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Brussels, 26 March 2007

Direct taxation: Commission requests Austria to end discriminatory rules on personal income tax

By a reasoned opinion under Article 226 of the EC Treaty, the European Commission has formally requested Austria to change one provision of its personal income tax legislation that is incompatible with the principles of free movement of worker and freedom of establishment in the Internal Market. According to Austrian law, under certain conditions resident taxpayers with foreign income cannot benefit from full tax deduction of personal expenses while residents with domestic income can. 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.

According to Austrian tax law certain personal expenses can be deducted from income when calculating income tax ("Steuerabsetzbeträge"). However, the same legislation limits this deduction to a pro rata amount of these expenses if the resident taxpayer has foreign income which is tax exempt but subject to progression[1], whereas a resident with only domestic income will receive the full allowances.

In the Commission's view, the rules on reducing the amounts deducted when foreign income is exempt from national tax, but subject to progression, impair the freedom of movement of workers and the freedom of establishment as guaranteed by Articles 39 and 43 of the EC Treaty. Indeed, they result in higher taxation in comparison to persons who have an exclusively domestic income.

The European Court of Justice has already held (see "de Groot" judgment of 12.12.2002 (C-385/00)) that the application of pro rata on personal expenses must be interpreted as contrary to Article 39 EC Treaty. Indeed, in this case, the taxpayer effectively loses part of their deductible allowances, if they are not taken into account in the state of activity.

The Commission of the European Communities is therefore of the opinion that the Republic of Austria has infringed its obligations under Articles 39 and 43 of the EC Treaty and the corresponding provisions of the EEA Agreement.

The Commission's reference number is 2005/2414.
For the press releases issued on infringement procedures in the taxation or customs area see:
For the latest general information on infringement measures against Member States see:

[1] This means that foreign income is tax exempt but is taken into account to calculate the progressive tax rate to be applied on the domestic income.

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