International Law of Taxation by Hongler Peter;

Author:Hongler, Peter;
Language: eng
Format: epub
Publisher: Oxford University Press, Incorporated
Published: 2021-10-15T00:00:00+00:00

As a rule, residents and non-residents are not in a comparable situation. However, as famously held in the Schumacker decision,341 in special circumstances, residents and non-residents are indeed in a comparable situation. As a result, the source State might be required to treat a resident of another State in the same manner as a domestic resident with respect to personal allowances and deductions.

Mr Schumacker was resident in Belgium and earned more than 90% of his income from his employment in Germany. Germany had the taxing right regarding the employment income and was not obliged to grant family allowances. In contrast, the residence State, due to insufficient taxable income, was not able to take Mr Schumacker’s personal and family circumstances into account. In these special circumstances, the discrimination arises from the fact that the personal and family circumstances of Mr Schumacker are not taken into account—neither in the residence nor the source State. Therefore, the ECJ reasoned that the source State is indeed required to grant the same personal and family allowances to a non-resident in order not to treat them in a discriminatory way.342

Of course, the rationale of the ECJ is that at least one but not both States should grant those tax benefits. However, in practice this poses many challenges unless direct taxes are not further harmonized in the EU. It is therefore not surprising that many cases were brought to the ECJ and it further developed this Schumacker doctrine.

In order for a cross-border situation to be comparable to a domestic situation, the ECJ evaluates (i) whether a non-resident worker receives almost all of his income from the Member State of employment and (ii) whether the residence State is unable to take personal and family circumstances into account due to insufficient taxable income.343

However, in more recent case law the Court ruled that it is only decisive that there is insufficient taxable income in the residence State to consider personal circumstances (criterion ii) although such circumstances can be taken into account elsewhere.344 To illustrate this, we refer to the case Commission v Estonia:345

A resident of Finland received half of her pension income from Finland and the other half from Estonia. However, only the income from Estonia was subject to tax. As the income from her residence State, Finland, was not subject to tax, the residence State could not consider her personal and family situation (criterion ii fulfilled). Due to sufficient taxable income, her personal situation could still be taken into account in Estonia. Hence, she was considered comparable to a resident of Estonia. In accordance with the Schumacker doctrine, Estonia was obliged to grant her personal and family tax allowances. In the later X case, the Court clarified that, at least in case of a self-employed person, if there are several source states and not sufficient income in the resident state, each source State that provides for a certain deduction must grant this tax relief on a pro rata basis to non-residents, that is in proportion to the share of income received within this Member State.

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