European Court of Justice: EC law does not prevent Feyenoord from the obligation to withhold wage tax on payment to UK clubs for friendly matches in 2001 and 2002
A case note
by Rijkele Betten
In July 2002 and March 2004, Feyenoord played friendly football matches against two English clubs. Feyenoord paid € 133,000 and € 50,000 to the clubs. The clubs did not pay these amounts through to the individual players. The Netherlands tax authorities imposed tax assessments corresponding to 20% of the paid sums after deduction of certain costs (for each payment € 2,750). The club went to appeal. The Lower Court of The Hague held in favour of the club; however, the Court of Appeal of The Hague confirmed the assessments by the Netherlands tax authorities. The club further appealed, arguing that the tax liability constituted a restriction within the meaning of art. 56 of the TFEU which could not be justified. The Supreme Court stayed the proceedings and referred the following questions to the EC Court of Justice:
“1 Must Article 56 TFEU be interpreted as meaning that a restriction on the freedom to provide services exists if the recipient of a service, provided by a service provider established in another Member State, is obliged, under the legislation of the Member State where the service recipient is established and where the service is provided, to withhold tax on the remuneration payable for that service, whereas that withholding obligation does not exist in relation to a service provider who is established in the same Member State as the service recipient?
2(a) If the answer to the previous question has the effect that legislation which provides for the imposition of tax by a service recipient hinders the freedom to provide services, can such a hindrance then be justified by the need to ensure that taxes are levied and collected from foreign companies whose stay in the Netherlands is short and which are difficult to monitor, with the result that the implementation of the taxing powers allocated to the Netherlands becomes problematic?
2(b) In that case, is it relevant that the legislation was later amended for situations such as the one at issue here, in the sense that the tax was unilaterally waived because it proved incapable of being simply and efficiently applied?
3 Does the rule go beyond what is necessary given the opportunities for mutual assistance in the recovery of taxes presented in particular by Council Directive 76/308/EEC of 15 March 1976 on mutual assistance for the recovery of claims relating to certain levies, duties, taxes and other measures (OJ 1976 L 73, p. 18), as amended by Council Directive 2001/44/EC of 15 June 2001 (OJ 2001 L 175, p. 17), (“Directive 76/308”)?
4 In answering the foregoing questions, is it relevant that the tax which is payable on the remuneration in the Member State where the service recipient is established can be set off against tax which is payable on that remuneration in that other Member State?”
In the years at hand, the Netherlands Wage Tax Act contained a withholding tax obligation on payments to non-resident artists and sportspersons, who made a performance in The Netherlands. The applicable rate was 20%, to be applied on the gross amount less reimbursed expenses.
From 2007, this obligation was for most situations (including the one at hand) abolished.
Tax treaty concluded between The Netherlands and the United Kingdom
The 1980 Tax Treaty, which was concluded between The Netherlands and the United Kingdom, includes a provision regarding artists and sportsmen that resembles the provision from the 1977 OECD Model Convention:
“1 Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of one of the States as an entertainer … or as an athlete, from his personal activities as such exercised in the other State, may be taxed in that other State.
2 Where income in respect of personal activities exercised by an entertainer or an athlete in his capacity as such accrues not to the entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the State in which the activities of the entertainer or athlete are exercised.”
The decision of the European Court of Justice
The European Court first confirmed its case law (notably Case C‑290/04 FKP Scorpio Konzertproduktionen  ECR I‑9461, paragraph 31, and Case C‑345/04 Centro Equestre da Lezíria Grande  ECR I‑1425, paragraph 20) that an obligation to withhold wage tax on payments to service providers established in another Member State (…) constitutes a restriction on the freedom to provide services.
But then the Court apparently found reason to look for a sufficient justification for this restriction. Such justification must be found in an overriding reason in the public interest. And then the restriction would need to ensure achievement of the aim pursued and not go beyond what is necessary for that purpose (Tankreederei I, paragraph 19).
An argument in favour of such justification was that the withholding on the payment to a sports club, from which relevant expenses are deducted, allows the players’ income to be taxed in a simpler and more effective manner, both from the perspective of the players and from that of the tax authorities (paragraph 41).
The Court then went into administrative burdens: the need to collect tax from quite a few service providers; the need to submit tax returns in a foreign language; and the need to familiarise with another Member States tax system (paragraph 50).
All in all, the Court agreed with the Advocate General that the collection of the tax directly from the non-resident service providers would not necessarily constitute a less severe means than deduction at source (paragraph 52). Explicitly, the Court mentioned that this applies even in the light of the opportunities for mutual assistance in the recovery of taxes presented by Council Directive 76/308 EEC of 15 March 1976.
Less surprisingly, the Court also held that the fact that the withholding tax obligation was unilaterally abolished by the Netherlands tax legislator in 2007 was no reason to decide otherwise. Also, it was held by the Court that it is irrelevant whether or not the service providers can credit the withholding tax against the income tax due in its Member State of residence.
The European Court of Justice ruled in the following terms:
“On those grounds, the Court (First Chamber) hereby rules:
1 Article 56 TFEU must be interpreted as meaning that the obligation imposed, under the legislation of a Member State, on the service recipient to withhold at source wages tax on the remuneration paid to service providers established in another Member State, whereas such an obligation does not exist in relation to remuneration paid to service providers who are established in the Member State at issue, constitutes a restriction on the freedom to provide services, within the meaning of that provision, in that it entails an additional administrative burden and related liability risks.
2. In so far as the restriction to the freedom to provide services arising from national legislation, such as that at issue in the main proceedings, results from the obligation to withhold tax at source, in that it entails an additional administrative burden and related liability risks, that restriction can be justified by the need to ensure the effective collection of tax and does not go beyond what is necessary to achieve that purpose, even in the light of the opportunities for mutual assistance in the recovery of taxes presented by Council Directive 76/308/EEC of 15 March 1976 on mutual assistance for the recovery of claims relating to certain levies, duties, taxes and other measures, as amended by Council Directive 2001/44/EC of 15 June 2001. The subsequent renunciation of the withholding tax at issue in the main proceedings cannot prejudice either its appropriateness to achieve the aim pursued or its proportionality, both of which must be assessed solely in the light of the objectives pursued.
3 In order to determine whether the obligation on the service recipient to withhold tax at source, in that it entails an additional administrative burden and related liability risks, constitutes a restriction on the freedom to provide services prohibited by Article 56 TFEU, it is irrelevant whether the non-resident service provider may deduct the tax withheld in the Netherlands from the tax for which he is liable in the Member State in which he is established.”
The European Court of Justice Decision that there is sufficient justification for the restriction at hand comes – to a certain extent – as a surprise. It can indeed be argued that levying withholding tax on payments to a club may be more efficient than going after all individual sports persons and to determine whether part of the payment may be considered as reimbursements of costs. On the other hand, arguments for sufficient justification as having to look at legislative obligations in foreign languages, and not finding sufficient relief in the Mutual Assistance Directive have, in the past, not been successful justification for the European Court of Justice to accept similar withholding tax restrictions on payment to service providers residing in another Member State.
The former argument that Member States must make use of exchange of information and assistance with the collection of taxes due in the other Member States was, on this occasion, held not to be sufficient. This might open the door for Member States to use efficiency reasons to increase tax obligations regarding payments to non-residents. Nevertheless, it may also be that the Court has taken into account the fact that taxing all the various sports persons that take part in the football games would be a rather burdensome exercise.
Finally, the Court held that it was not relevant that The Netherlands had abolished the tax liability in 2007 and that the tax due could be credited in the country of residence.
Now the Netherlands Supreme Court has to take the final decision.
 Tax lawyer, Betten Internationaal Fiscaal Advies, Sint-Michielsgestel, The Netherlands.