Prof. Dr. Axel Cordewener, LL.M. Of Counsel, Flick Gocke Schaumburg

1. Prof. Dr. Axel Cordewener, LL.M. Of Counsel, Flick Gocke Schaumburg PEARLE seminar “Taxation of non-resident artists: Recent developments in Germany” Brussels, 10 November 2009

2. Overview: I. Original system: final gross WHT II. Impact of EC free movement rules 1) Free movement of workers (Art. 39 EC) 2) Freedom to provide services (Art. 49 EC) III. Recent legislative reform 1) Reform discussion: potential options 2) Actual legislative amendments as of 2009

3. I. Original system: final gross WHT Taxation of performances of non-resident artists in Germany (until 1995) • uniform treatment of employees and self-employed persons under special sub-system only for non-residents (§§ 50, 50a EStG) -> WHT: 15 % on gross receipts (incl. travel expenses) + solidarity surcharge (5.5 % of WHT) -> payor: liable for deduction and payment to fisc -> recipient: final tax burden (no assessment/other refund procedure = no possibility for cost deduction!) -> double tax treaty relief: depending on bilateral agreement (distinction employed/self-employed or Art. 17 OECD-MC) => basically ex post refund, unless exemption certificate granted ex ante by German authority + presented to payor (§ 50d EStG)

4. II. Impact of EC free movement rules 1) Free movement of workers (Art. 39 EC) • ECJ 14 February 1995, C-279/93 „Schumacker“ -> exclusion of non-resident employed persons from annual tax assessment procedure (on net basis with possibility of tax refund) available to residents is discriminatory • reaction of German legislature: amendment of §§ 50, 50a EStG (1996): -> integration of non-resident employed artists into general wage WHT system for residents -> option for all non-residents with EU- or EEA-residence and -nationality: annual tax assessment on net income from employment activity in Germany = cost deduction possible! => BUT: progressive tax rate calculated on basis of global income (§32b EStG) + in principle no personal/family benefits

5. II. Impact of EC free movement rules 2) Freedom to provide services (Art. 49 EC) a) Anticipation of EC law problems • amendment of § 50 EStG (1996/97) -> introduction of annual “simplified refund procedure” for (inter alia) non-resident self-employed artists => condition: expenses directly related to receipts > ½ of receipts => refund: as far as WHT > 50 % of (receipts ./. dir. related costs) • BUT: simultaneous amendment of § 50a EStG = WHT rate also for performances raised to 25 % (idea: tax rate 50 % and costs corresponding to ½ of earnings) -> 2002/03 amendment: reduction to 20 % and even to 15 %, 10 % or 0 % for performances with earnings € 1,000 - € 0 -> 2008 amendment: 15 % for foreign corporate taxpayers

6. II. Impact of EC free movement rules 2) Freedom to provide services (Art. 49 EC) b) ECJ 12 June 2003, C-234/01 “Gerritse” • gross taxation of non-resident artists, as compared to net taxation of residents, is discriminatory -> deduction of business expenses directly linked to activity in Germany must be possible (otherwise tax base too high) • flat WHT rate for non-resident artists, as compared to progressive income tax rate for residents, may also be discriminatory -> BUT: exact comparison in individual case required • no clear statement on procedural issues • reaction: very restricted decree of Federal Ministry of Finance (3 November 2003) as “interim solution”

7. II. Impact of EC free movement rules 2) Freedom to provide services (Art. 49 EC) c) ECJ 3 October 2006, C-290/04 “Scorpio” • WHT as such (applying only to non-residents!) and liability of payor justified to “ensure effective collection of income tax” -> at least in relevant tax year (1993) no EC Directive on cross-border enforcement of tax claims • HOWEVER: in order to reduce disadvantages/burdens as compared to residents as far as possible, levying of WHT must take place on net basis -> costs directly linked to German activity must be deductible from gross receipts if reported by recipient to payor

8. II. Impact of EC free movement rules 2) Freedom to provide services (Art. 49 EC) d) ECJ 15 November 2007, C-345/04 “Centro Equestre” • existing “simplified refund procedure” is discriminatory -> condition that expenses must be “> ½ of receipts” excludes access to refund if actual costs are below that threshold -> BUT: condition that expenses must be “directly linked to receipts” from activity taxable in Germany is acceptable => ECJ: “Operating expenses directly connected to the income received in the Member State in which the activity is pursued must be understood as being expenses which have a direct economic connection to the provision of services which gave rise to taxation in that State and which are therefore inextricably linked to those services, such as travel and accomodation costs. In that context, the place and time at which the costs were incurred are immaterial.”

9. II. Impact of EC free movement rules 2) Freedom to provide services (Art. 49 EC) e) Provisional reactions in Germany • Federal Ministry of Finance (5 April 2007): another very restricted decree of as “interim solution” • all three plaintiffs (!) lost before Federal Tax Court -> “Gerritse” (10 January 2007): foreign artist did not inform German radio station of his business expenses related to concert performed in Germany in 1996 -> “Scorpio” (24 April 2007): German concert organiser was not informed by foreign agency of business expenses made by the latter in relation to performances of a music group in 1993 -> “Centro Equestre” (24 April 2007): costs incurred by foreign company organising horse shows were not “directly linked” to shows in Germany, but general overhead costs • EU Commission: infringement procedure (IP/07/413, 08/144)

10. III. Recent legislative reform 1) Reform discussion: potential options • (1) “radical” approach: complete waiver of taxing right as source State (see NL as of 2007) -> loss of tax revenue?; taxation in State of residence secured? • (2) mere “ex post” approach: abolition of WHT and compulsory tax assessment for all non-residents covered by § 50a EStG -> enforcement of declaration obligations? Non-EU residents? • (3) mere “ex ante” approach: extension of existing system (§§ 50, 50a EStG: final gross WHT) also to resident taxpayers -> practical (compliance) and constitutional law problems

11. III. Recent legislative reform 1) Reform discussion: potential options • (4) “combined” approach: continued application of WHT together with assessment procedure • (a) “small” solution: WHT only for non-residents (on net basis) with optional tax assessment (net basis + prog-ressive rate, possibly on global income like employees) instead of “simplified refund procedure” -> approximation of equal treatment with residents; open issue: influence of EC Directive on cross-border enforcement of tax claims on non-discrimination standard • (b) “large” solution: extension of WHT also to residents (gross basis possible) with optional tax assessment for non-residents (net basis + progressive tax rate) -> full equal treatment with residents, but practical problems

12. III. Recent legislative reform 2) Actual legislative amendments as of 2009 • “small combined” approach (with modifications) -> new § 50a EStG: continued application of WHT (only) to non-residents, but option for net basis => tax base: coverage of travel expenses excluded; exemption from WHT if receipts per performance not > € 250 => general WHT rate for deduction from gross receipts: 15 % => OR: WHT on net base (deduction of expenses with direct economic link to receipts if proven to payor in verifiable manner) at increased rate of 30 % for physical persons (corporate taxpayers: 15 %) with EU- or EEA-residence and -nationality -> new § 50 EStG: “simplified refund procedure” abolished; optional tax assessment for non-residents (EU/EEA only) => net basis + progressive tax rate (no calculation on global income!)