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Brussels, 26 March 2007

Direct taxation: Commission requests Germany to end discriminatory rules applied to non-resident tax payers

By a Reasoned Opinion under Article 226 of the EC Treaty, the European Commission has formally requested Germany to modify the withholding tax system applied on the income of certain categories of non-resident taxpayers – particularly artists and sportsmen. According to German law, a flat-rate withholding tax is applied to the total income without any possibility of deducting business expenses. A subsequent refund procedure allows non-resident tax payers to ask for reimbursement of the overpaid tax. The Commission considers the tax deduction at source and refund procedure incompatible with the principle of freedom to provide services in the Internal Market. If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the European Court of Justice.

Contrary to resident tax payers who have to declare their income annually, Germany applies a withholding tax at source on income paid to certain categories of non-residents (artists, sportsmen, journalists or other similar categories).Non-resident taxpayers cannot deduct their business expenses; it is only in a subsequent refund procedure that the non-residents have the right to ask for reimbursement of overpaid tax. Moreover, only business expenses directly economically linked to the activity in Germany are deductible in the refund procedure.

In the Commission's view these tax provisions constitute a considerable obstacle to the cross-border provision of services as guaranteed by Article 49 of the EC Treaty. Indeed, prohibition of the deduction of business expenses from gross receipts and prohibition of the deduction of indirect expenditure in many cases result in an objectively unjustified higher taxation of such non-residents as compared with residents. The Commission's opinion is supported by the judgments of the European Court of Justice of 03.10.2006 and 15.02.2007 in Cases C-290/04 ("Scorpio") and C-345/04 ("Centro Equestre").

The Commission's case reference number is 1999/4852.
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