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German Federal Tax Court (Bundesfinanzhof) holds that German withholding tax on artists and athletes is compatible with EC law and acte clair

In a decision of 29 November 2007 the German Federal Tax Court (Bundesfinanzhof, hereinafter BFH) has decided that the German withholding tax on artists and athletes is compatible with EC law. In the case at hand a German company had organised an event in Germany in which UK resident artists featured. German withholding tax was assessed on the payments to the artists, and the taxpayer objected against this withholding. The BFH first referred to the Scorpio decision of the ECJ (C-234/01), and concluded therefrom that a withholding tax may constitute a restriction on the freedom of providing services in another Member State. The BFH then held that nevertheless withholding is a legitimate and appropriate means for ensuring proper levying of income taxes. The fact that when Scorpio was decided the EC Mutual Assistance Directive was not yet effective, seems to be ignored by the BFH, at least the BFH specifically argued that it is not convinced that the Mutual Assistance Directive has the same effectiveness as in ensuring proper collection of taxes as a withholding tax mechanism. Therefore the BFH concluded that the German withholding tax system would still be accepted by the ECJ as being in agreement with EC law. This BFH decision can at least be considered as remarkable, and in deviation from the general interpretation of EC law as it can be derived from the case law of the ECJ. For example, a reduction in tax revenue cannot justify an obstacle for utilising a fundamental freedom (see e.g. the Marks & Spencer decision (C-446/03). The decision clearly shows a flow in the way EC law can be invoked by interested parties: if a Court holds that a matter is clear enough to take a decision, it is not obliged to ask prejudicial questions to the ECJ! Previously the Germany BFH has also been reluctant to ask prejudicial questions, it appears that this previous tendency is still present. Now it seems that only the EC Commission can to start additional an infringement procedure against Germany for bringing its legislation in this field in line with EC law.

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