This is a chapter from the book: "Taxes Crossing Borders (and Tax Professors Too) - Liber Amicorum Prof Dr R.G. Prokisch".
Prof.dr. G.T.K. Meussen1
My dear colleague Rainer Prokisch, residing in Germany and working at Maastricht University in the Netherlands, is the perfect example of a frontier working who falls under the scope of the Schumacker-doctrine as developed by the Court of Justice of the European Union (CJEU). Because of the deductibility of mortgage interest on personal dwellings in the Netherlands, that was expanded by the CJEU to non-residents in the Renneberg-case, the Schumacker-doctrine is still very much alive in the Netherlands. It led to a steady flow of case law in the Netherlands, of discussions concerning the legal implementation of the doctrine in the Dutch Individual Income Tax Act 2001 and raises a number of unanswered questions. In this contribution I will shed my light on a number of these issues.2
The Schumacker-case was a really straight forward case of a frontier worker, working in Germany and living in France, while his spouse did not earn any income. In the famous Schumacker-case3 the CJEU ruled:
“Article 48 of the Treaty must be interpreted as precluding the application of rules of a Member State under which a worker who is a national of, and resides in, another Member State and is employed in the first State is taxed more heavily than a worker who resides in the first State and performs the same work there when, as in the main action, the national of the second State obtains his income entirely or almost exclusively from the work performed in the first State and does not receive in the second State sufficient income to be subject to taxation there in a manner enabling his personal and family circumstances to be taken into account.”
Delivered by eleven judges, one might perceive that the judgement was carefully concluded after long deliberations. But the result of conceiving a newly developed doctrine in case law, will automatically mean that a flow of subsequent new cases will emerge, in which the CJEU has to answer all kind of detailed follow up questions. This happened in the aftermath of the Schumacker-case as well. Now, in the year 2022, so 27 years after the Schumacker-ruling was issued, there are still a number of unanswered questions.
The Schumacker-doctrine is highly controversial, and evolves around the key words ‘discrimination’, ‘hindrance’ and ‘disparity’. It is surely a reasonable and humane ruling, but the fact that under certain circumstances, the work state has to provide a non-resident taxpayer with a resident tax treatment, is still breathtaking. Opponents of the Schumacker-ruling argue that this is a case of a disparity, for which the TFEU does not provide a remedy. The controversy evolves around the fact how to determine the word ‘discrimination’ in a non-resident context. Although residents and non-residents are as a starting point not in the same situation, so discrimination cannot arise, the CJEU has ruled that in certain factual circumstances, they are in the same situation. And then the issue of violation of equal treatment resulting in discrimination may arise.
On the basis of the so-called Schumacker-doctrine, in a situation where a non-resident taxpayer receives no significant income in the Member State of residence and derives the major4 part of his taxable income from an activity pursued in the Member State of employment, the latter has to give him a ‘resident treatment’, meaning that the state of employment has to take the personal and family circumstances of the non-resident individual into consideration as if he was a resident. Although as a starting point residents and non-residents are not in the same position and therefore discrimination is not at hand, discrimination arises in such a situation according to the CJEU from the fact that without applying this doctrine, the personal and family circumstances of the taxpayer are taken into account neither in the State of residence nor in the State of employment. As the resident state effectively cannot take the personal and family circumstances of the taxpayer into consideration due to a lack of income, the source state is obliged to do so, under the relevant income tax rules of the source state.
As a result of subsequent court cases, there is now a general consensus that the Schumacker-doctrine applies if the worker has no or not sufficient taxable income in the resident state for this state to make it possible to take the tax aspects of his family and personal situation into consideration.
The Renneberg-case6, a Dutch case, expanded the Schumacker-doctrine to deduction of mortgage interest in relation to a personal dwelling. In the Netherlands, mortgage interest is tax deductible for income tax purposes. The Renneberg-case focuses on a situation of a non-resident, who works in the Netherlands and who lives in Belgium. He owns a personal dwelling in Belgium in which he also resides. The dwelling is financed by a mortgage from a Netherlands resident bank. In the contested years, 1996 and 1997, Renneberg was employed in the public service by the Netherlands municipality of Maastricht. During those two years he received his entire work related income in the Netherlands.
The question is what elements of a national income tax system exactly fall within the scope of ‘personal and family circumstances’. One could defend the opinion that source-related deductions fall outside the scope of personal and family circumstances. That family and personal circumstances therefore are all these tax elements that manifest themselves at a level outside or ‘above’ a source of income. Elements like family, children, excessive health costs, alimony payments, deductible gifts to charitable institutions, etc.
The CJEU, however, points at paragraph 34 of its judgment in the Lakebrink and Peters-Lakebrink case stating that personal and family circumstances refer to ‘all the tax advantages connected with the non-resident’s ability to pay tax which are granted neither in the State of residence nor in the State of employment.’
Without giving a material definition of the ability to pay, the CJEU implicitly acknowledges that deduction of mortgage interest regarding a personal dwelling in the case of Renneberg has an impact on the ability to pay and therefore falls under the Schumacker-doctrine. This, however, leads to a very questionable outcome, primarily in the border regions of the Netherlands, in Belgium and in Germany. Because workers working in the Netherlands and living in Belgium or Germany can benefit from the Dutch tax system and can deduct the mortgage interest from the income while workers working – and living – in Belgium or Germany cannot do so or only in a very limited matter (on the basis of the Belgium or German Income Tax Act), the cross-border workers can lend more money and can therefore afford a higher prize for their personal dwelling in Belgium or Germany than Belgian or German residents working and living in the same country. This leads to disruptions on the real estate market causing animosity between different nationals living in the border region. One may encompass that the CJEU looked at the Renneberg-case from a very technical-juridical perspective, while failing to see the impact on the societies in the border regions. Furthermore, the Renneberg-ruling is in my perception a wrong ruling delivered by the CJEU, as the deductibility of mortgage interest can be seen as a subsidy, that is given through the tax system. But in fact it has nothing to do with taxation. In essence it is a subsidy for owners of a personal dwelling. As the personal dwelling is situated within the territory of a state, it is a state matter to give such a subsidy to all residents, irrespective of their nationality.
In the X-case7, in the Netherlands also referred to as the Spanish football agent case, a taxpayer lived in Spain, where he had a personal dwelling in Spain financed with a mortgage. The taxpayer had no taxable income in Spain and derived his income from taxable sources in the Netherlands and Switzerland. The CJEU ruled that the deduction of mortgage interest, on the basis of the Schumacker-doctrine, had to be divided between the Netherlands and Switzerland, pro rata parte equivalent to the amount of income taxable in the respective countries. The personal and family considerations have to be taken in consideration in the respective work states on the basis of their national income tax legislation. So if in Switzerland mortgage interest is not tax deductible, this part of the deductibility fails as a result of a disparity. And if Switzerland were to have a possibility to deduct mortgage interest on a personal dwelling from for instance labour income, one may wonder whether Switzerland being a third state, can be obliged under EU law, to provide for a resident tax treatment. This obligation may arise under the Free Movement of Persons Agreement (FMA).8,9
The CJEU argued that if it would rule differently, the personal and family circumstances would be taken into consideration nowhere. Not in Spain because the taxpayer receives no taxable income in Spain. And not in the respective work states Netherlands and Switzerland either, because the taxpayer is a non-resident in these states. And this result cannot be accepted according to the CJEU. Therefore, the ruling in the X-case is very much in line with the Schumacker-doctrine, but with far reaching consequences for the tax systems of the Member States, especially that of the Netherlands.
With regard to the implementation of the Schumacker-doctrine in their national income tax legislation, some Members States still maintain a system where the non-resident taxpayer can choose to be treated as a resident taxpayer, eligible for all the tax benefits related to residency. In a recent Portuguese case, the MK-case10, the CJEU once again stated that such a system is in breach of the TFEU. Previously, the CJEU already judged comparably in the Gielen-case11.
Regarding a number of Schumacker-cases that have emerged in the Netherlands in recent years, one question was whether the income requirement should be dealt with at the individual level or, in case of marriage or partners actually living together, at the level of the partners taken the combined income of both partners into consideration. A case dating back to the year 201912 concerns two unmarried cohabiting partners who cohabit without being married in Belgium. The woman owns a personal dwelling in Belgium, which is financed by a mortgage, and she only receives Belgian income. The man is an entrepreneur, with 90% of the profit being allocated to the Netherlands and 10% to Belgium. The man wants to deduct the full mortgage interest on the Belgian home from his income, which the Dutch tax inspector refuses. Is this a prohibited discrimination under the TFEU?
The Dutch Supreme Court ruled that this was not the case, without asking the CJEU for a preliminary ruling. The Supreme Court ruled that the Schumacker-doctrine must be applied at the family level and concluded that the woman has sufficient Belgian income to take into account the personal and family situation of those involved in Belgium. The fact that Belgium only has a limited possibility to deduct mortgage interest is a disparity that falls outside the scope of EU law.
I can accept this ruling of the court, as both partners were not married, were not registered partners and had not concluded a partnership agreement.
Another case of a married couple was decided by the Dutch Supreme Court in the year 2021. The couple is married in community of property and both spouses lived in their personal home in Belgium that is financed by a mortgage. The man only receives Dutch sourced income and the wife exclusively Belgian sourced income. The Dutch tax inspector, on the basis of the Schumacker-doctrine, allows for the husband a deduction of mortgage interest of 50%, equivalent to his ownership of the personal dwelling. The taxpayer, however, claims a 100% deduction, stating that if both taxpayers would have been taxpayers resident in the Netherlands, they could have divided the mortgage interest deduction among them on the basis of a special provision in the Dutch Individual Income Tax Act13, in any possible ratio, which leads to an optimized tax situation. This instrument leads to the highest tax advantage irrespective of the civil ownership of the personal dwelling. So even if one fiscal partner owns the house, the other fiscal partner can deduct the full mortgage interest if taxpayers choose to do so, because this leads to the highest tax advantage. The contested taxpayer, therefore, claims that he is subject to a discriminatory treatment in the Netherlands, compared to a resident taxpayer.
AG Niessen advised the Dutch Supreme Court to refer the case for a preliminary question to the CJEU.14 The Dutch Supreme Court, however, overruled this request and decided the case unilaterally.15 The decision is very brief and, as so often happens, the Dutch Supreme Court did not refer to the opinion of the AG at all.16 The Supreme Court only generally referred to the Schumacker-doctrine, acknowledging that based on the facts of this case, the doctrine does not apply. The fact that mortgage interest is not deductible in Belgium is a disparity that the Dutch state does not have to mend. Korving17 rightly concludes that this case of non-referring to the CJEU is a missed opportunity to receive more guidance of the CJEU in this matter.
A number of court cases, primarily concerning pensioners, evolves around the question whether the taxpayer has obtained sufficient income in the residence state, following which the work state does not have to take into account the taxpayer’s personal and family circumstances. It should be noted that although the Schumacker-case concerned the free movement of workers, the Schumacker-ruling in the end relates to all types of income. Relatively recently, the lower tax court of Zeeland-West-Brabant18 ruled on a Dutch retiree who had emigrated to France. In France, he owned a house which was burdened with a mortgage. He enjoyed a pension of € 31,959 the taxation of which has been allocated to the Netherlands, and an old-age state pension of € 13,676, the taxation of which has been allocated to France. The French income falls below the French threshold of € 14,771 and is therefore effectively not taxed in France. The question was raised whether the taxpayer was entitled to a resident treatment in the Netherlands based on the Schumacker-doctrine, resulting in the deduction of the mortgage interest on his French dwelling in the Netherlands? And, in addition to that, whether he could also deduct his alimony payments and excessive medical costs in the Netherlands? The lower tax court ruled that this is indeed the case. The issue of sufficient income in the resident state must, when litigating in the source state, be judged on the basis of national tax legislation of the resident state.19 In that respect, the entire amount of taxable income in the residence state has to be taken into consideration.
Another interesting example in this regard is a recent ruling of again the lower tax court of Zeeland-West-Brabant20. This concerns a single taxpayer who lives in Belgium, owns a personal dwelling there and pays € 29,822 on mortgage interest. He receives a salary from employment that has been allocated to the Netherlands for tax purposes of € 77,880 and also possesses considerable private assets (assets of € 1,607,729 and debts of € 171,731). On the basis of the Dutch capital yield tax, which leads to a deemed fictitious income, this income is high enough to take the personal circumstances into consideration. However, according to Belgian tax law, the taxpayer as such has such a low Belgian income in relation to his capital, that he cannot fully effectuate his housing bonus in Belgium and, in addition, his tax free sum is higher than his effective taxable income in Belgium. For that reason, the Dutch lower tax court awarded him the full mortgage interest deduction (or rather the full negative income from the owner-occupied home) in the Netherlands.
To be able to be treated as a resident taxpayer in the work state, the taxpayer has to provide an income declaration given by the residence state. On the basis of this declaration, the tax inspector of the work state can determine whether the Schumacker-criteria in relation to the income are met. This requirement is laid down in Article 7.8, paragraph 6 Dutch Individual Income Tax Act 2001. The lower tax court of The Hague21 ruled that if a taxpayer fails to provide such income declaration, the taxpayer is not eligible for a tax treatment as a resident. One may question whether such a requirement is in violation with EU law, as there are all kinds of possibilities for Member States for exchanging information under the Directive on Administrative Cooperation (DAC). Obtaining information for the taxpayer himself is always burdensome, as experiences in the border region show, because the taxpayer has to go to the local tax office to obtain some kind of formal determination of the income taxable in the residence state. Not all tax administrations in, for instance, Belgium and Germany are digitalized on such a level, that the taxpayer can obtain the income declaration digitalized through the internet. An EU Expert Group in which I participated published a report some years ago on ways to tackle cross-border tax obstacles facing individuals within the EU.22 From the research conducted by the group it turns out that taxpayers even today face a lot of practical obstacles, for instance language problems, forms that are not harmonized, difficulties in communication, etc. As the CJEU obliges Member States to apply the Schumacker-treatment, it is my view that the income verification should take place at the Member States’ level and should not be burdened upon the shoulder of the taxpayer. In other words, the Dutch income declaration requirement to my perception is in violation of EU law.
The so-called Schumacker-doctrine, whereby a Member State under certain circumstances must give a non-resident the tax treatment a resident would be entitled to, has been laid down by the Dutch legislator in Article 7.8 Dutch Individual Income Tax Act 2001, and is worded as a so-called ‘qualified foreign tax liability’. The standard for such a resident tax treatment as laid down in the aforementioned Article 7.8 is on the one hand broader than is required by EU law, and on the other hand too limited and therefore in conflict with EU law, e.g. the TFEU. Article 7.8 states as a requirement that the taxpayer has to earn his entire or almost entire income (i.e., 90% or more) in the Netherlands. As Van den Broek23 rightly pointed out, the CJEU has never stated a percentage of income that must be earned in the country of employment in order to oblige that country to provide resident treatment to the non-resident.
The decisive factor is whether the taxpayer has such an amount of income in his country of residence that his personal and family situation can be taken into account. Therefore, a Dutch non-resident taxpayer with a worldwide taxable income from work of, for example, € 1,000,000 of which € 100,000 is taxable in the country of residence, can claim resident treatment in the Netherlands under Article 7.8 Dutch Income Tax Act 2001. However, this is not mandatory under EU law, because the income in the country of residence is sufficient to take into account the tax benefits that arise from the personal and family situation of the taxpayer. This leads to the peculiar situation that in such a situation, the taxpayer can claim the tax advantages of his personal and family situation twice, i.e. in the residence state as well as in the Netherlands.
On the other hand, a Dutch non-resident taxpayer with a worldwide income of, for example, € 20,000 of which € 5,000 is attributable to the country of residence, does not qualify for application of Article 7.8 Dutch Individual Income Tax 2001, while resident treatment is mandatory under EU law. One may wonder when the European Commission is going to start an infringement case against the Netherlands, in order to bring Article 7.8 Dutch Individual Income Tax Act 2001 in line with CJEU case law.
Article 21bis Executive Decree Individual Income Tax 2001 in this respect only offers a limited extension of Article 7.8 Dutch Income Tax Act. This article states that non-resident pensioners and other taxpayers with a comparable (old age) retirement income can benefit from a resident tax treatment if they can prove that they do not receive enough income in the resident state to take into consideration their personal and family circumstances. As stated, this requirement should be extended to all taxpayers, irrespective of the type of income.
Another issue is the implementation of the aforementioned Spanish football agent case into the Dutch Individual Income Tax Act 2001. Up until today, Article 7.8 Dutch Individual Income Tax Act 2001 still has not been changed as a result of this CJEU ruling. The ruling has been laid down in a separate decree of the Dutch State Secretary for Finance24, but one may imagine that this is not enough because a decree can also be annulled by the State Secretary without intervention of parliament and this ruling therefore has to be laid down in a formal bill of law. Also in this respect the Netherlands might expect an infringement case initiated by the European Commission.
The CJEU Renneberg-ruling has unjustly extended the Schumacker-doctrine to the deduction of mortgage interest. This leads to the curious situation that the Dutch tax system is subsidising foreign real estate, e.g. foreign personal dwellings. The deduction of mortgage interest is to be seen as a subsidy that runs through the tax system, but in essence has no relation to taxation as it is a pure subsidy. And a subsidy for real estate should only be provided by the state in which the real estate is situated.
Up to the year 2022, the Renneberg-ruling has led to a flow of follow up jurisprudence of specific Schumacker issues in the Netherlands. There is also considerable controversy concerning the way the Dutch tax legislator has implemented the Schumacker-doctrine in Article 7.8 Dutch Individual Income Tax Act 2001. Therefore, the Schumacker-doctrine as such is very much alive in the Netherlands including the EU law discussions around this issue. Especially the Renneberg-ruling has gained disapproval from the various successive Dutch governments. This can also be derived from the reluctance with which the Dutch tax legislator is implementing changes in Article 7.8 Dutch Individual Income Tax Act 2001. He only comes into action if absolutely necessary. But rulings of the CJEU are final and have to be accepted from a legislative perspective, whether one likes the ruling or not.
My dear colleague Rainer Prokisch is officially retiring as full professor of international tax law at Maastricht University. But I cannot imagine that this is a real retirement. I presume that Rainer, with his energy and dedication to international tax law, will continue to publish and lecture. That is a good thing for tax science in general but also for himself on a personal level. Work and intellectual debate keeps the mind and body young. In that sense, I wish Rainer all the best for the future.