Germany: 192. European Court of Justice Upholds German Taxation of Expatriate Spouses

Last Updated: 2 January 2000
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website

For disclaimer and copyright see end of this article.

1. Introduction

In its judgement of 14 September 1999 (Frans Gschwind - Case C-391/97), the European Court of Justice (ECJ) upholds the most important changes made in German income tax law following the ECJ's 1995 Schumacker decision (see articles nos. 29 sec. 4.1 and 50).

At issue in Gschwind, as in Schumacker, is the extent to which an EU Member State may permissibly deny foreign non-resident EU nationals working within its borders the personal and family-related tax benefits available to its residents. In Schumacker, the Court held that such denial was precluded by the EC Treaty where the income earned in the state of employment constitutes all or virtually all of an individual's total income and the income earned in the state of residence is inadequate to permit this state to take account of the taxpayer's personal and family circumstances.

 

2. Schumacker and its aftermath

Before Schumacker, Germany only took account of the personal or family circumstances of resident taxpayers. In order to file a joint return and qualify for the highly advantageous splitting rate, both spouses had to be residents.

After Schumacker, Germany changed its laws to permit residents of EU Member States, Liechtenstein, Iceland, and Norway to receive all personal and family-related tax benefits available to resident taxpayers if one of two conditions is met:

• at least 90 % of the taxpayer's total income for the calendar year is subject to German taxation (percentage threshold)

or

• the amount not subject to German taxation does not exceed the equivalent of DM 12,000 (absolute threshold).

With regard to the splitting rate, the (minimum) percentage threshold applies to the joint income of both spouses (not just to the spouse working in Germany) and the alternative (maximum) absolute threshold is doubled (DM 24,000).

 

3. Facts, central issue, and holding of Gschwind

The case involved a Dutch national living in the Netherlands with his wife and child, but working in Germany. Mr. Gschwind's German salary constituted his entire income. However, his wife also worked in the Netherlands and earned approx. 42 % of the joint spousal income. The German tax authorities refused to apply the splitting rate to Mr. Gschwind's taxable income. Since only Mr. Gschwind's income was subject to German taxation, he fell short of the minimum percentage threshold (90 %). Since Mrs. Gschwind's income exceeded the equivalent of DM 24,000, he could not meet the alternative maximum absolute threshold either.

Under the German splitting rate, the standard income tax rate is applied to half of a married couple's joint taxable income and the result is multiplied by two to determine their income tax. Because German income tax rates are sharply progressive, the splitting rate results in tax savings compared with filing two single returns wherever a couple's joint income is not earned half by each spouse. The current maximum tax reduction from the splitting rate is DM 22,886.

Mr. Gschwind appealed the denial of the splitting rate to the Cologne Tax Court, arguing that the requirements established by German law were discriminatory under Art. 48 (now Art. 39) of the EC Treaty since no comparable thresholds applied to German residents. The Cologne Tax Court suspended proceedings and requested a preliminary ruling from the ECJ (see articles nos. 114 and 160).

Following the recommendations of the Advocate General (Case C-391/97 - 11 March 1999), the ECJ upheld the relevant provisions of German law. The ECJ distinguished Gschwind from Schumacker on the grounds that Gschwind did not involve circumstances in which "almost the entire income" of the taxpayer's tax household was earned and taxable in the state of employment (Germany). Noting that nearly 42 % of the Gschwinds' total income was received in the Netherlands, the ECJ considered the tax base in this state to be sufficient to permit it to take account of the Gschwinds' personal and family circumstances (Gschwind at par. 28, 29).

The EJC rejected the taxpayer's argument that he and his wife were unfairly discriminated against because a German resident married couple, one of whom worked in Germany and the other in e.g. the Netherlands such that the latter's income was not subject to German taxation under the relevant tax treaty, would qualify for the splitting rate without regard to the percentage of joint spousal income which remained subject to German taxation. While Germany would take account of the exempt income of the spouse working in the Netherlands in fixing the tax rate applicable to the other spouse's income (progression adjustment), the same progression adjustment would occur if the splitting rate were applied to Mr. Gschwind's income (cf. § 1a (1) no. 2 EStG).

The reasoning of the ECJ on this issue (Gschwind at par. 30) is essentially that the different treatment of non-residents is justified because the state of residence of both spouses is better able to take account of their family circumstances since only this state has the power of taxation over their worldwide incomes. Equal treatment of residents and non-residents is only mandated by the EC Treaty where the income earned in the state of employment is such that the state of residence is no longer able to take account of the family circumstances as a factual matter.

Instead of holding merely that the state of residence is still able to take sufficient account of the family circumstances of a married couple where approx. 40% of the household income remains taxable in this state, the Court went further and explicitly endorsed the 90% German threshold, implying that the state of residence remains able to make a sufficient adjustment if as little as 11% of the household income is earned within its borders.

 

4. Observations and comments

Gschwind and Schumacker were both decided under Art. 48 (now Art. 39) of the EC Treaty providing for "freedom of movement for workers ... within the Community" and, more specifically, "abolishing any discrimination based on nationality between workers of the Member States as regards employment, remuneration, and other conditions of work and employment".

The issue before the Court was therefore whether the denial of the splitting rate to Mr. Gschwind constituted discrimination based on nationality. The relevant German law makes no mention of nationality, but rather defines different regimes based on residence. A couple resident in Germany is entitled to the splitting rate no matter how little of their joint income is subject to German taxation, whereas a couple resident in an EU Member State (or one of the European Economic Area countries) is only so entitled if it meets one of two thresholds (percentage threshold or absolute threshold). It is, however, clear that rules depending on residence may constitute discrimination based on nationality because non-residents are generally also foreign nationals (Schumacker, at par. 27, 28).

The ECJ defines discrimination as the application of different rules to comparable situations or the same rule to different situations (Gschwind, at par. 21). Since Gschwind involved the application of different rules, the issue was whether there was a justifying difference in the situations to which the different rules were applied.

Here the Court states that, "as far as direct taxes are concerned, the situations of residents and of non-residents in a given state are generally not comparable" because a state taxes the worldwide income only of its residents (Gschwind at par. 22). Its taxation of non-residents is limited to income having its source within its borders. The Court notes that this principle, found in the domestic tax law of most if not all developed nations, is also a cornerstone of the OECD model tax treaty, on which the developed world's network of tax treaties is based (cf. Gschwind at par. 24).

These comments by the Court signal strong deference to the principle of residence, from which derives the corollary principle that it is up to the state of residence to take account of a taxpayer's personal and family circumstances. Failure of the state of employment to take account of the personal and family circumstances of a non-resident is justified, hence not discriminatory in the sense of the EC Treaty, because of the inability of the state of employment to tax the worldwide income of its non-residents. Schumacker, however, stands for the principle that an exception applies when the income earned in the state of employment represents all or virtually all of the taxpayer's income, hence coincides with his worldwide income. In such cases, the limitations on the scope of taxation by the state of employment lose all practical significance and this state exercises de facto taxation over the taxpayer's worldwide income. Hence, in these circumstances, the state of employment must take account of the taxpayer's personal and family circumstances.

In Gschwind, the Court may be thought of as applying the same principles to an issue affecting the taxation of a married couple. Since the couple's joint income was not concentrated in Germany, the Court refused to recognise any obligation on Germany to accord a benefit designed for the couple as an economic unit to the spouse who worked in Germany, even though the income of this spouse, viewed in isolation, was entirely from German sources (subject to German taxation – cf. Gschwind, at par. 31).

 

5. Impact of the decision

Gschwind may make pragmatic sense because of the unharmonised state of European tax law, particularly as regards the account to be given to a taxpayer's personal and family situation. By approving the high German 90 % percentage threshold to qualify for the splitting rate, the Court has by implication approved the same threshold with respect to other relief related to family and personal circumstances as well.

While the diversity of EU tax law in the area makes it difficult to generalise, the bottom line would appear to be that non-resident individuals who do not earn substantially all of their income in a single EU land will continue to be at a disadvantage as compared with non-residents who meet a high percentage threshold and compared with residents.

The German tax authorities argued in Gschwind that unjustified cumulative benefits would result were Mr. Gschwind to enjoy the splitting rate in Germany while his wife claimed other family benefits in the Netherlands (Opinion of the Advocate General, at par. 14). While it is not clear that this contention was correct, windfall double benefits are conceivable as a theoretical matter as long as income tax law is not harmonised in this area.

In a harmonised tax system, Mr. Gschwind would clearly be entitled to the splitting rate he sought. This is shown by the following example, which assumes the German tax laws to be in force both in Germany and the Netherlands (tax calculations at 1999 rates).

 

DM

Taxable income, Mr. Gschwind (Germany)

52,000

Taxable income, Mrs. Gschwind (Neth.)

48,000

Joint household taxable income

100,000

Tax on DM 100,000, splitting rate

21,810

Tax on DM 52,000, splitting rate: Germany
(with progression adjustment)


11,341

Tax on DM 48,000, splitting rate: Neth.
(with progression adjustment)


10,469

Total tax, Germany + Netherlands

21,810

By applying the splitting rate in both countries, total family taxation on two incomes, one earned in Germany and the other in the Netherlands, is the same as if the entire income had been earned in either of the two countries. This result is unaffected by changes in the distribution of income between the two spouses.

However, failure to apply the splitting rate in Germany in the above example would increase Mr. Gschwind's tax and therefore the total tax for the household by DM 235.

Were one to assume taxable income of Mr. Gschwind of DM 75,000 (75 %) and taxable income for Mrs. Gschwind of DM 25,000 (25 %), the additional tax paid by Mr. Gschwind, and therefore total tax for the household, would increase by DM 3,563 if he were denied the splitting rate. Assuming taxable income to be proportionate to gross income, Mr. Gschwind would meet neither the percentage threshold nor the absolute threshold on these facts and hence be denied the splitting rate under current German law.

In an unharmonised tax world, there is no reason to assume that the penalty resulting from denial of personal and family benefits in analogous cases will be less than in the harmonised system hypothesised above. Gschwind thus appears to stand for the principle that substantial tax penalties on EU nationals who take work outside their country of residence are not incompatible with the principle of free movement of workers.


For further information, please send a fax or an e-mail stating your inquiry to KPMG Frankfurt, attn. Christian Looks: Fax (0)69-9587-2262, e-mail cLooks@kpmg.com. You may also send an e-mail to KPMG Germany by clicking the Contact Contributor button on this screen.

Disclaimer and Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG. Distribution to third persons is prohibited without our express written consent in advance.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions