OPINION OF ADVOCATE GENERAL

delivered on 11 March 2004(1)

(Reference for a preliminary ruling from the Regeringsrätten (Sweden))

(Article 39 EC – Freedom of movement for workers – Income tax – Discrimination between resident and non-resident taxpayers – Basic tax-free allowance – Student who has received a State grant and a parental allowance in his State of residence – Income which, by its nature, is not subject to income tax – Taking into account of personal and family circumstances in the State of residence – Not taken into account)

I – National legislation

5. A taxpayer who has been resident in Sweden for less than a year but for a period equal to or exceeding six months is entitled to an allowance in proportion to the length of his stay on national territory. For the tax year at issue here, the allowance was SEK 700 per month.

7. It is clear from the preparatory documents for the SINK law that the system was adopted with a view to facilitating matters for the taxpayers concerned and for the tax authority. Thus, as a result of the system, the matter is concluded when the salary is paid and the tax deducted is passed to the tax authority.

II – The facts and the main proceedings

8. Florian W. Wallentin, a German national, was, at the time material to the main proceedings, resident in Germany while studying. His parents gave him a monthly allowance of DEM 650 and he received a grant of DEM 350 every month from the German State for accommodation and living expenses. Under German tax legislation, these sums, by their nature, are not taxable income.

10. Mr Wallentin applied to the Swedish tax authority for an exemption from income tax on his pay. His request was rejected by the authority, which stated that tax had to be deducted from his pay at the rate of 25%, pursuant to the SINK law.

12. The tax authority brought an appeal before the Kammarrätten i Sundsvall (Administrative Court of Appeal, Sundsvall, Sweden), which set aside the judgment of the Länsrätten on the following basis. First, the centre of Mr Wallentin’s interests was in Germany, where he received his basic financial support, so that his situation was not comparable to that of a person resident in Sweden. Second, Mr Wallentin would have been taxed more highly had the general Swedish tax rules been applied to him and had he been granted the allowance in proportion to the period of his stay in Sweden. Finally, the Swedish legislature had stated that the reason for the 25% tax rate, relatively low by Swedish standards, was that there were no rights to an allowance. There had therefore been no discrimination, whether direct or indirect.

13. Mr Wallentin brought an appeal against the decision of the Kammarrätten i Sundsvall before the Regeringsrätten.

III – The question submitted for a preliminary ruling

14. The Regeringsrätten decided to stay proceedings and refer the following question to the Court for a preliminary ruling:

‘Is Article 39 of the EC Treaty to be interpreted as precluding a Member State’s legislation which provides that natural persons who are not regarded as resident in the country for tax purposes but who receive income from employment in the country (restricted tax liability) are subject to a tax at source of such a nature that a basic allowance or other allowance or deduction for personal circumstances is not granted, whereas persons resident in the country are entitled to such an allowance or deduction at the time of ordinary assessment to income tax in respect of all income which they receive in the Member State and abroad (full tax liability), but where the first mentioned person’s lack of right to a basic allowance is taken into account, inter alia, by means of a tax rate which is lower than the rate applicable for taxpayers resident in the country?’

IV – Analysis

15. Contrary to the Finnish Government and like the other interveners, I see no reason to question the validity of the Regeringsrätten’s analysis according to which Mr Wallentin’s situation does indeed fall within the scope of Article 39 EC. It is apparent from the order for reference that Mr Wallentin undertook a period of work experience with the Church of Sweden from 3 to 25 July 1996, and that he received remuneration totalling SEK 8 724. There is no reason to doubt that this employment relationship satisfies the conditions set down by the Court for conferring on Mr Wallentin the status of ‘worker’ within the meaning of Article 39 EC. It should be remembered, in this respect, that it is for the national court to check whether these conditions are met. In any event, the fact that Mr Wallentin was studying in Germany and that he went to Sweden to work for a short period during his summer holidays, and the existence of a connection, more or less close, between his studies and his period of paid work experience with the Church of Sweden are not, as such, liable to deny him the status of ‘worker’, where the abovementioned conditions are satisfied. I will therefore carry out my assessment on the basis that Article 39 EC applies in this case.

17. The Finnish and French Governments and the Swedish tax authority submit that the national legislation at issue is not discriminatory. They point out that during 1996 Mr Wallentin received the main part of his income in his State of residence, that is, in Germany, and that the pay which he received in Sweden represented only a minimal part of his overall income. Mr Wallentin therefore was not in a situation identical to that of a person resident in Sweden. The fact that the income which he received in Germany is not taxable in that State does not affect this analysis. Mr Wallentin cannot therefore claim the allowance provided for residents under Swedish law, as it is for his State of residence, and not Sweden, to take his personal and family circumstances into account. The French Government points out that the exemption under German tax legislation for the income received by Mr Wallentin in Germany clearly shows that Germany has taken his personal and family circumstances into account.

18. The Swedish tax authority adds that, in order to ascertain whether the SINK law is discriminatory, Mr Wallentin’s situation must be compared with the situation of persons who have worked in Sweden for only part of the year and not with that of residents. It points out that, under Swedish law, persons who have worked in Sweden for only part of the year are entitled to an allowance in proportion to the length of their stay in Sweden. Application of this system to Mr Wallentin would have resulted in his being taxed more highly than under the SINK law.

19. I do not share those interveners’ view. I consider, as do Mr Wallentin and the Commission of the European Communities, that legislation such as the SINK law discriminates against a non-resident who, in his own State of residence, has received only income which, by its nature, is not subject to income tax. This conclusion is inevitable, in my view, in light of the case-law of the Court concerning the direct taxation of natural persons.

21. According to settled case-law, the rules regarding equality of treatment forbid not only overt discrimination by reason of nationality but also all covert forms of discrimination which, by the application of other distinguishing criteria, lead to the same result. The Court has held that national rules which limit tax benefits to persons residing within national territory are liable to operate mainly to the detriment of nationals of other Member States, and thus to constitute indirect discrimination by reason of nationality.

However, discrimination can arise only through the application of different rules to comparable situations or the application of the same rule to different situations. The Court has held that, in relation to direct taxes, the situations of residents and of non-residents are generally not comparable. According to the Court, income received in the territory of a Member State by a non-resident is in most cases only a part of his total income, which is concentrated at his place of residence. In addition, a non-resident’s personal ability to pay tax, determined by reference to his aggregate income and his personal and family circumstances, is easier to assess at the place where his personal and financial interests are centred, which in general is the place where he has his usual abode.

Moreover, residence is the connecting factor on which international tax law, in particular the Model Convention on Double Taxation of the Organisation for Economic Cooperation and Development (OECD) is, as a rule, founded for the purpose of allocating powers of taxation between States in situations involving extraneous elements. It follows that the fact that a Member State does not grant to non-residents certain tax benefits which it grants to residents is not, as a rule, discriminatory having regard to the objective differences between the situations of those two categories of taxpayer.

Nevertheless, in Schumacker, the Court held that a non-resident and a resident are not in objectively different situations where the non-resident receives no significant income in his State of residence and obtains the major part of his taxable income in the State of employment. In such a case, the State of residence is not in a position to grant him those benefits which are determined by reference to his personal and family circumstances. The difference in treatment then becomes discriminatory vis-à-vis the non-resident as his personal and family circumstances are taken into account neither in the State of residence nor in the State of employment.

When applied to the circumstances of the present case, the principles recalled above allow the following conclusions to be drawn. National rules such as the SINK law which subject non-residents’ income to a flat and definitive tax rate of 25% when residents’ income is taxed according to a progressive tax rate including a basic tax-free allowance entail a difference in treatment which is disadvantageous for non-residents who are, generally, foreign nationals. However, such different treatment does not constitute discrimination contrary to the EC Treaty in so far as residents and non-residents are in situations which are objectively different. Thus, an allowance like the allowance at issue here, aimed, in principle, at guaranteeing a taxpayer a minimum subsistence amount exempt from tax may legitimately be limited by a State to its residents, who, generally, have received the major part of their income in that State and whose total income is taxed there, as non-residents must obtain a comparable benefit in their own State of residence which is responsible for taking their personal and family circumstances into account.

However, the question arising in the present case is whether the case-law established by the Court in Schumacker is capable of being applied to Mr Wallentin’s situation. In other words, must it be considered that, although he received in Germany a State grant and an allowance from his parents during the year in question, Mr Wallentin is, in Sweden, in the same situation as a resident as regards entitlement to the disputed tax allowance?

I consider that this question must be answered in the affirmative, in the light of the Court’s application of the case-law established in Schumacker. A review of the judgments given by the Court in the field of direct taxation of natural persons subsequent to Schumacker allows two points to be identified which are relevant to the response to the question submitted for a preliminary ruling.

The first of these points is that while it is indeed for the State of residence of a taxpayer who has exercised his right to freedom of movement to take account of his personal and family circumstances, the taxpayer must be capable of being subject in that State to taxation which enables them to be taken into account. Thus, in order for the State of residence to take account of a taxpayer’s personal and family circumstances, the taxpayer must receive taxable income there.

This requirement is totally logical in the light of what is at stake in this kind of dispute. These are disputes between a non-resident and the tax authority of the State of employment in the context of which the non-resident applies, in respect of the taxation of income received in that State, for a tax benefit laid down by the law of that State. In finding that such a tax benefit may be refused to a non-resident without this difference in treatment constituting discrimination prohibited by the Treaty, the Court has held that the situations of non-residents and of residents are not, generally, comparable since income received in a State by a non-resident ‘is in most cases only a part of his total income, which is concentrated at his place of residence’, and that it is at his place of residence that his personal ability to pay tax, determined by reference to his aggregate income and his personal and family circumstances, is easier to assess. In those circumstances, tax benefits laid down by the national law of the State of employment can be refused to non-residents because comparable benefits may be granted to them in their own State of residence, in accordance with the conditions and procedures laid down by the law of that State. The grant of benefits comparable to deductions or to allowances in respect of taxable income in the State of employment therefore necessarily entails the receipt of taxable income in the State of residence.

The second point which may be drawn from the case-law is that the personal and family circumstances of a taxpayer who has exercised his right to freedom of movement must be genuinely and actually taken into account. It is for Member States to take the necessary measures to this end. We have seen that this obligation falls, in principle, on the State of residence. The Court has stated that the scope of this obligation cannot be reduced where the State of residence is party to a convention for the avoidance of double taxation. Nevertheless, when the taxpayer does not receive sufficient taxable income in his State of residence to enable his personal and family circumstances to be taken into account, this obligation necessarily falls on the State of employment. In any event, this means that the ultimate result of taxation of the taxpayer in the State(s) of employment and in the State of residence must not be that his personal and family circumstances are not taken into account or are only partially done so.

In view of the foregoing, I consider that the case-law established by the Court in Schumacker can be applied to the circumstances of the main proceedings.

In this case, it is settled that during the 1996 tax year Mr Wallentin received all of his taxable income in Sweden. It is clear from the order for reference and the Commission’s written observations that both the allowance paid by Mr Wallentin’s parents and the State grant constitute income which, by its nature, is not taxable in Germany. Consequently, although Mr Wallentin lives in Germany and his personal interests are centred there, the German tax authorities clearly could not take his personal and family circumstances into account in the context of levying tax on his income, as he did not receive any taxable income in his State of residence.

Contrary to the French Government, I consider therefore that the exemption from tax, laid down by German tax legislation, of the grant and allowance received by Mr Wallentin in Germany cannot be assimilated to taking into account his personal and family circumstances in accordance with the case-law of the Court in the field of direct taxation of natural persons. The exemption does not have the effect of reducing the tax levied on taxable income, following an overall assessment of his ability to pay tax in the light of his personal and family circumstances.

I deduce from the foregoing that, in regard to the disputed tax allowance, Mr Wallentin is indeed in the same situation as a resident in Sweden who has performed comparable work for an identical period, since the only taxable income which he received and which can be covered by such an allowance was paid to him in Sweden and is taxable in that State. It follows that, contrary to the submissions of the Swedish tax authority, Mr Wallentin’s situation is also not to be compared with the situation of a non-resident who has been employed in Sweden for a period between six months and one year.

In support of this analysis, it should also be pointed out that if the Court were to adopt the position taken by the French and Finnish Governments and the Swedish tax authority, this would dissuade a large number of students who are Community nationals from taking a summer job in a Member State other than their State of residence. It is quite clear that a student cannot live for a whole year on the pay which he has earned from working during the summer holidays. He must have help from his parents or the State to meet his needs, unless he takes out a loan. Also, these sums are, necessarily, greater than those earned from a summer job. Therefore, many students could find themselves in a situation where the tax authorities in their State of employment raise the fact that they have received income in their State of residence well above the pay received for their work and accordingly the State of employment could systematically refuse to grant them the tax allowance laid down for residents.

Finally, such a position would appear difficult to reconcile with the Court’s decision in Gerritse, which also concerned the application to a non-resident taxpayer of a flat rate of tax of 25% without entitlement to a deduction or an allowance. The Court observed that Mr Gerritse, who lived in the Netherlands, received only a minimal part of his overall income in German territory. He could, however, benefit in the Netherlands from an advantage comparable to that claimed by him in Germany, in that he could benefit from the basic tax-free allowance which is deducted from overall income. The Court then pointed out that pursuant to the Convention between the Kingdom of the Netherlands and the Federal Republic of Germany, the Netherlands integrated Mr Gerritse’s income which was taxed in Germany into the basis of assessment, in accordance with the progressivity rule, and deducted a sum in order to take account of the tax levied in Germany. The Court concluded therefrom that, with regard to the progressivity rule, non-residents and residents were in a comparable situation, so that application to the former of a higher rate of income tax than that applicable to the latter would constitute indirect discrimination prohibited by Community law.

Accordingly, in that case, application of a flat rate of tax of 25% to non-residents was considered to be compatible with Treaty rules where the non-resident had received the major part of his taxable income in his State of residence, on condition however that that rate was not higher than that which would actually be applied to the person concerned, if taxed in accordance with the normal progressive table of the State of employment.

The position taken by the French and Finnish Governments and the Swedish tax authority would lead to an approach comparable to that adopted in the case of Mr Gerritse being applied to taxpayers in the same situation as Mr Wallentin. It would thus amount to treating Mr Wallentin’s State grant and the financial support received from his parents in the State of residence – sums which by their nature are not taxable and which were simply intended to give him enough to live on during his studies – in the same way as significant taxable income earned through engaging in an occupation. I cannot agree with such an approach.

It is for the foregoing reasons that I consider that the SINK law discriminates against non-residents who, in their State of residence, have received only income which, by its nature, is not subject to income tax.

It is appropriate, at this stage, to consider whether such indirect discrimination may be justified.

The Regeringsrätten has not raised any specific question in the order for reference as to possible justification for the discrimination at issue. Nor has the Swedish tax authority, which focused its arguments on the absence of discrimination, made submissions on this point. On the other hand, the Finnish Government submits that the discrimination at issue is justified by the need to ensure cohesion of the tax system: the basic allowance is not applied within the framework of a system of deduction at source because it would confer an unjustified tax advantage on non-residents.

This argument is in some respects very similar to the grounds set out in the preparatory documents for the SINK law, which were referred to in the order for reference. According to these grounds, the system of a flat-rate deduction at source was adopted because it proved to be too difficult to tax persons residing abroad on the basis of a declaration and the Swedish tax authority is not in a position to take into account the personal and family circumstances of workers coming to Sweden for a short period.

Admittedly, I am not maintaining that, in the absence of harmonisation at Community level of the direct taxation of natural persons, it is a simple matter for national tax authorities to lay down taxation systems which ensure compliance, in all instances, with the right to freedom of movement guaranteed by the Treaty. However, it is clear that if administrative constraints or difficulties could justify derogation from compliance with this freedom, its scope would be greatly reduced. That is why the Court has very regularly dismissed the argument related to the need to safeguard the cohesion of the tax system, pointing out that where it had accepted that this need could justify rules of such a kind as to restrict fundamental freedoms, there was a direct link between the deductibility of contributions paid for old-age and life assurance contracts and the taxation of the sums paid out under those contracts.

In the present case, there is no such link between the system of taxation at source and the failure to take into account the taxpayer’s personal and family circumstances. Furthermore, I do not see how the system would confer an unjustified tax advantage on a taxpayer in a situation like that of Mr Wallentin, who did not receive any taxable income in his State of residence. It should be recalled that in Schumacker, the Court dismissed the argument based on the need to preserve the cohesion of the tax system, stating that where the State of residence cannot take account of the taxpayer’s personal and family circumstances because the tax payable there is insufficient to enable it to do so, the Community principle of equal treatment requires that, in the State of employment, the personal and family circumstances of a foreign non-resident be taken into account in the same way as those of resident nationals and that the same tax benefits should be granted to him.

The indirect discrimination entailed by the SINK law for non-residents in the same position as Mr Wallentin does not therefore appear to be justified. I accordingly suggest that the Court state in answer to the question referred for a preliminary ruling that Article 39 EC precludes national legislation such as the SINK law where persons not resident in the State of taxation have had, in their State of residence, only income which, by its nature, is not subject to income tax.

V – Conclusion

In view of the foregoing, I propose that the Court answer the question submitted to it by the Regeringsrätten as follows:

Article 39 EC must be interpreted as precluding a Member State’s legislation from providing that natural persons who are not regarded as resident for tax purposes in that Member State but who receive income there from employment are subject to taxation at source of such a nature that the basic allowance or any other allowance or deduction linked to taxpayer’s personal circumstances is not granted, whereas taxpayers resident in that State are entitled to such allowances or deductions at the time of ordinary assessment to tax on their income received in that State and abroad, when the persons not resident in the State of taxation have had, in their own State of residence, only income which, by its nature, is not subject to income tax.

Original language: French.

Order for reference, paragraph 4.

There is extensive case-law on the concept of ‘worker’ within the meaning of Article 39 EC. The Court gave a summarised definition of the concept in Case C-188/00 Kurz [2002] ECR I‑10691, at paragraph 32. Under this definition, in order to be treated as a ‘worker’, a person must pursue an activity which is genuine and effective, to the exclusion of activities on such a small scale as to be regarded as purely marginal and ancillary. The essential feature of an employment relationship is that for a certain period of time a person performs services for and under the direction of another person in return for which he receives remuneration. By contrast, neither the sui generis nature of the employment relationship under national law, nor the level of productivity of the person concerned, the origin of the funds from which the remuneration is paid or the limited amount of the remuneration can have any consequence in regard to whether or not the person is a ‘worker’ for the purposes of Community law.

For a recent application, see Case C-413/01 Ninni-Orasche [2003] ECR I-0000, paragraph 32.

See, to this effect, Case 197/86 Brown [1988] ECR 3205, paragraphs 21 to 23, Case C-357/89 Raulin [1992] ECR I-1027, paragraph 19. See also to this effect Ninni-Orasche, cited above, paragraph 28.

See, in particular, Case C-246/89 Commission v United Kingdom [1991] ECR I-4585, paragraph 12, and Case C-209/01 Schilling [2003] ECR I-0000, paragraph 22.

Case C-175/88 [1990] ECR I-1779, paragraph 12.

See, in particular, Case 152/73 Sotgiu [1974] ECR 153, paragraph 11, and Case C-27/91 Le Manoir [1991] ECR I-5531, paragraph 9.

Case C-279/93 Schumacker [1995] ECR I-225, paragraph 28, Case C-107/94 Asscher [1996] ECR I-3089, paragraph 38, and Case C-87/99 Zurstrassen [2000] ECR I-3337, paragraphs 19 and 20.

See, in particular, Schumacker, cited above, paragraphs 31 and 32, and Case C-234/01 Gerritse [2003] ECR I-5933, paragraph 43.

See Schumacker, paragraph 34, Case C-391/97 Gschwind [1999] ECR I-5451, paragraph 23, and Gerritse, paragraph 43.

Mr Schumacker, a Belgian national, who lived in Belgium with his wife and children, had received in Germany his entire wages which constituted the major part of the household income as Mrs Schumacker was unemployed. Under the Double Taxation Treaty between the Kingdom of Belgium and the Federal Republic of Germany, Mr Schumacker’s income had to be taxed in Germany. Mr Schumacker applied for the tax relief for married employed persons under German law known as ‘splitting’ which, in order to mitigate the progressive nature of the income tax rates, involves aggregating the spouses’ total income, notionally attributing 50% to each spouse, and then taxing each separately. His request was rejected on the grounds that that benefit was conditional on both spouses residing in Germany and having full tax liability there.

Ibid., paragraphs 36 to 38.

In Gschwind, cited above, the Court held that a State of residence which is party to a double taxation convention cannot simply take into account a resident taxpayer’s family expenses in proportion to the income taxed there without first ascertaining that the remainder of those expenses will be taken into consideration by the States of employment party to the convention (paragraphs 90 to 95).

In Case C-80/94 Wielockx [1995] ECR I-2493, the Court considered that Netherlands tax legislation which did not allow non-residents to deduct from their taxable income contributions paid to a pension scheme whilst allowing residents to do so was discriminatory where the non-resident received all or almost all of his income in the Netherlands. The Court considered that, in this situation, the non-resident and the resident are taxed in that State alone and that their taxable income is the same, so that, if a non-resident taxpayer is not given the same tax treatment as regards deductions from his taxable income as a resident, his personal situation will be taken into account neither by the tax authorities of the State where he works because he is not resident there, nor by the State of residence, because he receives no income there.

In de Groot, cited above, the Court held this obligation to be an obligation as to the result to be achieved. The Court stated that ‘the mechanisms used to eliminate double taxation or the national tax systems which have the effect of eliminating or alleviating double taxation must permit the taxpayers in the States concerned to be certain that, as the end result, all their personal and family circumstances will be duly taken into account, irrespective of how those Member States have allocated that obligation amongst themselves, in order not to give rise to inequality of treatment which is incompatible with the Treaty provisions on the freedom of movement for workers and in no way results from the disparities between the national tax laws’ (paragraph 101).

This is also how I interpret German tax law. Under Paragraph 3(11) of the Einkommensteuergesetz (Law on Income Tax), payments by the State or any public foundation which are directed at promoting vocational training such as, inter alia, study grants paid under the Bundesausbildungsförderungsgesetz (Federal Law on the Promotion of Education) are not taxable (see W. Heinicke in L. Schmidt, Einkommensteuergesetz, 21st edition, 2002, p. 83). As regards allowances paid by parents to their children as dependants, as a rule these do not constitute taxable income either as they appear neither in the definition of taxable income in Paragraph 2(1) of the Einkommensteuergesetz nor among the other kinds of taxable income listed in Paragraph 22 of the same law.

Mr Gerritse, a Netherlands national living in the Netherlands, received in 1996 the sum of approximately DEM 6 000 for musical services performed in Germany. The same year, his income in his State of residence and in Belgium totalled DEM 55 000. In accordance with the Convention between the Kingdom of the Netherlands and the Federal Republic of Germany, the income received by Mr Gerritse in Germany was subjected to tax under German law, that is, at the flat rate of 25%. Following a challenge by Mr Gerritse, the Court ruled, inter alia, on the question of whether the rules on the freedom to provide services precluded the legislation at issue when residents were taxed on their net income in accordance with a progressive table which included a basic tax-free allowance.

24Ibid., paragraph 46.

Ibid., paragraphs 51 to 53. The Court concluded that Articles 49 and 50 EC do not preclude legislation which subjects the income of non-residents to a definitive tax at the uniform rate of 25%, whilst the income of residents is taxed according to a progressive table including a tax-free allowance, provided that the rate of 25% is not higher than that which would actually be applied, in accordance with the progressive table, in respect of net income of the person concerned increased by an amount corresponding to the tax-free allowance.

Such assimilation would also be questionable in the light of the OECD Model Convention on Double Taxation, which gives students’ income special treatment. Under Article 20 of the Model Convention, payments which a student or business apprentice receives for the purpose of his maintenance, education or training arising from sources from outside the State he is visiting are not to be taxed in that State (Model Convention on Double Taxation concerning Income and Capital, abridged version, 28 January 2003, OECD).

See Case C-204/90 Bachmann [1992] ECR I-249, paragraph 28, and Case C-300/90 Commission v Belgium [1992] ECR I-305, paragraph 21.

See, for example, de Groot, paragraph 108.

Schumacker, paragraph 41.