Amsterdam, 6 February 2009Bas Opmeer, tax partner

Personal deductions and income tax, recent developments

Recent developments:• Ritter-Coulais, 21 February 2006, C-152/03;• Lakebrink, 18 July 2007, C-182/06;• Renneberg, C-527/06, 16 October 2008.

Ritter-Coulais

The case:

- Appellants lived in a private dwelling in France;- Assessed in Germany for the tax year 1987 as natural persons liable to income tax on their total income;- The negative income deriving from their own house in France was not taken into account for the purposes of determining the rate for their tax liability in Germany.

Questions from the Bundesfinanzhof:

1) Is it contrary to Article 43 and Article 56 of the Treaty establishing the European Community that a natural person assessable to tax in Germany on his or her total income and in receipt of income from an employment there should be unable to deduct rental income losses arising in another Member State in the computation of taxable income in Germany?

2) If not: is it contrary to Article 43 and Article 56 of the Treaty establishing the European Community for such losses not to be taken into account for the purposes of what is known as the ‘negative tax progression clause’?

Answer from the ECJ:

Article 48 of the EEC Treaty (subsequently Article 48 of the EC Treaty and now, after amendment, Article 39 EC) must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which does not permit natural persons in receipt of income from employment in one Member State, and assessable to tax on their total income there, to have income losses relating to their own use of a private dwelling in another Member State taken into account for the purposes of determining the rate of taxation applicable to their income in the former state, whereas positive rental income relating to such a dwelling is taken into account.

Note that the ECJ did not answer the question of deductibility, but only with regard of the rate of taxation

Lakebrink The case:

- Mr and mrs Lakebrink, German nationals resident in Germany, were both employees exclusively in Luxemburg, and were jointly taxed in Luxemburg;

- They declared a negative rental income of € 26.080 in connection with two properties in Germany owned by them but not occupied by themselves;

- They wanted the rental loss to be taken into account for the purpose of determining the tax rate applicable to residents in Luxemburg.

Question from the Cour administrative:

‘Is Article 39 EC to be interpreted as precluding national rules, such as those introduced in ... Luxembourg by Article 157ter of the [LIR], under which a Community national not resident in Luxembourg who receives income of Luxembourg origin from employment, which constitutes the major part of his taxable income, cannot rely on his negative rental income relating to property situated in another Member State, in this case Germany, which he does not himself occupy, for the purposes of the determination of the tax rate applicable to his Luxembourg income?’

Answer from the ECJ:

Article 39 EC is to be interpreted as precluding national legislation which does not entitle a Community national who is not resident in the Member State in which he receives income that constitutes the major part of his taxable income to request, for the purposes of determination of the tax rate applicable to the income so received, that negative rental income relating to property situated in another Member State which he does not himself occupy be taken into account, whilst a resident of the first State can request that such negative rental income be taken into account.

Note that this decision also is not about deductibility but applicable rate

Renneberg The case:

- Mr Renneberg is a Netherlands citizen who emigrated to Belgium in 1993;

- He owned a dwelling in Belgium financed by a mortgage from a Netherlands resident bank;

- In the years in question (1996/1997) he was a public servant in The Netherlands and derived his entire employment income from The Netherlands;

- Mr Renneberg deductive the negative income from his dwelling: difference between rental value and mortgage income from his employment income. The Netherlands tax inspector refused the deduction.

‘Must Articles 39 EC and 56 EC be interpreted as precluding, either individually or jointly, a situation in which a taxpayer who, in his [Member State] of residence, has negative income from a dwelling owned and occupied by him, and obtains all of his positive income, specifically work-related income, in a Member State other than that in which he resides, is not permitted by that other Member State … to deduct the negative income from his taxable work-related income, even though the [Member] State of employment does allow its own residents to make such a deduction?’

Questions Hoge Raad:

‘Article 39 EC must be interpreted as precluding national legislation such as that at issue in the main proceedings, pursuant to which a Community national who is not resident in the Member State in which he receives all or almost all of his taxable income cannot, for the purposes of determining the basis of assessment of that income in that Member State, deduct negative income relating to a house owned by him and used as a dwelling in another Member State, whereas a resident of the first Member State may deduct such negative income for the purposes of determining the basis of assessment of taxation of his income’

Answer from the ECJ

Judgement ECJ

• ECJ applies its Schumacker case law

• The Court states that the scope of this case law extends to all tax advantages connected with the non resident’s ability to pay tax which are granted neither in de state of residence nor in the state of employment

Comments

• A bridge too far• Risk of double offset of negative income• This is all against the fiscal sovereignty of the member

states and against bilateral agreements between member states

• It leads to tax deductions which would not have been granted in case the state of residence is the same as the state of employment

Future

What about losses of permanent establishments?

Mr. Bas OpmeerTax partner

T: +31 418 579 679F: +31 418 579 688M: +31 653 80 53 23

E: b.opmeer@fsv.nl