Personal Tax (Şahıs Vergisi)

 
- General overview

The Commission in its Communication "Tax Policy in the European Union - Priorities for the years ahead" (COM(2001) 260) of 23 May 2001 stated its belief that taxes on personal income may be left to Member States even when the European Union achieves a higher level of integration than at present (see IP/01/737 and MEMO/01/193) . At the same time the Commission acknowledged that co-ordination at EU level is in some cases necessary to safeguard the application of the Treaty freedoms and to eliminate tax obstacles to cross-border activities. The Commission also referred to the need to co-ordinate personal income taxes to prevent double taxation or unintentional non-taxation in cross-border situations, or to tackle cross-border tax evasion. The European Court of Justice has consistently held that, in the absence of harmonisation, taxes on personal income fall within the competence of the Member States but they must respect the fundamental Treaty principles on the free movement of workers, services and capital and the freedom of establishment (Articles 39, 43, 49 and 56 of the EC Treaty). In particular, there must not be any direct or indirect discrimination on the basis of nationality, nor may there be any unjustified restrictions to the four freedoms. Moreover, in more general terms, the Treaty provides that every citizen of the Union has the right to move and reside freely within the territory of the Member States (Article 18 of the Treaty). It should be noted that the applicability of the four freedoms is extended to Norway , Liechtenstein and Iceland through the Agreement creating the European Economic Area (Articles 28 to 45). The Communications on the taxation of pensions of April 2001 and dividends of December 2003 are the first two examples of the Commission's new approach to achieve a co-ordinated response from Member States to important case-law of the European Court of Justice and eliminate tax obstacles to the Internal Market. Both Communications stress that Member States are free to choose their pension and dividend taxation systems as long as they respect the four freedoms of the EC Treaty. Respect for the Treaty freedoms is equally important in the area of migrant and cross-border workers, where the European Court of Justice has already given a number of rulings on the taxation of persons earning income in Member States other than where they live. Double taxation agreements form an integral part of Member States' tax rules, and the personal tax rules included in these agreements have to remain within the boundaries set by the EC Treaty, just like any other national laws. Finally, the need to avoid distortions to the movement of capital and the need to ensure effective taxation of interest payments received by individuals in Member States other than the Member State of residence have led to the adoption of a Directive on the taxation of savings income in the form of interest payments. This Directive enables such interest payments to be made subject to effective taxation in accordance with the laws of the Member State of residence.   

- Taxation of Savings Income

On 24 June 2005 the Council adopted the "Green light note" which triggers the application, by Member States, five European Third Countries and Member States' relevant dependent or associated territories, of the agreed measures as from 1 July 2005. Background information on the application of the savings taxation directive can be found in MEMO/05/228.

On 3 June 2003 , the Council adopted the Directive on taxation of savings income in the form of interest payments (Council Directive 2003/48/EC - see IP/03/787). This measure formed one of the elements of the "Tax Package" aimed at tackling harmful tax competition in the Community. On 19 July 2004 , the Council adopted a Decision establishing the application date of 1 July 2005 (Council Decision 2004/587/EC).

A proposal for directive was first made by the European Commission in 1989. A second proposal was presented in 1998, which allowed Member States to choose between exchanging information or applying a withholding tax. The proposal which led to the Directive which we have today was presented on 18 July 2001 .

The ultimate aim of the Directive is to enable savings income in the form of interest payments made in one Member State to beneficial owners who are individuals resident for tax purposes in another Member State to be made subject to effective taxation in accordance with the laws of the latter Member State.

 

Under the terms of the Directive:

·       All Member States will ultimately be expected to automatically exchange information on interest payments by paying agents established in their territories to individuals resident in other Member States. All Member States, except Belgium , Luxembourg and Austria , will immediately introduce a system of information reporting.

·       Belgium , Luxembourg and Austria will introduce a system of information reporting at the end of a transitional period, during which they will levy a withholding tax at a rate of 15% for the first three years and 20% for the following three years and 35% thereafter. They will transfer 75% of the revenue of this withholding tax to the investor's state of residence. These three Member States will be entitled to receive information from the other Member States.

·       The transitional period will end:

          ·    if and when the EC enters into an agreement, following a unanimous decision of the Council, with Switzerland, Liechtenstein, San Marino, Monaco and Andorra to exchange information upon request as defined in the OECD Model Agreement on Exchange of Information on Tax Matters released on 18 April 2002 in relation to interest payments, and these countries continue to apply simultaneously the withholding tax and

          ·    if and when the Council agrees by unanimity that the United States is committed to exchange of information upon request as defined in the 2002 OECD Model Agreement in relation to interest payments.

·       Belgium , Luxembourg or Austria may elect to introduce automatic exchange of information during the transitional period, in which case they will no longer apply the withholding tax and the revenue sharing.

·       The Directive has a broad scope that covers interest from debt-claims of every kind whether obtained directly or as a result of indirect investment via collective investment undertakings and other similar entities.

·       The Directive will apply from 1 July 2005 , provided that agreements with certain third countries ( Switzerland , Andorra , Liechtenstein , Monaco and San Marino), for equivalent measures and with all relevant Member States' dependent or associated territories for the same measures as those of the Directive, will apply from that same date.

On 2 June 2004 , the Council adopted a Decision on the signature and conclusion of an Agreement between the EC and Switzerland providing for measures equivalent to those laid down in the Directive. The Agreement was signed on 26 October 2004 . The following key elements of this Agreement also form the basis for agreements with Andorra , Liechtenstein , Monaco and San Marino :

·       a retention or withholding tax with revenue sharing at the same rates as applied by Belgium, Luxembourg or Austria during the transitional period of the Directive;

·       an option for the taxpayer to permit the disclosure of the income to his or her Member State of residence for tax purposes as an alternative to the retention or withholding tax;

·       a provision for the exchange of information on request in cases of tax fraud or similar misbehaviour;

·       a review clause to allow the Contracting Parties to review its working over time in line with international developments.

These agreements have all been signed (IP/04/1445) and concluded.

All relevant Member States' dependent or associated territories (the Channel Islands, the Isle of Man and the dependent or associated territories in the Caribbean) will provide for the same measures as those of the Directive, i.e. they will apply a system of information reporting or, during the transitional period of the Directive, levy a withholding tax on the same terms as Belgium, Luxembourg or Austria. With the consent of the Council High Level Group which was set up to co-ordinate work on the "Tax Package", these territories have established model agreements which will form the basis for bilateral agreements between them and each of the Member States.

·       Council Decision 2004/587/EC of 19 July 2004 on the date of application of Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.

·       Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.

·       Text of the Proposal (COM(2001) 400 of 18 July 2001 ) for a Council Directive to ensure effective taxation of savings income in the form of interest payments within the Community.

·       For more explanation of the 2001 proposal, see the Press Release IP/01/1026 ; while the most frequently asked questions are answered in Memo/01/266.

·       Council Decision (2004/911/EC) of 2 June 2004 on the signing and conclusion of the Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the accompanying Memorandum of Understanding (see Official Journal L 385 of 29 December 2004, p.28)

·       Council Decision (2004/912/EC) of 25 October 2004 on the conclusion of the Agreement in the form of an Exchange of Letters between the European Community and the Swiss Confederation on the date of application of the Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments (see Official Journal L 385 of 29 December 2004, p.50)

·       Council Decision (2004/ 828/EC) of 2 November 2004 concerning the signature of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signature of the accompanying Memorandum of Understanding (see Official Journal L 359 of 4 December 2004, p.32)

·       Council Decision (2004/897/EC) of 29 November 2004 on the signing of the Agreement between the European Community and the Principality of Liechtenstein providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signing of the accompanying Memorandum of Understanding (see Official Journal L 379 of 24 December 2004, p.83)

·       Council Decision (2004/903/EC) of 29 November 2004 on the signing of the Agreement between the European Community and the Republic of San Marino providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signing of the accompanying Memorandum of Understanding (see Official Journal L 381 of 28 December 2004, p.32).

·       Council Decision of 7 December 2004 on the signing of the Agreement between the European Community and the Principality of Monaco providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signing of the accompanying Memorandum of Understanding see Official Journal L 019 of 21 January 2005, p.53).

·       Council Decisions of 22 December 2004 concerning the conclusion of the Agreements between the European Community and, respectively, the Principalities of Andorra, Liechtenstein and Monaco and the Republic of San Marino providing for measures equivalent to those laid down in Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.

The Commission is determined to remove obstacles to a Single Market for pensions, and in particular for occupational pensions (second pillar pensions). Since the adoption of the Pension Funds Directive on 13 May 2003, the pressure on the remaining tax obstacles has increased.

Taxation of occupational pensions in the Member States of the European Union
Most current Member States tax occupational pensions according to the EET system (Exempt contributions, Exempt investment income and capital gains of the pension institution, Taxed benefits) or ETT principle (Exempt contributions, Taxed investment income and capital gains of the pension institution, Taxed benefits). This means that:

·       the contributions by both employer and employee are tax deductible,

·       the investment results of the pension fund are usually exempt (they are taxed only in Denmark, Italy and Sweden) and

·       the benefits are taxed.

This system of deferred taxation is logical, since contributions to pension funds diminish a person's ability to pay taxes; at the same time it encourages citizens to save for old age. In addition, it will help Member States to deal with the demographic time-bomb, as the State will receive tax revenue by taxing the pensions paid to people when more people will be dependant upon state aid.

However, many Member States do not allow tax deduction for pension contributions paid to a pension fund in another Member State. This effectively seals off their national markets from competition from other Member States, it makes it difficult to create pan-European funds and it constitutes a major obstacle to the free movement of workers within Europe.

Tax obstacles to the cross-border provision of occupational pensions

In a first step, the Commission submitted a Communication (IP/01/575; MEMO/01/142) on the elimination of tax obstacles to the cross-border provision of occupational pensions, on 19 April 2001. The Commission concluded, on the basis of the EC Treaty and the case-law of the European Court of Justice in Luxembourg (ECJ), that Member States were not allowed to restrict the freedom to provide services and the free movement of workers by refusing tax deductibility for pension contributions paid to pension funds in other Member States.

The Communication of April 2001 also developed ideas on the exchange of information and the elimination of double taxation.

Infringement procedures

As a second step, the Commission launched new infringement proceedings (IP/03/179) under Article 226 of the EC Treaty against Belgium, Spain, France, Ireland, Italy, Portugal, and the United Kingdom. The Commission also continued its proceedings against Denmark (IP/03/965), referring Denmark to the Court of Justice.

On 17 December 2003 the Commission sent reasoned opinions to Belgium, Portugal, Spain and France (IP/03/1756).

On 8 July 2004 it decided to refer Spain to the Court of Justice and to send a formal request to the United Kingdom to amend its legislation (IP/04/873).

On 22 October 2004 the Commission decided to refer Belgium to the Court of Justice and to send a reasoned opinion to Italy to amend its legislation (IP/04/1283).

On 20 December 2004 the Commission decided to send a reasoned opinion to Sweden to amend its legislation (IP/04/1500).

Reactions from the Council, the European Parliament and the European Economic and Social Committee

After an initially favourable reaction to the Commission Communication (IP/01/575; MEMO/01/142) in October 2001, the Council failed to reach agreement in December 2002.

The European Parliament gave a favourable opinion on the Communication in November 2001. So did the Economic and Social Committee .

A first article published in July 2003 discusses two Court cases and provides an overview of the issues at stake.

A second article discusses the developments in December 2003, especially the announcement by France and Spain to end the discrimination of foreign pension funds.

A third article presents an overview of developments up to 1 July 2004 per Member State.

 

The taxation of dividend income received by individuals is not harmonised at the EU-level, nor does the Commission intend to harmonise it.

However, Member States may not restrict the free movement of capital within the EU.  This means that dividends from another Member State received by individual shareholders cannot be subjected to higher taxation than domestic dividends.  Similarly, dividends paid to individuals in another Member State cannot be subjected to higher taxation than domestic dividends.

The Commission recently issued a Communication on this matter (see below) and calls on the Member States to co-operate in order to quickly deal with the issues examined in the Communication. If Member States cannot agree on solutions, the Commission will be obliged to initiate legal action against those Member States whose dividend tax rules do not comply with the Treaty.

The current state of play

Member States operate different systems for taxing dividend income in the hands of individual shareholders. For domestic dividends, most Member States prevent or reduce economic double taxation (which results from the levying of corporation tax and income tax on the same dividend income) by applying either:

·       an imputation system or

·       a schedular system.

Where Member States differentiate between the tax treatment of domestic and inbound or outbound dividends in applying their systems, this may constitute a restriction on cross-border investments and can result in fragmented capital markets in the EU.

In its developing case law, the ECJ has considered this issue on the basis of the provisions for the free movement of capital. It has ruled that a measure which provides for a different tax treatment between domestic and inbound dividends is in principle incompatible with these provisions.

Analysis of case law leads to certain conclusions on the design of dividend taxation systems.  Member States cannot levy higher taxes on:

·       inbound EU dividends than on domestic dividends; or

·       outbound EU dividends than on domestic dividends.

Member States should re-examine their systems in light of this law. Any necessary changes will help to optimise capital allocation in the Internal Market.

Moreover, a co-ordinated approach to ensure the rapid removal of any tax obstacles will help to:

·       create a more stable and investment-friendly environment; and

·       remove uncertainty created by potential legal conflict and litigation.

Such co-ordination is in the interests of both individual investors and business.  It would also help ensure maximum efficiency of the Internal Market, with consequent positive effects on the competitiveness of the Union in the global marketplace.

If a solution cannot be found despite the clear logic of such an approach, the Commission will, in line with its responsibility as guardian of the Treaty, take the necessary steps to ensure effective compliance with the Treaty, including bringing the matter before the ECJ on the basis of Article 226 of the EC Treaty.

Need more information?

·       Reaction from the European Economic and Social Committee.
On 30 June 2004 the European Economic and Social Committee adopted its opinion on the Dividend Communication.

·       Commission to tackle tax discrimination against foreign dividends: press release IP/04/25 8 January 2004

·       Communication from the Commission - Dividend taxation of individuals in the Internal Market (COM/2003/810 of 19 December 2003)

·       Treaty provisions on capital movements

In the field of social security there exist Community rules which define the concept of cross-border worker for the purpose of determining in which Member State they are entitled to social benefits. The Community definition in the social security field covers both employed and self-employed persons.

Taxation and cross-border workers - no special Community rules exist

In the field of taxation there exist no rules at Community level regarding the definition of cross-border workers, the division of taxing rights between Member States or the tax rules to be applied.

Neighbouring Member States with many persons crossing borders to work often agree special rules for cross-border workers in their bilateral double taxation conventions.

Since these rules reflect the special situation between two Member States and are the result of negotiations between them, it follows that these rules vary from one double taxation convention to another. This applies both to the definition as such, and the division of taxing rights between the Member States concerned. Normally any special rules for cross-border workers are limited to persons who both live and work close to the border and are employed. They may even be limited to persons employed in the private sector (as opposed to the public sector).

Income earned by a cross-border worker may be taxed in one or both of the Member States concerned, depending on the tax arrangements. In the latter case, tax paid in the Member State where the work is carried out would normally be taken into account when determining the tax liability in the Member State of residence, in order to avoid double taxation.

There are no rules which guarantee the cross-border worker the right to the most favourable of the tax regimes of the Member States involved (see the Gilly case, para 46. C-336/96).

- Cross-border workers and the non-discrimination principle

Taxation in the State of residence 

The EC Treaty freedoms and the non-discrimination principle mean that the cross-border worker may not be discriminated against in his State of residence, because he works in another Member State .

To the extent that he/she is taxed in the State of residence on income from employment or self-employment exercised in another Member State , he/she should therefore normally have the same right to deduction for work-related costs or costs of a personal kind in the State of residence as if the work had been carried out there. This may be the case for instance as regards costs for travelling to and from work, social security contributions paid in the Member State of employment/self-employment, child-care fees, pension contributions etc. 

Taxation in the State of employment 

From the point of view of the State of employment, a cross-border worker falls within the broader category of non-resident workers ¿ non-resident meaning that they have their tax residence somewhere else.

The Court of Justice has constantly held that residents and non-residents are not generally in the same situation. Differences in taxation between residents and non-residents may therefore not necessarily constitute discrimination.

However, where a non-resident worker - including a cross-border worker - is virtually in the same situation as a resident worker (for instance because he/she earns all or almost all of his/her income in that State), the non-resident worker may not be subject to less favourable taxation rules in the State of employment than residents of that State.

The Commission Recommendation of 1993 regarding non-resident workers 

On 21 December 1993 the Commission issued a Recommendation (94/079/EC) on the taxation of certain items of income received by non-residents in a Member State other than that in which they are resident.

The recommendation proposes to Member States a Community system for taxing income of non-resident workers. The main feature is that non-resident persons should benefit from the same tax-treatment as residents, if they obtain 75 % of their total income in one Member State . In such situations, the Member State of residence would be allowed to reduce the personal tax advantages correspondingly in order to avoid that personal allowances could be enjoyed twice. 

The case-law of the Court of Justice relating to cross-border workers

The principles of the Recommendation were largely confirmed by the Court of Justice in its judgment of 14 February 1995 in the Schumacker case (C-279/93). They have been further settled in later judgments such as Gschwind C-391/97 , Zurstrassen C-87/99 , Gerritse C-234/01 and Wallentin C-169/03 even if notably the Gschwind case indicates that the limit should be set somewhat higher than the 75 % suggested in the Commission Recommendation.

For further information on the personal tax systems of the different Member States and on the network of bilateral tax treaties between Member States see the links section of this website.

 

As part of its general strategy of addressing the cross-border tax problems facing individuals and business operating within the Internal Market, the Commission is currently considering closely the possible conflicts between the EC Treaty and the bilateral double taxation treaties that Member States have concluded with each other and with third countries.

 

In relation to company taxation the Commission is in the process of assessing the various options for tackling the problems set out in the Commission's 2001 study on company taxation. Issues include the question of equal treatment of EU residents and the application of bilateral treaties in situations where more than two countries are involved (triangular situations).

 

In June 2005 the Commission presented in a working document (document  ; annex A  ; annex B  ) a general legal analysis of problems regarding tax treaties, especially the consequences of certain rulings of the Court of Justice (ECJ) in this area together with possible solutions such as the creation of an EU version of the OECD Model Convention on which Member States' bilateral tax treaties are based or a multilateral EU tax treaty.

 

These issues were discussed with Member States in a workshop that took place in Brussels in July 2005. Several experts in this matter contributed to the workshop.

 

The double-taxation agreements of Member States will continue to be subject to review by the ECJ. In particular, the problems resulting from the current lack of co-ordination in this area, notably in triangular situations and with regard to third countries, will increase even further. Without Community action, there may be important political and economic repercussions for Member States' policies in this area. Therefore, the Commission hopes that its approach of gradual and measured co-ordination of treaty policies will eventually gain support and meet with a constructive attitude from Member States.

 

Discussions among Member States on this subject will be resumed in 2006 in the framework of a working group. The Commission intends to present a communication in 2006 explaining its short and long term strategy.

(Reproduction or use of textual or other information contained on this page is not permitted without the express consent of the relevant speaker)

Summary:

Impact of European law on double taxation conventions concluded between Member States and with third states. Meeting of a group of experts in Brussels on 5 July 2005

Welcome and introduction

Mr. Aujean, Mr. Mors and Mr. Roccatagliata from the European Commission opened the floor and introduced the documents and the objectives of the workshop.

Working Document "EC Law and Tax Treaties "

In order to animate the debates that took place after each panel and to receive input for future work, the working document raises questions regarding views on possible conflicts and their possible avoidance.

1st PANEL (Tax Treaties between Member States)

The first panel examined possible conflicts between EC Law and tax treaties concluded among Member States. Such problems may result from court decisions of the European court of Justice that repeatedly said, despite the absence of harmonising measures and although "direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law". In this respect, some of the recent judgements of the Court have highlighted cases of discrimination in the treatment of Community citizens and businesses or of violation of the fundamental freedoms rules. Moreover, t he EC Study on Company Taxation identified a number of issues not covered within the scope of existing tax treaties. Primarily, these are issues for intra-Member States treaties. These issues include, for example, triangular situations, deduction of pension contributions, treatment of stock options, the relationship with anti-deferral and anti-abuse provisions, cross-border loss compensation. Finally, some pending ECJ cases inspired the debate.

2 nd PANEL (Tax Treaties between Member States and Third Countries)

The second panel debated problems with EC Law related to tax treaties signed by individual Member States with third countries. The Commission suggested to examine this issue of tax treaties between individual Member States and third countries as a separate topic because of its peculiarity nature. Certainly - as already underlined in the Study on Company Taxation - it is true that anti-abuse clauses in tax treaties concluded by Member States with third countries should not discriminate against taxpayers in other Member States and that "limitation-on-benefits" clauses concluded by some Member States with the United States should be examined in the light of EC Law.

OECD Presentation

Mr. Mike Waters, Chair of WP1 (OECD-CFA); Ministry of Finance , United Kingdom

The European Commission offered the opportunity to the OECD, Centre of Tax Policy and Administration, to present to the tax experts and Member States representatives in charge of EC law, the work of groups and sub-groups of the Committee of Fiscal Affairs on tax treaties.

OECD-CFA website

FINAL PANEL (Possible Solutions)

The concluding panel discussed possible solutions and the role that the European Commission could play in this context. Some experts also suggested opposite solutions (e.g. a multilateral tax treaty versus an EC tax model). Nevertheless, the debate was not limited to this main hypothesis. The existing tax treaties seem to need - at the very least - to be amended to conform to the developing rules of EC tax law as elaborated by the ECJ jurisprudence, by legislation and by soft-law in this area.

- Prof. Daniel Deák, Corvinus University Budapest
[Consumption-oriented company taxation: a central European perspective ]

- Prof. Albert Rädler, Universität Hamburg
[Contribution to the workshop ]