Swiss Court Denies European Frontier Workers Their
           ‘Schumacker’ Rights (Comment on the 31 A...

which are obliged on their part to apply Community law                                          1.2. The Bilate...
Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights

to the signature of the EU-Swiss bilateral treaty...

1.3. Income Tax Implications of                                                                 on the grounds ...
Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights

   In August 2005, they filed a ‘demande de recti...

   The Swiss Jurisdiction secondly examines the source-                                       2.3. The Principl...
Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights

obtain most of their taxable income from an activ...

into account.65 The Swiss Jurisdiction therefore refused to                                       OECD Model (a...
Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights

   Third, the conclusion of the Swiss Jurisdictio...

   Likewise in its income tax case law, the Court has                                            other advantag...
Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights

3.3. Administrative Convenience Cannot,          ...

discriminate between resident and non-resident taxpay-                                       apply, that discri...
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Swiss Court Denies European Frontier Workers Their Schumacker Rights Comment On The 31 August 20 (2)

  1. 1. ARTICLE Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights (Comment on the 31 August 2009 Decision of the Geneva-Based ‘Commission Cantonale de Recours en Matiètre Administrative’ in the Boitelle Case) Marie Lamensch* & Servaas van Thiel** The Community law principle of free movement of persons entails a broad prohibition of discrimination including by means of tax provisions. The Bi- lateral EU-Swiss Treaty on free movement of persons contains this same prohibition of discrimination and refers for its proper interpretation to the case law of the European Court of Justice (ECJ). In the recent Boitelle case, however, a Swiss court did not apply the relevant ECJ case law (Schumacker) when upholding source-based taxation rules that discriminate against ‘frontaliers’ who work in Switzerland but live in France. This note first discusses the legal framework (Community law, the EU-Swiss treaty, income tax implications for ‘frontaliers’). It subsequently summarizes the Boitelle case (facts, arguments, decision of the court). Finally, it places the decision of the Swiss court in the context of settled ECJ internal market and income tax case law. 1. THE FREE MOVEMENT OF WORKERS functioning of the European Union (TFEU).1 One of its BETWEEN THE EU AND SWITZERLAND: components is the free movement of workers, which offers the right to any national of any Member State to work INCOME TAX IMPLICATIONS FOR as an employed person on the territory of another Mem- ‘FRONTALIERS’ ber State under the same conditions as those that apply 1.1. Free Movement of Workers within to nationals of that State.2 Because the free movement of persons is one of the internal market’s cornerstones, its the EU provisions may not be interpreted restrictively,3 and since The free movement of persons constitutes one of the fun- these are enacted in a clear and unconditional way, they damental freedoms guaranteed to all EU citizens by the have direct effect.4 This means that EU citizens can rely on Lisbon Treaties on the European Union (TEU) and on the their right not to be discriminated before national courts, Notes * Marie Lamensch is a PhD Researcher at the Institute for European Studies, Vrije Universiteit Brussel. She previously worked as a Lawyer in Brussels (DLA Piper UK LLP) and Luxembourg (Clifford Chance UK LLP) and as a Teaching Assistant at the Université Libre de Bruxelles. ** Prof. van Thiel works for the EU and is Director of the LL.M. programme at the Vrije Universiteit Brussel (where he teaches international and European tax law). He is also a Guest Professor at Erasmus University Rotterdam, New York University, and the Vienna University of Economics and Business. He occasionally sits as a Judge in the Regional Court of Appeal in Den Bosch (Netherlands). This contribution reflects the personal views of the author and can in no way be understood as reflecting the official position of any of the institutions mentioned. 1 For consolidated versions of the ‘Treaty on European Union’ and the ‘Treaty on the functioning of the European Union’, see Official Journal of the European Union C 115 of 9 May 2008. Subsequent to the ratification of these Treaties by the Czech Republic on 3 Nov. 2009, they entered into force is foreseen for 1 Dec. 2009 (in accordance with Art. 54 TEU and Art. 357 TFEU). 2 Article 45 TFEU provides in paras 1 and 2: Freedom of movement for workers shall be secured within the Union. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment. 3 Case C-53/81, Levin v. Staatssecretaris van Justitie [1982] ECR 1035. 4 Case C-48/75, Procureur du Roi v. Royer [1976] ECR 497. The direct effect principle was developed by the ECJ in Case C-26/62, NW Algemene Transporten Expeditie Onderne- ming van Gend en Loos v. Nederlandse Administratie der Belastingen [1963] ECR 1 as follows: Community law not only imposes obligations on individuals but is also intended to confer upon them rights which become part of their legal heritage (…) and creates individual rights which national courts must protect. As a general rule, any community provision enacting obligations that are sufficiently clear and unconditional must be considered as having direct effect. As a consequence, individuals may rely upon them, irrespective of the existence or not of internal provisions implementing those rules. INTERTAX, Volume 38, Issue 2 93 © 2010 Kluwer Law International BV, The Netherlands
  2. 2. Intertax which are obliged on their part to apply Community law 1.2. The Bilateral Treaty on Free and to ignore incompatible domestic law (primacy of Movement of Persons between Community law5). the EU and Switzerland From a broad body of case law from the European Court of Justice (ECJ or Court), it has become clear that this fun- On 21 June 1999, the EC and Switzerland signed seven damental freedom, which is granted to ‘migrant’ workers bilateral agreements,11 including one relating to the free as well as to seasonal and frontier workers (or ‘frontaliers’), movement of persons (hereinafter the EU-Swiss bilateral entails a broad prohibition of any discrimination includ- treaty).12 ing by means of social or tax provisions.6 Moreover, as the Under the EU-Swiss bilateral treaty, the Community Court decided early on, Community law not merely pro- principle of free movement of persons is extended to the hibits overt discrimination on the grounds of nationality relations between the EU and Switzerland. Article 1 of the but also any covert forms of discrimination based on any EU-Swiss bilateral treaty indeed provides that: other criterion of differentiation the use of which works in The objective of this Agreement, for the benefit of particular against nationals of other Member States. As far nationals of the Member States of the European Com- back as 1974, the Court decided in the Sotgiu case that a munity and Switzerland, is: ‘(a) to accord a right of different treatment on grounds of residence could amount entry, residence, access to work as employed persons, to a prohibited discrimination under Community law.7 establishment on a self-employed basis and the right In particular since the mid-1980s, when the ECJ to stay in the territory of the Contracting Parties; (b) started applying the principles of free movement and to facilitate the provision of services in the territory of non-discrimination also in the area of income taxation,8 the Contracting Parties, and in particular to liberalise it has become clear that Community law also prohib- the provision of services of brief duration; (c) to accord its any income tax discrimination against cross-border a right of entry into, and residence in, the territory of workers, including frontier workers, who live in one the Contracting Parties to persons without an economic Member State but work in another.9 In its landmark activity in the host country; (d) to accord the same 1995 Schumacker decision, the ECJ held that non-resi- living, employment and working conditions as those dent frontier workers who earned all or almost all their accorded to nationals. income in the work state (and not enough income in their state of residence so as to be able to claim personal For the sake of uniformity of application and coherence, deductions there) should be considered by the host (or Article 16(1) of the EU-Swiss bilateral treaty foresees that work) state to be in a similar situation, from an ability to Switzerland shall take any necessary measures to ensure pay point of view, as their resident colleagues from the that rights and obligations equivalent to those contained work state. They should consequently enjoy the same tax in Community instruments in the field of free movement treatment in the work state as their resident colleagues of persons are applied in its relationships with the EU.13 and this included a right to personal and family deduc- For that purpose, and because this implies the interpreta- tions in the work state as well as a right to be taxed as a tion of Community principles, Switzerland committed to married couple there.10 take the case law of the ECJ into account as it existed prior Notes 5 The primacy of Community law was confirmed in early case law (Case 6/64, Costa v. ENEL [1964] ECR 585; Case 48/71, Commission v. Italy (export tax on art treasures) [1972] ECR 527; Case 106/77, Amministrazione delle Finanze dello Stato v. Simmenthal [1978] ECR 629), including income tax case law (Case 6/60, Humblet v. Belgium [1960] ECR 559, which concerned the compatibility of a Belgian exemption with progression, applied to the income of a Community staff member and his spouse, with the Pro- tocol on privileges and immunities). 6 See already Art. 7 of Regulation 1612/69 of 15 Oct. 1968 on freedom of movement for workers within the Community (OJ L 257, 19 Oct. 1968, 2). 7 Case C-152/73, Sotgui v. Deutsche Bundespost [1974] ECR 153, 11. 8 In the 1986 breakthrough decision in Case 270/83, Commission v. France (‘avoir fiscal’) [1986] ECR 273, the Court for the first time declared a domestic income tax provision contrary to the EC Treaty Articles on the free movement of persons. In fact, in this case, the Court held that the French refusal to extend the benefits of an imputation credit to a French permanent establishment of a German insurance company constituted a discrimination contrary to the Treaty freedom of establishment. 9 See S. van Thiel, ‘Free Movement of Persons and Income Tax Law: The European Court in Search of Principles’, IBFD Amsterdam 3, Doctoral series (2001). 10 Case 279/93, Finanzamt Koeln-Altstadt v. Schumacker [1995] ECR I-225. 11 These are: Agreement on the free movement of persons (OJ L 114, 30 Apr. 2002, 6); Agreement on air transport (OJ L 114, 30 Apr. 2002, 73); Agreement on the carriage of passengers and goods by road and rail (OJ L 114, 30 Apr. 2002, 91); Agreement on trade in agricultural products (OJ L 114, 30 Apr. 2002, 132); Agreement on the mutual recognition of conformity assessment (OJ L 114, 30 Apr. 2002, 369); Agreement on certain aspects of government procurement (OJ L 114, 30 Apr. 2002, 430); Agreement on scientific and technological cooperation(OJ L 114, 30 Apr. 2002, 468). 12 On the European side, the bilateral treaty on free movement of persons was signed by the EC and all the Member States (mixed agreement). 13 Article 16(1) of the EU-Swiss bilateral treaty provides that: In order to attain the objectives pursued by this Agreement, the Contracting Parties shall take all measures necessary to ensure that rights and obligations equivalent to those contained in the legal acts of the European Community to which reference is made are applied in relations between them. 94
  3. 3. Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights to the signature of the EU-Swiss bilateral treaty.14 As to services,22 or in the case of unemployed persons, on subsequent case law, the agreement provides that this will being financially independent and covered by health be communicated to Switzerland and that a Joint Com- insurance.23 Frontier workers do not need a residence mittee composed of representatives of the participating permit but the competent authorities of the work state States15 will determine its implications upon request.16 may nevertheless issue the frontier worker with a special In practice, it thus means that Swiss and EU nationals permit for the duration of his employment where this is (and their families) may benefit, within the territory of any longer than three months and less than one year. It shall other contracting States, from any rights ensuing from the be extended for at least five years provided that the fron- Community principle of free movement of persons.17 For tier worker furnishes proof that he is actually pursuing that same purpose the EC and Switzerland also agreed to an economic activity.24 coordinate national social security schemes18 and to mutu- The EU-Swiss bilateral treaty entered into force on 1 ally recognize professional diplomas.19 June 2002 for an initial period of seven years but was Rights enshrined in the EU-Swiss bilateral treaty are renewed indefinitely in June 2009.25 Before that, its conditional, however, either on the possession of a valid extension to the twelve states that recently joined the employment contract,20 on being self-employed,21 on EU was approved by the Swiss population by means of the fulfilment of the traditional conditions to provide referendums.26 Notes 14 Article 16(2) of the EU-Swiss bilateral treaty provides that: Insofar as the application of this Agreement involves concepts of Community law, account shall be taken of the relevant case-law of the Court of Justice of the European Communities prior to the date of its signature. 15 The joint Committee is set up in accordance with Art. 14 of the EU-Swiss bilateral treaty. It is composed of representatives of the Contracting Parties and is responsible for the management and proper application of the Agreement. It may issue recommendations and take decisions by mutual agreement. It may also take appropriate measures in the event of serious economic or social difficulties. The Joint Committee meets at least once a year and it may decide to set up any working party or group of experts to assist it in the performance of its duties. 16 Article 16(2) of the EU-Swiss bilateral treaty also provides that: Case-law after that date shall be brought to Switzerland’s attention. To ensure that the Agreement works properly, the Joint Committee shall, at the request of either Con- tracting Party, determine the implications of such case-law. 17 Article 7 of the EU-Swiss bilateral treaty provides that: The Contracting Parties shall make provision, in accordance with Annex I, for the following rights in relation to the free movement of persons: (a) the right to equal treat- ment with nationals in respect of access to, and the pursuit of, an economic activity, and living, employment and working conditions; (b) the right to occupational and geographical mobility which enables nationals of the Contracting Parties to move freely within the territory of the host state and to pursue the occupation of their choice; (c) the right to stay in the territory of a Contracting Party after the end of an economic activity; (d) the right of residence for members of the family, irrespective of their nationality; (e) the right of family members to pursue an economic activity, irrespective of their nationality (on family members, see also Annex 1, Section I, article 3 of the EU-Swiss bilateral treaty); (f) the right to acquire immovable property in so far as this is linked to the exercise of rights conferred by this Agreement; (g) during the transitional period, the right, after the end of an economic activity or period of residence in the territory of a Contracting Party, to return there for the purposes of pursuing an economic activity and the right to have a temporary residence permit converted into a permanent one. 18 Article 8 of the EU-Swiss bilateral treaty provides that: The Contracting Parties shall make provision, in accordance with Annex II, for the coordination of social security systems with the aim in particular of: (a) securing equality of treatment;(b) determining the legislation applicable; (c) aggregation, for the purpose of acquiring and retaining the right to benefits, and of calculating such benefits, all periods taken into consideration by the national legislation of the countries concerned; (d) paying benefits to persons residing in the territory of the Contracting Parties; (e) fostering mutual administrative assistance and cooperation between authorities and institutions. 19 Article 9 of the EU-Swiss bilateral treaty provides that: In order to make it easier for nationals of the Member States of the European Community and Switzerland to gain access to and pursue activities as employed and self- employed persons and to provide services, the Contracting Parties shall take the necessary measures, in accordance with Annex III, concerning the mutual recognition of diplomas, certificates and other qualifications, and coordination of the laws, regulations and administrative provisions of the Contracting Parties on access to and pursuit of activities as employed and self-employed persons and the provision of services. 20 See Annexes I and II of the EU-Swiss bilateral treaty relating to employed persons. 21 See Annexes I and III of the EU-Swiss bilateral treaty relating to self-employed persons. 22 These conditions are being set up in accordance with the laws of an EU Member State or Switzerland, being established in the territory of one of these States and being authorized to provide services there. See Annexes I and IV of the EU-Swiss bilateral treaty relating to the provision of services. 23 See Annexes I and V of the EU-Swiss bilateral treaty relating to persons not pursuing an economic activity. 24 Annexes I and II, Art. 7 of the EU-Swiss bilateral treaty. 25 In accordance with Art. 25(2) and (3) of the EU-Swiss bilateral treaty, which provides that: (2) This Agreement shall be concluded for an initial period of seven years. It shall be renewed indefinitely unless the European Community or Switzerland notifies the other Contracting Party to the contrary before the initial period expires. In the event of such notification, paragraph 4 shall apply. (3) The European Community or Switzerland may terminate this Agreement by notifying its decision to the other Party. (…). None of the parties chose to terminate the agreement (and the Swiss population approved its continuation by referendum in February 2009). 26 On 25 Sep. 2005 for the ten States joining the EU in 2004 (56% of positive votes, into force on 1 Apr. 2006) and on 8 Feb. 2009 for Bulgaria and Romania (59.6% of positive votes, into force on 1 Jun. 2009). 95
  4. 4. Intertax 1.3. Income Tax Implications of on the grounds of their residence constitutes an indirect the Bilateral EU-CH Treaty for discrimination if the frontier worker is in a comparable ‘Frontaliers’ (Working in Switzerland situation as his resident colleague, that is if he earns all or but Residing in the EU) almost all his income in the work state.34 Based on the case law of the Court and the explicit At present, there are many EU citizens living in the provision in the EU-Swiss bilateral treaty, Switzerland EU but working on a daily basis in Switzerland. These should ensure equal treatment to EU nationals who have ‘frontaliers’ are considered in Switzerland as non-residents opted to use their freedom to move in order to work as for tax purposes and they are consequently taxed differ- employed persons in Switzerland, inter alia as regards ently than resident taxpayers. In fact, Swiss law provides income taxation, and must interpret this principle and for two distinct income taxation systems, applicable on its implications in this specific field in the light of the the basis of the taxpayer’s residence.27 Resident taxpay- ECJ case law (at least the one existing prior to the conclu- ers are submitted to the laws of 22 September 2000,28 sion of the EC-Swiss Agreement) and thus including the which provide for the submission of an annual tax return Schumacker case law. in which social and professional expenses may be deducted Unsurprisingly, therefore, the question of the conform- (taking into consideration the costs actually incurred, thus ity of the Swiss source-based taxation system (as applied to made a posteriori). Non-resident taxpayers are submitted non-resident Swiss taxpayers) with the Community prin- to source-based taxation under the law of 23 September ciple of free movement of persons was submitted to the 1994,29 pursuant to which their employer retains income Swiss tax administration and the competent Swiss national tax at source.30 Under this procedure, the applicable rates jurisdictions in the Boitelle case, in which, surprisingly take account of social and professional expenses and fam- perhaps, neither the administration nor the courts applied ily circumstances, but only on a flat-rate basis (flat-rate the principles of the ECJ Schumacker case law. deductions a priori – no possibility to deduct the costs The remainder of this note will set out the main facts actually incurred31). In practice, these two systems of tax- and legal arguments of the Boitelle case (section 2) and will ation may thus give rise to a different tax treatment of comment on the conclusion reached by the Swiss Court Swiss taxpayers’ income on the grounds of their residence, (section 3). potentially to the detriment of the non-residents. In general, it may be questioned whether a continuation of this different tax treatment of frontaliers32 in Switzer- land is compatible with the Bilateral EU-Swiss Treaty. As 2. THE ‘BOITELLE CASE’ mentioned above, Switzerland has committed to take all 2.1. Facts of the Case necessary measures to ensure that rights and obligations equivalent to those provided in Community instruments The Boitelle spouses reside in France and earn their income in the field of free movement of persons are granted to from employment in the control of Geneva in Switzerland. EU nationals who work in Switzerland while residing in For the year 2004, they were taxed as non-residents in an EU Member State. Moreover, since this commitment Switzerland, which means that their income was taxed implies an interpretation of Community principles, at source on a flat-rate basis, that they enjoyed flat-rate Switzerland has agreed to take account of the relevant (but not the full) deductions for certain social security and ECJ case law,33 and the ECJ has consistently decided since travel expenses, and that they were taxed on an individual Schumacker, that a different treatment of frontier workers basis and not as a married couple.35 Notes 27 Such a difference of applicable laws already existed prior to the conclusion of the EU-Swiss bilateral treaty, and no further distinction between EU and third states nationals was ever added. 28 LIPP-I-LIPP-V, D 3 11–D 3 16. 29 LISP, D 3 20. 30 In fact foreigner’s resident in Switzerland are subject to the source tax systems. For EU citizens, they only are subject to the ordinary procedure once they have obtained their permanent residence permit or if they buy real estate in Switzerland or dispose of taxable wealth. 31 Some additional deductions are possible in the framework of a yearly regularization procedure (a posteriori), but which ultimately does not offer the same level of deductions than the ordinary procedure. In addition, personal deductions such as passive mortgage interest are ignored under the service tax system. See Federal Tax Harmonisation Law (Arts 3 to 48) and Federal Direct Tax Law (Arts 83 to 101). 32 And resident EU nationals. 33 However, only the one existing prior to the conclusion of the EU-Swiss bilateral treaty. The subsequent case law will only be communicated to Switzerland and a committee composed of representatives of both the EC and Switzerland will determine its implications. 34 See also Case 80/94, Wielockx [1995] ECR I-2508; Case C-107/94, Asscher [1996] ECR I-3089; Case C-336/96, Gilly [1998] ECR I-2823; Case C-18/95, Terhoeve [1999] ECR I-345; Case C-391/97, Gschwindt [1999] ECR I-5453; Case C-229/98, van der Zwalmen [1999] ECR I-7115; Case C-87/99, Zurstrassen [2000] ECR I-3339; Case C-385/00, De Groot [2002] ECR I-11819; Case C-234/01, Gerritse [2003] ECR I-5933; Case C-209/01, Schilling [2003] ECR I-13389; Case C-169/03, Wallentin [2004] ECR I-6443; Case C-346/04, Conijn [2006] ECR I-6137; Case C-436/05, De Graaf and Daniels 2006 Order of Inadmissibility OJ C 326 of 30 Dec. 2006; Case C-329/05, Meindl [2007] ECR I-1107; C-527/06 Renneberg [2008] ECR I-7735. 35 It also meant that they did not benefit from compensating interests on the difference between taxes paid by anticipation and those effectively due, but this aspect will not be further discussed in this note. 96
  5. 5. Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights In August 2005, they filed a ‘demande de rectification However, at the same time Article 8 of the Swiss Con- (a posteriori adjustment request) with the competent stitution guarantees equality of treatment and Article 9 of tax administration, which decided on 31 October 2005 the Swiss Constitution protects against arbitrary decisions, to partially grant their request for deduction of social and the question thus arises to what extent a different tax security contributions and for them being taxed as a mar- treatment of residents and non-residents would be incom- ried couple. In November 2005, the Boitelle spouses filed patible with that constitutional equal treatment clause. a new tax return for the year 2004 indicating, like their The Swiss Jurisdiction first recalls38 that the Con- resident colleagues, their worldwide income and request- stitution requires the law to treat the same situations ing to be taxed in the normal way like resident taxpayers in the same way and different situations differently. In and not under the taxation at source system that applies this respect, it recalls that ‘the principle of equality of to non-residents. This request was rejected by the tax treatment only covers equality in right’ and that it does administration on 30 January 2006. not ‘oblige the State to correct inequalities in fact’, and In November 2005, the Boitelle spouses filed an objec- it recognizes that the main element of the decision is to tion against the refusal to allow personal deductions and establish whether two situations are the same or compara- in February 2006, they lodged an appeal against this ble, or whether a different treatment is based on objective rejection with the ‘Commission Cantonale de recours en differences. matière administrative’36 (hereinafter the Swiss Jurisdic- It subsequently notes that in the tax area the equal tion) requesting permission to file an annual tax return treatment principle is reflected in the principles of gener- like resident taxpayers. They argued that since they ality and equality of taxation as well as in the principle of earned most of their world income (95%) in Geneva, they proportionality of the tax burden with economic capacity were, from a tax point of view, in a similar situation as as laid down in Article 127 of the Constitution, and it Swiss residents who are engaged in a comparable employ- recalls in this respect that taxpayers with similar capacity ment. Therefore, they wished to benefit from the same tax should bear a similar tax burden.39 advantages, in particular the right to fully deduct certain On the other hand, the Swiss Jurisdiction recognizes expenses37 and the right to be taxed jointly as a married that the complexity of a situation that is subject to regu- couple. In essence, they claimed that taxation at source lation and the potentially numerous parameters to take constitutes a violation of their right to equal treatment into consideration when comparing two situations make under the Swiss Constitution, the 1966 bilateral Franco- it impossible to ensure absolute equality. Therefore, in Swiss tax treaty, and the EU-Swiss bilateral treaty, and the framework of a certain schematic approach, not all that such a difference of treatment between residents and taxpayers need to be taxed in exactly the same way, but the non-residents earning most of their income in Switzerland constitutional norm should, except when taxation leads was not justified. to a flagrant inequality, be satisfied if the law broadly guarantees equality of treatment.40 Whereas, in general 2.2. The Principle of Equal Treatment terms, different circumstances should result in differ- under Swiss Constitutional Law and ent taxation (vertical equity) and similar circumstances the Franco-Swiss Double Tax Treaty: should result in similar taxation (horizontal equity),41 Claim Denied procedural simplifications and estimations were accepted in tax case law even though they may affect individual As mentioned above, the different tax treatment in cases and even though this would mean that equality of Switzerland of resident and non-resident taxpayers is treatment cannot be fully guaranteed.42 Broadly speak- explicitly provided by Swiss law, which submits those two ing, the principle of equality would therefore supersede categories of taxpayers to different procedures. the right to equality.43 Notes 36 The ‘Jurisdiction cantonale de recours en matière administrative’ is part of the Swiss judiciary order and acts as an appeal jurisdiction for decisions of the tax administra- tion. 37 Whereas resident taxpayers may deduct social security and professional expenses actually incurred in the framework of their annual tax declaration, non-resident taxpayers (even when earning most of their income from Swiss source) cannot fully deduct such costs because their employer retains tax at source and deductions are allowed on a flat-rate basis (not taking account of costs actually incurred). In the case at stake, the main item was passive (mortgage interest). 38 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 4. 39 Reference is made to Federal Tribunal Decision ATF of 12 Mar. 2001 in Case 2P.215/2000. Under Swiss tax law, the equal treatment principle receives a concrete expression in the principles of generality and equality of taxation, and in the principle of proportionality of the tax burden based on the economic capacity. Pursuant to the first two, exonerations are forbidden without an objective reason; pursuant to the third, citizens being in the same economic situation must carry a similar tax burden, and when they are in a different situation, their tax burden must be adapted. 40 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 4. Reference is made to ATF 118 Ia 4. 41 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 4; reference is made to J.-M. Rivier, Droit Fiscal Suisse, L’imposition du Revenu et de la Fortune, 2nd edn (Neucha- tel: Press Lausanne Centrale, 1998), 85. 42 Reference is made to ATF 114 Ia 221; 123 II 9 dated 13 Feb. 1998, RDAF 1998, 441, and ATF dated 3 Nov. 2000, RF 56 (2001) 414. 43 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 4 alinéa 7. Reference is made to ATF dated 3 Jul. 2002 in Case 2P.282/2001. 97
  6. 6. Intertax The Swiss Jurisdiction secondly examines the source- 2.3. The Principle of Equal Treatment based income taxation procedure as applied to non- under the EU-Swiss Agreement resident taxpayers in the light of the constitutional and the Relevant ECJ Case Law: principle of equal treatment.44 It first notes that the Swiss Claim Denied legislator wanted a specific procedure for non-residents and that there was no legal basis for the claimants to file Finally, the Boitelle spouses relied on the Community a tax return as if they were resident taxpayers. It holds principle of free movement of persons, as applicable to moreover that the different treatment (source-based taxa- EU-Swiss relations by virtue of the EU-Swiss bilateral tion) for non-residents is justified by the need to ensure treaty. As above mentioned, Switzerland indeed commit- the collection of taxes45 and that Article 32 of the Fed- ted to guarantee the free movement of EU nationals on eral Tax Harmonization Law, which provides for flat-rate its territory and to grant them similar living and work- deductions for professional expenses, insurance premiums, ing conditions as it grants to its nationals, including in and family charges, was already accepted by the Federal the field of income taxation. In addition, for the inter- Tribunal, even though this simplification could result in a pretation of this principle, Switzerland also committed different tax burden for taxpayers.46 to taking account of the relevant case law of the ECJ The Swiss Jurisdiction concludes that the source- existing prior to the conclusion of that bilateral treaty. based taxation of non-residents does not constitute In fact, the Federal Tribunal confirmed on several occa- discrimination because it applies to both Swiss nationals sions that this case law should be considered as ‘determin- and foreigners (to the extent they reside abroad), and that, ing’ for Switzerland50 and in this light it should have been as applied to the Boitelle spouses, it does not infringe the expected that the Swiss Jurisdiction in the Boitelle case equality principle under national constitutional law.47 would have applied the Schumacker case law of the European The Swiss Jurisdiction finally deals with the claimants Court,51 which was developed prior to the signature of the reliance on Article 26, paragraph 1 of the 1966 Franco- EU-Swiss bilateral treaty. Swiss double tax treaty,48 which provides that nationals of To summarize, Schumacker was a Belgian national who a contracting State may not be subject, in the other con- worked in Germany where he was taxed as a non-resident tracting State, to an income taxation that would be so that he could not file an annual tax return so as to deduct his personal and family expenses and to benefit from joint different or heavier than the one to which nationals of taxation with his spouse. The ECJ recalled constant case that other State in the same situation are subject. In law that the Treaty prohibits not only overt discrimina- particular, nationals of a contracting State who pay tax tion by reason of nationality but also all covert forms of in the other contracting State must benefit, under the discrimination, which, by the application of other crite- same conditions than nationals of that State, of exemp- ria of differentiation, lead in fact to the same result.52 It tions, reliefs, deductions and rebates (…). noted that the contested German tax legislation applied It simply notes that this provision prohibits any a distinction on the basis of residence, and that this was difference of treatment on the grounds of nationality but likely to operate mainly to the detriment of nationals not a difference of treatment on the grounds of residence. of other Member States, in the circumstance that non- For that reason, and because both Swiss nationals resid- residents are, in the majority of cases, nationals of other ing abroad and foreign non-residents are subject to the Member States.53 The Court also held that even though, source-based income taxation system, the Swiss Jurisdic- in the field of income taxation, the situations of residents tion concludes that this procedure does not give rise to and non-residents were, in general, not comparable,54 the a discrimination under the French-Swiss double taxation position would be different, however, when non-residents agreement.49 receive no significant income in the State of residence and Notes 44 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 5. 45 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 5 alinea 5 with reference to Peter Locher, Kommentar zum DBG, II ieme partie, Therwil/Bale (2004) and to Raoul Oberson, ‘Imposition a la Source’, Archives 61, no. 2 (1992): 405. 46 Reference is made to P. Agner, B. Jung & G. Steinmann, Commentaire de la loi sur l’Impôt Fédéral Direct (Zurich: Schultess, 2001), 350, 351. 47 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, end of paras 5–7. Reference is made to ATF 2P. 145/1999 dated 31 Jan. 2000. 48 Which entered into force on 26 Jul. 1967. 49 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 8. 50 ATF 129 II 215 dated 28 Mar. 2003; ATF 2A.494/2003 dated 24 Aug. 2004. 51 Case C-279/93, Schumacker [1995] ECR I-225. 52 Case C-279/93, Schumacker [1995] ECR I-225, 26. See also Case C-152/73, Sotgiu [1974] ECR, 153, 11. 53 Case C-279/93, Schumacker [1995] ECR I-225, 28. 54 Ibid., 31. This is why international tax law, and in particular the OECD Model Tax Treaty, recognizes that in principle the overall taxation of taxpayers, taking account of their personal and family circumstances, is a matter for the State of residence. 98
  7. 7. Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights obtain most of their taxable income from an activity per- The Swiss Jurisdiction then recognizes the obligation formed in the State of employment, with the result that on Switzerland to take account of the ECJ case law as the State of residence is not in a position to take their it stood before 21 June 1999 and it does analyse the personal and family circumstances into account.55 There Schumacker decision in the above sense. It subsequently is indeed no objective difference between the situations of recognizes that part of Swiss literature considers there- such a non-resident and a resident engaged in compara- fore that the Swiss rules on the taxation of ‘frontaliers’ ble employment, such as to justify different treatment as should be amended, but that others are of the opinion regards the taking into account, for taxation purposes, of that in general the source tax rules applied by Switzer- the taxpayer’s personal and family circumstances.56 To the land are not discriminatory because they also affect Swiss contrary, in the case of a non-resident who earns most of nationals who are non-resident, but who nevertheless his income and almost all his family income in a Member feel that frontier workers who earn all their income in State other than that of his residence, discrimination arises Switzerland should have the possibility to be taxed as from the fact that his personal and family circumstances residents.62 are taken into account neither in the State of residence Nevertheless, the Swiss Jurisdiction rejects the claim nor in the State of employment.57 In conclusion, the ECJ and considers that the Geneva source tax system guaran- decided that the principle of free movement does not, in tees an equal tax treatment of non-resident and resident principle, preclude the application of rules of a Member taxpayers in a similar situation. To arrive at this conclu- State under which a non-resident working as an employed sion, the Swiss Jurisdiction notes first that the Geneva person in that Member State is taxed more heavily on his tax administration a posteriori corrects the source tax income than a resident in the same employment.58 But the system in a number of cases, that is if the spouses both position is different in a case such as this one where the earn income from the Canton and are subject to taxation non-resident receives no significant income in the State as singles (without deduction for married couples), or if of his residence and obtains the major part of his taxable the taxpayer concerned has exercised several economic income from an activity performed in the State of employ- activities, or if the taxpayer has, in addition to taxable ment, since there is, between such a non-resident and a income, received social payments. Secondly, the Geneva resident exercising a similar economic activity, no objec- tax administration allows certain supplementary deduc- tive difference such as to justify a difference of treatment.59 tions at the request of the taxpayers (payments to buy into The Court has confirmed this position in subsequent case social security schemes, alimony payments, frais de garde). law.60 According to the Swiss Jurisdiction, these additional However, the Swiss Jurisdiction in the Boitelle case measures together with the flat-rate arrangements ensure nevertheless goes another way and it bases itself directly that sufficient account is taken of the personal and family or indirectly on the following arguments. First, it relies situation of the ‘frontalier’ and they also consider that in on the wording of the Bilateral EU-Swiss Treaty. It notes this respect the German legislation subject to the Schu- that Article 2 of the agreement prohibits discrimination macker case was not comparable to the Geneva legislation on grounds of nationality, but that Article 21, paragraph 2 subject to the Boitelle case.63 This is because the Geneva allows different tax treatment on grounds of residence tax system would a posteriori place the non-residents in a because it explicitly provides that no provision of the Treaty similar situation as a resident (which was disputed by the can be taken to prevent the Parties from distinguishing on Boitelle spouses who claimed that, even after a rectification the basis of the relevant tax legislation between taxpayers a posteriori, they were not able to benefit from the same who are not in a similar situation in particular as regards level of deductions as residents do64) and would as such their residence.61 sufficiently take the personal situation of the claimants Notes 55 Case C-279/93, Schumacker [1995] ECR I-225, 36. 56 Ibid., 37. 57 Ibid., 38. 58 Ibid., 35. 59 The ECJ rejected the justifications offered by the German government, based on: (1) the need to ensure the cohesion of the applicable tax system and the fear that the per- sonal situation of the taxpayer be taken into consideration twice (i.e., in the residence state and in the employment state) because of a lack of revenue in the residence state (40–42); (2) the administrative difficulties prevent the State of employment from ascertaining the income that non-residents working in its territory receive in their State of residence, in view of the existing mutual assistance instruments (43–45). 60 See Case C-182/06, Lakebrink [2007] ECR I-6705; Case C-383/05, Talotta [2007] ECR I-2555; Case C-169/03, Wallentin [2004] ECR I-6443; Case C-234/01, Gerritse [2003] ECR I-5933; Case C-87/99, Zurstrassen [2000] ECR I-3337; Case C-391/97, Gschwind [1999] ECR I-5451; Case C-80/94, Wielockx [1995] ECR I-2493, and C-107/94, Asscher [1996] ECR I-3089. 61 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 10. 62 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 11, reference to J.M. Rivier, ‘L’égalité Devant l’impôt des Travailleurs Suisses et Étrangers’, Archives 71 (2002): 97 (supportive of a change in the rules). 63 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, paras 12 and 13. 64 The Boitelle spouses claimed that there remained a difference of CHF 13.391 in their disfavour. 99
  8. 8. Intertax into account.65 The Swiss Jurisdiction therefore refused to OECD Model (and its commentary). It recognized that apply the Schumacker jurisprudence in the Boitelle case residents and non-residents were generally not in the same because the regulations at stake in those two cases would situation for tax purposes, but it clarified that this would not be comparable. be different if the non-resident earned all or almost all his income in the work state (and no income in the residence state). In that case, the non-resident would, from an abil- ity to pay tax point of view, be in a similar situation as his 3. COMMENTS resident colleagues because he could deduct his personal 3.1. General and family expenses only in the work state. Denying him those deductions would amount to discrimination because Formally speaking, the Swiss Jurisdiction did not refuse to those expenses could in that case be taken into account consider the Schumacker decision and it, in fact, includes neither in the residence state (no income) nor in the work an elaborate summary of the case in its judgment. How- state (no residence). ever, it seems to come to the conclusion that that case More importantly, the same logic underlies the Court’s law was not applicable to the Boitelle spouses presumably interpretation of the Maastricht Treaty Articles on the free because the Geneva regulations at stake in the latter case movement of capital. In those new articles, the Member were different from the German regulation at stake in States had inserted a new tax exception to the free move- the Schumacker case in that The Geneva one a posteriori ment of capital, which, very much in the sense of Arti- corrected some of the disadvantages suffered by the non- cle 24 of the OECD Model, provided that Member States resident taxpayer. The result is that the Swiss Jurisdiction would be allowed to maintain different tax treatment on allows a different tax treatment on the basis of residence grounds of residence.67 Again the ECJ did not interpret and to arrive at that conclusion it cites the EU-Swiss this new provision in the sense of the OECD Model, but bilateral treaty, and in particular the clause that allows it interpreted the new provision in the light of its own different tax treatment on grounds of residence, and it previous case law on tax discrimination. As such, it came concludes that the Geneva tax laws do not discriminate to the conclusion that different treatment on the basis of against the Boitelles because their disadvantages are a pos- residence could only be acceptable if the resident and non- teriori corrected and Swiss nationals residing in ‘France resident taxpayers would not be in the same situation or voisine’ receive the same treatment. Though the outcome if there were overriding public interest reasons to deny of the case may be readily understood in the light of the equal treatment.68 significant budgetary implications of a decision in favour Second, the suggestion by the Swiss Jurisdiction that of the Boitelles, the decision of the Swiss Jurisdiction and the non-resident non-national Boitelle spouses would not be its underlying reasoning is open to criticism. discriminated because non-resident Swiss nationals receive First of all, even though it is true that the Bilateral the same tax treatment is unconvincing. In a national treat- Treaty contains an Article 24 Organization for Economic ment analysis, the right comparison is between a domestic Cooperation and Development (OECD) Model type and a cross-border situation, or in this case between a resi- clause66 that allows different tax treatment on grounds of dent worker and an incoming non-resident frontier worker. residence, this is hardly relevant in the Boitelle case, which The question then would be if the use of the criterion of must be looked at in the light of Community law. Already residence would work in particular against the cross-bor- in the Schumacker case, the Member States argued that der situation, which it obviously does. In that case, the resident and non-resident taxpayers were not in a similar contested legislation constitutes covert discrimination and situation (and could therefore be taxed differently) but the the nationality of the incoming frontier workers seems to Court took a more nuanced position than the one of the be of less relevance for that question. Notes 65 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 12 alinea 4. 66 Article 24, para. 1 of the OECD Model prohibits discrimination against resident non-nationals, but it does not prohibit different tax treatment of non-residents because these are not considered to be in ‘the same circumstances’ as residents. 67 The Maastricht Treaty provided that the provisions on the free movement of capital ‘. . . shall be without prejudice to the right of Member States: (a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested.’ 68 In Case 35/98, Verkooijen [2000] ECR I-4073, the ECJ held in para. 43: In addition, the possibility granted to the Member States by Article 73d(1)(a) of the Treaty of applying the relevant provisions of their tax legislation which distinguish between taxpayers according to their place of residence or the place where their capital is invested has already been upheld by the Court. According to that case-law, before the entry into force of Article 73d(1)(a) of the Treaty, national tax provisions of the kind to which that article refers, in so far as they establish certain distinctions based, in particular, on the residence of taxpayers, could be compatible with Community law provided that they applied to situations which were not objectively comparable (see, in particular, Case C-279/93 Schumacker [1995] ECR I-225) or could be justified by overriding reasons in the general interest, in particular in relation to the cohesion of the tax system (Case C-204/90, Bachmann v. Belgian State [1992] ECR I-249 and Case C-300/90, Commission v. Belgium [1992] ECR I-305). 100
  9. 9. Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights Third, the conclusion of the Swiss Jurisdiction hinges are accepted in Community law as grounds to justify dif- on several interlocking reasons, which are partly implicit ferent treatment of similar situations. and party explicit but which all are problematic from a European law point of view. In fact, the Swiss Jurisdic- tion correctly recalls that the main question in every (tax) 3.2. No De Minimis Exception discrimination case is to decide whether the two situa- in Community Law tions that are compared are really similar. If they are, they must be treated in the same way; if they are not, they It is clear from the ECJ tax case law that the European must be treated differently. Now here the ECJ had been concept of equal treatment means full equal treatment, quite clear in Schumacker that a non-resident frontier and the Court has on several occasions clarified that worker who earned all or almost all his income in the work even small inequalities of treatment may gives rise to an state should be considered to be in the same situation as EC-incompatible discrimination. There is no de minimis his resident colleagues. The Swiss Jurisdiction seems to exception in European internal market law and, from a accept that the Boitelle spouses are in the same situation as European law point of view, it would not be sufficient for resident taxpayers because they earn 95% of their income the Geneva tax system to provide grosso modo equal tax in Geneva. Nevertheless, the Swiss Jurisdiction does not treatment of non-resident frontier workers (in particular proceed to the expected conclusion that denying them the not if that grosso modo equal tax treatment results in a same deductions as granted to residents amounts to a pro- higher tax burden for the non-resident of several thou- hibited discrimination. sands of Swiss francs a year). On the contrary, the Swiss Jurisdiction makes the sur- As a matter of fact, even though the difference in the prising assessment that the Geneva tax system does ensure treatment of resident and non-resident taxpayers under equal tax treatment of residents and non-residents this Swiss law is not as critical as in the Schumacker case, it still in spite of the fact that the non-resident Boitelle spouses exists, potentially to the detriment of the non-residents, only enjoy flat-rate deductions, instead of deductions of and this without any valid justification. Indeed, source- actual costs, which result in a higher annual tax burden based taxation remains a procedure that applies a priori of several thousands of Swiss francs as compared to the tax and for which a regularization (which would, however, not burden on a resident couple in the same circumstances. fully rectify the existing disadvantage) may only be made The reasons for the Swiss Jurisdiction to conclude that the a posteriori (that is, at least one year later). Geneva tax system ensures equal treatment include that The fact that the disadvantage suffered by non-residents the source tax system as applied to the Boitelles is a pos- would be less important than in the Schumacker case is teriori corrected in several ways and that supplementary irrelevant and does not alter the general principle defined deductions can be claimed. This observation must pre- by the ECJ that there is, between a resident and a non- sumably be read together with an earlier observation that resident earning most if his income in the employment full equal treatment can never be assured in cases in which State, no difference such as to justify a difference in his a ‘schematic’ of flat-rate tax system is applied, and that the income tax treatment. The Court already decided, as a non-resident non-national are not discriminated because general principle, that the fact that a disadvantage was non-resident Swiss nationals are treated in the same way. minimal (de minimis exception) does not justify a differ- It is accompanied by the observation that, because of these ence of treatment in the field of free movement of persons extra corrections and deductions, the Geneva tax system whose provisions are directly applicable.69 In fact, Mem- is not comparable to the German tax system subject in ber States have often tried to play down the disadvantageous the Schumacker case. To this must probably be added the effect of one of their discriminatory measures, by arguing underlying concern over the possible budgetary implica- that the disadvantage is very small or negligible, avoidable or tions of a decision in favour of the Boitelle spouses. compensated by another advantage. However, in its general These reasons are, however, not convincing from a internal market case law the Court has consistently rejected European law point of view, because neither the concept claims that EC-incompatible restrictions should be allowed if of a de minimis exception (section 3.2) nor the concept of the disadvantage is de minimis, because any restriction of free administrative convenience or an ex post procedural remedy movement, even a minor one, distorts the internal market (section 3.3), nor possible budgetary losses (section 3.3) and is therefore prohibited (constant case law in the area of goods,70 services,71 and persons72). Notes 69 Joined Cases 177 and 178/82, Van der Haar and Kaveka de Meern [1984] ECR 1795, 13; Case C-270/83, Commission v. France [1986] ECR 273, 21; Case C-103/84, Commission v. Italy [1985] ECR 1759, 18; Case C-19/92, Kraus [1993] ECR 1663, 32. 70 Indirect tax discrimination, for instance, cannot be justified on the ground that the resulting tax is only marginally higher for the imported than for the domestic product. Case 127/75, Bobie [1976] ECR 1079; Case 20/76, Schöttle [1977] ECR 247; Case 171/78, Commission v. Denmark [1985] ECR 447, Joined Cases 177 and 178/82, van de Haar and Kaveka de Meern [1984] ECR 1797 (point 13); Case 103/84, Commission v. Italy [1985] ECR 1759 (point 18). 71 See, for instance, Advocate General van Gerven in Case C-18/93, Corsica Ferries [1994] ECR I-1783 (point 25) and Case C-49/89, Corsica Ferries France [1989] ECR 4441 (point 8). 72 See, for instance, Case 270/83, Commission v. France [1986] ECR 273 (point 21); Case C-19/92, Kraus [1993] ECR I-1663 (point 32). 101
  10. 10. Intertax Likewise in its income tax case law, the Court has other advantages also related to the cross-border economic refused to accept that national restrictive tax measures activity, and the Court has reiterated this rule in its inter- should be allowed if they only cause a small disadvantage nal market case law,78 and in its income tax case law (see, for the cross-border situation (see, for instance, Commission for instance, Commission v. France (avoir fiscal), paragraph v. France (avoir fiscal),73 paragraph 2174). In addition, the 21,79 St Gobain, paragraph 53,80 Eurowings, paragraphs Court has been unimpressed by arguments that a restric- 43–45,81 Verkooyen, paragraph 61,82 AMID, paragraph 27,83 tive national tax measure should be allowed to the extent Amurta, paragraph 7584). In the same spirit, the Court held the disadvantage that it causes can be easily avoided if only that Member States are not allowed to offset, by means of the taxpayer would chose to take another course of action a less favourable tax treatment of a cross-border as com- (see, for instance, Commission v. France (avoir fiscal), para- pared to a domestic activity, the possible advantages that graph 22,75 Bachmann, paragraphs 12 and 13,76 Futura77). this cross-border activity may enjoy by moving to another Finally, it is settled case law that a discriminatory restriction tax jurisdiction (Biehl, paragraph 15, Commission v. France, on free movement cannot be justified by the fact that the paragraph 21, Eurowings, paragraph 44, Skandia, paragraph disadvantage caused by that restriction is compensated by 52, Cadbury Schweppes, paragraph 4985). Notes 73 According to France, the ceiling on the number of shares that an insurance company was allowed to hold, and the very low dividend return on its typical low-risk invest- ment, necessarily limited the financial impact of the imputation credit refusal. In addition, insurance companies invested in shares, not because of the anticipated dividend income (as affected by the imputation credit), but because of potential capital gains (not affected by the imputation credit). Moreover, if foreign companies suffered a real disadvantage, the premiums charged by them should have been higher than those charged by French companies, which was not the case. 74 Apart from the fact that the French argument was probably factually incorrect, the Court reiterated the more fundamental position that there is no de minimis exception in Community law on free movement, by noting that it was necessary neither to assess the extent of the disadvantages suffered by foreign insurance companies as a result of the refusal of the imputation credit nor to consider whether those disadvantages could have any impact on the tariffs, since the Treaty ‘prohibits all discrimination, even if only of a limited nature’ (para. 21). The Court thus rejected a de minimis exception in the area of free movement of persons, as a matter of principle and in doing so referred to previous case law. See, for instance, Joined Cases 177 and 178/82, van der Haar and Kaveka de Meern [1984] ECR 1797 (para. 13); Case 103/84, Commission v. Italy [1986] ECR 1759 (para. 18); Case C-19/92, Kraus [1993] ECR I-1663 (para. 32). 75 France argued that foreign insurance companies could avoid the disadvantage of the imputation credit refusal, by establishing in France in the form of a subsidiary rather than a branch. The Court dismissed the argument on the more fundamental than practical ground that the Treaty ‘expressly leaves traders free to choose the appropriate legal form in which to pursue their activities in another Member State and that this freedom of choice must not be limited by discriminatory tax provisions’ (para. 22). 76 Belgium argued that a migrant worker, when taking up employment in Belgium, could avoid the non-deductibility of premiums paid to foreign insurance companies, by replacing existing insurance contracts with new contracts concluded in Belgium (report, at I-252). The Court, however, considered that the termination of contracts would in itself be a restriction on free movement ‘by reason of the arrangements and expense involved’ (judgment, at I-280, paras 12 and 13). 77 Luxembourg submitted that Futura could avoid the double accounting disadvantage by setting up a subsidiary instead of a branch. The applicants, as well as the Commission and Advocate General Lenz, recalled the Court’s previous decisions, and, perhaps surprisingly, the Court simply ignored the argument. 78 An initial misunderstanding on this rule was created by the Court in Case 152/73, Sotgiu [1974] ECR 153, paras 11 and 12, in which it held that there was no discrimina- tion if a comparison between two schemes of allowances (for workers living away from home) ‘taken as a whole’ showed that non-residents (who received a lower allowance indefinitely) were not placed at a disadvantage as compared to residents (who received a higher allowance, but temporarily). Nevertheless, in other cases, the Court clearly confirmed the general rule. For instance, higher taxes on imports cannot be justified by the need to compensate certain disadvantages that exist for domestic production, such as higher prices for raw materials, higher production costs, an adverse exchange rate or a higher tax burden as a result of different economic structures of operators. Joined Cases 2 and 3/62, Commission v. Belgium and Luxembourg [1962] ECR 425 and 445; Case 28/69, Commission v. Italy [1970] ECR 187; Case 45/75, Rewe [1976] ECR 181; Case 55/79, Commission v. Ireland [1980] ECR 481; Case 32/80, Kortmann [1981] ECR 251. 79 The French government had argued that the disadvantages of the imputation credit denial were more than compensated by the facts that branches did not incur incorpora- tion costs (unrelated advantage) and that their profits were exempt from corporate income tax in the head office country because of the tax treaty network (more related advantage). The Court, on its part, rejected the possibility of compensation as a matter of principle, when it held that ‘Even if such advantages would actually exist they cannot justify a breach of the obligation laid down in Article 52 EC Treaty to accord foreign companies the same treatment’ (at para. 21). 80 In St Gobain, the German and Portuguese governments argued that the denial of the participation exemption and indirect foreign tax credit to the permanent establishment was compensated by the advantage that its profits could be remitted to the head office without further withholding tax. The Court, referring to Commission v. France, ruled that the disadvantageous tax treatment of branches as compared with subsidiaries could not be justified by other advantages. Even if those advantages existed, they could not justify a breach of the national treatment obligation of the Treaty (para. 53). 81 In Eurowings, the German government argued that the broadening of the tax base was necessary to prevent a lower overall tax burden for German companies that leased economic goods abroad. However, the Court rejected the argument with the observation that a possible tax advantage for service suppliers in their state of establishment would not allow the Member State in which the service recipient was established to treat that recipient less advantageously for tax purposes (paras 44 and 45). 82 In Verkooyen, the Netherlands had argued that it should be allowed to refuse the dividend exemption for shares in foreign companies, because taxpayers otherwise would be able to secure a twofold advantage, since they could enjoy tax reliefs both in the Member State in which the dividends were paid and in the Member State in which they were received. Though presented as a double-dip argument, the Court replied that the unfavourable Netherlands tax treatment could not be compensated by the existence of other tax advantages (para. 61). 83 In AMID, the Court noted that even if the Belgian system were favourable to companies with establishments abroad more often than not, this would not prevent it from being discriminatory if it would prove disadvantageous for certain of those companies (para. 27). 84 In Amurta, the Netherlands argued that the disadvantage of the withholding tax on outbound dividends (unfavourable tax treatment) could be neutralized by tax measures in the Member State of the shareholder and that this was for the national judge to establish (para. 70). However, the Court held that the Netherlands could not rely on the existence of a tax advantage granted unilaterally by another Member State in order to escape its obligations under the Treaty (para. 78). It continued, however, that it cannot be excluded that a Member State may succeed in complying with those obligations by concluding a tax treaty with another Member State (para. 79 with reference to ACT Test Claimants, para. 71). Finally, it held that it is for the national court to establish whether to take account of the tax treaty and to what extent that treaty neutralizes the restrictive effect of the contested measure (para. 83). 85 This was clear already in Biehl, in which the Court did not allow Luxembourg to refuse the non-permanent resident a refund of overpaid tax, on the grounds that it had to offset the possible income tax progression advantage for the migrant worker. In Cadbury Schweppes, the Court itself referred to ‘settled case law that any advantage result- ing from the low taxation to which a subsidiary established in a Member State other than the one in which the parent company was incorporated is subject cannot by itself authorise that Member State to offset that advantage by less favourable tax treatment’ (see also Cadbury Schweppes, para. 49, Commission v. France, para. 21, Eurowings, para. 44, Skandia, para. 52). 102
  11. 11. Swiss Court Denies European Frontier Workers Their ‘Schumacker’ Rights 3.3. Administrative Convenience Cannot, control). From the point of view of a national tax admin- and Ex Post Procedural Remedies Can istration, there may be good reasons not to grant the same Only Exceptionally, Justify a Different tax treatment automatically to cross-border situations and Treatment to domestic situations, because tax collection and enforce- ment mechanisms, in principle, stop at the border, and When discussing the question of equality of treatment information cannot be as easily obtained in cross-border under national constitutional law, the Swiss Jurisdiction, situations (mutual assistance clauses are notoriously cum- firstly, considers that the source-based taxation of non- bersome to use in practice). In international tax law, the residents is necessary to ensure the collection of taxes from argument that administrative difficulties necessitate a dif- non-residents and, secondly, that the use of flat rates is ferent substantive treatment of domestic and cross-border justified for practical reasons and that a certain schemati- situations is therefore perfectly understandable. How- zation may be necessary.86 ever, the Court, though explicitly recognizing this over- From a European law point of view, however, justifica- riding public interest in Cassis de Dijon, never actually tions based on the effectiveness of tax controls and the allowed the justification in its income tax case law (see, collection of information are usually rejected by the Court for instance, Futura,89 Baxter,90 Vestergaard,91 and also XY, in view of the existing mutual assistance instruments, and paragraphs 60–63, Lankhorst, Commission v. France II, para- because of the possibility for the taxing state to require graph 29, Manninen, paragraph 54, Fournier). information from the taxpayers.87 Such administrative In its income tax case law, the Court has recognized reasons for non-compliance would, in the framework of an that Member States are entitled to obtain any information economic integration process between several states and based that will enable the correct application of their tax laws,92 on the rule of law, be unconvincing, because Member States but it has stopped short of accepting discriminatory tax could on the basis of that argument unilaterally endanger the measures for that reason, essentially on the grounds that uniform application of Community law. Unsurprisingly, the all necessary information could be obtained under the Court has consistently rejected the ‘administrative difficul- 1977 Mutual Assistance Directive, or directly from the ties’ argument, in its general case law.88 taxpayer (see, for instance, Commission v. France, paragraph In a variation to the theme, Member States have argued 29,93 and also Bachmann, Schumacker, Manninen). It can in the income tax case law that they had to maintain cer- therefore be safely assumed that a national court cannot tain EC-incompatible restrictions, not because it was not allow a discriminatory tax measure on the grounds that administratively feasible to comply with Community law, the application of such a measure would be justified for but because those restrictions were necessary to maintain administrative reasons or in order to maintain the effec- the effectiveness of fiscal supervision or controls (lack of tiveness of fiscal supervision and control. information) or that they imposed a restriction on cross- In any case, the ECJ has been very clear in reject- border activity for administrative convenience (such as cost ing administrative convenience as a justified reason to Notes 86 Decision of the Swiss Jurisdiction dated 31 Aug. 2009, para. 5 alinea 5. See also Agner et al., supra n. 44, 350, 351. 87 Case C-204/90, Bachman v. Belgique [1992] ECR I-249, 18–20; Case C-1/93, Halliburton [1994] ECR I-1137, 21 and 22; Case C-279/93, Schumacker [1995] ECR 1-225, 43–45; Case C-250/95, Futura [1997] ECR I-5063, 41; Case C-254/97, Baxter [1999] ECR 18–20; Case C-55/98, Vestergaard [1999] ECR I-7641, 25. 88 Trendsetting in this respect is the routine rejection of the Italian defence that parliamentary procedures caused delays in implementation of Community directives. In Halliburton, which concerned an exemption from real estate transfer tax in the case of intra-group reorganizations, the Court rejected the Netherlands argument that it could only grant the exemption if the group members were Netherlands companies, because it could not verify whether corporate structures from other Member States were similar to the Netherlands companies (paras 21 and 22 with reference to the Mutual Assistance Directive). 89 Though the Court recognized that Luxembourg could not be forced to rely on accounts drawn up according to another Member State’s rules (paras 32–35), it held that Luxembourg could not refuse the carry-forward if the taxpayer demonstrated, by other means, clearly and precisely the amount of losses concerned. 90 France argued that the deductibility of research costs was limited to those incurred in France, because that would allow France to control effectively the amounts really spent on research. The Court again recognized the possibility of invoking effectiveness of fiscal controls as a justification but considered the complete exclusion from tax deductibility of research costs incurred abroad to be disproportional, as it could not be excluded that the taxpayer was capable of submitting evidence that would allow the tax authorities to control effectively research costs really incurred (paras 18–20). 91 The Court recognized that Member States may, in the interest of the effectiveness of fiscal supervision and control, apply measures that allow the amount of deductible costs for professional training to be ascertained clearly and precisely. It held, however, that this could not justify a Member State in making that deduction subject to different conditions according to whether the training courses take place in one or the other Member State. In this respect, the Court referred to both the 1977 Mutual Assistance Directive and its previous stand that there is nothing to prevent the tax authorities concerned from requiring the taxpayer to supply all necessary proof. The Court, moreover, rejected the Danish argument that the exchange of information provided for by the Mutual Assistance Directive was not sufficient to make a correct assessment in relation to the duration of the stay abroad for training purposes, with the argument that the directive allows Member States to request any information required for the correct applica- tion of its tax laws, without preventing the Member States from assessing themselves whether the conditions for obtaining the deduction are fulfilled (paras 25–28). 92 The Court, for instance, notes in para. 31 of its Futura decision: ‘The Court has repeatedly held that the effectiveness of fiscal supervision constitutes an overriding require- ment of general interest capable of justifying a restriction on the exercise of fundamental freedoms guaranteed by the Treaty (see, for example, the judgment in Case 120/78, REWE-Zentral (“Cassis de Dijon”) [1979] ECR 649, para. 8). A Member State may therefore apply measures which enable the amount of both the income taxable in that State and of the losses which can be carried forward there to be ascertained clearly and precisely.’ See also Vestergaard, para. 23 and Rewe Zentralfinanz, para. 55. 93 France argued that the extension of the imputation credit to all non-residents would be impossible, because of the resulting problems for the application of the ‘précompte’. The Court implicitly rejected any possible justification, including the one concerning the administrative difficulties caused for the application of the French ‘précompte’. 103
  12. 12. Intertax discriminate between resident and non-resident taxpay- apply, that discriminatory or restrictive tax measures can- ers. In fact, no exception to Community law (and certainly not be justified on the grounds that the correct applica- not to the basic freedoms) may be justified by practical tion of Community law would result in a loss of revenue considerations or to facilitate the calculation and collec- for, or an erosion of the tax base of, the Member State tion of taxes.94 concerned. Finally, the ECJ also decided that the existence of procedural remedies available to non-residents does not justify such a difference of treatment either, except when 4. CONCLUSIONS such remedies ensure a certain and entire restoration of equality,95 which does not seem to be the case with the With all due respect to the Swiss tax administration and Swiss source tax system and its a posteriori corrections and the Swiss Jurisdiction dealing with the Boitelle case, it additional deductions. seems to us that the Geneva tax system did discriminate against the Boitelle spouses contrary to the provisions of the Bilateral EU-Swiss Treaty as interpreted in line with 3.4. Possible Budgetary Consequences the case law of the ECJ. Cannot Justify Discrimination The reason is that: A justification that has frequently been argued by the – as non-resident taxpayers they were taxed differently Member States in the income tax cases before the ECJ is as their resident colleagues, essentially because the that the application of Community law would result in a Geneva tax system allowed residents deductions of loss of tax revenue or an erosion of the tax base. It seems expenses actually incurred whereas it allowed non- to us that this may also have been one of the less explicit residents only flat-rate deductions (different tax treat- concerns of the Swiss Jurisdiction judging the Boitelle ment by one single tax system); case. The truth, however, is that the European Court has never been too impressed by the possible budgetary con- – this different tax treatment was applied in spite of the sequences for Member States of the correct application of fact that they were in a similar situation as their resi- Community law,96 and this is understandable because such dent colleagues because they earned all or almost all a derogation would constitute a tremendous potential gap (95%) of their worldwide income in Geneva (of similar in the internal market, if only because any amendment situation); of a national regulatory system (in particular in the tax – the different treatment was based on the arbitrary area) necessarily entails costs for the public and private criterion of residence, which, though not leading to sectors. overt discrimination on grounds of nationality, leads to Likewise, in its income tax case law the Court has been covert discrimination, because the use of residence as a rather indifferent to budgetary considerations because loss of criterion of distinction is likely to work in particular revenue was neither mentioned as a justification in the to the disadvantage of cross-border situations as com- Treaty nor recognized as an overriding public interest rea- pared to similar domestic situations (residence-based son (ICI, paragraph 28, St Gobain, paragraphs 49 and 50, differentiation); Verkooyen, paragraphs 52 and 59, Metallgesellschaft Hoechst, – the different tax treatment of non-residents resulted paragraph 59, Danner, paragraph 56, Skandia, paragraph in a disadvantage for the cross-border situation in the 53, X and Y, paragraph 50, De Groot, paragraph 103, De form of a higher annual tax burden (disadvantage for the Lasteyrie, paragraph 60, Lenz, paragraph 40, Manninen, cross-border situation, no reverse discrimination); and paragraph 49, Fokusbank, paragraph 33 and Cadbury Schweppes, paragraph 49). – finally, the different tax treatment could not be justified Exceptionally, however, the Court may be willing to on the ground that the disadvantage was de minimis, that accommodate the budgetary concerns of Member States the application of the source-based tax to non-residents by limiting the temporal scope of its decision to the was administratively convenient, that some of the dis- future (see the two AG Opinions in the Meilicke case). advantages were ex posteriori corrected or that there The unequivocal conclusion can thus be that it is settled would be considerable budgetary costs in applying the case law of the Court, which national courts may readily Geneva tax laws in a non-discriminatory way. Notes 94 Case C-87/99, Zurstrassen [2000] ECR, 24 and 25. 95 Case C-151/94, Commission v. Luxembourg [1995] ECR I-3685. 96 In the area of indirect tax, for instance, the Court declared a Danish labour market contribution incompatible with Art. 33 of the Sixth VAT Directive, thus obliging the Danish government to refund approximately DKK 15 billion to its taxpayers. Likewise, recent decisions of the Court in the area of social security have had significant budgetary implications for the German government. 104