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In articles nos. 23 (sec. 4.1) and 50, we reported on the changes in German taxation of EU citizens flowing from the "Schumacker" decision of the European Court of Justice (14 February 1995).

Relying on this decision, a German tax court has now ruled that "serious doubt" exists as to whether these legislative changes go far enough (FG Hessen EFG 1997, 1314 - 18 July 1997). Specifically, the court finds that serious doubt exists regarding the conditions under which an EU citizen domiciled in Germany and his or her spouse domiciled outside of Germany can qualify for the favourable splitting tax rates for joint filers.

For individuals not citizens of an EU state (or of Norway, Liechtenstein, or Iceland), the splitting rates are not available unless both spouses are subject to tax in Germany on their worldwide incomes. This requires that they both be German residents, i.e. have either their domicile or their habitual abode in Germany.

A citizen of an EU state, Norway, Liechtenstein, or Iceland residing in Germany is, however, permitted to elect joint filing status with his or her spouse residing abroad provided the German resident spouse earns at least 90 % of their joint income. In other words, the spouse residing abroad cannot earn more than 10 %.

The court's doubts relate to the justifiability of these income requirements under EU law. The case before it involves a taxpayer whose spouse earns more than 10 % of the couple's joint income. The court was ruling on a motion to stay collection of the tax, not on the merits. The affirmation of "serious doubt" means that collection must be stayed (sec. 361 AO, sec. 69 FGO).

Taxpayers in comparable situations would be well advised to file appeals and request stays of collection after consultation with their tax advisors.

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