INTERNATIONAL TAX PLAZA - The AG in Case C-15/22: “No different treatment allowed between a salary earned in relation to a project financed by national budgetary resources and a salary earned in relation to similar projects funded by the EDF”

Details: Published: 10 February 2023

On February 9, 2023 on the website of the Court of Justice of the European Union (CJEU) the judgment of the CJEU in Case C-15/22, RF versus Finanzamt G, ECLI:EU:C:2023:92, was published.

For the purposes of personal income tax, can Member States treat the salary of persons working on development cooperation projects that are carried out in third countries and financed by the European Development Fund (‘the EDF’) differently from a salary earned through work on similar projects that are, by contrast, funded by national budgetary resources?

The present case concerns a German national administrative practice (‘the national tax rule at issue’). It grants an exemption from income tax for salaries paid for working on foreign development aid projects that are funded to a level of at least 75% by a Federal Ministry responsible for development cooperation or by a state-owned private development assistance company (together, ‘national budgetary resources’). However, the salary of an employee working on an aid project that is funded by the EDF does not benefit from such an exemption.

The referring court asks the Court of Justice, in essence, whether the principle of sincere cooperation laid down in Article 4(3) TEU, read in conjunction with Articles 208 and 210 TFEU concerning the field of development cooperation, should be interpreted as precluding Member States from taxing salaries earned in relation to aid projects financed by the EDF, where such an exemption is granted for a salary earned in relation to a project financed by national budgetary resources. In addition, the difference in treatment resulting from that tax rule also raises the question whether the Treaty provisions on the fundamental freedoms are to be applied to the case at hand.

It follows that the Court is faced with the delicate task of determining whether the fundamental freedoms and/or the principle of sincere cooperation laid out in Article 4(3) TEU apply in the area of development cooperation and, if so, how. This is by no means a simple question since the European Union and Member States may exercise parallel competences in that area. The present case also touches upon a broader global debate that relates to the tax treatment of development assistance and its effectiveness.

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

22. In the period from 12 April 2009 to 31 October 2012, RF worked as a project manager for a development aid company established in Germany. She worked on the Micro-Projects Programme (MPP) (‘the programme at issue’) in Africa on a fixed-term contract of employment. The programme was financed, in whole or in part, by the resources of the European Union and its Member States, namely under the Seventh and Ninth EDFs.

23. During that period, RF’s place of residence and centre of interests were in Germany, where she was therefore subject to unlimited tax liability, while her place of employment was in Africa.

24. Since the development aid company considered that RF’s salary was exempt under the Notice from the Ministry of Finance, it did not withhold tax at source on that salary for the 2011 and 2012 financial years and did not pay that tax to the competent tax authorities. According to the file submitted to the Court, that company was initially issued with an exemption certificate, which was made conditional on compliance with the Notice from the Ministry of Finance. RF’s salary was also not taxed in Africa at the place of employment.

25. The development aid company was subjected to a payroll tax audit by the competent tax authorities. Those authorities stated that the programme had not been financed by the Federal Ministry responsible for development cooperation or by the GIZ, but by the EDF. Therefore, by tax notices of 13 February 2014, those authorities decided that RF’s salary should be subject to income tax in respect of 2011 and 2012.

26. RF lodged a complaint against that decision before those authorities, which rejected it. She then brought an action before the Finanzgericht Köln (Finance Court, Cologne, Germany), which was unsuccessful. It is against that judgment that RF directs her appeal on a point of law to the Bundesfinanzhof (Federal Finance Court, Germany) (‘the referring court’).

27. In the order for reference, the referring court states that, on the basis of national law, the appeal is unfounded, since RF’s salary was not directly financed by any national budgetary resources and her activity abroad was therefore not linked to German public development aid. It considers that the distinction made by the administration is also not contrary to the principle of equal treatment since the tax benefit at issue is motivated by support for certain sectors of the German economy and, therefore, constitutionally justified.

28. Nevertheless, the referring court harbours doubts as to the compatibility of the legislation at issue with EU law. It points out that, unlike in the Petersen case, the tax rule at issue does not constitute a restriction on free movement, and, in particular, on the free movement of workers, since no worker or employer is discriminated against on the ground that he or she comes from another Member State.

29. According to the referring court, the tax rule at issue could be contrary to the principle of sincere cooperation enshrined in Article 4(3) TEU. RF claims, in that regard, that it follows from that principle and from the obligation of the Member States to coordinate their development policies that there is a duty to include projects financed from EU resources within the scope of the tax exemption at issue. However, the referring court is of the opinion that, in the light of the Member States’ own competence in the field of development aid, it is not certain whether they may be prohibited from adopting development aid policy measures designed to promote their foreign trade. Such a duty does not derive either from the Cotonou Agreement.

30. In those circumstances, the referring court decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling:

‘Are Article 4(3) of the [TEU] and Article 208 [TFEU], in conjunction with Article 210 [TFEU], to be interpreted as precluding a national administrative practice according to which tax is not waived in cases where a development cooperation project is financed by the [EDF], while salary that a worker earns from a current employment relationship in respect of an activity associated with German official development assistance within the framework of technical or financial cooperation that is financed to [a level of] at least 75% by a Federal Ministry responsible for development cooperation or else by a state-owned private development assistance association is, in certain conditions, exempted from taxation?’

31. Written observations were submitted by RF, the German Government and the European Commission. Those parties also presented oral argument at the hearing on 23 November 2022.

Conclusion

Advocate General Medina proposes that the Court reply as follows to the question referred for a preliminary ruling by the Bundesfinanzhof (Federal Finance Court, Germany):

(1) Article 63 TFEU must be interpreted as precluding the application of a tax rule of a Member State which provides for an exemption from income tax for the salary received by an employee assigned to development aid activities only where such an activity is financed to the level of at least 75% from German budgetary resources (either the Federal Ministry responsible for development aid or the Gesellschaft für internationale Zusammenarbeit), but which has the effect of depriving an employee of the benefit of such an exemption where he or she is assigned to an activity of that nature financed to the same extent by one of the European Development Funds (EDFs).

(2) In the alternative:

Article 4(4), Article 208(1) and Article 210(1) TFEU, read in conjunction with the principle of sincere cooperation enshrined in Article 4(3) TEU, must be interpreted as precluding the application of a tax rule of a Member State which deprives an employee of the benefit of a tax exemption on the grounds that that employee is assigned to development aid activities financed by the EDFs, since such taxation of the funding granted by the EDF by Member States has the effect of reducing the amount of financial support that is received by the recipients of the aid projects in question in the third countries and forms financial obstacles to those projects.

Legal context

A. International law

1. The Lomé IV Convention

5. The Fourth ACP-EEC Convention signed at Lomé on 15 December 1989 was concluded between the African, Caribbean and Pacific Group of States (‘the ACP States’) and the European Economic Community (EEC) (‘the Lomé IV Convention’). That convention was approved by a Decision of the Council and the Commission of 25 February 1991.

6. Article 2 of the Lomé IV Convention states that ACP-EEC cooperation, ‘underpinned by a legally binding system and the existence of joint institutions’, is to be exercised on the basis of the principles of equality between partners, respect for their sovereignty, mutual interest and interdependence, and the right of each State to determine its own political, social, cultural and economic policy options.

7. Article 9 of that convention sets out:

‘In order to step up the effectiveness of the instruments of this Convention, the Contracting Parties shall adopt, in the framework of their respective responsibilities, guidelines, priorities and measures conducive to attaining the objectives set out in this Convention …’

2. The Cotonou Agreement

8. The Partnership Agreement between the [ACP States], of the one part, and the European Community and its Member States, of the other part, signed in Cotonou on 23 June 2000 (‘the Cotonou Agreement’) by Council Decision 2003/159/EC of 19 December 2002. It came into force on 1 April 2003 and replaced the existing Lomé Conventions.

9. Article 2 of the Cotonou Agreement sets out the fundamental principles of ACP-EC cooperation, which is ‘underpinned by a legally binding system and the existence of joint institutions’.

10. Article 3 of the Cotonou Agreement states that ‘the Parties shall … take all appropriate measures, whether general or particular, to ensure the fulfilment of the obligations arising from this Agreement and to facilitate the attainment of the objectives thereof. …’

11. Article 70(a) of the Cotonou Agreement states that cooperation is to support ‘micro projects at local level which have an economic and social impact on the life of the people, meet a demonstrated and observed priority need, and shall be undertaken at the initiative and with the active participation of the local community which shall benefit therefrom’.

12. Article 71 of that agreement provides:

‘1. Microprojects and decentralised cooperation operations may be supported from the financial resources of the Agreement. …

2. Contributions for the financing of micro-projects and decentralised cooperation shall be made by the Fund, in which case the contribution shall not normally exceed three-quarters of the total cost of each project and may not exceed the limit set in the indicative programme. The remaining balance shall be provided:

(a) by the local community concerned in case of micro-projects (either in kind or in the form of services or cash and adapted to its capacity to contribute);

…

(c) exceptionally by the ACP State concerned, either in the form of a financial contribution or through the use of public equipment or the supply of services.

…’

B. European Union law

13. The EDFs were set up to finance cooperation with the ACP States and overseas countries and territories, initially by means of an annex to the EEC Treaty and later by internal agreements between the Member States meeting within the Council. An EDF finances any project or programme which contributes to the economic, social or cultural development of the countries in question. Each EDF is concluded for a period of several years, often five years, corresponding to the period of validity of the various agreements and conventions through which the European Union and its Member States established the special partnership with the ACP States. Historically, the EDFs did not come under the general budget of the European Union. Therefore, specific financial regulations were adopted to implement the obligations stemming from the international agreements and to set up, in particular, the financing of the EDF.

1. The Seventh EDF

14. The representatives of the Governments of the Member States of the European Economic Community, meeting within the Council, on 16 July 1990 adopted Internal Agreement 91/401/EEC on the financing and administration of Community aid under the [Lomé IV Convention]. By that agreement, the Member States established the Seventh EDF. The provisions implementing that internal agreement are the subject of Financial Regulation 91/491/EEC of 29 July 1991 applicable to development finance cooperation under the [Lomé IV Convention].

15. The Authorising Officer decided to bring an end to the Seventh EDF on 31 August 2008. In the absence of a legal basis for the closure of EDFs, the remaining balances and the related contracts and decisions were transferred to the Ninth EDF, according to the provisions of Part 3 of the Financial Regulation applicable to the Ninth EDF.

2. The Ninth EDF

16. After the Cotonou Agreement, the Internal Agreement 2000/770/EC between Representatives of the Governments of the Member States, meeting within the Council, on the Financing and Administration of Community Aid under the Financial Protocol to [the Cotonou Agreement] and the allocation of financial assistance for the Overseas Countries and Territories to which Part Four of the EC Treaty was adopted. The provisions implementing that internal agreement are the subject of the Financial Regulation of 27 March 2003.

C. German Law

17. Paragraph 1(1), first sentence, of the Einkommensteuergesetz (Law on income tax; ‘the EStG’), in the version applicable to the facts in the main proceedings, provides that natural persons domiciled or who have their place of permanent residence or usual abode in Germany are subject in that country to tax on the entirety of their income.

18. Under Paragraph 2(1) of the EStG, income from paid employment which the taxable person receives while subject to unlimited tax liability is subject to income tax.

19. Paragraph 34(c) of the EStG provides:

‘(1) Where persons subject to unlimited tax liability pay tax on income of foreign origin in the State of origin of that income which is equivalent to German income tax, the foreign tax which has been calculated, paid and reduced by the amount of a right of reduction shall be offset against the amount of German income tax which they are liable to pay in respect of income received in that State;…

…

(5) The upper tax authorities of the Länder or the tax authorities designated by them may, with the agreement of the Federal Ministry of Finance, grant a partial or full rebate of the income tax on foreign income, or fix a lump sum where this is deemed appropriate for economic reasons or if the application of point 1 of this paragraph proves particularly difficult.’

20. On 31 October 1983, the Bundesministerium der Finanzen (Federal Ministry of Finance, Germany) published a Notice concerning the tax treatment of employee income for overseas work (‘the Notice from the Ministry of Finance’), which is addressed to the upper tax authorities of the Länder. It provides, in Section I(4), that, inter alia, activities carried out abroad for a national contractor in connection with German official development assistance within the framework of technical or financial cooperation are to be exempt from income tax.

21. According to the order for reference, the German tax authorities interpreted the phrase ‘German official development assistance’ as referring only to development assistance measures that are funded directly from the German budget, either by the Federal Ministry responsible for development cooperation or by the GIZ.

From the assessment of the Advocate General

A. Preliminary remarks

32. First, the German Government, without formally raising an objection to the question referred, nevertheless expresses doubts as to its admissibility. In its written observations and at the hearing it claimed, in essence, that the exemption provided for by the national tax rule at issue necessarily requires that the project be financed to a level of at least 75% by national budgetary resources. In other words, in order for the tax rule to be applicable, the salary that an employee receives must result from an activity that receives at least 75% of its financing from those resources. However, this does not mean that such an activity is entirely exempt from tax, since the proportion of the activity that is not financed by those resources will still be subject to taxation (that is to say, up to a maximum of 25%).

33. In that regard, I would point out that, according to settled case-law, questions on the interpretation of EU law referred by a national court in the factual and legislative context which that court is responsible for defining and the accuracy of which is not a matter for the Court to determine, enjoy a presumption of relevance.

34. In my view, while there may be gaps in the legal background set out in the order for reference, it is clear how the national tax rule at issue operates. In essence, the national court has explained that that rule provides that a salary received in respect of an activity in the field of development assistance is exempt from income tax, provided that the activity is financed using funds from national budgetary resources, while a salary gained in respect of such an activity financed using EDF funds is subject to taxation. Consequently, I am of the opinion that the Court may provide the referring court with elements of interpretation of EU law in the context of the assessment of the tax rule at issue.

35. Second, by its question, the referring court asks, in essence, whether Article 4(3) TEU, read in conjunction with Articles 208 and 210 TFEU, precludes the national tax rule at issue. However, the Commission suggested in its written submissions that an explicit reference to the fundamental freedoms laid down in the Treaties be included in the wording of the question. Therefore, by its written questions, the Court requested that the parties provide an answer at the oral hearing in respect of the fundamental freedoms. At the hearing, RF and the Commission both submitted that the tax rule at issue fell within the scope of the fundamental freedoms, while the German Government contended that those freedoms did not apply in the present case.

36. I would recall that the Court may have to reformulate the question referred to it. The Court may also find it necessary to consider provisions of EU law, which the national court has not referred to in its questions.

37. In that respect, first, it should be observed that, in its order for reference, while making mention of the freedom of movement enshrined in Article 45 TFEU and the provisions of the Cotonou Agreement, the national court comes to the conclusion that those provisions do not preclude the national rule at issue, since RF is not a worker from another Member State.

38. It is important to note that the request for a preliminary ruling in Petersen concerned the same national tax rule set out in the Notice from the Ministry of Finance, as the one subject of the present case. However, the Court examined a different aspect of that rule, namely the place of establishment of the employer. In Petersen, the worker at issue was employed by an employer established in Demark that carried out a development aid project financed by the Danish Agency for International Development. The Court observed that the exemption from income tax required that the employer have its registered office in Germany and held that such a requirement constituted a restriction on the free movement of workers prohibited under Article 45 TFEU. In the present case, the facts in the main proceedings do not concern that same requirement (which is actually met), since both RF and the development aid company are established in Germany. In any event, it is a purely internal situation with respect to the free movement of workers.

39. Nonetheless, I would emphasise that the national tax rule at issue also treats employees differently on the basis of the origin of the funds provided for the aid project. The tax exemption is granted or refused to the employee working on that project depending on whether a development cooperation project is financed directly by national budgetary resources or by EDF resources. Thus, it is appropriate to commence by determining whether and, if so, which of the other fundamental freedoms may apply to the present case.

B. The relevance of the other fundamental freedoms

40. In order to determine whether a national measure falls within the scope of a fundamental freedom, it is clear from now well-established case-law that the purpose of the legislation concerned must be taken into consideration.

41. For the reasons mentioned above, I take the view that the case in the main proceedings cannot be examined in the light of Article 45 TFEU. However, the fact that this case deals with the effect of the national tax rule at issue on cross-border workers, but not with the way in which it affects the financing of aid projects, does not rule out the application of the other fundamental freedoms, unless those other fundamental freedoms are considered to be ancillary in relation to the free movement of workers. In certain specific situations where two fundamental freedoms are equally important for the purposes of the legislation at issue, the Court has held that those situations relate to both fundamental freedoms at the same time. According to the relevant case-law, such a specific situation may arise where one of the fundamental freedoms does not apply to the case at hand, since the situation is, for the purposes of that freedom, confined in all respects within a single Member State. However, that may not be the case for the purposes of the other fundamental freedoms. It follows that the situation in question may be confined with respect to the free movement of workers within a single Member State but have a cross-border element in respect of other freedoms.

42. In the present case, I would observe that a tax rule such as that at issue in the main proceedings has the effect of creating a difference in treatment depending on the origin of the funds. As is clear from the order for reference, the tax exemption at issue is granted with respect to a foreign assistance development activity funded by national budgetary resources, but is refused when the financing is granted by the EDF. In that respect, in its recent Grand Chamber judgment in Commission v Hungary, the Court held that national legislation that treats differently the associations and foundations established in Hungary according to the national or ‘foreign’ origin of the financial support they receive falls under Article 63 TFEU. Therefore, in the present case, since the difference in treatment at issue lies in the origins of the funds, it should be examined whether and, if so, to what extent a national tax rule such as that at issue in the main proceedings is capable of affecting the exercise of the free movement of capital enshrined in Article 63 TFEU. In that respect, I should emphasise that, as regards Article 63 TFEU, it follows from the Court’s settled case-law that that article has direct effect, so that it may be relied on before national courts and may render national rules that are inconsistent with it inapplicable.

43. Taking into account such direct effect and in the light of the oral arguments put forward by RF and the Commission, I shall start by examining whether Article 63 TFEU must be interpreted as precluding the application of a tax rule of a Member State which provides for an exemption from income tax for the salary received by an employee assigned to development aid activities only where such an activity is financed to a level of at least 75% from national budgetary resources, but has the effect of depriving an employee of the benefit of such an exemption where he or she is assigned to an activity of that nature financed to the same extent by one of the EDFs.

C. The free movement of capital enshrined in Article 63 TFEU

1. The scope of Article 63 TFEU

(a) Territorial scope

44. First of all, Article 63 TFEU provides that all restrictions on the movement of capital between Member States and between Member States and third countries are to be prohibited. The referring court states that the differentiated tax treatment at issue is not discriminatory within the meaning of the Treaties since the foreign assistance development activity funded directly from EU resources does not constitute funding from another Member State.

45. In that respect, I would observe that, in the present case, the funding provided to the development aid company in order to carry out foreign assistance development activities is provided by the EDFs. As explained in points 13 and 16 above, the financing of the EDFs was adopted by internal agreement between the representatives of the governments of the Member States, meeting within the Council, and is subject to financial regulations. Therefore, while the funding to the undertaking at issue is not provided directly by another Member State, the expenditure necessary for the (then) Community financial assistance was assumed directly by the Member States, which provided financial contributions to the EDFs. For example, the final accounts of the Ninth EDF for the financial year 2009 show that the EDF resources are ‘ad hoc’ contributions from the EU Member States. I should add that, according to the financial regulations, the Commission is to ‘manage the EDF on its own responsibility’ and is to appoint, in particular, the chief authorising officer and the financial controller of the EDF. In short, during the period at issue in the main proceedings, the EDF was intergovernmental in nature and remained outside the EU budget, despite the fact that most of its resources were managed by the European Commission.

46. In my view, the following conclusions can be drawn from that finding. First, if the funding provided to the company at issue were to be provided by German budgetary resources, the situation could be considered as a purely internal situation. However, in the present situation, the funding is provided by external entities, namely the EDF, which has the characteristics referred to above. Second, the funding provided by the EDF is composed of the Member States’ direct contributions. It may be equated, therefore, to a movement of capital from other Member States. The cross-border element, which makes the Treaty provisions on the free movement of capital applicable, is established by the movement of capital from the EDF to the undertaking at issue.

47. In the light of the foregoing considerations, I take the view that the territorial scope of the free movement of capital laid down in Article 63 TFEU should include the movements of capital between a foreign joint fund established by the Member States, such as the EDF, and an undertaking located in one of the Member States. For the case at hand, this means that there is a cross-border element.

(b) Material scope

48. With regard to the material scope of Article 63 TFEU, while the FEU Treaty does not define the concept of ‘movement of capital’, the fact remains that the case-law has provided a number of indications of its scope. In the absence of such a definition, the Court has often relied on the list provided by secondary law, namely the nomenclature of capital movements. In the present case, that nomenclature does not explicitly cover the funding provided by the EDF. However, that nomenclature has merely an indicative value for the purposes of defining the notion of capital movements, which means that the Court can expand the concept of capital beyond the ‘classical’ economic meaning. For example, the Court has already held that inheritances and gifts are included in the concept of movements of capital. Thus, it has already applied the freedom of movement of capital to a tax on a legacy received by a religious association, which was a non-profit-organisation. Moreover, that concept also encompasses investments in real estate relating to the acquisition of a usufruct over land.

49. While the economic and legal meanings of the term ‘capital’ are not always identical, in the present case, it should by no means be controversial to say that financial funding such as that provided by a fund to a development aid company established in Germany falls within the concept of capital since, subject to the checks to be carried out by the referring court, it involves a transfer of a sum of money to an undertaking for a development project carried out by that company.

50. If the Court decides that the term ‘movement of capital’ encompasses such financial funding, the next question would be whether it covers the salary paid by that undertaking to a person working on a foreign aid development project. In that respect, the Court must decide whether the ‘movement’ at issue entails movement between the EDF and the Member State’s undertaking or between the EDF and the recipient project developed in the ACP State at issue. In my opinion, the concept of ‘movement’ should apply to the whole ‘aid’, that is the financial flow from the donor (the EDF) to the recipient, that is the programme at issue developed in the ACP State in question. The Member State undertaking is just a step in the funding of that programme, which has to meet the needs of the local communities of the ACP States. Therefore, the term ‘movement’ should cover all the links of the chain from donor to recipient. Since there are international incentives to reduce taxation in respect of the developing countries, it goes without saying that the concept of ‘aid’ encompasses the entire financial flow from the EDF to the recipient in the ACP States.

51. Consequently, I am of the opinion that the tax rule at issue in the main proceedings, in so far as it relates to income funded by the EDF and received by an undertaking in a Member State, should come within the concept of ‘movement of capital’ within the meaning of Article 63 TFEU.

(c) Personal scope

52. The personal scope of Article 63 TFEU involves resolving two questions. First, the Court must decide whether that provision applies ratione personae to an income funded by the EDF, which is a public fund established by Member States under a financial regulation adopted by those States, and received by a development aid company established in a Member State, and, second, whether an employee of such a company may rely on that fundamental freedom.

53. Advocate General Mengozzi has underlined the ‘inherent nature of the free movement of capital, which is a freedom based on the object of the transactions rather than on the nature of the persons who carry them out’. In the same vein, the Court has already held, for instance, that the free movement of capital applied to operations carried out by a non-profit-making charitable foundation and to a tax on a legacy received by a religious association, which was a non-profit-organisation. Moreover, in the event that the Court characterises the EDF as an EC or EU fund, other fundamental freedoms apply to civil servants of the European Union, making those freedoms applicable to different types of movement – personal or material – between the European Union and the Member State.

54. It is beyond all doubt that a company whose development aid projects are funded by the EDF may, as the beneficiary of that capital, challenge the compatibility of the tax rule at issue with the free movement of capital. In general, a worker contributing to the production process or services of a company is considered an input or a factor of production. In other words, the way the worker is treated affects the company and its input-output value. For example, labour costs affect the number and quality of workers the company can hire. Therefore, since the term ‘movement’ should cover all the elements of the chain from the EDF to the project in the ACP State, it should also encompass the salary of a worker who participates in that project and constitutes a company’s input.

55. Moreover, it is worth noting that the dispute in the main proceedings was, to some extent, triggered by the company at issue, which was initially granted an exemption certificate with respect to RF’s salary and which did not withhold tax at source on that salary. As a result of that omission, the German tax authorities decided to claim from RF the income tax that was due for 2011 and 2012. It seems to me that RF should be able to rely on that fundamental freedom in order to protect her salary from taxes that may be incompatible with EU law. For the purposes of both the present dispute and the objectives pursued by the tax rule at issue, the salary received by RF must be seen as part of the capital that the company received from the EDF. As such, RF may rely on that fundamental freedom.

56. In the light of the foregoing, and contrary to the view taken by the German Government at the hearing, I am of the opinion that the tax rule at issue falls within the scope of the free movement of capital laid down in Article 63 TFEU.

2. The existence of a restriction on the free movement of capital

57. It should be recalled that Article 63 TFEU prohibits all restrictions on the movement of capital between the Member States, subject to the justifications laid down in Article 65 TFEU. Although direct taxation falls within the competence of the Member States, it is settled case-law that they must nonetheless exercise that competence consistently with EU law and, in particular, with the fundamental freedoms guaranteed in that Treaty. This means that Member States must refrain from adopting discriminatory measures to the detriment of persons who have exercised their rights to freedom of movement.

58. In accordance with the Court’s case-law, the measures prohibited by Article 63(1) TFEU, as restrictions on the movement of capital, include those that are such as to discourage non-residents from making investments in a Member State or to discourage that Member State’s residents from doing so in other States.

59. In Commission v Hungary, in the context of an infringement action, the Court was seised of an examination of the compatibility with the free movement of capital of provisions of national legislation which imposed obligations of registration, declaration and publication on certain categories of civil society organisations directly or indirectly receiving support from abroad exceeding a certain threshold and which provided for the possibility of applying penalties to organisations that do not comply with those obligations. It held that those provisions targeted the persons from other Member States or third countries granting financial support to the associations or foundations established in Hungary by providing for the public disclosure of information on those persons and that financial support, which was likewise such as to deter those persons from providing such support. The Court went on to emphasise that, in so doing, as a whole, those provisions treated not only the associations and foundations established in Hungary which received financial aid that was sent from other Member States or from third countries differently from those which received financial support from a Hungarian source, but also treated the persons who provide those associations and foundations with financial support sent from another Member State or third country differently from those who did so from a place of residence or registered office located in Hungary.

60. In that judgment, the Court found that the differences in treatment depending on the national or foreign origin of the financial support in question constitute indirect discrimination on the basis of nationality.

61. In the present case, it is clear from the order for reference that the tax exemption at issue is available only when the development aid project is financed by national budgetary resources. Such financing takes place where the project is financed to a level of at least 75% by a Federal Ministry responsible for development cooperation or by a State-owned private development aid company. By contrast, a development aid project financed by foreign funding, such as the EDF, falls under the Notice from the Ministry of Finance and, therefore, salaries paid under that project by the undertaking in question are to be taxed.

62. By applying the tax rule at issue, the tax treatment of salaries paid by undertakings financed by national budgetary resources and those paid by undertakings financed by foreign funding are not the same. Undertakings financed by foreign capital are subject to a higher tax burden than that applied to undertakings financed by national budgetary resources. The former are consequently in a less favourable position than the latter.

63. Such a difference in tax treatment has an effect on the use of funding received by the development aid companies, namely by increasing the labour costs of the aid projects in question and, thus, reducing the available resources with respect to those projects and the capital made available to the companies. Essentially, on the one hand, the company at issue must decide whether, first, it applies for funding from national budgetary resources or the EDF, second, whether it hires fewer employees or employees who are less competitive in the sector at issue, and/or, third, whether it reduces other costs. The worker, on the other hand, may be faced with choosing foreign aid projects that are less financially advantageous than projects funded from national budgetary resources. If the worker chooses the projects funded by the EDF, tax is withheld at source (or, like in the present case, can be claimed at a later stage) by the competent tax authority, meaning that that person’s tax burden is much higher.

64. As a consequence, I take the view that such a tax rule at issue constitutes a restriction on the free movement of capital prohibited by Article 63 TFEU.

3. The existence of a justification for the restriction on the free movement of capital under Article 65 TFEU

65. It follows from the case-law in relation to Article 65(1) TFEU, read in conjunction with Article 65(3) thereof, that in order for national tax rules to be regarded as compatible with the Treaty provisions on the free movement of capital, the difference in treatment must relate to situations which are not objectively comparable or which must be justifiable by an overriding reason in the public interest.

66. First, as regards the comparability of the situations, the German Government stated at the hearing that the situation of an aid project financed by national budgetary resources and one funded by the EDF are objectively different. In particular, it argued that EDF projects may be better financed than nationally funded projects and thus wages related to EDF projects are higher than those related to nationally funded projects.

67. In that regard, it is settled case-law that the comparability of situations must be examined having regard to the aim pursued by the national provisions at issue. In that respect, only the relevant distinguishing criteria established by the legislation in question must be taken into account in determining whether the difference in treatment resulting from that legislation reflects situations which are objectively different.

68. In the present case, I would note that the tax exemption at issue is tied to a distinguishing criterion that is based, in essence, on the origin of the funds. As regards projects financed by national budgetary resources, the applicant submits that the purpose of the exemption provided for in Paragraph 34(c)(5) of the EStG is to support development aid bodies by helping them to attract the best performing workers. Thus, it appears that the general purpose is to support foreign development projects. The EDF is the main EU instrument in the area of development cooperation, which aims to fund projects, in particular, in the ACP States. In the light of those objectives, projects financed by the EDF and those financed by national budgetary resources should be regarded as being in a comparable situation. Even if the Court were to examine the German Government’s justification that the wages of EDF projects are higher than those paid in relation to nationally funded projects, it should be emphasised that the Government has not substantiated that argument, which, in any case, does not rely on the objective of the tax rule at issue. Consequently, I take the view that the difference in treatment at issue in the main proceedings concerns situations that are objectively comparable.

69. Second, according to the Court’s settled case-law, a restriction on the free movement of capital is permissible only if it is justified, in the case of direct discrimination, by one of the grounds expressly provided for in the Treaties and, if that is the case, only if it is suitable for securing the attainment of the objective in question and does not go beyond what is necessary in order to attain it.

70. In the present case, it must be stated that the documents before the Court do not specify what objective the national tax authority was pursuing when it established the criterion that the development aid measure had to be financed to a level of at least 75% by national budgetary resources.

71. According to the statements made by the German Government at the hearing, the tax rule at issue falls under Germany’s sovereign powers. In that connection, it should be observed that, although it is for each Member State to organise its system for taxing revenues, it is settled case-law that Member States must nevertheless exercise their fiscal autonomy in accordance with the requirements of EU law, in particular those imposed by the provisions of the TFEU on the free movement of capital, which requires that the tax system be designed to be non-discriminatory. Accordingly, the justification at issue should be rejected, without there being any need to examine its proportionality.

4. Interim conclusion

72. In the light of the foregoing, I propose that the answer that the Court should give to the question referred is that Article 63 TFEU must be interpreted as precluding the application of a tax rule of a Member State, such as that at issue in the main proceedings, which provides for an exemption from income tax for the salary received by an employee assigned to development aid activities only where such an activity is financed to the level of at least 75% from national budgetary resources, but which has the effect of depriving an employee of the benefit of such an exemption where he or she is assigned to an activity of that nature financed to the same extent by one of the EDFs.

73. However, in its order for reference, the national court has asked the Court to examine the compatibility of the tax rule at issue with the principle of sincere cooperation enshrined in Article 4(3) TEU, read in conjunction with Articles 208 and 210 TFEU. It is only in the event that the Court does not concur with the above conclusion and nevertheless decides to examine the application of those provisions that I discuss that issue below.

74. Before turning to my analysis of the national court’s question as formulated by it, I should emphasise that, as already explained, it follows from the Court’s settled case-law that Article 63 TFEU has direct effect, so that it may be relied on before national courts and may render national rules that are inconsistent with it inapplicable. However, the principle of sincere cooperation does not have such effect. Moreover, the Court has applied that provision to national tax law on multiple occasions, which is not the case with the principle of sincere cooperation. Therefore, reliance on the fundamental freedoms of the internal market, and in particular on the free movement of capital, is less intrusive on the competences of the Member States than that of Article 4(3) TEU, read in conjunction with Articles 208 and 210 TFEU in the area of parallel competences, which I will discuss below.

D. The principle of sincere cooperation applied in conjunction with the rules on competences laid down in the Treaties

75. The referring court asks, in essence, whether the principle of sincere cooperation enshrined in Article 4(3) TEU, read in conjunction with Articles 208 and 210 TFEU, must be interpreted as precluding a national tax rule such as that at issue in the main proceedings.

76. In order to answer that question, I shall first consider the exercise of the competences by the European Union and the Member States in the area of development cooperation. Second, I shall examine whether a national tax rule such as that at issue in the main proceedings constitutes a breach of Article 4(3) TEU, read in conjunction with Article 4(4) and Articles 208 and 210 TFEU. Third, I shall deal with the issue of the direct effect of those provisions.

1. The exercise of competences by the EU and the Member States

(a) The rules on competence in the area of development cooperation and the obligation of efficiency

77. At the outset, I should point out that, depending on the area, the European Union may have exclusive, shared or ‘supportive’ competences. The areas of those specific competences are listed in Articles 3 to 6 TFEU.

78. In the area of development cooperation, Article 4(4) TFEU states that the European Union ‘shall have competence to carry out activities and conduct a common policy’, adding that ‘however, the exercise of that competence shall not result in Member States being prevented from exercising theirs’. The latter competence is thus not included in the list of ‘standard’ shared competences set out in Article 4(2) TFEU, which lists areas such as the internal market, agriculture and fisheries, consumer protection and transport. As regards shared competences, Article 2(2) TFEU follows the principle of pre-emption whereby ‘the Member States shall exercise their competence to the extent that the Union has not exercised its competence’. By contrast, the competence rule set out in Article 4(4) TFEU states that the exercise of the competence of the European Union does not prevent the Member States from exercising theirs. It ‘is carved out as what could be called a “non-principal area of shared competence”’, a ‘non-pre-emptive competence’ or a ‘shared parallel competence’. In short, Article 4(4) TFEU has the peculiarity of allowing both the EU and the Member States to exercise their competences in parallel.

79. Moreover, Article 4(4) TFEU is to be read in conjunction with Articles 208 and 210 TFEU, which are specific Treaty provisions on the area of development cooperation. In particular, Article 208(1) TFEU states that the EU’s and the Member States’ competences are to ‘complement and reinforce each other’. Article 210(1) TFEU further provides that in order to promote the complementarity and efficiency of their action, the EU and the Member States may undertake joint action and that Member States are to, where necessary, contribute to the implementation of EU aid programmes.

80. It follows, in my view, that Article 4(4), Article 208(1) and Article 210(1) TFEU, as stand-alone provisions, impose an obligation on the European Union and the Member States to reinforce each other’s actions in the area of development cooperation in order to make those actions efficient. In addition, Article 4(4) TFEU states that the exercise of the EU’s competence in the area of development cooperation ‘shall not result in Member States being prevented from exercising theirs’. However, those Treaty provisions are silent as to whether a similar negative obligation exists in respect of the Member States, according to which they must refrain from hindering or hampering the exercise of the EU’s competence in the area of development cooperation. Therefore, an interpretation of Article 4(4), Article 208(1) and Article 210(1) TFEU that incorporates reciprocity between the EU and the Member States requires, in my view, having recourse to the principle of sincere cooperation.

(b) The principle of sincere cooperation enshrined in Article 4(3) TEU

81. For the purposes of the present case, the wording of the third subparagraph of Article 4(3) TEU seems to be highly relevant. That subparagraph imposes an obligation on the Member States to ‘facilitate the achievement of the Union’s tasks’ and to ‘refrain from any measure which could jeopardise the attainment of the Union’s objectives’. Hence, it imposes a positive duty to facilitate the achievement of the EU’s tasks and a general prohibition on the Member States adopting any such measure. I would add that that paragraph refers to the EU's tasks and objectives, rather than to EU law.

82. As regards context, I would point out that in the area of development cooperation, Article 4(3) TEU should be read in conjunction with the objectives referred to in Article 21 TEU. It is precisely in that context that the Member States are obliged, by reason of the principle of sincere cooperation set out in the third subparagraph of Article 4(3) TEU, to refrain from adopting any measure which could render the achievement of the EU’s tasks more difficult or jeopardise the attainment of the EU’s objectives.

83. As regards the scope of the principle of sincere cooperation, that principle applies irrespective of whether the competence concerned is exclusive or shared. For instance, in Commission v Sweden, the Court held that the Kingdom of Sweden had infringed Article 4(3) TEU by unilaterally proposing the addition of a particular substance to the annex to an international convention in an area of shared competence. By doing so, that Member State ‘dissociated itself from a concerted common strategy within the Council’, which had consequences for the European Union. In my view, that case-law should also be transposable to the area of ‘shared parallel’ competences. Indeed, the fact that the European Union has exercised its power, regardless of its nature, means that the Member States must respect the objectives the European Union is trying to attain in the area in question.

84. Therefore, it follows from Article 4(4), Article 208(1) and Article 210(1) TFEU, read in conjunction with the principle of sincere cooperation enshrined in Article 4(3) TEU, that the Member States are required to facilitate the achievement of the EU’s tasks and not to jeopardise the attainment of the objectives the European Union pursues in the area of development cooperation and namely to guarantee the efficiency of the EU’s actions in that area.

(c) Application to the present case

85. In the present case, it should be noted that there are two sets of different competences that have been exercised. First, the European Union has exercised its ‘shared parallel competence’ in the area of development cooperation pursuant to Article 4(4), and Articles 208 and 210 TFEU.

86. In particular, externally, together with the Member States, it concluded the Lomé IV Convention and the Cotonou Agreement, which were approved by Council decisions. The Court has already held that the Member States and the European Union are ‘jointly liable’ for the obligations stemming from the Lomé IV Convention. Internally, the obligations stemming from those agreements were implemented by the European Union by Financial Regulation 91/491/EEC, applicable to the Seventh EDF, and the Financial Regulation of 27 March 2003, applicable to the Ninth EDF. As already explained, the Commission is responsible, under the agreements and conventions setting up the various EDFs and by the corresponding financial regulations, for the management of the Seventh and Ninth EDFs. It follows from that framework that, in the present case, the EU has exercised its ‘shared parallel’ competence externally by way of concluding the mixed agreements mentioned above and internally by adopting the financial regulations at issue.

87. Second, by the tax rule at issue, Germany adopted a tax measure in the area of direct taxation, which, as the law currently stands, is not a matter for the European Union, but falls under the Member States’ retained powers. Similarly, in adopting the tax rule, Germany was also exercising its competence in the area of development cooperation, since the object of that rule is development aid.

88. While it is true that the case-law cited above gives no indication whether and, if so, how the principle of sincere cooperation enshrined in Article 4(3) TEU applies in respect of the ‘shared parallel’ competences set out in Articles 4(4), Article 208(1) and Article 210(1) TFEU, I take the view that those indications can be found by having recourse to the so-called ‘framing of powers’ doctrine. According to that doctrine, the Member States are under a general obligation to exercise their retained powers while having due regard to EU law. In that respect, even if, in the current state of the development of EU law, direct taxation falls within the competence of the Member States, they must nevertheless exercise that competence in compliance with EU law and, also, I would argue, consistently with the EU’s tasks and objectives. The same applies when a Member State exercises its competences in the area of development cooperation. Therefore, actions taken by Member States in areas which have not been subject to (or cannot be subject to) harmonisation within the European Union, such as direct taxation and development cooperation, are not excluded from the scope of the principle of sincere cooperation enshrined in Article 4(3) TEU.

89. In the light of the foregoing, it follows from Article 4(4), Article 208(1) and Article 210(1) TFEU, read in conjunction with the principle of sincere cooperation enshrined in Article 4(3) TEU, that even when the Member States are exercising their retained competences in the areas of direct taxation and development cooperation, they are required to facilitate the achievement of the European Union’s tasks and not to jeopardise the attainment of the objectives that the European Union pursues in the area of development cooperation.

2. The existence of a breach of Articles 4(4), Article 208(1) and Article 210(1) TFEU, in conjunction with Article 4(3) TEU

90. At the outset, I should emphasise that, when Member States agree to create a common fund, such as the EDF, they should create rules with respect to income taxation of the funding in the framework concerning that fund. However, in the absence of such rules, the Court must examine the present case in the light of the existing primary law provisions. The issue that arises is what constitutes a breach of those Treaty provisions, read in conjunction with the principle of sincere cooperation enshrined in Article 4(3) TEU.

91. Since the Member States are required to facilitate the achievement of the EU’s tasks and not to jeopardise the attainment of the objectives that the European Union pursues in the area of development cooperation, it follows, in my opinion, that they should not impose any measures that reduce the efficiency of the EU’s actions in that area. Moreover, it is the duty of the Member States to create the appropriate conditions to achieve that task or objective. Thus, any tax measure that may reduce funding that seeks to finance a development aid project in the recipient ACP State does not facilitate the achievement of the EU's task and makes it harder to attain the objectives pursued by the European Union in the field of development cooperation. Indeed, the taxation by Member States of the funding granted by the EDF reduces the amount of financial support that is received by the recipients of the aid projects in question in the ACP States and forms financial obstacles to those projects. Therefore, that tax measure constitutes a breach of those provisions.

92. In particular, as stated by RF, account should be taken of the objectives set out in Article 21(2)(d) TEU and in the Cotonou Agreement, namely those in relation to ‘poverty eradication, sustainable development and the gradual integration of the ACP countries into the world economy’. By setting up the EDF and the MPPs in order to promote a wide range of projects in the ACP States, the European Union and the Member States implemented very specific means for attaining those broad objectives. In other words, the financing granted by the EDF in order to fund the activities carried out by the MPPs constitutes the concrete manifestation of those objectives. In that respect, the MPPs constitute a ‘UN charted EU intervention’, with the purpose of meeting the basic needs of the entire population.

93. It follows that when the EDF grants money to an MPP, its aim is to finance the programme at issue and to support the local population benefiting from that project. Conversely, its purpose is not to finance the budget of one of the Member States. Therefore, notwithstanding the contributions in relation to the social security of the workers or to other similar services provided by the Member States, those states should not, in principle, tax the projects and personal income in relation to projects funded by the EDF. Taxing such projects directed at ACP States has the effect of reducing the amount of financial support that is received by the recipients of the aid projects in question in those states and constitutes, in itself, a breach of Article 4(4), Article 208(1) and Article 210(1) TFEU, read in conjunction with Article 4(3) TEU.

94. Moreover, in order to determine whether there is a breach of those provisions, it is not necessary to establish that there has been a difference in the tax treatment of projects financed by national resources and those financed by the EDF. Therefore, unlike restrictions on the free movement of capital, a breach of those Treaty provisions can take place even in the absence of a difference in the tax treatment of those two types of projects. Since any national tax measure that does not facilitate the achievement of the EU’s task or makes it harder to attain the EU’s objectives in the field of development cooperation breaches the principle of sincere cooperation, the issue whether the tax rule at issue places the projects funded by the EDF and the employees working on that project at a disadvantage is irrelevant for the purposes of establishing a breach of those Treaty provisions. On the contrary, for the purpose of applying those provisions, it is sufficient to establish difficulty in carrying out the EU’s task or objective in an efficient manner.

3. Direct effect

95. Direct effect is the ability of an EU law rule to be justiciable at national level, directly before the national judge, without the need for any further ‘intermediary’ of national law. As far as primary legislation is concerned, the Court established the principle of direct effect in the Van Gend & Loos judgment, with the proviso, however, that the obligations must be sufficiently clear, precise and unconditional to confer on individuals a right capable of being relied on as such before a national court. In my view, the succinctly worded Article 4(4), Article 208(1) and Article 210(1) TFEU, read in conjunction with the principle of sincere cooperation enshrined in Article 4(3) TEU, cannot possibly be interpreted as containing such obligations. The same is true of the provisions of the Lomé IV Convention and the Cotonou Agreement, which were discussed at the hearing by the parties.

96. Nevertheless, in the present case, the act that contains direct effect is the decision of the Commission or the authorising officer decision whereby the Commission decides to award a procurement contract or a grant allowing the funding to the company at issue. In principle, there should be a procurement or grant decision or a contract between the Commission, acting on behalf of the EDF, and the company at issue, which specifies the obligations of each party. Unfortunately, that act does not appear in the Court file. However, it follows from the provisions of the financial regulations at issue that the Commission acts as an authority, which can adopt legally binding decisions with third parties. In the present case, that decision can be relied upon by the company at issue and, thus, by RF. However, it is for the national court to establish the existence and content of that individual decision.

4. Interim conclusion

97. In the light of the foregoing, I propose that the answer that the Court should give to the question referred is that Article 4(4), Article 208(1) and Article 210(1) TFEU, read in conjunction with the principle of sincere cooperation enshrined in Article 4(3) TEU, must be interpreted as precluding the application of a tax rule of a Member State which deprives an employee of the benefit of a tax exemption on the grounds that that employee is assigned to development aid activities financed by the EDFs, since such taxation of the funding granted by the EDF by Member States has the effect of reducing the amount of financial support that is received by the recipients of the aid projects in question in the third countries and forms financial obstacles to those projects.

Follow International Tax Plaza on Twitter (@IntTaxPlaza)

INTERESTING ARTICLES