TAXATION
Artists, Live Music Industry

In May 2006 Advocate General Leger expressed his opinion in the case of FKP Scorpio Konzertproduktion. Scorpio, a German concert promoter, contracted with a Dutch tour promoter in 1993 for performances by American and European artists in Germany. Scorpio did not pay any German withholding tax and the tax authorities raised a massive tax assessments because of breach of of the German Einkommensteuergesetz (Income Tax Law). The Bundesfinanzhofraised four questions to the ECJ: (1) is it correct that non-residents fall under a withholding tax, and residents not; (2) does the withholding tax at source need to be reduced because of the expenses of the non-residents, because residents only pay tax on their net income after the deduction of expenses;(3) can an exemption provided for in a tax treaty be used without the explicit approval of the domestic tax authority; (4) do the answers to these questions also apply to artists and sportsmen living outside the EU? The Scorpio case attacks the artist tax system more explicitly than theGerritse case and the German tax authorities have already allowed organisers of performances to postpone the payment of the withholding tax for non-resident artists

AG Leger opined that neither the procedure of deducting tax at source nor the debtor’s liability for tax was an infringement of the right to provide service. The implicit inequality between residents and non-residents was justifiable on the grounds of efficiency of the tax imposition itself. However (and Schumacker [1995] ECR I-‘225 and Gerritse 234-01 applied) a refusal to allow the deduction of business expenses was an infringement. However, provided that a full mechanism for the deduction of business expenses is provided (eg with a refund procedure) then the withholding procedure itself is not an infringement of the freedom to provide services. Turning to the third point raised, the AG opined that whilst the requirement to provide a tax exemption treaty was a restriction on non-residents in the provision of services, this was justifiable on the ground of the correct and efficient application of whithholding provisions. Finally AG Leger opined that the nationally of an EU resident provider was not relevant to the rights of the recipient. In summary the AG concluded that, in 1993, the withholding tax obligations and procedures themselves were not an infringement of the freedom to provide services, provided the non-resident taxpayer is provided with mechanisms to deduct business expenditure and enjoy tax treaty provisions in the end. Thus it was the AG’s opinion that the disadvantage of withholding tax is allowable on the grounds of taxation efficiency and the liability of taxation of the recipient was accepted except where this was a liability where an exemption was provided for by way of tax treaty.

However the European Court of First Instance has now held that the taxation of non-resident artistes on gross income and allowing a refunding afterwards was in breach of the EC Treaty provisions. Germany must allow deduction of expenses at the time of performance. The Judgment by the Full Grand Chamber composed of V. Skouris, President, P. Jann, C.W.A. Timmermans, A. Rosas and J. Makarczyk, Presidents of Chambers, J.-‘P. Puissochet, R. Schintgen, P. Kūris, U. Lõhmus, E. Levits (Rapporteur) and A. Ó Caoimh, Judges gave judgment on the 3 rd October 2006.

The Court held (emphasis added) that Articles 59 and 60 of the EC Treaty which prohibit obstacles which promote the restriction in the freedom to provide services must be interpreted as

not precluding :

1.         national legislation under which a procedure of retention of tax at source is applied to payments made to providers of services not resident in the Member State in which the services are provided, whereas payments made to providers of services resident in that Member State are not subject to such a retention;

– national legislation under which liability is incurred by a recipient of services who has failed to make the retention at source that he was required to make.

2.       Articles 59 and 60 of the EEC Treaty must be interpreted as:

– precluding national legislation which does not allow a recipient of services who is the debtor of the payment made to a non-resident provider of services to deduct, when making the retention of tax at source, the business expenses which that service provider has reported to him and which are directly linked to his activity in the Member State in which the services are provided, whereas a provider of services residing in that State is taxable only on his net income, that is, the income received after deduction of business expense;
– not precluding national legislation under which only the business expenses directly linked to the activity that generated the taxable income in the Member State in which the service is provided, which the service provider established in another Member State has reported to the payment debtor, are deducted in the procedure for retention at source, and expenses that are not directly linked to that economic activity can be taken into account if appropriate in a subsequent refund procedure;
– not precluding a rule that the tax exemption granted under the Convention of 16 June 1959 between the Federal Republic of Germany and the Kingdom of the Netherlands for the avoidance of double taxation in the area of income, capital, and various other taxes and for regulating other tax matters, to a non-resident provider of services who has carried on activity in Germany can be taken into account by the payment debtor in the procedure for retention of tax at source, or in a subsequent procedure for exemption or refund, or in proceedings for liability brought against him,only if a certificate of exemption stating that the conditions laid down to that end by that convention are satisfied is issued by the competent tax authority.

3.       Article 59 of the EEC Treatymust be interpretedas not being applicable in favour of a provider of services who is a national of a non-member country.

ECJ Judgment http://www.bailii.org/eu/cases/EUECJ/2006/C29004.html

AG Legers opinionhttp://www.pwc.com/Extweb/pwcpublications.nsf/docid/E58DDFA0B61B8EC1802570A0003E3BDF/$file/PwC_2006-013-Newsalert17May2006.pdf