After a success for the live music industry in the case of the 2003 Arnoud Gerriste in Germany there are now three new tax cases pending before the European Court of Justice (ECJ) regarding the taxation of non-resident artists. The industry has long argued that German withholding tax laws are unfair to non-resident touring and performing artists, particularly where these artists are EC citizens. In all three cases, the German Bundesfinanzhof (Federal Fiscal Court) has raised preliminary questions to the ECJ as to whether German taxation of non-resident artists is in accordance with the EC Treaty. The Geriste case held that Article 49 and 50 of the EC Treaty (previously articles 59 and 60) precluded a national provision which, as a general rule, taxed non-residents on gross income without allowing for the deduction of business expenses whilst allowing residents to deduct such expenses before a tax on net income. The case also held that a fixed rate of 25% was allowable on non-residents provided this would not be a different taxation rate to residents taxed on a progressive scale but on net income. However the decision has only been partially applied by Germany in its legislation while other countries, such as France, Spain, Italy, Greece, Portugal, and the Czech Republic have simply ignored the decision of the ECJ.
In the case of FKP Scorpio Konzertproduktion a German promoter, Scorpio, 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 Bundesfinanzhof raised 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 the Gerritse case and the German tax authorities have already allowed organisers of performances to postpone the payment of the withholding tax for non-resident artists.
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.
The final case is Centro di Musicologia Walter Stauffer. This case concerns an Italian non-commercial foundation which provides education for classical music students. The institution is exempt from the Italian l’imposta sul reddito delle persone giuridiche (Corporation Tax) and comparable German institutions would be exempt from the GermanKörperschaftssteuergesetz (Corporation Tax Law). The Centro di Musicologia Walter Stauffer had rental income in Germany which was taxed under a of the German KStG but could not make use of the exemption for cultural institutions, because it was not based in Germany. The German Bundesfinanzhof has raised the question to the ECJ, whether this exclusion for non-resident institutions is correct under the EC Treaty as an Italian institution would suffer tax on income whereas as comparable German institution would not.
COMMENT :In some ways the very nature of a withholding tax on entertainers and sports people is quite unusual but almost all countries worldwide apply these taxes. Within the European Community there is a very diverse range of taxes schemes, each administered by the fiscal authority in that country. Despite the Gerriste case there is no harmonisation in place within the EC. All three of the new cases are food for thought and the live music industry must be hopeful that a favourable decision from the ECJ will lead to major revisions in national legislation in Germany and elsewhere, at least in as much as taxes are applied to artists and sportsmen/women from EC member states. The details of these cases were kindly provided by Dick Molenaar of All Artists Tax Advisors in the Netherlands and Dr Harald Grams of Grams und Partners in Germany. Both Mr Molenaar and Dr Grams have been advising the International Live Music Conference (ILMC) Tax Group for a number of years as the international touring industry has tried to deal with prohibitive withholding tax laws on foreign artists, particularly in Germany. Germany taxes touring artists at a current rate of 20% of gross income (25% until January 2003) and some artists reduce touring activities in Germany because of the tax. The UK has a fairer system where foreign artists are allowed to deduct tour expenses before a calculation is made to determine tax. In fact the ILMC acknowledges that “the UK has the fairest system in the main European touring world s because it’s the only country that has a dedicated, commercially tuned in tax unit called the Foreign Entertainers Unit”. The system allows foreign artists and sportsmen to negotiate and agree their tax liability in advance based on the basis of budgeted figures. An act can also file an income tax return if the results of the tour are not as expected. Holland also has a model system very similar to the UK with withholding tax 2% lower than the UK’s rate of 22% at 20% of net income. But it is the difference between taxing on gross versus taxing on net which is the main bone of contention – in a business where expenses can account for upwards of 75% of performing fees it can make a massive difference in the final financial reward (or indeed loss) for the artist! (Taxing Times, ILMC Globetrotters Guide 2004).
The most interesting case above seems to be the Scorpio case. Here the German courts are asking the ECJ to answer the following questions: (1) Is it right that non-German residents should be liable to withholding tax whereas German residents are 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? The Gerriste case surely goes some way in answering this and the first question (3) can an exemption provided for in a [international] tax treaty be used without the explicit approval of the domestic tax authority? This is a fascinating point, particularly as the German Bundesamt für Finanzen has virtually ignored the provisions of the EC treaty and the simple concept of a ‘common market’, unfairly penalising citizens from other member states who perform in Germany; But does that mean Scorpio were right not to withhold tax without permission from the tax authority? If the Bundesamt fur Finanzen are wrong and in light of clear provisions in the EC Treaty, would Scorpio have been acting wrongly or even illegally if they had withheld tax? (4) do the answers to these questions also apply to artists and sportsmen living outside the EU? Again, an interesting question – but surely the ECJ’s decision will primarily be to look at the position of artists and sportsmen and women from EC member states when being taxed on earnings in Germany.
– FKP Scorpio Konzertproduktion C-290/04
– Centro Equestro de Leziria Grande Lda. C-345/04
– Centro di Musicologia Walter Stauffer C-386/04
– Arnoud Gerritse (reference by the Finanzgericht Berlin) decision of the ECJ (Fifth Chamber)12 June 2003, C-234/01