FN43 Para. [19] in Case 270/83, E.C. Commission v. France, cited above. 45. A tax provision based on the criterion of residence and having discriminatory effects does not encroach upon the principle of freedom of movement for workers provided that it pursues an objective in the public interest (such as upholding the coherence of the national tax system) and is strictly necessary in order to achieve that aim. In its judgment in E.C. Commission v. Belgium, [FN44] the Court recognised that a *461 tax provision restricting the free movement of workers did not infringe Article 48 of the Treaty provided that it was justified "by the need to safeguard the cohesion of the tax system at issue" . [FN45] FN44 Cited above. FN45 Para. [21]. 46. Under Belgian tax law, contributions in respect of supplementary old-age or death insurance are deductible from taxable income only if they are paid to companies established in Belgium or to the Belgian establishment of a foreign insurance undertaking. The Court held that the cohesion of the tax system (namely the link between deductibility of contributions and the subsequent taxation of the income or capital paid out by the insurance company) could not be ensured by less restrictive measures and that the tax provision in question was therefore compatible with Article 48 of the Treaty. 47. Since the judgments in Bachmann and E.C. Commission v. Belgium, the Court has held that national rules which are discriminatory within the meaning of Article 48(2) may, despite such discrimination, be justified for overriding reasons of public interest. The exceptions to the principle of non- discrimination laid down by that article are not merely those referred to in paragraphs 3 and 4 thereof. 48. The Court thus applies the "rule of reason" to discriminatory tax rules intended to temper the effects of bringing within the scope of Articles 48 and 52 national rules which apply without distinction and prevent or hamper the free

movement of workers. [FN46] FN46 See the judgment of 31 March 1993 in Case C-19/92, Kraus: [1993] I E.C.R. 1663. See, on this point, with respect to the Bachmann judgment, Vanistendael, F., "The Limits to the New Community Tax Order", cited above, p. 312: "The non-discrimination rule ... has the following meaning: even though any de facto discrimination is in principle to be considered as a violation of the basic freedoms in the Treaty, some rules resulting in de facto distinction or discrimination can be justified by general interest or policy objectives, provided those rules make distinctions on the basis of criteria that are objective and directly necessary to achieve the policy goals." 49. Those are the principles which, I suggest, should be applied in the present case. 50. Is there discrimination in this case? If so, is it justified? 51. It can be conceded that the majority of non-residents are non-nationals [FN47] and that a benefit reserved exclusively for residents conceals discrimination based on nationality. FN47 See the judgments cited above: Biehl, para. [14], Bachmann, para. [9] E.C. Commission v. Belgium , para. [7], and Commerzbank, para. [15]. 52. But it is also necessary, at the very outset, for there to be a clear indication of discrimination. 53. As we know, "discrimination consists solely in the application of different rules to comparable situations or in the application of the same rule to differing situations". [FN48] FN48 Case 283/83, Racke v. Hauptzollamt Mainz: [1984] E.C.R. 3791. para. [7]. 54. In tax matters, the Court takes particular care to ensure that the existence of discrimination is actually established. 55. Thus, in its judgment in Case 270/83 E.C. Commission v. France, [FN49] *462 the Court held that, where companies having their registered office in France and branches and agencies situated in France of companies having their registered offices abroad are subject to the same tax regime and no distinction is drawn for the purpose of "determining the income liable to corporation tax", they may not be treated differently as regards the grant of an advantage related to taxation, such as tax credits. [FN50] Similarly, in Biehl, the taxable amount over the period concerned was the same for residents and non-residents. Finally, in Commerzbank, resident companies enjoyed tax benefits which were not available to non-residents in the same tax situation. FN49 Cited above. FN50 Paras. [19]-[20].

56. It is therefore necessary to verify in this case whether "similar situations" are "treated differently". [FN51] FN51 Case 810/79, Uberschär: [1980] E.C.R. 2747, para. [16]. 57. Having regard to the procedures and conditions for the taxation of income, is there an objective difference of circumstances which could justify different treatment? [FN52] FN52 See the final sentence of para. [20] of Case 270/83, E.C. Commission v. France, cited above. 58. The ratio legis of the German tax rules is clear: those in the category of taxpayers "subject to unlimited taxation", which includes residents, are taxed on worldwide income. [FN53] Enjoying as they do the benefits provided by their State of residence, they must contribute through taxation to the expenditure thereby incurred. Moreover, it is that State which is best placed to know--or find out--what their personal circumstances are and to tax them individually by granting various allowances or reliefs for family responsibilities or business expenses (Werbungskosten), and so forth. That is the centre of the taxpayer's essential interests. [FN54] FN53 The taxable amount is reduced to the amount of income arising in the State of employment, in order to avoid double taxation. FN54 The taxpayer is subject to tax in his State of residence simply because he "lives" on the territory of that State. See the Order for reference, II, B, 2.1. 59. On the other hand, a person "subject to limited taxation" (here, a non- resident) is taxed in Germany only on the part of his income arising there. He is taxed objectively, regardless of his personal circumstances, according to the principle that those circumstances will be taken into account by the tax administration in his State of residence, which knows him better, in accordance with the rules of international tax law. [FN55] As the national court observed, "It is thus not the taxpayer personally who is linked with the national territory, but the work done by him". [FN56] FN55 Article 24 of the OECD 1977 Model Tax Convention: "This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for tax purposes on account of civil status or family responsbilities which it grants to its own residents." FN56 Order from the national court, II, B, 2.1.

60. The taxpayer's personal situation is therefore taken into account only in his State of residence, where the taxation takes account of all *463 his income [FN57] in order to avoid duplication of the personal reliefs and deductions granted to him. FN57 Section 1(1) of the 1987 EStG. 61. It is only in his State of residence that the "splitting" approach can be used, which presupposes that all the income obtained by both spouses, both at home and abroad, is taken into account. 62. It is a cohesive system: if Germany took account of the 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 to which residents and non-residents are subject make it possible to avoid duplication of benefits. That is why, under Article 24(3) of the OECD Model Convention on double taxation, a contracting State is not obliged to grant residents of another contracting State the personal deductions, reliefs and rebates which it grants its own residents. [FN58] FN58 See para. 22 of the commentary on the second sentence of Article 24(3) of the OECD Model Double Taxation Convention. The Greek Government emphasises correctly that the Court must not allow "the residents of any Community country who earn wages in more than one country to have the benefit, on more than one occasion, of reliefs or deductions in respect of tax on income, since they would be entitled to ask for such reductions or reliefs to be granted to them in all those countries where they earned income which was taxable in the country where that income arose" (observations, p. 8). 63. There is thus no discrimiantion between a person subject to unlimited taxation and one subject to limited taxation because they are not in comparable circumstances. Taxation of the former's worldwide income cannot be compared to the taxation of the latter, 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 latter having any right to invoke the principle of non-discrimination. 64. It cannot therefore be contended that a non-resident subject to limited taxation is, in principle, taxed "more heavily" than a resident subject to unlimited taxation. [FN59] The basis of taxation is not the same [FN60] and the individual circumstances of the person concerned may be taken into account under very favourable conditions by his State of residence. FN59 That view is expressed at p. 7 of the French Government's observations.

FN60 Income received abroad is not included in the taxable amount to which progressive tax rates are applied in the State of employment, which may constitute a considerable advantage. 65. But does this system not display a weakness where the non-resident taxpayer receives all (or almost all) his income in his State of employment and, under the double taxation treaty between the State of residence and the State of employment, such income is taxable *464 only in the latter State? That is the specific issue raised in the third question.

The Third Question 66. Not being subject to taxation in his State of residence, where he does not receive sufficient income, a taxpayer in the circumstances of the plaintiff in the main proceedings [FN61]--he is subject to limited taxation in his State of employment--will not have his 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. FN61 It seems that Belgium ceased paying unemployment benefits to Mr Schumacker's wife in 1988. Mr Schumacker receives income in his own right only in Germany. 67. This sort of "negative conflict" of jurisdiction between the State of employment and the State of residence (which both refuse to grant tax relief in respect of personal and family responsibilities) leads to "overtaxation" of non-residents. Does this constitute discrimination? 68. The practical importance of the question should be emphasised: frontier workers--in very many cases--receive all their income in the State where they are employed. They are therefore, in that respect, in a situation wholly comparable with that of residents. Can the distinction between residents and non-residents be invoked against them when, objectively, they are for tax purposes in the same situation as residents? 69. That situation is reminiscent of the Biehl case, in which the Court emphasised that breach of the principle of equal treatment was particularly clear where the non-resident taxpayer received income only in the Grand Duchy of Luxembourg. [FN62] FN62 Para. [16]. See also para. 10 of the Opinion of the Advocate General in that case: "The manifestly discriminatory nature of the rule at issue is evident in particular in all cases in which the national concerned received no income during the year in question in the Member State of origin or destination." 70. A national of a Member State who exercises his right of freedom of movement under Article 48, to work in another Member State (where he receives all his income) whilst continuing to reside in his State of origin, will have

to pay tax on the income received in his State of employment without his personal circumstances and his family responsibilities being taken into consideration. 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 ... tax" is determined in the same way [FN63] and both are in the same specific situation from the tax point of view. FN63 Para. [19] in Case 270/83, E.C. Commission v. France, cited above. 72. More particularly, the non-resident is refused the benefit of "splitting", the effect of which is to moderate the progressive nature of the tax rates. *465 73. The consequences of such discrimination for the free movement of persons has not escaped the Commission, which on 21 December 1993 adopted a recommendation (97/79) on the taxation of certain items of income received by non-residents in a Member State other than that in which they are resident [FN64]: the free movement of persons may be impeded by personal income tax arrangements which have the effect of imposing a heavier tax burden on non-residents than on residents in comparable situations. [FN65] FN64 [1994] O.J. L39/22. FN65 Second recital (my emphasis). The former must not, where the preponderant part of their income is received in the country of activity, be deprived of the tax reliefs and deductions enjoyed by residents. [FN66] FN66 Sixth recital (my emphasis). 74. Consequently, the Commission recommends that the Member States do not subject the income of non-residents received in the State of employment to higher taxation than that State would impose if the taxpayer and his wife and children resided there, provided that such income constitutes at least 75 per cent of his total taxable income. [FN67] FN67 Article 2(1) and (2). 75. The existence of discrimination is not in doubt where the non-resident receives all his income in his State of employment. What is the position where he receives most or almost all his income in the latter State? At what point must he be treated as if he were a resident? In its recommendation, the Commission puts the threshold at 75 per cent. The German and Netherlands rules put it at 90 per cent. 76. I consider that, in the absence of such rules, only an appraisal of the facts--

falling to the national court--will make it possible to determine the threshold as from which the income in the State of residence is sufficient for the personal circumstances of the person concerned to be taken into account by the tax authorities of that State. Only the residents of that State who have not reached that threshold can be placed on the same footing as residents of the State of employment where they receive the major part of their income. 77. What justification might "save" the German rules in the light of Article 48 of the Treaty? 78. Where one encounters discriminatory tax rules, one examines very rigorously any grounds for justification. Thus, a tax disadvantage is not necessarily justified by the fact that it may be balanced out by an advantage. [FN68] FN68 See para. [21] in Case 270/83, E.C. Commission v. France, cited above. 79. Two justifications have been put forward in this case.

(a) The personal situation of a taxpayer must be considered only by the tax administration in the State of residence, which alone is capable of

ascertaining it precisely. 80. In that connection, the exchange of information between *466 national administrations has expanded, particularly by virtue of Directive 77/799 [FN69] (even if co-operation between tax administrations in the Member State is limited by Article 8(1) of that directive), [FN70] and Directives 79/1070 [FN71] and 91/12 [FN72] which amended it. FN69 Cited above. FN70 See para. [20] of Bachmann. FN71 Council Directive of 6 December 1979 amending Directive 77/799 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation ([1979] O.J. L331/8). FN72 Council Directive of 25 February 1992 on the general arrangements for products subject to excise duty and on the holding, movement and monitoring of such products ([1992] O.J. L76/1). 81. Relying on those directives, the Court rejected the argument that it was difficult for a tax administration to gather the information necessary for the taxation of a person established in another Member State. [FN73] FN73 Para. [18] of Bachmann and para. [22] of Halliburton Services. 82. Even if it were assumed that such co-operation is still regarded as insufficient today, I consider that the reasoning adopted by the Court regarding the deductibility of insurance contributions can be transposed to the deductions or

reliefs which a person subject to unlimited taxation may claim: However, the inability to request such collaboration (between tax authorities of Member States) cannot justify the non-deductibility of insurance contributions. There is nothing to prevent the tax authorities concerned from demanding from the person involved such proof as they consider necessary and, where appropriate, from refusing to allow deduction where such proof is not forthcoming. [FN74] FN74 Para. [20] of Bachmann, (my emphasis).

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

83. I have shown that the distinction between residents and non-residents is understandable where the latter's income arises both in the State of residence and in the State of employment. On the other hand, the tax status of a non-resident must be eligible for the same treatment as that of a resident where he receives his income under exactly the same conditions as a resident. Moreover, overtaxation of the non-resident is, in such circumstances, particularly unfair since it has the effect of increasing his tax payment in a State where he does not reside. 84. That being so obviously the case, Germany initially adjusted its tax rules so as to bring frontier workers from the Netherlands who received at least 90 per cent of their worldwide income in Germany within the tax regime applicable to German residents, [FN75] in particular *467 the benefit of "splitting". Subsequently, the German legislature brought the treatment of all non-residents receiving at least 90 per cent of their overall income in Germany into line with that of residents of that State, apart from the benefit of "splitting" . [FN76] FN75 Act of 21 October 1980 on the implementation of the Additional Protocol of 13 March 1980 to the Convention of 16 June 1959 between Germany and The Netherlands (AGGrenzg NL, [1980] I BGB1 1999 [1980] BStB1 725). It should also be noted that, reciprocally, Netherlands tax law treats in the same way as persons subject to unlimited taxation those who receive at least 90 per cent of their worldwide income in The Netherlands but do not reside there ("Resolutie" of the Secretary of State for Finance of 21 December 1976, 27-621 782, and of 28 December 1989, DB 89/2184, BNB 1990/100 and, since 1 January 1990, Wet op de Inkomstenbelasting 1964, Articles 53a and 53b). See also para. 11.5 of the Commission's observations. FN76 Gesetz zur einkommensteuerlichen Entlastung von Grenzpendlern und anderen beschränkt steuerpflichtigen natürlich Personen und zur Änderung anderer gesetzlicher Vorschriften (Grenzpendlergesetz) ([1994] I BGB1 39, at p. 1395). 85. To justify the different treatment under its rules for frontier workers from Belgium as compared with those from the Netherlands, the German Government

contends that to extend to the former the status of taxpayer subject to unlimited taxation would expose it to the risk of having to accord that status generally to all non-resident or non-national workers, who could invoke the constitutional principle of equal treatment. 86. Let me say straight away that unequal treatment already exists, and was even ascertained by the Bundesfinanzhof in a judgment of 20 April 1988 [FN77]: It would be contrary to para. 3 of the Basic Law to treat frontier workers from other neighbouring States differently from those from the Netherlands. FN77 I R 219/82, [1990] BStBl, Teil II, p. 701, BFHE Bd 154, p. 38, 46. 87. In any event, the German Government cannot justify an infringement of Article 48 by pleading the excessive financial consequences of making generally available a right which it has already granted to certain non-residents. The Court has already responded to an argument of that kind in Case 270/83 , E.C. Commission v. France. [FN78] Whilst a Member State may limit entitlement to a tax benefit, it may only do so if it observes the principle of non-discrimination. FN78 Para. [25]. 88. In any event, it is evident from recent German tax legislation that the assimilation, in certain specific circumstances, of non-residents to residents does not endanger the cohesion of the national tax system. On the contrary, it enables the principle of equal treatment to be upheld. 89. What is the position regarding "splitting, of which the benefit is withheld from non-residents by the Grenzpendlergesetz? 90. There is no risk in this case of the taxpayer's personal circumstances being taken into account twice, because he is not taxed in his State of residence. 91. The difficulty arises from the fact that, in the present case, application of the "splitting tariff" means that the income received by the spouse in the State of residence (unemployment benefits), which is not taxable in Germany, is taken into account. 92. The national court concedes that "taking account thereof for the *468 purposes of progressive tax rates ... appears technicaly feasible", [FN79] which is confirmed by the fact that frontier workers from the Netherlands already enjoy that benefit. FN79 Para. II, B, 2.2 of the Order. 93. I agree that it would be impossible to extend "splitting" to non-residents if it were established that residents in Germany, in circumstances comparable to those of the plaintiff in the main proceedings, were deprived of it. 94. However, spouses residing together in Germany are subject to unlimited taxation and "splitting" is systematically available to them. Moreover, it is apparent from the findings of the national court that a married couple residing at the same time in both Germany and Belgium could also qualify for it. [FN80]

FN80 ibid. 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 taken into consideration. [FN81] FN81 See the observations of the plaintiff in the main proceedings, pp. 43 and 44. See also Sass, G., "Zum Einfluss der Rechtsprechung des Eugh Auf Die Beschränkte Einkommen- und Körperschaftsteuerpflicht"; ;, [1992] DB, Heft 17, 857, at p. 862. 96. Finally, the benefit of "splitting" cannot be withheld because of difficulties in exchanging information between national tax administrations. I have already considered this point. [FN82] FN82 See para. 80. 97. In the extremely specific case referred to the Court, the cohesion of the tax system does not require a distinction between residents and non-residents but, on the contrary, requires the latter to be treated in the same way as the former. Being subject to the same tax obligations, they must enjoy the same benefits and, in particular the same tax reliefs. 98. Let me emphasise, in conclusion, that the distinction between residents and non-residents is not absolute. The tax rules of several Member States deem certain persons who do not live there to be residents and subject them to unlimited taxation. Section 1(2) of the EStG, which is concerned with non-resident civil servants, or the German tax regime for people with dual residence are two examples of this.

The Fourth Question 99. Does Article 48 require the State of employment to apply to non-residents in the circumstances of the plaintiff in the main proceedings the principle of annual adjustment of deductions at source in respect of wages tax (Lohnsteuerjahresausgleich) and assessment of income tax by the administration (Veranlagung zur Einkommensteuer)? In other words, does Article 48 require equal treatment regarding not only substantive tax rules but also at procedural level? 100. The German rules provide for annual adjustment of deductions *469 at source in respect of wages tax paid by persons subject to unlimited taxation. The employer is required to refund part of the income tax to the employee where the total amount retained monthly exceeds the amount resulting from the tax scale for the year. Non-residents--who are subject to limited taxation--do not qualify for any such adjustment [FN83]: the sum of the monthly deductions at source constitutes the definitive taxation.

FN83 Section 50.5 of the EStG. 101. Whilst the non-resident may thus be able to avoid possible retroactive taxation, [FN84] the important point is that he is deprived of the possibility of claiming for exceptional expenditure or extraordinary financial burdens 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 the course of a year, as in the case of the plaintiff in the main proceedings in 1988). FN84 See the Order from the national court, II, B, 4. 102. provided that the non-resident's situation 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? 103. That question was, in my view, settled by the judgment in Biehl. 104. In that case, a taxpayer who left the Grand Duchy of Luxembourg during a year was unable, unlike residents, to receive a refund at the year end of any overpayment received by the tax administration as a result of deductions at source. Finding that taxpayers who leave their State of employment (or establish themselves there) during the course of a year are mainly nationals of other Member States, the Court identified disguised discrimination. [FN85] FN85 Judgment in Biehl, para. [14]. 105. In the present case, by depriving non-residents of the right to annual adjustment of 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. 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 possibility of an administrative appeal against a tax decision which is considered unfair could not justify maintaining a discriminatory procedural tax provision. [FN86] FN86 ibid., paras. [17]-[18]. 107. Consequently, it seems to me that there is a breach of Article 48 of the Treaty which, moreover, the Commission identified in a written reply to a question from a Member of the European Parliament on 26 October 1992. [FN87] FN87 Question 2579/91 ([1993] O.J. C16/1). *470 108. Two last remarks are called for.

109. First, the solution which I advocate is compatible with the Court's judgment in Werner which, it will be remembered, concerned a situation internal to a Member State in which the Court perceived neither disguised discrimination on grounds of nationality nor an infringement of Article 52. 110. Secondly, there is no risk here that, after a round of fiscal forum shopping, the taxpayer would choose to establish his residence in the State where taxation is most favourable, as the Danish Government fears. To align the tax regime of non-residents with that of residents where both receive all their income in the Member State of employment has the effect, on the contrary, of rendering the choice of residence neutral from the tax point of view. 111. I therefore suggest that the Court rule as follows: (1) Tax rules which apply to residents and non-residents different conditions regarding income tax may fall within the scope of Article 48 E.C. (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 employment within the territory of Member State A and (1) receives in Member State A all or most of his income and (2) does not receive in Member State B sufficient income to be taxed individually on the basis of his personal circumstances, income tax at a level higher than that payable by a person residing in Member State A who is assessed on the same taxable amount. Such a worker must therefore be entitled to the benefit of the same tax benefits as a resident. (4) Under Article 48, an employed person may not be deprived of the annual adjustment of deductions at source in respect of income tax and assessment to wages tax by the administration if those benefits are available to a resident employed person in the same situation. JUDGMENT [1] By order of 14 April 1993, received at the Court Registry on 14 May 1993, the Bundesfinanzhof referred to the Court for a preliminary ruling under Article 177 EEC several questions on the interpretation of Article 48 EEC in order to enable it to assess the compatibility with Community law of certain provisions of the legislation of Germany on income tax under which taxpayers are treated differently depending on whether or not they reside within national territory. [2] Those questions were raised in proceedings between the Finanzamt Köln-Altstadt (Tax Office, Cologne Alstadt) and Roland Schumacker, a Belgian national, concerning the way in which the latter's earnings as an employee were taxed in Germany. [3] In Germany, the Einkommensteuergesetz (Act on income tax, *471 hereinafter "the EStG") applies different tax regimes to employed persons according to their residence.

[4] Under section 1(1) of the EStG, natural persons who have their permanent residence or usual abode in Germany are subject there to tax on all their income ("unlimited taxation"). [5] However, under section 1(4) natural persons with no permanent residence or usual abode in Germany are subject to tax only on the part of their income arising in Germany ("limited taxation"). Under section 49(1)(4), such income of German origin includes in particular income from employment in Germany. [6] In Germany, in general, tax on income from employment is deducted at source by the employer from workers' wages and is then paid to the tax administration. [7] For this deduction at source to be carried out, employed persons subject to unlimited taxation are divided into several taxation categories (section 38b of the EStG). Unmarried persons come within category I (general tax tariff). Married employed persons who are not permanently separated come within category III (the "splitting" tariff, section 26b of the EStG), provided that both spouses are resident in Germany and are subject to unlimited taxation. The German "splitting" regime was introduced to mitigate the progressive nature of the income tax rates. Under the "splitting" regime, the spouses' total income is aggregated, notionally attributed to each spouse as to 50 per cent and then taxed accordingly. If the income of one spouse is high and that of the other low, "splitting" makes their taxable amounts the same and palliates the progressive nature of the income tax rates. [8] Employed persons subject to unlimited taxation also benefit from the procedure of annual adjustment of wages tax (section 42b of the EStG). Under that procedure, the employer is required to refund to the employee part of the wages tax which he has levied where the aggregate of the sums deduced each month exceeds the amount indicated by the tax scale for the year, for example, if the amount of wages has varied from month to month. [9] Moreover, employed persons subject to unlimited taxation qualified, until 1990, for annual wages tax adjustment by the tax administration and, since then, have qualified for the procedure whereby the tax is assessed by the administration (section 46 of the EStG). That procedure makes it possible to set off against income from employment losses suffered in respect of income of another kind (for example, dividends). [10] Finally, in the case of persons subject to unlimited taxation, tax is assessed according to overall ability to pay, that is to say having regard to all the other income received by such taxpayers and to their personal and family circumstances (family expenses, welfare expenses and other outgoings which in general give rise to tax reliefs and rebates). [11] Some of the above benefits are withheld from those employed *472 persons who are subject only to limited taxation. The German Gesetz zur einkommensteuerlichen Entlastung von Grenzpendlern und anderen beschränkt steuerpflichtigen natürlichen Personen und zur Änderung anderer gesetzlicher Vorschriften--Grenzpendlergesetz (Act reducing taxation of the income of cross-frontier workers and other natural persons subject to limited taxation and amending other legislative provisions) of 24 June 1994, which is intended to

remedy this situation at national level, is not relevant in the present case since it had not come into force at the material time. [12] Under the legislation in force at the material time, persons subject to limited taxation came within category I (general tariff) regardless of their family circumstances (section 39d of the EStG). Consequently, they did not qualify for the tax benefit of "splitting" and married employed persons were treated in the same way as unmarried persons. [13] A simplified tax procedure was applied to persons subject to limited taxation. Their liability to income tax was deemed to be definitively discharged by the monthly deduction at source made by the employer. They were excluded both from the annual wages tax adjustment made by the employer (section 50(5) of the EStG) and from the annual income tax assessment by the administration. Without such annual wages tax adjustment, they could not qualify for reimbursement of any overpaid tax at the end of the year. [14] Finally, by contrast with employed persons subject to unlimited taxation, persons subject to limited taxation were not entitled to deduct their social expenses (premiums in respect of old-age, sickness or invalidity insurance) where they exceeded the flat rates laid down in the taxation scale. [15] According to the case-file, Mr Schumacker has always lived in Belgium with his wife and their children. After first working in Belgium, he was employed in Germany from 15 May 1988 until 31 December 1989, although he continued to live in Belgium. Mrs Schumacker, who was not employed, drew unemployment benefit in Belgium only during 1988. Since 1989, Mr Schumacker's wages have been the household's sole income. [16] Pursuant to Article 15(1) of the Double Taxation Treaty concluded between Belgium and Germany on 11 April 1967, the right to tax Mr Schumacker's wages was, as from 15 May 1988, vested in Germany, as the State where he worked. Mr Schumacker's wages were thus subject in Germany to a deduction at source by his employer, calculated by reference to taxation category I, pursuant to sections 1(4) and 39d of the EStG. [17] On 6 March 1989, Mr Schumacker asked the Finanzamt to calculate his tax on an equitable basis (section 163 of the Abgabenordnung--the German Tax Code), by reference to tax category III (normally applicable to married employed persons residing in Germany, giving them the right to "splitting" ) and *473 requested that the difference between the deduction from his wages each month, on the basis of tax category I, and what would be payable by him on the basis of tax category III, be refunded to him. [18] The Finanzamt rejected his request by decision of 22 June 1989, whereupon Mr Schumacker instituted proceedings before the Finanzgericht, Cologne. That court upheld Mr Schumacker's claims in respect of 1988 and 1989 and ordered the Finanzamt to take a decision on an equitable basis pursuant to Article 163 of the German tax code. The Finanzamt then brought an appeal on a point of law before the Bundesfinanzhof against the judgment of the Finanzgericht. [19] The Bundesfinanzhof is uncertain whether Article 48 EEC may have a bearing on the decision to be given in the case before it. It has therefore stayed the proceedings pending a ruling from the Court of Justice on the following

questions: 1. Does Article 48 EEC restrict the right of Germany to levy income tax on a national of another E.C. Member State? If so: 2. Does Article 48 EEC allow Germany to impose a higher level of income tax on a natural person of Belgian nationality, whose sole permanent residence and usual abode is in Belgium and who has acquired his professional qualifications and experience there, than on an otherwise comparable person resident in Germany, if the former commences employment in Germany without transferring his permanent residence to Germany? 3. Does it make any difference if the person of Belgian nationality referred to in Question 2 derives almost all (that is over 90 per cent) of his income from Germany and the said income is also only taxable in Germany, in accordance with the Double Taxation Agreement between Germany and Belgium? 4. Is it contrary to Article 48 EEC for Germany to exclude natural persons who have no permanent residence or usual abode in Germany and in that country derive income from employment from the annual wages tax adjustment and also to deny them the possibility of being assessed for income tax with account being taken of earnings from employment? The First Question [20] By its first question, the national court asks essentially whether Article 48 of the Treaty must be interpreted as being capable of limiting the right of a Member State to lay down the conditions concerning the liability to taxation of a national of another Member State and the manner in which tax is to be levied on the income received by him within its territory. [21] Although, as Community law stands at present, direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law (see Case C-246/89 , E.C. Commission v. United Kingdom [FN88]). FN88 [1991] I E.C.R. 4585, [1991] 3 C.M.L.R. 706 *474 , para. [12]. [22] With regard more particularly to the free movement of persons within the Community, Article 48(2) of the Treaty requires the abolition of any discrimination based on nationality between workers of the Member States as regards, inter alia, remuneration. [23] In that connection, the Court held in Case C-175/88, Biehl v. Administration des Contributions [FN89] that the principle of equal treatment with regard to remuneration would be rendered ineffective if it could be undermined by discriminatory national provisions on income tax. That is why the Council laid down the requirement in Article 7 of Regulation 1612/68 on the free movement of workers within the Community [FN90] that workers who are nationals of a Member State are to enjoy, in the territory of another Member State, the same tax benefits as nationals working there.

FN89 [1990] I E.C.R. 1779, [1990] 3 C.M.L.R. 143, para. [12]. FN90 [1968] II O.J. Spec. Ed. 475. [24] In view of the foregoing, the answer to be given to the first question is that Article 48 of the Treaty must be interpreted as being capable of limiting the right of a Member State to lay down conditions concerning the liability to taxation of a national of another Member State and the manner in which tax is to be levied on the income received by him within its territory, since that article does not allow a Member State, as regards the collection of direct taxes, to treat a national of another Member State employed in the territory of the first State in the exercise of his right of freedom of movement less favourably than one of its own nationals in the same situation. The Second and Third Questions [25] By its second and third questions, which it is appropriate to consider together, the national court seeks essentially to ascertain whether Article 48 of the Treaty must be interpreted as precluding the application of rules of a Member State under which a worker who is a national of, and resides in, another Member State and is employed in the first State is taxed more heavily than a worker who resides in the first State and performs the same work there. The national court also asks whether the answer to that question is affected by the fact that the national of the second Member State derives his income entirely or almost exclusively from his work in the first Member State and does not receive, in the second State, sufficient income to be subject to taxation there in a manner enabling his personal and family circumstances to be taken into account. [26] The Court has consistently held that the rules regarding equal treatment forbid not only overt discrimination by reason of nationality but also all covert forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result (Case 152/73, Sotgiu v. Deutsche Bundespost [FN91]). FN91 [1974] E.C.R. 153 *475 , para. [11]. [27] It is true that the rules at issue in the main proceedings apply irrespective of the nationality of the taxpayer concerned. [28] However, national rules of that kind, under which a distinction is drawn on the basis of residence in that non-residents are denied certain benefits which are, conversely, granted to persons residing within national territory, are liable to operate mainly to the detriment of nationals of other Member States. Non-residents are in the majority of cases foreigners. [29] In those circumstances, tax benefits granted only to residents of a Member State may constitute indirect discrimination by reason of nationality. [30] It is also settled law that discrimination can arise only through the application

of different rules to comparable situations or the application of the same rule to different situations. [31] In relation to direct taxes, the situations of residents and of non-residents are not, as a rule, comparable. [32] Income received in the territory of a Member State by a non-resident is in most cases only a part of his total income, which is concentrated at his place of residence. Moreover, a non-resident's personal ability to pay tax, determined by reference to his aggregate income and his personal and family circumstances, is more easy to assess at the place where his personal and financial interests are centred. In general, that is the place where he has his usual abode. Accordingly, international tax law, and in particular the Model Double Taxation Treaty of the Organisation for Economic Cooperation and Development (OECD), recognises that in principle the overall taxation of taxpayers, taking account of their personal and family circumstances, is a matter for the State of residence. [33] The situation of a resident is different in so far as the major part of his income is normally concentrated in the State of residence. Moreover, that State generally has available all the information needed to assess the taxpayer's overall ability to pay, taking account of his personal and family circumstances. [34] Consequently, the fact that a Member State does not grant to a non-resident certain tax benefits which it grants to a resident is not, as a rule, discriminatory since those two categories of taxpayer are not in a comparable situation. [35] Accordingly, Article 48 of the Treaty does not in principle preclude the application of rules of a Member State under which a non-resident working as an employed person in that Member State is taxed more heavily on his income than a resident in the same employment. [36] The position is different, however, in a case such as this one where the non-resident receives no significant income in the State of his residence and obtains the major part of his taxable income from an activity performed in the State of employment, with the result that the State of his residence is not in a position to grant him the benefits *476 resulting from the taking into account of his personal and family circumstances. [37] There is no objective 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 taxpayer's personal and family circumstances. [38] In the case of a non-resident who receives the major part of his income and almost all his family income in a Member State other than that of his residence, discrimination arises from the fact that his personal and family circumstances are taken into account neither in the State of residence nor in the State of employment. [39] The further question arises whether there is any justification for such discrimination. [40] The view has been advanced, by those Member States which have submitted observations, that discriminatory treatment--regarding the taking into account of personal and family circumstances and the availability of "splitting" --was justified by the need for consistent application of tax regimes to non-

residents. That justification, based on the need for cohesion of the tax system, was upheld by the Court in Case C-204/90, Bachmann v. Belgium. [FN92] According to those Member States, there is a link between the taking into account of personal and family circumstances and the right to tax worldwide income. Since the taking into account of those circumstances is a matter for the Member State of residence, which is alone entitled to tax worldwide income, they contend that the State on whose territory the non-resident works does not have to take account of his personal and family circumstances since otherwise the personal and family circumstances of the non-resident would be taken into account twice and he would enjoy the corresponding tax benefits in both States. FN92 [1992] I E.C.R. 249, [1993] 1 C.M.L.R. 785, para. [28]. [41] That argument cannot be upheld. In a situation such as that in the main proceedings, the State of residence cannot take account of the taxpayer's personal and family circumstances because the tax payable there is insufficient to enable it to do so. Where that is the case, the Community principle of equal treatment requires that, in the State of employment, the personal and family circumstances of a foreign non-resident be taken into account in the same way as those of resident nationals and that the same tax benefits should be granted to him. [42] The distinction at issue in the main proceedings is thus in no way justified by the need to ensure the cohesion of the applicable tax system. [43] At the hearing, the Finanzamt argued that administrative difficulties prevent the State of employment from ascertaining the income which non-residents working in its territory receive in their State of residence. *477 [44] That argument likewise cannot be upheld. [45] Council Directive 77/799 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation [FN93] provides for ways of obtaining information comparable to those existing between tax authorities at national level. There is thus no administrative obstacle to account being taken in the State of employment of a non-resident's personal and family circumstances. FN93 [1977] O.J. L336/15. [46] More particularly, it must be pointed out that Germany grants frontier workers resident in The Netherlands and working in Germany the tax benefits resulting from the taking into account of their personal and family circumstances, including the "splitting tariff". Provided that they receive at least 90 per cent of their income in Germany, those Community nationals are treated in the same way as German nationals under the German Act of 21 October 1980 implementing the additional protocol of 13 March 1980 to the Double Taxation Treaty between Germany and The Netherlands of 16 June 1959. [47] The answer to be given to the second and third questions is therefore that Article 48 of the Treaty must be interpreted as precluding the application of rules

of a Member State under which a worker who is a national of, and resides in, another Member State and is employed in the first State is taxed more heavily than a worker who resides in the first State and performs the same work there when, as in the main action, the national of the second State obtains his income entirely or almost exclusively from the work performed in the first State and does not receive in the second State sufficient income to be subject to taxation there in a manner enabling his personal and family circumstances to be taken into account. The Fourth Question [48] By its fourth question, the national court essentially asks whether Article 48 of the Treaty must be interpreted as precluding a provision in the legislation of a Member State on direct taxation under which the benefit of procedures such as annual adjustment of deductions at source in respect of wages tax and the assessment by the administration of the tax payable on remuneration from employment is available only to residents, thereby excluding natural persons who have no permanent residence or usual abode on its territory but receive income there from employment. [49] The answers to the second and third questions have disclosed discrimination of a substantive nature between non-resident Community nationals and nationals resident in Germany. It is necessary to consider whether such discrimination also exists at procedural level in so far as the application of the abovementioned adjustment procedures is available only to resident nationals and is withheld from non-resident Community nationals. If such *478 discrimination is found to exist, it will be necessary to decide whether there is any justification for it. [50] It should be noted at the outset that in Germany the wages tax deducted at source is deemed to discharge all liability to income tax on remuneration from employment. [51] According to the order from the national court, by virtue of the discharge from liability arising from the deduction at source, non-residents are first of all deprived, for reasons of administrative simplification, of the possibility of relying, in the procedure for the annual adjustment of deductions at source or in connection with the assessment by the administration of tax on remuneration from employment, on certain items forming part of the basis of assessment (for example, occupational expenses, special expenditure or so-called extraordinary costs) which might give rise to a partial refund of the tax deducted at source. [52] Non-residents may thereby be placed in a less advantageous position than residents, the latter being taxed, by virtue of sections 42, 42a and 46 of the EStG, in principle in such a way that all items forming part of the basis of assessment are taken into account. [53] In its observations, the German Government emphasised that German law provides for a procedure under which non-resident taxpayers may ask the tax administration to supply them with a tax certificate indicating certain reliefs to which they are entitled and which the tax administration must retrospectively apportion equally over the calendar year (section 39d of the EStG). The

employer is then entitled, under that section in conjunction with section 41c of the EStG, to reimburse, with the next payment of wages, the wages tax collected up to that time if the employee provides the employer with a certificate having retroactive effect. If the employer does not exercise that right, the adjustment may be made by the tax administration after the end of the calendar year. [54] However, it must be noted that those provisions are not binding and that neither the Finanzamt Köln-Altstadt nor the German Government has referred to any provision imposing an obligation on the tax administration to remedy in all cases the discriminatory consequences of application of the provisions of the EStG at issue. [55] Secondly, since they do not have the benefit of the abovementioned procedures, non-residents who in the course of the year have left employment in a Member State in order to take up another post in another Member State, or who have been unemployed for part of the year, cannot obtain reimbursement of any overpaid tax from their employer or from the tax administration. [56] It is apparent from the order from the national court that an equitable procedure exists under German law pursuant to which a non-resident may ask the tax administration to review his situation and recalculate the taxable amount. That procedure is provided for by section 163 of the German tax code. *479 [57] However, it does not suffice to meet the requirements of Article 48 of the Treaty for a foreign worker to have to rely on equitable measures adopted by the tax administration on a case-by-case basis. Moreover, in its judgment in Biehl, [FN94] the Court rejected the arguments to that effect advanced by the Luxembourg tax administration. FN94 Cited above. [58] It follows that Article 48 of the Treaty requires equal treatment at procedural level for non-resident Community nationals and resident nationals. Refusal to grant non-resident Community nationals the benefit of annual adjustment procedures which are available to resident nationals constitutes unjustified discrimination. [59] The answer to be given to the national court is therefore that Article 48 of the Treaty must be interpreted as precluding a provision in the legislation of a Member State on direct taxation under which the benefit of procedures such as annual adjustment of deductions at source in respect of wages tax and the assessment by the administration of the tax payable on remuneration from employment is available only to residents, thereby excluding natural persons who have no permanent residence or usual abode on its territory but receive income there from employment. Costs [60] The costs incurred by the Danish, German, Greek, French, Netherlands and United Kingdom Governments and the E.C. Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for

the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Order On those grounds, THE COURT, in answer to the questions referred to it by the Bundesfinanzhof by order of 14 April 1993, HEREBY RULES: 1. Article 48 EEC must be interpreted as being capable of limiting the right of a Member State to lay down conditions concerning the liability of taxation of a national of another Member State and the manner in which tax is to be levied on the income received by him within its territory, since that article does not allow a Member State, as regards the collection of direct taxes, to treat a national of another Member State employed in the territory of the first State in the exercise of his right of freedom of movement less favourably than one of its own nationals in the same situation. 2. Article 48 of the Treaty must be interpreted as precluding the application of rules of a Member State under which a worker who is a national of, and resides in, another Member State and *480 is employed in the first State is taxed more heavily than a worker who resides in the first State and performs the same work there when, as in the main action, the national of the second State obtains his income entirely or almost exclusively from the work performed in the first State and does not receive in the second State sufficient income to be subject to taxation there in a manner enabling his personal and family circumstances to be taken into account. 3. Article 48 of the Treaty must be interpreted as precluding a provision in the legislation of a Member State on direct taxation under which the benefit of procedures such as annual adjustment of deductions at source in respect of wages tax and the assessment by the administration of the tax payable on remuneration from employment is available only to residents, thereby excluding natural persons who have no permanent residence or usual abode on its territory but receive income there from employment.

(c) Sweet & Maxwell Limited [1996] 2 C.M.L.R. 450 END OF DOCUMENT