(February 24, 2015) 

On February 24, 2015 the European Court of Justice (CJEU) ruled in Case C-559/13; Finanzamt Dortmund-Unna versus Josef Grünewald (ECLI:EU:C:2015:109).

Does Article 63 of the Treaty on the Functioning of the European Union (TFEU) preclude legislation of a Member State under which private support payments by non-resident taxable persons which are connected with a transfer of revenue-producing domestic assets in the course of an “anticipated succession” are not tax deductible, whereas such payments are deductible in the case of full liability to taxation, but the deduction results in a corresponding tax liability for a (fully taxable) recipient of the payments?

The dispute in the main proceedings and the questions referred for a preliminary ruling

·       By a transfer agreement of 17 January 1989, in the context of a gift by way of anticipated succession, Mr Grünewald acquired from his father a 50% share in a civil-law partnership (Gesellschaft bürgerlichen Rechts) active in the fruit and vegetable sector and located in Germany, with his brother receiving the other half. In consideration for those gifts, the recipients were to pay to their father — or, as appropriate, to their parents — the annuities defined in section 2 of that agreement.

·       Mr Grünewald, who lives in a Member State other than the Federal Republic of Germany and who is neither domiciled nor habitually resident in Germany, earned income between 1999 and 2002 from a business activity on the basis of that shareholding. He also earned other income in Germany.

·       The Finanzamt took the view that Mr Grünewald was partially liable for tax, and on the basis of Paragraph 50 of the EStG, it refused to allow him to deduct from his taxable income in Germany the annuities that he had paid to his parents who were resident in Germany.

·       Mr Grünewald’s appeal against that decision was upheld by judgment of the Finanzgericht Münster (Münster Finance Court).

·       The Finanzamt applied to the Bundesfinanzhof (Federal Finance Court; or ‘the referring court’) to have that judgment set aside and for the action to be dismissed.

·       The referring court believes that the Finanzamt was right to refuse, in accordance with the applicable national law, deduction of the support payments at issue when determining the basis of assessment for income tax in the context of Mr Grünewald’s limited tax liability. According to the referring court, Mr Grünewald could deduct business expenses or occupational expenses economically linked to income of German origin, but not special expenses such as the support payments.

·       However, the referring court considers that there is still doubt as to the compatibility of that tax regime with EU law. It is true that, in its judgment in Schröder (C‑450/09, EU:C:2011:198), the Court held that there is a restriction of free movement of capital under Article 63 TFEU if support payments by a non-resident taxpayer connected with rental income of domestic origin arising from immovable property are not deductible, while corresponding payments undertaken by a resident person with full tax liability are deductible. However, in the view of the referring court, since the Court of Justice was not asked a question on that matter, it did not make a ruling in its judgment in Schröder (EU:C:2011:198) on the specific issue as to whether it is necessary to take into account the fact that the German tax regime concerned was based on the ‘principle of correspondence’ (‘Korrespondenzprinzip’), according to which, where the person obliged to make the payment has a right to have it deducted, the recipient of the payment must be liable to tax.

·       In those circumstances, the Bundesfinanzhof decided to stay proceedings and refer the following question to the Court:

‘Does Article 63 of the Treaty on the Functioning of the European Union (TFEU) preclude legislation of a Member State under which private support payments by non-resident taxable persons which are connected with a transfer of revenue-producing domestic assets in the course of an “anticipated succession” are not tax deductible, whereas such payments are deductible in the case of full liability to taxation, but the deduction results in a corresponding tax liability for a (fully taxable) recipient of the payments?’

The CJEU ruled as follows:

Article 63 TFEU must be interpreted as precluding legislation of a Member State which does not permit a non-resident taxpayer who has received in that Member State commercial income generated by shares in a business which were transferred to him by a relative in the course of a gift by way of anticipated succession to deduct from that income the annuities which he has paid to that relative in consideration for that gift, whereas that legislation allows a resident taxpayer to make such a deduction.

For further information click here to be forwarded to the text of the ruling as published on the website of the Court of Justice, which will open in a new window.

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