Court of Justice of the European Communities (including Court of First Instance Decisions)

Provisional text

OPINION OF ADVOCATE GENERAL

CAMPOS SÁNCHEZ-BORDONA

delivered on 16 November 2023 (1)

Case C‑627/22

AB

v

Finanzamt Köln-Süd

(Request for a preliminary ruling from the Finanzgericht Köln (Finance Court, Cologne, Germany))

(Reference for a preliminary ruling - Agreement on the free movement of persons between the European Union and the Swiss Confederation - Transfer of the residence for tax purposes of a natural person from a Member State to Switzerland - Direct taxation - Free movement of employed persons - Equal treatment - Tax concessions - Income tax - Voluntary assessment available only to partially taxable employed persons resident for tax purposes in an EU Member State or an EEA country)

1.        This reference for a preliminary ruling concerns the treatment afforded to employed persons resident in Switzerland who are partially liable to German income tax on wages they receive in Germany. (2)

2.        According to the referring court, employed persons resident in Switzerland cannot avail themselves of the voluntary assessment mechanism (3) in order to ‘receive an income tax refund following the deduction of business expenses and the crediting of amounts withheld from their pay in Germany on account for the settlement of that tax’. That possibility is  available, on the other hand, to those resident in Germany and in other Member States of the European Union and the European Economic Area (‘the EEA’).

3.        In answering the question referred for a preliminary ruling, the Court of Justice will be called upon to supplement its case-law relating to the scope ratione personae of the Agreement between the European Community and its Member States, of the one part, and the Swiss Confederation, of the other, on the free movement of persons (‘the AFMP’), (4) and the prohibition of discrimination on grounds of nationality which it contains.

A.      European Union law: the AFMP

4.        In accordance with Article 1 thereof (‘Objective’):

‘The objective of this Agreement, for the benefit of nationals of the Member States of the European Community and Switzerland, is:

(a)      to accord a right of entry, residence, access to work as employed persons, establishment on a self-employed basis and the right to stay in the territory of the Contracting Parties;

…

(c)      to accord a right of entry into, and residence in, the territory of the Contracting Parties to persons without an economic activity in the host country;

(d)      to accord the same living, employment and working conditions as those accorded to nationals.’

5.        Article 2 (‘Non-discrimination’) provides:

‘Nationals of one Contracting Party who are lawfully resident in the territory of another Contracting Party shall not, in application of and in accordance with the provisions of Annexes I, II and III to this Agreement, be the subject of any discrimination on grounds of nationality.’

6.        Article 4 (‘Right of residence and access to an economic activity’) states:

‘The right of residence and access to an economic activity shall be guaranteed unless otherwise provided in Article 10 and in accordance with the provisions of Annex I.’

7.        In accordance with Article 7 (‘Other rights’):

‘The Contracting Parties shall make provision, in accordance with Annex I, for the following rights in relation to the free movement of persons:

(a)      the right to equal treatment with nationals in respect of access to, and the pursuit of, an economic activity, and living, employment and working conditions;

…’

8.        According to Article 13 (‘Standstill’):

‘The Contracting Parties undertake not to adopt any further restrictive measures vis-à-vis each other’s nationals in fields covered by this Agreement.’

9.        Article 16 (‘Reference to Community law’) provides:

‘1.      In order to attain the objectives pursued by this Agreement, the Contracting Parties shall take all measures necessary to ensure that rights and obligations equivalent to those contained in the legal acts of the European Community to which reference is made are applied in relations between them.

2.      In so far as the application of this Agreement involves concepts of Community law, account shall be taken of the relevant case-law of the Court of Justice of the European Communities prior to the date of its signature. Case-law after that date shall be brought to Switzerland's attention. To ensure that the Agreement works properly, the Joint Committee shall, at the request of either Contracting Party, determine the implications of such case-law.’

10.      Article 21 (‘Relationship to bilateral agreements on double taxation’) states:

‘1.      The provisions of bilateral agreements between Switzerland and the Member States of the European Community on double taxation shall be unaffected by the provisions of this Agreement. In particular, the provisions of this Agreement shall not affect the double taxation agreements’ definition of “frontier workers”.

2.      No provision of this Agreement may be interpreted in such a way as to prevent the Contracting Parties from distinguishing, when applying the relevant provisions of their fiscal legislation, between taxpayers whose situations are not comparable, especially as regards their place of residence.

3.      No provision of this Agreement shall prevent the Contracting Parties from adopting or applying measures to ensure the imposition, payment and effective recovery of taxes or to forestall tax evasion under their national tax legislation or agreements aimed at preventing double taxation between Switzerland, of the one part, and one or more Member States of the European Community, of the other part, or any other tax arrangements.’

11.      In accordance with paragraph 1 of Article 7 (‘Employed frontier workers’) of Annex I:

‘An employed frontier worker is a national of a Contracting Party who has his residence in the territory of a Contracting Party and who pursues an activity as an employed person in the territory of the other Contracting Party, returning to his place of residence as a rule every day, or at least once a week.’

12.      Article 9 (‘Equal treatment’) of Annex I reads:

‘1.      An employed person who is a national of a Contracting Party may not, by reason of his nationality, be treated differently in the territory of the other Contracting Party from national employed persons as regards conditions of employment and working conditions, especially as regards pay, dismissal, or reinstatement or re-employment if he becomes unemployed.

2.      An employed person and the members of his family referred to in Article 3 of this Annex shall enjoy the same tax concessions and welfare benefits as national employed persons and members of their family.

…’

B.      German law. Einkommensteuergesetz (5)

13.      According to Paragraph 1,

-      Natural persons who have a place of residence or their habitual abode in Germany shall be fully liable to income tax.

-      Natural persons who do not have their place of residence or their habitual abode in Germany may also, if they so request, be treated as fully liable to income tax, in so far as they are in receipt of domestic earnings within the meaning of Paragraph 49. (6)

-      Natural persons who do not have their place of residence or their habitual abode in Germany shall be liable to a limited extent to income tax if they are in receipt of domestic earnings within the meaning of Paragraph 49. (7)

14.      Paragraph 38 states that, in the case of earnings from an activity as an employed person, income tax is to be withheld at source, by deduction from pay (wage tax), where the wage is paid by an employer having its place of residence, its habitual abode, its address, its head office, a permanent establishment or a permanent representative in national territory.

15.      Paragraph 46(2), point 8, provides that income all or part of which comes from an activity as an employed person which has been the subject of deduction at source will be assessed to tax only if an assessment has been requested, in particular with a view to having wage tax which has been deducted offset against income tax. A request to that effect must be made by filing an income tax return.

16.      Paragraph 49 provides that, for the purposes of partial liability to income tax, domestic earnings are, inter alia, earnings from paid employment exercised or exploited in Germany.

17.      Paragraph 50 contains specific provisions relating to persons partially liable to income tax. Subparagraph 2 thereof provides that, in the case of taxable persons, income tax on earnings subject to the withholding of wage tax at source is to be regarded as paid by the withholding of that tax.

18.      However, that provision does not apply if the taxpayer has made the request (for voluntary assessment) referred to in Paragraph 46(2), point 8, of the EStG. This is stated in point 4(b) of the second sentence of Paragraph 50(2) of the EStG.

19.      In any event, moreover, point 4(b) of the second sentence of Paragraph 50(2) of the EStG is to apply only to nationals of a Member State of the European Union or of another State to which the EEA Agreement applies (8) who have their place of residence or habitual abode in the territory of one of those States.

II.    Facts, dispute and question referred for a preliminary ruling

20.      AB is a German national who, for family reasons, had since 2016 lived in Switzerland, where he had his sole place of residence and habitual abode, while at the same time being an employee (manager) of an undertaking having its registered office in Germany.

21.      In that capacity, AB worked for his German employer, either from Switzerland (on a remote working basis) or on business travel in Germany. For the latter, AB used a car purchased under a lease contract not arranged by his employer and bore other costs connected with his vehicle and his business travel.

22.      As a result of his work in Germany, AB received earnings from employment in the years 2017 to 2019 (‘the years at issue’). In 2021, he stopped living in Switzerland and took up residence again in Germany.

23.      During the years at issue, AB was partially liable to income tax in Germany, in accordance with Paragraph 1(4) of the EStG. From the total amount of his gross salary, his employer withheld sums on account for the settlement of income tax and paid these to the German tax authority. (9)

24.      In addition to income from paid employment, AB received income from the rental of two properties situated in Germany.

25.      For each of the two years at issue, AB filed an income tax return reflecting income from the rental of immovable property and earnings from employment. He included as tax-deductible the business expenses connected with his activity as an employed person in Germany. In those returns, he sought the benefit of point 4(b) of the second sentence of Paragraph 50(2) of the EStG, which is to say that he requested a voluntary assessment.

26.      The Finanzamt Köln-Süd (Tax Office, Cologne-South, Germany) issued notices of assessment to income tax taking into account AB’s rental income but not his income from paid employment. Consequently, the sums withheld on account for the settlement of German income tax were not credited and no account was taken of the expenses which AB had declared.

27.      AB lodged an administrative appeal against each of those notices of assessment. He claimed that, in accordance with the AFMP, it was unlawful to restrict the voluntary assessment mechanism to workers resident in a Member State of the European Union or the EEA. The appeals were dismissed by decisions of 25 February 2020 and 15 November 2021.

28.      AB took legal action against those decisions before the Finanzgericht Köln (Finance Court, Cologne, Germany), which has referred the following question to the Court of Justice for a preliminary ruling:

‘Are the provisions of the [AFMP], in particular Articles 7 and 15 of the AFMP, read together with Article 9(2) of Annex I to the AFMP (right to equal treatment), to be interpreted as precluding legislation of a Member State under which employees who are nationals of an EU or EEA Member State (including Germany) and who reside (with their place of residence or habitual abode) in Germany or in EU/EEA States may voluntarily apply for an assessment of income tax that takes into account income from employment that is taxable in Germany (‘voluntary assessment’), in particular in order to receive an income tax refund allowing for expenses (income-related expenses) and crediting German wage tax withheld as part of the tax deduction procedure, but that right is denied to German and Swiss nationals residing in Switzerland?’

III. Procedure before the Court of Justice

29.      The request for a preliminary ruling was registered at the Court of Justice on 4 October 2022.

30.      Written observations have been lodged by the German Government and the European Commission.

31.      It was not considered necessary to hold a hearing.

IV.    Assessment

32.      Since the question referred for a preliminary ruling asks whether certain provisions of the AFMP preclude the tax regime at issue, I shall begin my analysis by looking at the applicability ratione personae of that agreement to the dispute in the main proceedings.

33.      On that basis, I shall consider the features of German income tax legislation in order to determine whether, in the circumstances of this case, that legislation might infringe the prohibition of discrimination laid down in Article 9(2) of Annex I to the AFMP.

A.      Personal scope of the AFMP

34.      As I have already explained, the present dispute concerns whether a German national employed by a German undertaking and resident in Switzerland may benefit from the (voluntary assessment) mechanism which German income tax law reserves for persons resident in Germany and nationals of other Member States of the European Union and the States party to the EEA Agreement who are resident in one of those States.

35.      In order to determine whether the AFMP applies in this situation, it is important to remind ourselves, first of all, of the characteristics of that agreement and of how it has been interpreted by the Court of Justice.

36.      In the judgment in Wächtler, (10) the Court:

-      Recalled, as a preliminary point, that, ‘since the AFMP is an international treaty, it must be interpreted, in accordance with Article 31 of the Vienna Convention on the Law of Treaties of 23 May 1969 (United Nations Treaty Series, vol. 1155, p. 331), in good faith, in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose … Further, it follows from that provision that a term will be understood to have special meaning if it is shown that that was the intention of the parties …’ (11)

-      Held that ‘the AFMP falls within the more general framework of relations between the European Union and the Swiss Confederation. Although the Swiss Confederation does not participate in the European Economic Area and in the European Union’s internal market, it is nevertheless linked to the European Union by numerous agreements covering vast fields and prescribing specific rights and obligations, analogous, in some respects, to those laid down by the Treaty. The general objective of those agreements, including the AFMP, is to strengthen the economic ties between the European Union and the Swiss Confederation …’ (12)

-      Noted, nonetheless, that, ‘as the Swiss Confederation has not joined the internal market of the European Union, the interpretation given to the provisions of EU law concerning that market cannot automatically be applied to the interpretation of the AFMP, unless there are express provisions to that effect laid down by that agreement itself …’ (13)

-      Held that, ‘as regards … the objective of the AFMP and the interpretation of its terms, it is clear from the preamble, Article 1 and Article 16(2) of the AFMP that the aim of that agreement is to secure, for natural persons who are EU nationals or nationals of the Swiss Confederation, the free movement of persons in the territory of those parties based on the rules applying within the European Union, the terms of which must be interpreted in accordance with the relevant case-law of the Court prior to the date of signature of that agreement’. (14)

-      Went on to say that, ‘as regards case-law after that date, it must be noted that Article 16(2) of the AFMP provides, first, that that case-law must be brought to the attention of the Swiss Confederation and, second, that, in order to ensure that the AFMP works properly, at the request of a Contracting Party, the Joint Committee provided for in Article 14 of the AFMP is to determine the implications of such case-law. That said, even where no determination is made by that committee, … that case-law should also be taken into account in so far as it does no more than clarify or confirm the principles established in the case-law in existence on the date of signature of the AFMP in relation to concepts of EU law which inform that agreement’. (15)

37.      I shall therefore take the foregoing into account when examining the personal scope of the AFMP in order to determine whether a German employee (16) resident in Switzerland may rely on it as against Germany.

38.      According to the preamble to, and Article 1(a) and (c) of, the AFMP, the latter applies both to natural persons who are economically active and to those who are not economically active. In this case, AB carries on an economic activity as an employed person for a German company from which he received a salary during the years at issue, after having taken up residence in Switzerland, for family reasons, with effect from 2016. (17)

39.      The situation in which the AFMP ordinarily applies is that where a national of a Member State of the European Union relies on it as against the country to which he or she has moved in order to carry on an activity as an employed person. Nonetheless, the Court has stated that, in certain circumstances and in the light of the applicable provisions, nationals of a Contracting Party may claim rights under the AFMP not only against the country towards which they exercise freedom of movement but also against their own country. (18)

40.      AB’s personal circumstances combine two features:

-      He is not an ‘employed frontier worker’ as provided for in Article 7(1) of Annex I to the AFMP because he does not carry on his activity in Germany and returns home to Switzerland every day or at least once a week. During the period at issue, AB, who was resident in Switzerland, carried on his activity as an employed person from Switzerland or by travelling to Germany in his car in order to contact customers of the German company for which he works.

-      AB is a national of a Contracting Party to the AFMP (Germany) who is resident in the territory of another Contracting Party (Switzerland) and carries on an economic activity in German territory. In this case, the factor warranting the application of the AFMP is not nationality but residence in another State party to that agreement. Nationality therefore becomes less relevant and the application of the AFMP stems from the change of the person’s country of residence.

41.      The Court has accepted the application of the AFMP to cross-border workers of German nationality (19) who have transferred their residence to Switzerland while continuing to work as employed or self-employed persons in Germany. (20) To my mind, that case-law is particularly amenable to extrapolation to a situation such as that of AB, who is not technically a frontier worker within the meaning given above but whose transfer of residence in the exercise of freedom of movement supports his entitlement to rely on the AFMP.

42.      If that were not the case, the free movement of persons guaranteed by the AFMP would be impeded, as the Court too has held. A national of a Contracting Party would be placed at a disadvantage in his or her State of origin solely for having exercised his or her right of free movement. (21)

43.      It is true that the Court’s case-law subsequent to signature of the AFMP cannot be mechanically extrapolated to situations of cross-border mobility between countries of the European Union and Switzerland, as is apparent from Article 16(2) of the AFMP.

44.      Nonetheless, even where no decision is made by the Joint Committee, the Court has stated that account may be taken of its case-law subsequent to signature of the AFMP, in so far as it does no more than clarify or confirm the principles established in the case-law in existence on that date in relation to the concepts of EU law which inform that agreement. (22)

45.      The position adopted by the Court in the judgments in Ettwein and Wächtler in relation to German workers who transfer their place of residence to Switzerland in the exercise of the freedom of movement provided for in the AFMP is consistent with the Court’s settled case-law interpreting the ‘equivalent’ provisions of the TFEU on the free cross-border movement of workers. That case-law may therefore be relied upon in order to resolve the current dispute.

46.      On that basis, I see no reason why the AFMP should not be applied to a situation such as that of AB, who has exercised his right to free movement under that agreement.

47.      That statement is not contradicted, in my view, by the judgment in Picart. In that judgment, the Court stated that Article 12(1) of Annex I to the AFMP did not apply to the situation of a French national who did not intend to pursue his economic activity in Switzerland, but wished to maintain an activity in the territory of his State of origin (France), notwithstanding that he had transferred his residence to Switzerland. (23)

48.      Picart concerned a dispute between a taxpayer, a French national, and the French tax authorities concerning the latter’s decision to re-assess the amount of unrealised capital gains on transferable securities which that taxpayer held and had declared at the time of transferring his residence for tax purposes from France to Switzerland. (24)

49.      The issue, therefore, was to determine whether the provisions of the AFMP (on the right of establishment and the principle of non-discrimination) was applicable to a tax measure involving the taxation of unrealised capital gains ‘on departure’ from national territory, adopted by the State of origin of a French national who had transferred his residence for tax purposes to Switzerland.

50.      In the case under consideration here, on the other hand, AB continues to be linked by employment to his State of origin and his German employer, but transferred his residence to Switzerland for family reasons and worked as an employed person partly from Switzerland (online) and partly in person while on business in Germany.

51.      Unlike the French taxpayer in Picart, AB does not carry on a shareholding-management activity, and is not an investor or simply a silent partner, but an employee. His situation is more akin to the factual scenarios underlying the judgments in Ettwein and Wächtler than it is to that in the judgment in Picart.

52.      In short, AB’s situation falls within the scope of the AFMP. The German Government itself infers from Article 1(a) of the AFMP that AB, as a natural person of German nationality resident in Switzerland who carries on an economic activity in Germany as an employed person, falls within the scope of that agreement. (25)

B.      Application of German income tax to employed persons resident in Switzerland

53.      The law governing personal income tax in Germany is defined in the EStG and, in common with other similar national systems, distinguishes between full tax liability and partial liability. In accordance with its rules:

-      Natural persons with their place of residence or habitual abode in German territory are fully liable to tax (first sentence of Paragraph 1 of the EStG) and are taxed on their entire worldwide income.

-      Natural persons who do not have their place of residence or habitual abode in Germany are partially liable to tax if they receive earnings in Germany within the meaning of Paragraph 49(1) of the EStG. This is the case with employed persons in receipt of earnings from their personal work in Germany (Paragraph 49(1)(4)(a) of the EStG).

54.      In the case of both fully and partially taxable employed persons, wages paid by an employer established in Germany are subject to the withholding of income tax at source (Paragraph 38 et seq. of the EStG).

55.      The ‘wage tax’ operates as a method for the collection of income tax. If a worker is liable to wage tax (first sentence of Paragraph 38(2) of the EStG), the employer must withhold that tax from each wage payment (first sentence of Paragraph 38(3) of the EStG). (26)

56.      In calculating the amount of that tax, the employer must take into account, inter alia, the ‘employee lump-sum allowance’ (point 1 of the fifth sentence of Paragraph 39b(2) of the EStG). That sum represents a deductible business expense (point 1(a) of the first sentence of Paragraph 9a of the EStG). (27)

57.      The tax withheld at source can be further reduced, at the request of the employee, (28) by business expenses in excess of the employee lump sum. The employer must take into account declared deductions for business expenses when calculating taxable pay (fourth sentence of Paragraph 39b(2) of the EStG).

58.      Income tax on earnings from employment which are subject to withholding tax at source is, in principle, deemed to be paid as soon the withholding tax is levied. The discharging effect of the withholding tax extends to all employees, whether fully or partially liable to tax.

59.      As regards employed persons who are partially liable to tax because they have received earnings from employment in Germany:

-      In the case of such earnings from employment, tax is deemed to be paid by virtue of having been withheld at source from pay (first sentence of Paragraph 50(2) of the EStG). However, this is not the case where a reduction for business expenses (point 4(a) of the second sentence of Paragraph 50(2) of the EStG) has been established as a detail specific to withholding at source (Paragraph 39a(4) of the EStG). In that case, the taxation procedure must be followed and the employee is obliged to file an income tax return.

-      Neither does the withholding of wage tax at source have a discharging effect where the employee asks to have applied to him or her the voluntary assessment scheme provided for in point 4(b) of the second sentence of Paragraph 50(2) of the EStG. However, the right to opt for voluntary assessment (29) is enjoyed only by nationals of the Member States of the European Union and the EEA who have their place of residence or habitual abode in the territory of one of those States, meaning that persons resident in Switzerland are excluded (seventh sentence of Paragraph 50(2) of the EStG).

60.      Under the regime for the levying of income tax, taxable earnings which a worker obtains from his or her activity as an employed person are determined by calculating the proportion of earnings from employment that exceeds business expenses (point 2 of Paragraph 2(2) of the EStG). That calculation is not linked to the figures forming the basis of the procedure applicable to wage tax. Wage tax withheld at source by the employer is offset against the income tax amount calculated in this way (point 2(a) of Paragraph 36(2) of the EStG) and, where appropriate, is refunded (Paragraph 36(4), second sentence, of the EStG). Under this taxation regime, the tax authority may also demand payment of additional tax.

61.      If an employer has withheld wage tax at source on pay in respect of which Germany has no right of taxation pursuant to a double taxation agreement, and a procedure for the levying of income tax is not applied, the worker may still, under a specific procedure (applicable by analogy with the second sentence of Paragraph 50d(1) of the EStG), claim a refund of the amount of wage tax unduly withheld at source. The time limit for claiming such a refund is four years from the end of the calendar year in which the tax liability was incurred (by analogy with the ninth sentence of Paragraph 50d(1) of the EStG). (30)

62.      In short, for the purposes of the present case, the key point is that employed persons resident in Switzerland who receive earnings from employment in Germany, in respect of which they are partially liable to tax, cannot avail themselves of the voluntary assessment mechanism provided for in point 4(b) of the second sentence of Paragraph 50(2) of the EStG.

C.      Equal treatment and the prohibition of discrimination in the AFMP

63.      As is apparent from the preamble to, and Article 1 and Article 16(2) of, the AFMP, the objective of that agreement is to bring about, for the benefit of nationals of the Member States of the European Union and of Switzerland, ‘the free movement of persons in the territory of the contracting parties’. The achievement of that objective is to be based ‘on the rules applying in the European Union, the terms of which must be interpreted in accordance with the case-law of the Court of Justice’. (31)

64.      According to Article 1(a) and (d) of the AFMP, nationals of the Member States of the European Union and Switzerland are accorded rights of entry, residence and access to work as employed persons (inter alia) and the same living, employment and working conditions as those accorded to their own nationals.

65.      Article 4 of the AFMP guarantees the right of access to an economic activity in accordance with the provisions of Article 10 and Annex I. Chapter II of Annex I to the AFMP contains provisions on freedom of movement for employed persons, in particular those relating to the principle of equal treatment. (32)

66.      More specifically, Article 9 of Annex I to the AFMP deals with equal treatment and states that:

-      ‘An employed person who is a national of a Contracting Party may not, by reason of his nationality, be treated differently in the territory of the other Contracting Party from national employed persons as regards conditions of employment and working conditions, especially as regards pay, dismissal, or reinstatement or re-employment if he becomes unemployed’ (paragraph 1).

-      ‘An employed person and the members of his family … shall enjoy the same tax concessions and welfare benefits as national employed persons and members of their family’ (paragraph 2).

67.      The Court has held that, as regards tax concessions, the principle of equal treatment, laid down in Article 9(2) of Annex I to the AFMP, ‘may be also relied on by a worker who is a national of a contracting party and has exercised his right to freedom of movement, with regard to his State of origin’. (33) As I have already stated, there is no reason why German nationals resident in Switzerland should not be able to rely on that provision as against the German authorities.

68.      The principle of equal treatment laid down in Article 9 of Annex I to the AFMP goes beyond discrimination on grounds of nationality per se (34) and extends to differences in treatment arising from the place of residence of employed persons covered by the AFMP, irrespective of their nationality.

69.      In my view, the judgments in Wächtler (35) and Ettwein are telling in this regard, in that they extend the principle laid down in Article 9 of Annex I to the AFMP to situations of inequality brought about by the place of residence.

70.      It is logical that the case-law should evolve in this way, since the principle of equal treatment is a concept of EU law (36) which existed on the date when the AFMP was signed. The Court’s judgments subsequent to that date clarify, in this area, the principles arising from the pre-existing case-law relating to equal treatment in order to determine whether any inequality prohibited by the AFMP is present. (37)

D.      Discrimination of employed persons resident in Switzerland who are partially liable to income tax in Germany

71.      The German tax authority denies AB a ‘tax concession’ within the meaning of Article 9(2) of Annex I to the AFMP. (38) In particular, it rules out the option for the taxpayer to ask to file in Germany an income tax return in which he could claim a deduction of business expenses necessarily incurred in obtaining the income from employment earned by him during the years at issue.

72.      Does the ruling out of that option entail tax treatment which is discriminatory by comparison with that afforded to employed persons who, while pursuing an activity similar to that of AB, live in Germany or in other Member States of the European Union or the EEA?

73.      To my mind, the answer to that question has to be in the affirmative: AB is the subject of discriminatory and disadvantageous tax treatment precisely because of his status as an employed person resident in Switzerland.

74.      Employed persons resident in Germany or in other EU Member States or EEA countries may avail themselves of the voluntary assessment mechanism in order to exclude the discharging effect of having wage tax withheld at source and obtain (if applicable) a refund of any overpayments thereof.

75.      Conversely, AB, because he lives in Switzerland, cannot request a voluntary assessment, with the result that, unlike workers resident in Germany and other Member States of the European Union or the EEA, he does not qualify for the deduction of any business expenses other than the lump-sum allowance (EUR 1 000) from which all employed taxpayers in Germany benefit when it comes to the calculation of withholding tax.

76.      German law therefore establishes a difference in tax treatment between taxpayers (employed persons) resident in Germany or other Member States of the European Union or the EEA who receive wages in Germany, on the one hand, and those resident in Switzerland who also receive their wages in Germany, on the other.

77.      Such a difference, which is based on place of residence rather than nationality, is sufficient to deter employed persons resident in Germany from transferring their place of residence to Switzerland, pursuant to their right to freedom of movement, and continuing to receive their wages in Germany. This therefore constitutes unequal treatment prohibited, in principle, by Article 9(2) of Annex I to the AFMP.

78.      It is true that Article 21(2) of the AFMP (39) provides for the possibility of affording different treatment for tax purposes to taxpayers who are not in comparable situations, especially as regards their place of residence. (40) In my view, however, the situation here is comparable.

79.      After all, Germany has accepted in its legislation that persons resident in other Member States of the European Union or the EEA who are partially liable to German income tax are also eligible to request a voluntary assessment of their earnings from employment with a view to obtaining a deduction of their business expenses after tax has been withheld at source on payment of their wages.

80.      Now, the freedom of movement enjoyed by employed persons resident in countries of the European Union or the EEA is comparable to that which the AFMP recognises as being enjoyed by employed persons resident in Switzerland. It follows that the situations of those two groups are comparable for the purposes of the voluntary assessment of wages they receive in Germany. (41)

81.      In the judgment in Schumacker, the Court held that EU law ‘… preclud[es] a provision in the legislation of a Member State [Germany] on direct taxation under which the benefit of procedures such as annual adjustment of deductions at source in respect of wage tax and the assessment by the administration of the tax payable on remuneration from employment is available only to residents, thereby excluding natural persons who have no permanent residence or usual abode on its territory but receive income there from employment’. (42)

82.      Following the judgment in Schumacker, Germany allowed employed persons resident in other Member States of the European Union and the EEA who were partially liable to German income tax to avail themselves of the voluntary assessment mechanism (and to deduct business expenses). It applied to them the same tax regime as is applicable to employed persons resident in Germany who are fully liable to income tax.

83.      The same logic that informed the judgment in Schumacker should now support the extension of the voluntary assessment mechanism to employed persons partially liable to German income tax who are resident in Switzerland, so they may benefit from the equal treatment provided for in the AFMP. Such persons would otherwise be the subject of tax discrimination.

E.      Justification for the discrimination?

84.      If the foregoing assumption is correct, it remains to be analysed whether there may be some justification for the discrimination on grounds of residence contained in the German legislation.

85.      In accordance with Article 21(3) of the AFMP, no provision of that agreement is to prevent the Contracting Parties from adopting or applying measures to ensure the imposition, payment and effective recovery of taxes or to forestall tax evasion under their national tax legislation or agreements aimed at preventing double taxation between Switzerland of the one part, and one or more Member States of the European Community, of the other part, or any other tax arrangements. (43)

86.      Such measures must, according to the Court’s case-law in the context of the free movement of persons within the European Union, be motivated by overriding reasons in the general interest and, in any event, have due regard for the principle of proportionality. In other words, they must be appropriate for attaining those objectives and must not go beyond what is necessary in order to attain them. (44)

87.      I agree with the referring court that the German tax provision which discriminates against employed persons resident in Switzerland is not justified by the need to ensure the imposition, payment and effective recovery of income tax in Germany, and is not necessary to forestall tax evasion.

88.      Following the judgment in Schumacker, German law allowed employed persons resident in other Member States of the European Union or the EEA to avail themselves of the voluntary assessment mechanism in order to declare earnings from employment received in Germany. Now, if that measure does not pose a problem from the point of view of ensuring the correct taxation of income from employment and does not raise any issues in terms of tax evasion, I do not see how Article 21(3) of the AFMP would provide a basis for not taking the same approach in the case of workers resident in Switzerland who also receive their wages in Germany. Residence in the latter country is not decisive for the purposes of recovering German income tax on such earnings.

89.      As the referring court rightly explains, (45) the withholding of tax at source on wages paid in Germany to persons resident in Switzerland ensures that income tax on those earnings is properly collected by the German authorities.

90.      The German Government cites as a possible justification for the unfavourable treatment of employed persons resident in Switzerland and in receipt of wages in Germany the existence of an alternative procedure that would enable them to obtain the same outcome as is achieved by voluntary assessment as regards tax relief on their business expenses.

91.      That procedure would enable a worker, on request, to reduce the amount withheld at source by way of wage tax, taking into account business expenses in excess of the lump-sum allowance referred to above. (46) The employer is required to take into account declared deductions for business expenses when calculating taxable pay (fourth sentence of Paragraph 39b(2) of the EStG).

92.      However, I take the view, like the referring court, (47) that the German Government’s line of argument is not sufficient to rebut the assertion as to the existence of discrimination without adequate justification, since:

-      First, the Court has noted that the possibility of opting for another tax regime is not capable of excluding the discriminatory effects of a tax regime that is contrary to EU law. (48) That case-law postdates the signature of the AFMP but can be extrapolated to the interpretation of that agreement, since it does no more than clarify or confirm the principles established in the case-law in existence on the date of signature of the AFMP in relation to the concepts of EU law which inform that agreement. (49)

-      Second, as the referring court has also noted, the alternative procedure referred to by the German Government is subject to time limits and conditions which preclude its comparison, from the point of view of the advantage it brings, with the voluntary assessment mechanism, and is not therefore a less restrictive alternative. (50)

93.      In short, the unfavourable treatment which German law provides for in connection with the voluntary assessment of employed persons partially liable to tax and resident in Switzerland cannot be ‘made up for’ by the option available to them of seeking to have their business expenses factored into the calculation of the tax withheld at source.

94.      As regards the ‘preservation of fiscal coherence’, which the German Government also cites by way of justification for the measure at issue, its line of reasoning is identical to that mentioned above, which is to say that the taxpayer has the option of seeking to have less tax withheld at source. I shall therefore simply reiterate what I have already said in this regard.

F.      Article 13 of the AFMP (Standstill)

95.      Article 13 of the AFMP provides that ‘the Contracting Parties undertake not to adopt any further restrictive measures vis-à-vis each other’s nationals in fields covered by this Agreement’.

96.      The German Government advocates a reading of that provision which would allow restrictive measures in existence at the time when the AFMP was concluded to remain in force, but would not allow further such measures to be introduced. The prohibition preventing employed persons partially liable to German income tax but resident in Switzerland from availing themselves of the voluntary assessment mechanism would therefore be permissible because it was in force before the AFMP was signed.

97.      As I see it, Article 13 of the AFMP refers to new restrictions (which are prohibited), but does not protect restrictions in existence at the time when that agreement was concluded. It can operate only to prevent the introduction of future restrictions but it has the effect of requiring that previous restrictions be eliminated: otherwise, the liberalising effect of the AFMP would be neutralised.

98.      I therefore agree with the Commission (51) that the a contrario interpretation of Article 13 of the AFMP advocated by the German Government is untenable. It is precluded by the wording of that provision, by Article 16 of the AFMP and by the Court’s case-law interpreting Article 13, which has gradually abolished discriminatory measures in force in the States Parties to the AFMP which have operated to the detriment of the persons covered by that agreement.

99.      Retaining restrictions in existence at the time when the AFMP was concluded would be incompatible with the objectives of the agreement itself and would constitute a limit to its interpretation that would be difficult to negotiate.

V.      Conclusion

100. In the light of the foregoing, I propose that the answer to be given to the Finanzgericht Köln (Finance Court, Cologne, Germany) should be as follows:

The provisions of the Agreement between the European Community and its Member States, of the one part, and the Swiss Confederation, of the other, on the free movements of persons, in particular Article 7 thereof read together with Article 9(2) of Annex I thereto,

must be interpreted as meaning that they preclude the legislation of a Member State which denies employed persons resident in Switzerland and partially liable to income tax in force in Germany the possibility of requesting a voluntary assessment to that tax, in particular with a view to obtaining a refund thereof following the deduction of business expenses and the crediting of amounts withheld from their pay in Germany on account for the settlement of that tax, while at the same time making that possibility available to those resident in other Member States of the European Union or the European Economic Area.

1      Original language: Spanish.

2      I shall henceforth refer to these persons as employed persons partially liable to German income tax in order to distinguish them from persons who, being resident in Germany, are fully liable to income tax.

3      As I shall explain later, that mechanism allows an employee to request a voluntary assessment to income tax based on earnings from employment received in Germany, together with the consequences attendant upon such assessment in the form of the deduction of business expenses and the crediting of amounts withheld on account [for the settlement of income tax].

4      Agreement between the European Community and its Member States, of the one part, and the Swiss Confederation, of the other, on the free movement of persons - Final Act - Joint Declarations - Information relating to the entry into force of the seven Agreements with the Swiss Confederation in the sectors free movement of persons, air and land transport, public procurement, scientific and technological cooperation, mutual recognition in relation to conformity assessment, and trade in agricultural products (OJ 2002 L 114, p. 6), which was signed in Luxembourg on 21 June 1999 and entered into force on 1 June 2002.

5      Law on income tax, in the version applicable ratione temporis to the dispute (BGBl. 2009 I, p. 3366); ‘the EStG’.

6      This will only be the case where at least 90% of their earnings in a calendar year is subject to German income tax, or where their earnings not subject to German income tax do not exceed the allowance provided for in point 1 of the second sentence of Paragraph 32a(1); that amount must be adjusted downwards to the extent necessary and appropriate to the situation in the State of residence.

7      Without prejudice to the provisions of Paragraph 1(2) and (3) and Paragraph 1.a of the EStG.

8      Agreement on the European Economic Area of 2 May 1992 (OJ 1994 L 1, p. 3; ‘the EEA Agreement’).

9      AB did not ask the German tax authority to take into account an allowance in the information he was required to provide to his employer in order to enable the latter to withhold wage tax in accordance with Paragraph 39 of the EStG.

10      Judgment of 26 February 2019 (C‑581/17, EU:C:2019:138; ‘the judgment in Wächtler’).

11      Judgment in Wächtler, paragraph 35, citing the judgment of 27 February 2018, Western Sahara Campaign UK (C‑266/16, EU:C:2018:118, paragraph 70).

12      Judgment in Wächtler, paragraph 36.

13      Judgment in Wächtler, paragraph 37.

14      Judgment in Wächtler, paragraph 38.

15      Judgment in Wächtler, paragraph 39.

16      AB is not a person without an economic activity or a person providing services within the meaning of Article 5 of the AFMP. See judgment of 12 November 2009, Grimme (C‑351/08, EU:C:2009:697, paragraph 44).

17      It is not clear from the order for reference whether AB was engaged in that activity as an employed person in 2016 too.

18      Judgments of 15 March 2018, Picart (C‑355/16, EU:C:2018:184; ‘the judgment in Picart’), paragraph 16; of 28 February 2013, Ettwein (C‑425/11, EU:C:2013:121; ‘the judgment in Ettwein’), paragraph 33; and of 15 December 2011, Bergström (C‑257/10, EU:C:2011:839, paragraphs 27 to 34).

19      Such workers are governed by Article 7(1) or Article 12(1) of Annex I to the AFMP, depending on whether they are employed or self-employed persons.

20      See judgment in Ettwein, paragraphs 34 and 35 and judgment of 19 November 2015, Bukovansky (C‑241/14, EU:C:2015:776, paragraphs 32 and 33).

21      Judgments of 23 January 2020, Bundesagentur für Arbeit (C‑29/19, EU:C:2020:36, paragraph 34); and in Wächtler, paragraph 53.

22      Judgment in Wächtler, paragraph 39, reproduced above.

23      Mr Picart’s situation did not therefore fall within the scope of Article 12(1) of Annex I to the AFMP. Article 13(1) of Annex I to the AFMP was not applicable to him either, as he could not be regarded as a self-employed frontier worker, inasmuch as he remained in Swiss territory, from where he pursued his economic activity in France without undertaking every day - or even once a week - the journey from the place of his economic activity to his place of residence. Judgment in Picart, paragraphs 22 to 27.

24      The French authorities made Mr Picart liable for additional assessments to income tax and social security contributions, with penalties.

25      Paragraph 63 of its observations. That statement does not prevent it, however, from arguing that, in this case, there is no inequality contrary to Articles 2 and 7 of the AFMP.

26      The amount of wage tax payable is determined on the basis of the amount of the wage and other details specific to withholding at source.

27      In the years at issue, the employee lump sum was EUR 1000 per year.

28      In practice, this option is available to employed persons fully liable to income tax as a liability in personam and to employed persons partially liable to that tax. Point 1 of the first sentence of Article 39a(1) of the EStG, applicable to the former, and point 1 of the first sentence of Article 39a(4) of the EStG, applicable to the latter, are framed in similar terms. There are nonetheless differences in the time limits within which the taxable pay reduction, which I shall discuss later, must be applied for.

29      This right traces its configuration back to the judgment of 14 February 1995, Schumacker (C‑279/93, EU:C:1995:31; ‘the judgment in Schumacker’), as I shall discuss later.

30      There is no requirement for compliance with a different time limit under the Convention between the Federal Republic of Germany and the Swiss Confederation for the avoidance of double taxation in respect of taxes on income and assets of 11 August 1971 (BGBl. 1972 II, p. 1022), as amended by the Protocol of 27 October 2010 (BGBl. 2011 II, p. 1092).

31      Judgments of 21 September 2016, Radgen (C‑478/15, EU:C:2016:705; ‘the judgment in Radgen’), paragraph 36, and of 19 November 2015, Bukovansky (C‑241/14, EU:C:2015:766, paragraph 40).

32      Judgment in Radgen, paragraph 38.

33      Judgment in Radgen, paragraph 40, citing judgment of 19 November 2015, Bukovansky (C‑241/14, EU:C:2015:766, paragraph 47).

34      A restrictive understanding of this principle is discernible in the judgment of 12 November 2009, Grimme (C‑351/08, EU:C:2009:697, paragraph 48): ‘that Article [Article 9 of Annex I to the AFMP] only concerns the case of discrimination by reason of nationality against a national of a Contracting Party in the territory of another Contracting Party’.

35      In that judgment, the Court stated that ‘… a German national who, like Mr Wächtler, has exercised his right of establishment as a self-employed person under the AFMP suffers a fiscal disadvantage as compared with other German nationals who, like him, pursue a self-employed activity by means of a company in which they own shares, but who, unlike him, maintain their domicile in Germany. That is because the latter have to pay the tax on the capital gains with respect to the shares concerned only when those capital gains are realised, that is when there is a disposal of those shares, whereas a national such as Mr Wächtler is obliged to pay the tax at issue, at the time when he transfers his domicile to Switzerland, on the unrealised capital gains with respect to such shares, and has no right to a deferral of payment until the disposal of those shares’ (paragraph 56). The Court went on to say that ‘that difference in treatment, which constitutes a tax-flow disadvantage for a German national such as Mr Wächtler, is capable of deterring him from making actual use of the right of establishment he derives from the AFMP. It follows that the tax regime at issue in the main proceedings may impede the right of establishment as a self-employed person guaranteed by that agreement’ (paragraph 57).

36      Judgments of 19 October 1977, Ruckdeschel and Others (117/76 and 16/77, EU:C:1977:160, paragraph 7), and of 6 October 2011, Graf and Engel (C‑506/10, EU:C:2011:643, paragraph 26).

37      Judgment of 6 October 2011, Graf and Engel (C‑506/10, EU:C:2011:643, paragraph 26); judgments in Radgen, paragraph 47, and Wächtler, paragraph 55.

38      As the Commission argues (paragraph 23 of its observations), the concept of tax concession includes the options available under national law for calculating a tax liability in a more favourable way. The German Government (paragraph 75 of its observations) also accepts that the voluntary assessment scheme constitutes a tax concession in that it allows the taxpayer to overcome the discharging effect of withholding at source.

39      ‘No provision of this Agreement may be interpreted in such a way as to prevent the Contracting Parties from distinguishing, when applying the relevant provisions of their fiscal legislation, between taxpayers whose situations are not comparable, especially as regards their place of residence.’

40      Judgments in Wächtler, paragraph 58 and Radgen, paragraph 45.

41      This was the finding in the judgment in Radgen, paragraphs 42 and 43.

42      Judgment in Schumacker, paragraph 3 of the operative part.

43      I cannot find any provision relevant to the answer to be given to the question referred for a preliminary ruling in the Convention between the Federal Republic of Germany and the Swiss Confederation for the avoidance of double taxation in respect of taxes on income and assets, to which I referred earlier.

44      Judgment in Wächtler, paragraphs 62 and 63, as well as, inter alia, judgments of 15 May 1997, Futura Participations and Singer (C‑250/95, EU:C:1997:23, paragraph 3); of 3 October 2006, FKP Scorpio Konzertproduktionen (C‑290/04, EU:C:2006:630, paragraph 37); and of 11 December 2014, Commission v Spain (C‑678/11, EU:C:2014:2434, paragraphs 45 and 46).

45      Order for reference, paragraph 65.

46      Point 1 of the first sentence of Paragraph 39a(1) and the first sentence of Paragraph 39a(4), respectively, of the EStG.

47      Order for reference, paragraph 67.

48      Judgment of 18 March 2021, Autoridade Tributária e Aduaneira (Tax on capital gains from property) (C‑388/19, EU:C:2021:212, paragraphs 43 and 44), and of 18 March 2010, Gielen (C‑440/08, EU:C:2010:148, paragraph 52).

49      Judgment in Wächtler, paragraph 39.

50      The referring court recalls (in paragraph 67 of its order) that, in the judgment in Schumacker, the Court has already held that the existence of alternative procedures cannot in itself justify the discrimination contained in the German legislation under analysis at that time.

51      Paragraph 36 of its observations.

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