Three new tax cases are pending before the European Court of Justice (ECJ) regarding the German taxation of sportsmen and artists: FKP Scorpio Konzertproduktion (C-290/04), Centro Equestro de Leziria Grande Lda. (C-345/04) and Centro di Musicologia Walter Stauffer (C-386/04). In all three cases, the German Bundesfinanzhof (Federal Tax Court) has put preliminary questions before the ECJ. The questions deal with the question of whether the German taxation of non-resident artists and sportsmen is in accordance with EC law.
Follow-up of the Arnoud Gerritse case (C-234/01)
The cases can be seen as a follow-up to the Arnoud Gerritse decision of the ECJ (12 June 2003, C-234/01). The ECJ decided in this case that non-resident artists and sportsmen in Germany (1) need to be allowed to deduct from their gross income for performances their expenses and (2) cannot be taxed at a higher tax rate than the normal income tax rates. Unfortunately, the Arnoud Gerritse decision was just partly taken over by Germany in its legislation, while other countries, such as France, Spain, Italy, Greece, Portugal, Czech Republic and others simply ignored the decision of the ECJ and did not change anything in their tax rules for non-resident artists and sportsmen.
The case of FKP Scorpio Konzertproduktion (C-290/04)
The slow improvement process was not good enough for Dr. Harald Grams from Grams und Partner, Bielefeld, Germany and he pushed forward the case of FKP Scorpio Konzertproduktion (C-290/04). In this case a German concert promoter (Scorpio) had in 1993 contracted a Dutch tour promoter for performances of American and European artists in Germany. Scorpio did not pay any German withholding tax and the tax authorities raised massive tax assessments because of breach of ?50a of the German Einkommensteuergesetz (Income Tax Law).
The Bundesfinanzhof put four questions before the ECJ, i.e. (1) is it correct that non-residents are subject to a withholding tax, while residents are not, (2) should the withholding tax at source be reduced because of the expenses of the non-residents (residents only pay tax on their net income after the deduction of expenses), (3) may a tax exemption that follows from a tax treaty be used without explicit approval of the tax authorities, and (4) do the answers to these questions also apply to artists and sportsmen living outside the EU?
The Scorpio case attacks the German artist and sportsman tax system more explicitly than the Gerritse case. The German tax authorities have already allowed organizers of performances to postpone the payment of the withholding tax for non-resident artists and sportsmen (Bundesministerium der Finanzen (Ministry of Finance), 17 October 2004)
The case of Centro Equestro de Leziria Grande Lda (C-345/04)
The German Einkommensteuergesetz (Income Tax Law) is very strict on the application for tax refunds by non-resident artists and sportsmen after the year. It has created the Vereinfachtes Erstattungsverfahren (Simplified Tax Refund Procedure), but only expenses that are directly connected with the performances are taken into account and also these expenses need to be more than 50% of the earnings. Applications are only considered when the original invoices are attached. It is an understatement to state that this procedure is simplified and in practice is therefore not very often used.
However, the Portuguese company Centro Equestro de Leziria Grande Lda. wanted to make use of the procedure, because it had paid 29% withholding tax on the fees for the 11 horse shows it performed in Germany during. Centro Equestro de Leziria Grande Lda had calculated after the performances that the total expenses, direct and indirect, had been higher than the earnings. This was e.g. due to the death of one of the horses during the German tour, giving reason for an extra depreciation for the book value of the animal.
The German Bundesamt f?r Finanzen (Tax Office) rejected the application of Centro Equestro de Leziria Grande Lda for a full tax refund, because the indirect expenses were not accepted, the direct expenses were lower than 50% of the earnings and the original invoices were not delivered. The Bundesfinanzhof raised the question to the ECJ, whether this strict procedure is in conflict with EC law since German resident artists and sportsmen are taxed on their net income, after the deduction of all their business expenses.
The case of Centro di Musicologia Walter Stauffer (C-386/04)
This new case before the ECJ is not about performance income of artists and sportsmen, but concerns an Italian non-commercial foundation that is educating classical music students. The institution is exempted from the Italian l’imposta sul reddito delle persone giuridiche (Corporation Tax). Comparable German institutions would also be exempted for the German K?rperschaftssteuergesetz (Corporation Tax Law).
The Centro di Musicologia Walter Stauffer had received rental income from Germany, and was taxed under ? 50a of the German KStG. The Centro di Musicologia Walter Stauffer could however not make use of the exemption for cultural institutions, because it was not resident in Germany.
The German Bundesfinanzhof has raised the question to the ECJ, whether this exclusion for non-resident institutions is in agreement with EC law.
This case may be of importance for artists and sportsman institutions that are based within the EU, and are exempted from corporation tax in their own country. These institutions should arguable also be exempt in comparable situations in the country of performance. The outcome might for instance be that these institutions cannot be taxed for their performances for more than the salary element of the performing artists or sportsmen, even when the tax treaty with the performance country contains an Article 17(2) provision.
The ECJ is getting more involved with the taxation of international artists and sportsmen. Already in the Arnoud Gerritse case, it decided that the strict and deviating tax rules are not in accordance with the freedom principles guaranteed by EC law. The three new cases, Scorpio, Centro Equestro and Walter Stauffer, will make clear whether EU countries can continue with taxing non-resident artists and sportsmen heavier than others taxpayers. The expectation is that this is not acceptable for the ECJ and that EU countries will once again be forced to change their legislation.