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The Federal Tax Court has now affirmed that serious doubt exists whether the high hurdle established by German law to qualify for the advantageous German splitting rates is consistent with EU law as regards EU citizens only one of whom is resident in Germany (DB 1998, 1494 - 24 March 1998; cf. article no. 114).

Under sec. 1 (3) EStG, citizens of an EU state, Norway, Liechtenstein, or Iceland residing in Germany are permitted to elect joint filing status with their 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 %.

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.

The preferential treatment of EU citizens is the result of the "Schumacker" decision of the European Court of Justice (14 February 1995), reported on in articles no. 23 item 4.1 and article no. 50.

Relying on a 1994 statement of position by the European Commission (BB 1994, 1404 - 4 May 1994), the Federal Tax Court has now ruled that "serious doubt" exists as to whether these legislative changes go far enough. Specifically, serious doubt exists whether the 90 % requirement is consistent with Art. 48 of the European Treaty. A case posing this issue has been referred to the European Court of Justice by the Cologne Tax Court.

The case before the Federal Tax Court involved a taxpayer whose spouse, residing in Great Britain, earned 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).

Since Art. 48 of the European Treaty is directly applicable law in Germany, the court held that it was not appropriate to weigh the interest of the taxpayer in receiving a stay against the interest of the public treasury in an uninterrupted flow of revenue. Such a weighing of interests is appropriate when the constitutionality of a tax law is challenged, but not when serious doubt exists whether a provision of the tax law is consistent with directly applicable EU law, the court stated.

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

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