Prof' Dr' Axel Cordewener, LL'M'

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PEARLE seminar Taxation of non-resident artists
Recent developments in Germany Brussels, 10
November 2009

• Prof. Dr. Axel Cordewener, LL.M.
• Of Counsel, Flick Gocke Schaumburg

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Overview

• I. Original system final gross WHT
• II. Impact of EC free movement rules
• 1) Free movement of workers (Art. 39 EC)
• 2) Freedom to provide services (Art. 49 EC)
• III. Recent legislative reform
• 1) Reform discussion potential options
• 2) Actual legislative amendments as of 2009

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I. Original system final gross WHT

• Taxation of performances of non-resident artists
  in Germany (until 1995)
• uniform treatment of employees and self-employed
  persons under special sub-system only for
  non-residents ( 50, 50a EStG)
• -gt WHT 15 on gross receipts (incl. travel
  expenses) solidarity surcharge (5.5
  of WHT)
• -gt payor liable for deduction and payment to
  fisc
• -gt recipient final tax burden (no
  assessment/other refund procedure no
  possibility for cost deduction!)
• -gt double tax treaty relief depending on
  bilateral agreement (distinction
  employed/self-employed or Art. 17 OECD-MC)
• gt basically ex post refund, unless exemption
  certificate granted ex ante by German authority
  presented to payor ( 50d EStG)

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II. Impact of EC free movement rules

• 1) Free movement of workers (Art. 39 EC)
• ECJ 14 February 1995, C-279/93 Schumacker
• -gt exclusion of non-resident employed persons
  from annual tax assessment procedure (on net
  basis with possibility of tax refund) available
  to residents is discriminatory
• reaction of German legislature amendment of
  50, 50a EStG (1996)
• -gt integration of non-resident employed
  artists into general wage WHT system for
  residents
• -gt option for all non-residents with EU- or
  EEA-residence and -nationality annual tax
  assessment on net income from employment activity
  in Germany cost deduction possible!
• gt BUT progressive tax rate calculated on
  basis of global income (32b EStG) in principle
  no personal/family benefits

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II. Impact of EC free movement rules

• 2) Freedom to provide services (Art. 49 EC)
• a) Anticipation of EC law problems
• amendment of 50 EStG (1996/97)
• -gt introduction of annual simplified refund
  procedure for (inter alia) non-resident
  self-employed artists
• gt condition expenses directly related to
  receipts gt ½ of receipts
• gt refund as far as WHT gt 50 of (receipts
  ./. dir. related costs)
• BUT simultaneous amendment of 50a EStG WHT
  rate also for performances raised to 25 (idea
  tax rate 50 and costs corresponding to ½ of
  earnings)
• -gt 2002/03 amendment reduction to 20 and
  even to 15 , 10 or 0 for performances with
  earnings 1,000 - 0
• -gt 2008 amendment 15 for foreign corporate
  taxpayers

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II. Impact of EC free movement rules

• 2) Freedom to provide services (Art. 49 EC)
• b) ECJ 12 June 2003, C-234/01 Gerritse
• gross taxation of non-resident artists, as
  compared to net taxation of residents, is
  discriminatory
• -gt deduction of business expenses directly
  linked to activity in Germany must be possible
  (otherwise tax base too high)
• flat WHT rate for non-resident artists, as
  compared to progressive income tax rate for
  residents, may also be discriminatory
• -gt BUT exact comparison in individual case
  required
• no clear statement on procedural issues
• reaction very restricted decree of Federal
  Ministry of Finance (3 November 2003) as interim
  solution

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II. Impact of EC free movement rules

• 2) Freedom to provide services (Art. 49 EC)
• c) ECJ 3 October 2006, C-290/04 Scorpio
• WHT as such (applying only to non-residents!) and
  liability of payor justified to ensure effective
  collection of income tax
• -gt at least in relevant tax year (1993) no EC
  Directive on cross-border enforcement of tax
  claims
• HOWEVER in order to reduce disadvantages/burdens
  as compared to residents as far as possible,
  levying of WHT must take place on net basis
• -gt costs directly linked to German activity
  must be deductible from gross receipts if
  reported by recipient to payor

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II. Impact of EC free movement rules

• 2) Freedom to provide services (Art. 49 EC)
• d) ECJ 15 November 2007, C-345/04 Centro
  Equestre
• existing simplified refund procedure is
  discriminatory
• -gt condition that expenses must be gt ½ of
  receipts excludes access to refund if actual
  costs are below that threshold
• -gt BUT condition that expenses must be
  directly linked to receipts from activity
  taxable in Germany is acceptable
• gt ECJ Operating expenses directly
  connected to the income received in the Member
  State in which the activity is pursued must be
  understood as being expenses which have a direct
  economic connection to the provision of services
  which gave rise to taxation in that State and
  which are therefore inextricably linked to those
  services, such as travel and accomodation costs.
  In that context, the place and time at which the
  costs were incurred are immaterial.

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II. Impact of EC free movement rules

• 2) Freedom to provide services (Art. 49 EC)
• e) Provisional reactions in Germany
• Federal Ministry of Finance (5 April 2007)
  another very restricted decree of as interim
  solution
• all three plaintiffs (!) lost before Federal Tax
  Court
• -gt Gerritse (10 January 2007) foreign
  artist did not inform German radio station of his
  business expenses related to concert performed in
  Germany in 1996
• -gt Scorpio (24 April 2007) German concert
  organiser was not informed by foreign agency of
  business expenses made by the latter in relation
  to performances of a music group in 1993
• -gt Centro Equestre (24 April 2007) costs
  incurred by foreign company organising horse
  shows were not directly linked to shows in
  Germany, but general overhead costs
• EU Commission infringement procedure (IP/07/413,
  08/144)

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III. Recent legislative reform

• 1) Reform discussion potential options
• (1) radical approach complete waiver of taxing
  right as source State (see NL as of 2007)
• -gt loss of tax revenue? taxation in State of
  residence secured?
• (2) mere ex post approach abolition of WHT and
  compulsory tax assessment for all non-residents
  covered by 50a EStG
• -gt enforcement of declaration obligations?
  Non-EU residents?
• (3) mere ex ante approach extension of
  existing system ( 50, 50a EStG final gross
  WHT) also to resident taxpayers
• -gt practical (compliance) and constitutional
  law problems

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III. Recent legislative reform

• 1) Reform discussion potential options
• (4) combined approach continued application of
  WHT together with assessment procedure
• (a) small solution WHT only for non-residents
  (on net basis) with optional tax assessment (net
  basis prog-ressive rate, possibly on global
  income like employees) instead of simplified
  refund procedure
• -gt approximation of equal treatment with
  residents open issue influence of EC Directive
  on cross-border enforcement of tax claims on
  non-discrimination standard
• (b) large solution extension of WHT also to
  residents (gross basis possible) with optional
  tax assessment for non-residents (net basis
  progressive tax rate)
• -gt full equal treatment with residents, but
  practical problems

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III. Recent legislative reform

• 2) Actual legislative amendments as of 2009
• small combined approach (with modifications)
• -gt new 50a EStG continued application of
  WHT (only) to non-residents, but option for net
  basis
• gt tax base coverage of travel expenses
  excluded exemption from WHT if receipts per
  performance not gt 250
• gt general WHT rate for deduction from gross
  receipts 15
• gt OR WHT on net base (deduction of expenses
  with direct economic link to receipts if proven
  to payor in verifiable manner) at increased rate
  of 30 for physical persons (corporate
  taxpayers 15 ) with EU- or EEA-residence and
  -nationality
• -gt new 50 EStG simplified refund procedure
  abolished optional tax assessment for
  non-residents (EU/EEA only)
• gt net basis progressive tax rate (no
  calculation on global income!)