Case C-403/03

Egon Schempp

v

Finanzamt München V

(Reference for a preliminary ruling from the Bundesfinanzhof)

(Citizenship of the Union –– Articles 12 EC and 18 EC –– Income tax –– Deductibility from taxable income of maintenance paid by a taxpayer resident in Germany to his former spouse resident in Austria –– Proof of taxation of the maintenance payments in that Member State)

Opinion of Advocate General Geelhoed delivered on 27 January 2005

Judgment of the Court (Grand Chamber), 12 July 2005

Summary of the Judgment

1. Citizenship of the European Union — Provisions of the Treaty — Material scope — Exclusion of purely internal situations — National tax legislation relating to the deductibility of maintenance payments from taxable income — Taking into account of the fiscal treatment of maintenance paid to a recipient residing in another Member State — Not a purely internal situation

(Art. 17 EC)

2. Citizenship of the European Union — Equal treatment — Discrimination on grounds of nationality — Right to move and reside freely within the territory of the Member States — National legislation under which the deductibility from taxable income of maintenance paid to a recipient residing in another Member State is subject to its being taxed in that State — Whether permitted

(Arts 12 EC and 18(1) EC)

1. Citizenship of the Union, established by Article 17 EC, is not intended to extend the material scope of the Treaty to internal situations which have no link with Community law. The situation of a national of a Member State who has not made use of the right to freedom of movement cannot however, for that reason alone, be assimilated to a purely internal situation.

In the case of national tax legislation which, for the purposes of determining the deductibility of maintenance paid by a taxpayer resident in the Member State concerned to a recipient resident in another Member State, takes account of the fiscal treatment of those payments in the Member State of residence of that recipient, the exercise by the recipient of the right to move and reside freely in another Member State under Article 18 EC influences the taxpayer’s right of deduction in his Member State of residence.

Such a situation cannot therefore be regarded as an internal situation with no connection with Community law.

(see paras 20, 22, 24-25)

2. The first paragraph of Article 12 EC and Article 18(1) EC must be interpreted as not precluding a taxpayer resident in a Member State from being unable under national legislation to deduct from his taxable income in that Member State the maintenance paid to his former spouse resident in another Member State in which the maintenance is not taxable, where he would be entitled to do so if his former spouse were resident in the same Member State.

Article 12 EC is not concerned with any disparities in treatment, for persons and undertakings subject to the jurisdiction of the Community, which may result from divergences existing between the various Member States, so long as they affect all persons subject to them in accordance with objective criteria and without regard to their nationality.

Moreover, the Treaty offers no guarantee to a citizen of the Union that transferring his activities to a Member State other than that in which he previously resided will be neutral as regards taxation. Given the disparities in the tax legislation of the Member States, such a transfer may be to the citizen’s advantage in terms of indirect taxation or not, according to circumstances. The same principle applies a fortiori to a situation in which the person concerned has not himself made use of his right of movement, but claims to be the victim of a difference in treatment following the transfer of his former spouse’s residence to another Member State.

(see paras 34, 45-47, operative part)

JUDGMENT OF THE COURT (Grand Chamber)

12 July 2005 ( * )

(Citizenship of the Union – Articles 12 EC and 18 EC – Income tax – Deductibility from taxable income of maintenance paid by a taxpayer resident in Germany to his former spouse resident in Austria – Proof of taxation of the maintenance payments in that Member State)

In Case C‑403/03,

REFERENCE under Article 234 EC for a preliminary ruling from the Bundesfinanzhof (Germany), made by decision of 22 July 2003, received at the Court on 29 September 2003, in the proceedings

Egon Schempp

v

Finanzamt München V,

THE COURT (Grand Chamber),

composed of V. Skouris, President, P. Jann, C.W.A. Timmermans and A. Rosas, Presidents of Chambers, C. Gulmann, J.‑P. Puissochet, A. La Pergola, R. Schintgen, N. Colneric, J. Klučka, U. Lõhmus, E. Levits and A. Ó Caoimh (Rapporteur), Judges,

Advocate General: L.A. Geelhoed,

Registrar: R. Grass,

having regard to the written procedure,

after considering the observations submitted on behalf of:

– Mr Schempp, by J. Seest, Rechtsanwalt,

– the German Government, by W.‑D. Plessing and A. Tiemann, acting as Agents,

– the Netherlands Government, by H.G. Sevenster and C.A.H.M. ten Dam, acting as Agents,

– the Commission of the European Communities, by K. Gross and R. Lyal, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 27 January 2005,

gives the following

Judgment

1 This reference for a preliminary ruling concerns the interpretation of Articles 12 EC and 18 EC.

2 The reference was made in the course of proceedings between Mr Schempp and the Finanzamt München V (Munich V Tax Office, ‘the Finanzamt’), concerning the latter’s refusal to regard the maintenance paid by Mr Schempp to his former spouse resident in Austria as special expenditure deductible in respect of income tax.

Law

3 Under Paragraph 10(1)(1) of the Einkommensteuergesetz (Law on Income Tax, ‘the EStG’), the following expenditure constitutes ‘special expenditure’ if it is neither operating expenditure nor advertising costs:

‘Maintenance payments to a divorced or separated spouse who is subject to unlimited income tax liability, if the debtor applies for this with the consent of the recipient, up to DEM 27 000 per calendar year. An application may be made only for one calendar year at a time and may not be withdrawn …’

4 Under Paragraph 22(1a) of the EStG, the amounts which are deductible by the maintenance debtor form part of the taxable income of the recipient, under the principle of ‘correspondence’. The deduction which the debtor is entitled to make is not conditional on the recipient actually paying tax on those amounts. However, if the recipient has to pay tax on the maintenance payments received, it is the maintenance debtor who is, under civil law, liable to pay that tax.

5 Under Paragraph 1a(1)(1) of the EStG:

‘Maintenance payments to a divorced or separated spouse (Paragraph 10(1)(1)) are also deductible as special expenditure if the recipient is not subject to unlimited income tax liability. It is a condition that the recipient has his principal or habitual residence in the territory of another Member State of the European Union or of a State to which the Agreement on the European Economic area applies. It is a further condition that the taxation of the maintenance payments in the hands of the recipient is proved by a certificate of the competent foreign tax authorities …’

6 Pursuant to Paragraph 52(2) of the EStG, Paragraph 1a(1)(1) applies to the Republic of Austria from the 1994 tax year, since that State acceded to the Agreement on the European Economic Area on 1 January 1994.

The main proceedings and the questions referred for a preliminary ruling

7 Following his divorce, Mr Schempp, a German national resident in Germany, pays maintenance to his former spouse resident in Austria.

8 In his tax declarations for the tax years 1994 to 1997, Mr Schempp sought to deduct the maintenance payments, in accordance with the first and second sentences of Paragraph 1a(1)(1) of the EStG. However, in his income tax assessments for 1994 to 1997, the Finanzamt refused him the deduction on the ground that it had not received a certificate from the Austrian tax authorities to show that his former spouse had been taxed in Austria on the maintenance payments, as prescribed by the third sentence of Paragraph 1a(1)(1).

9 Mr Schempp was unable to produce such a certificate, as Austrian tax law excludes, in principle, taxation of maintenance payments and does not allow them to be deducted. The documents in the case show, however, that Mr Schempp would have been able to deduct the total amount of the maintenance payments to his former spouse if she had been resident in Germany. In that case, she for her part would not have paid any tax on the maintenance, as her income is less than the taxable minimum in Germany.

10 Since he considered that the German legislation in question was incompatible with Articles 12 EC and 18 EC, Mr Schempp lodged objections against the Finanzamt’s assessments. The Finanzamt rejected the objections by decision of 27 July 1999.

11 After his action brought against that decision was dismissed by the Finanzgericht München (Finance Court, Munich), Mr Schempp appealed on a point of law to the Bundesfinanzhof (Federal Finance Court). That court, taking the view that the proceedings raised questions of interpretation of Community law, decided to stay the proceedings and refer the following two questions to the Court for a preliminary ruling:

‘1. Is Article 12 EC to be interpreted as meaning that Paragraph 1a(1)(1) and Paragraph 10(1)(1) of the EStG, to the effect that a taxpayer resident in Germany is not entitled to deduct maintenance payments to his divorced spouse resident in Austria whereas he would be entitled to do so were she still resident in Germany, are incompatible therewith?

2. If Question 1 is answered in the negative: is Article 18(1) EC to be interpreted as meaning that Paragraph 1a(1)(1) and Paragraph 10(1)(1) of the EStG, to the effect that a taxpayer resident in Germany is not entitled to deduct maintenance payments for his divorced spouse resident in Austria whereas he would be entitled to do so were she still resident in Germany, are incompatible therewith?’

The questions referred for a preliminary ruling

12 By its questions the referring court asks essentially whether the first paragraph of Article 12 EC and Article 18(1) EC must be interpreted as precluding a taxpayer resident in Germany from being unable, under the national legislation at issue in the main proceedings, to deduct from his taxable income in that Member State the maintenance paid to his former spouse resident in Austria, where he would have been entitled to do so if she were still resident in Germany.

13 The first point to examine is whether the situation at issue in the main proceedings falls within the scope of Community law.

14 It should be recalled that the first paragraph of Article 12 EC prohibits, within the scope of application of the Treaty, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality.

16 Under Article 17(1) EC, every person holding the nationality of a Member State is a citizen of the Union. Mr Schempp, as a German national, thus has such citizenship.

26 The Court must therefore examine whether Articles 12 EC and 18 EC preclude the German tax authorities from refusing deduction of the maintenance paid by Mr Schempp to his former spouse resident in Austria.

Application of Article 12 EC

27 It is common ground that if Mr Schempp’s former spouse had been resident in Germany he would have been entitled to deduct the maintenance payments made to her. Since, however, she was resident in Austria, the German tax authorities refused him that deduction.

29 It must therefore be examined whether the situation of Mr Schempp, who pays maintenance to his former spouse resident in Austria without being able to deduct those payments in his income tax declaration, can be compared to that of a person who makes such payments to a former spouse resident in Germany and enjoys that tax advantage.

30 Under the third sentence of Paragraph 1a(1)(1) of the EStG, the deductibility in Germany of maintenance payments by a taxpayer resident in that Member State to a recipient resident in another Member State is conditional on their being taxed in that other Member State.

31 It follows that since, in the main proceedings, the maintenance payments were not taxed in the Member State of residence of Mr Schempp’s former spouse, he was not allowed to deduct those payments from his income in Germany.

32 In those circumstances, it is apparent that the unfavourable treatment of which Mr Schempp complains in fact derives from the circumstance that the tax system applicable to maintenance payments in his former spouse’s Member State of residence differs from that applied in his own Member State of residence.

33 As the Netherlands Government points out, if his former spouse had chosen to reside in a Member State, such as the Netherlands, in which – contrary to the situation in Austria – maintenance payments are taxed, Mr Schempp would have been entitled under the national legislation at issue in the present case to deduct the maintenance payments made to her.

35 It follows that, contrary to Mr Schempp’s claims, the payment of maintenance to a recipient resident in Germany cannot be compared to the payment of maintenance to a recipient resident in Austria. The recipient is subject in each of those two cases, as regards taxation of the maintenance payments, to a different tax system.

36 Consequently, the fact that a taxpayer resident in Germany is not able, under Paragraph 1a(1)(1) of the EStG, to deduct maintenance paid to his former spouse resident in Austria does not constitute discrimination within the meaning of Article 12 EC.

37 According to Mr Schempp, the unequal treatment of which he is the subject in the present case derives, however, from the fact that, while deductibility of maintenance paid to a person resident in Germany is not conditional on that person actually paying tax, actual payment of tax is required for deductibility of maintenance paid to a person resident in the territory of another Member State.

38 However, it must be recalled that in the present proceedings the national court solely asks the Court whether Community law precludes a taxpayer resident in Germany from being unable to deduct the maintenance paid to his former spouse resident in Austria. Consequently, for the purpose of providing the national court with an interpretation which will be of use to it in giving its decision in the main proceedings, it must be concluded that the point raised by Mr Schempp, in that it concerns the payment of maintenance to a recipient resident in another Member State in which maintenance payments are taxable, does not arise in the present case, as it is common ground that maintenance payments are not taxable in Austria.

39 As to the undisputed fact that, if Mr Schempp’s former spouse had resided in Germany, he would have been entitled to deduct the maintenance paid to her, even though in such a case the maintenance would not have been taxed because his former spouse’s income in Germany during the period in question was below the tax thresholds applied by German tax legislation, that cannot call into question the conclusion in paragraph 36 above. As the Commission of the European Communities rightly observes, the non-taxation of maintenance payments on those grounds in Germany cannot be equated to the non-taxation of the maintenance in Austria on the ground of its non-taxable character in that Member State, since the fiscal consequences which attach to each of those situations as regards the taxation of income are different for the taxpayers concerned.

Application of Article 18 EC

41 As a national of a Member State and hence a citizen of the Union, Mr Schempp is entitled to rely on that provision.

42 In his observations, Mr Schempp submits that Article 18(1) EC protects not only the right to move and settle in other Member States but also the right to choose one’s residence. He submits that, since the maintenance payments are not deductible from taxable income where the recipient resides in another Member State, the recipient could be subject to a certain pressure not to leave Germany, thus constituting a restriction on the exercise of the rights guaranteed by Article 18(1) EC. That pressure could materialise specifically at the time when the amount of the maintenance is determined, since that determination takes the tax implications into account.

43 On this point, it is clear that, as the German and Netherlands Governments and the Commission submit, the national legislation in question does not in any way obstruct Mr Schempp’s right, as a citizen of the Union, to move and reside in other Member States under Article 18(1) EC.

44 As has been observed, it is true that the transfer of his former spouse’s residence to Austria entailed unfavourable tax consequences for Mr Schempp in his Member State of residence.

Costs

48 Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

On those grounds, the Court (Grand Chamber) rules as follows:

The first paragraph of Article 12 EC and Article 18(1) EC must be interpreted as not precluding a taxpayer resident in Germany from being unable, under national legislation such as that at issue in the main proceedings, to deduct from his taxable income in that Member State the maintenance paid to his former spouse resident in another Member State in which the maintenance is not taxable, where he would be entitled to do so if his former spouse were resident in Germany.

[Signatures]

* Language of the case: German.