Centro Equestro de Leziria Grande Lda ECJ C345-04

November 2006

Live Event Industry

The case of Centro Equestro de Leziria Grande Lda concerns German Einkommensteuergesetz (Income Tax Law) and the very strict application of tax refunds for non-resident artists. The German tax authorities have created theVereinfachtes Erstattungsverfahren (Simplified Tax Refund Procedure), but only expenses that are directly connected with the performances are taken into account and these expenses need to be more than 50% of the earnings. Applications are only considered when the original invoices are attached. The procedures are somewhat complex and not widely used. The Portugese company Centro Equestro de Leziria Grande wanted to make use of the procedure because it had paid 29% withholding tax on the fees for its 11 horse shows in 1996 in Germany and had calculated post-tour that the total expenses (both direct and indirect) had been higher than the gross earnings. One of the horses had died during the German tour, giving an additional depreciation for the book value of the animal. The German Bundesamt für Finanzen (Tax Office) rejected the application for a full tax refund because the indirect expenses were not accepted. The Bundesfinanzhof raised the question to the ECJ, whether this strict procedure is correct under the EC Treaty, because German resident artists and sportsmen are taxed on their net income, after the dedcution of all their business expenses.

Advocate General Leger opinion was that for a non-resident company, only income and expenses associated with the activity in the State may be considered (those expenses being direct or with a casual economic connection with the activity). The AG also stated that where resident and non-resident companies provided the same services then both should be entitled to the same considerations – thus is all cases proceeds may be reduced by the expenses directly related to the activities in the state (Gerritse 234-01 applied). However the AG pointed out that only expenses directly associated with activities in the State and necessary to the activities may be deducted – and if the activities take place in a number of member states then only a proportionate amount of expenses may be deducted. The AG thus decided that it was not discriminatory to require an economic connection between expenses claimed and the taxable activity but that it was discriminatory if non-residents had to provide a direct connection (whereas residents did not) and in breach of the freedom to provide services. The AG also held that it was discriminatory to insist that expenses can only be deducted by non-residents to when they exceed 50% of the proceeds where there is no such limitation for residents (and resident companies). The latter policy had, in all events, been scrapped by the Bundesamt für Finanzen.

For a link to the case summary seehttp://www.pwc.com/extweb/pwcpublications.nsf/docid/e58ddfa0b61b8ec1802570a0003e3bdf

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