Judgment summary
This is a request for a preliminary ruling from the Finanzgericht Köln (Fiscal Court, Cologne, Germany) concerning the interpretation of the Agreement between the European Community and its Member States and the Swiss Confederation on the free movement of persons (the AFMP) [1].
The dispute concerned the calculation of German income tax for 2019 for BT and CY, both holding German and Swiss nationality, who lived in Switzerland and sought a tax reduction under Paragraph 35a of the EStG for craftsperson's and household services performed on their house in Switzerland [2, 22-26].
The German tax authority refused the relief because Paragraph 35a(4) of the EStG limits the reduction to services performed in a household situated in the European Union or a State party to the EEA Agreement [27-28]. The referring court asked whether this restriction is compatible with Articles 1, 2, 7 and 15 of the AFMP, read with Article 9(2) of Annex I [30].
The Court held that the restriction, as applied to an employed frontier worker resident in Switzerland, is precluded by those provisions of the AFMP [91].
Background
BT and CY, spouses holding both German and Swiss nationality, live in Switzerland in a house they own [22]. During 2019 they commissioned tradespeople and a gardening company based in Switzerland to carry out work on that house and paid the labour costs on the basis of invoices [22].
BT is employed by a German company and has also lived alone in a flat in Germany since 2015. In 2019 he worked and lived in Germany during the week and regularly returned to Switzerland at weekends [23]. He received employment income and rental and tenancy income in Germany, along with foreign income exempt from tax in Germany. CY received employment income in Switzerland [23].
In their 2019 income tax return, CY applied to be treated as having unlimited tax liability in Germany and to be taxed jointly with BT [24]. After the tax authority determined the income tax due by assessment of 26 February 2021, the applicants requested an amendment to benefit from the tax relief under Paragraph 35a(2) to (5) of the EStG, which was refused, as was their subsequent appeal, leading them to bring proceedings before the Finanzgericht Köln [25-26].
The referring court noted that Paragraph 35a of the EStG was adopted in 2002 to create an incentive to employ staff in private households in Germany and to combat undeclared work, and that its extension to households in other EU Member States or EEA States was introduced in 2008 to comply with EU law [27]. It found that the conditions in Paragraph 35a(5) were met but that the applicants could not satisfy Paragraph 35a(4), since the services were provided in Switzerland, which is not a State party to the EEA Agreement [28].
Core dispute
The core question was whether Articles 1, 2, 7 and 15 of the AFMP, read together with Article 9(2) of Annex I to the AFMP, preclude national legislation of a Member State that grants an income tax relief for household and craftsperson's services only where the household is situated in the European Union or a State party to the EEA Agreement, thereby denying that relief to an employed frontier worker whose household is situated in Switzerland [30-31].
A preliminary issue arose as to whether the AFMP applied at all, given that the applicants held German nationality in addition to Swiss nationality, and whether BT, who had accommodation in both Switzerland and Germany, qualified as an employed frontier worker under Article 7(1) of Annex I to the AFMP [37, 43-49].
Court findings
The Court found that the applicants' dual nationality did not prevent them from relying on rights under the AFMP against Germany, provided their situation fell within the material scope of Annex I [41-42]. It held that BT, who resided in Switzerland and worked in Germany, returning to Switzerland at least once a week, qualified as an 'employed frontier worker' within Article 7(1) of Annex I to the AFMP, notwithstanding his accommodation in Germany [43-49].
As an employed frontier worker, BT (and CY as a family member assessed jointly with him) could rely on Article 9(2) of Annex I to the AFMP, which guarantees the same tax concessions as those available to national employed persons [50-52].
The Court held that the tax reduction under Paragraph 35a of the EStG constitutes a tax advantage within the meaning of Article 9(2) of Annex I [54], and that the restriction based on the location of the household, while formally neutral, was liable to produce the same practical effect as a residence-based distinction, since a frontier worker resident in Switzerland would generally be unable to have his household situated in Germany, another EU Member State or an EEA State [59-63].
On comparability under Article 21(2) of the AFMP, the Court found that BT, being subject to unlimited income tax liability in Germany, was not in a situation objectively different from residents, and that the tax relief was not linked to ability to pay or personal and family circumstances [68-70]. The objective of combating undeclared work did not render the situations of taxpayers with households in Switzerland objectively different from those with households in the EU or EEA [71].
On justification, the Court accepted that combating undeclared work could in principle justify unequal treatment under the AFMP, but found that excluding Swiss households did not further this objective, particularly given that service providers from Switzerland are entitled under Article 5(1) of the AFMP and Article 17(a) of Annex I to provide services in Germany for up to 90 days per year [76-87]. The Court also rejected the argument based on the need to safeguard the cohesion of the tax system, finding no direct link established between the tax advantage and any offsetting tax levy [88-90].
Outcome
The Court ruled that Articles 1, 2, 7 and 15 of the AFMP, read in conjunction with Article 9(2) of Annex I to the AFMP, must be interpreted as precluding legislation of a Member State which reserves an income tax relief for household and craftsperson's services to employees whose household is situated in the European Union or a State party to the EEA Agreement, where that relief is denied to an employed frontier worker whose household is situated in Switzerland [91].
The decision on costs was left to the referring court [92].
Major issues / areas of contention
- Whether the AFMP applies to dual German-Swiss nationals invoking rights against Germany
- Whether BT qualified as an 'employed frontier worker' under Article 7(1) of Annex I to the AFMP despite having accommodation in both Switzerland and Germany
- Whether Paragraph 35a(4) of the EStG, restricting tax relief for household services to households in the EU or EEA, amounted to indirect discrimination contrary to Article 9(2) of Annex I to the AFMP
- Whether taxpayers with households in Switzerland were in an objectively comparable situation to those with households in the EU or EEA under Article 21(2) of the AFMP
- Whether the exclusion of Swiss households could be justified by the objective of combating undeclared work
- Whether the exclusion could be justified by the need to safeguard the cohesion of the tax system