61994C0151
OPINION OF ADVOCATE GENERAL
JACOBS
delivered on 19 September 1995 (
*1
)
1.
In this case the Commission seeks a declaration that the Grand Duchy of Luxembourg has failed to fulfil its obligations under Article 48(2) of the Treaty and under Article 7(2) of Council Regulation No 1612/68 of 15 October 1968 on free movement for workers within the Community (
1
)(‘the Regulation’) by maintaining in force provisions under which the excess amounts of tax deducted from the wages or salaries of employees who are nationals of a Member State cannot be repaid if the employee resided in Luxembourg or occupied a salaried position there for part of the year only.
The national legislation
2.
The relevant Luxembourg provisions on income tax may be summarized as follows. Under Article 153 of the Loi sur l'Impôt sur le Revenu (Income Tax Law, hereinafter the ‘LIR’) taxpayers whose employment income exceeds a certain threshold or who have significant income on which tax is not deducted at source are taxed by direct assessment (par voie d'assiette). They are obliged to submit annual tax returns to the authorities, (
2
) which form the basis of a notice of assessment (bulletin) issued by the authorities. Upon receipt of the notice they are obliged to pay the tax due or, if they have already paid some tax by way of deduction at source, the balance of tax due (Article 154(1) to (3) of the LIR). Where they have overpaid tax, the overpayment is set against other tax liabilities or, if there are none, automatically refunded (Article 154(5)).
3.
A simplified procedure applies to permanent residents whose income is essentially employment income taxed at source and falls below the threshold for taxation par voie d'assiette (Article 145 of the LIR). Such taxpayers are not obliged to submit returns. (
3
) At the end of each tax year a calculation (décompte annuel) is performed by the tax authorities or by the employer or pension fund to determine whether a refund of the tax deducted at source is due (Article 2 of the Grand-Ducal Regulation of 9 March 1992 implementing Article 145 of the LIR).
4.
Persons entering or leaving the country during a tax year are in general not entitled to refunds under either of those procedures. Article 154(6) of the LIR provides that:
‘Tax deducted from salaries and wages is not repayable where the deduction was made in respect of employees who are resident taxpayers during only part of the year because they took up residence in the country or left it during the course of the tax year’.
Similarly Article 145 of the LIR provides:
‘Employed or retired persons not qualifying for taxation par voie d'assiette are entitled to an adjustment of the deductions made by way of a décompte annuel (annual adjustment). Only taxpayers who, during the twelve months of the relevant tax year, had their tax domicile or habitual residence in the Grand Duchy and taxpayers who, while not fulfilling that condition, were in salaried employment there for at least nine months of the relevant tax year and were in continuous employment during that period, are entitled to a décompte annuel’
5.
Where such persons consider that they have overpaid tax, they must apply to the tax authorities for a refund of tax on equitable grounds under Article 131(1) of the Abgabenordnung (General Tax Law). Article 131(1) provides:
‘The Minister of Finance may in specific cases (or in a number of specific cases, such as those arising from storm damage or other emergencies) waive wholly or in part State taxes whose collection would be inequitable in the particular circumstances or in such cases provide for the refund or crediting of State taxes already paid.’
6.
Requests submitted pursuant to that provision are decided upon by the Director of the tax authority. Although, as will be explained below, the Director's decisions taken under that provision may be the subject of an appeal to the Conseil d'Etat, the rules on the basis of which the liability of the taxpayer, and hence any refund, are calculated do not appear to be based directly on any legislative text but to have been developed as a matter of administrative practice by the Director. It appears that they are analogous to the method used by Luxembourg to protect the progressive nature of its tax system where a resident taxpayer receives foreign income exempt from Luxembourg tax under a double tax agreement: see Article 134 of the LIR.
The Biehl judgment
7.
In Biehl (
4
) the Luxembourg Conseil d'Etat sought a preliminary ruling from the Court in order to enable it to appraise the compatibility with Community law of Article 154(6) of the LIR. The Court held that Article 48(2) of the Treaty precluded a Member State from laying down rules preventing repayment of sums deducted by way of tax from the salaries and wages of employed persons who were nationals of a Member State and were resident taxpayers for only part of the year because they took up residence in the country or left it during the course of the tax year.
8.
The Court observed that:
‘Under Article 48(2) of the Treaty freedom of movement for workers entails the abolition of all discrimination based on nationality between workers of the Member States, particularly with regard to remuneration.
The principle of equal treatment with regard to remuneration would be rendered ineffective if it could be undermined by discriminatory national provisions on income tax. For that reason the Council laid down, in Article 7 of Regulation (EEC) No 1612/68 of the 15 October 1968 on freedom of movement for workers within the Community ..., that workers who are nationals of a Member State are to enjoy, in the territory of another Member State, the same tax advantages as national workers.’ (
5
)
9.
The Court noted that, although the criterion of permanent residence, employed by the Luxembourg rules for the purpose of determining whether a taxpayer was entitled to a refund, applied irrespective of the nationality of the taxpayer concerned, there was a risk that it would work in particular to the disadvantage of taxpayers who were nationals of other Member States.
10.
The Court rejected the Luxembourg Government's argument that the refusal to grant refunds was necessary to preserve the progressive nature of Luxembourg's tax system. It also rejected the argument that the discrimination was remedied by the noncontentious procedure (procédure gracieuse) under which taxpayers could claim a refund on equitable grounds. The Court pointed out that Luxembourg had not cited any provision imposing an obligation on the tax authorities to remedy in every case the discriminatory consequences arising from Article 154(6).
The procedure
11.
On 27 November 1989, that is to say, before the Court gave its judgment in Biehl, the Commission wrote a letter of formal notice to Luxembourg pursuant to Article 169 of the Treaty in which it claimed that Articles 145 and 154(6) of the LIR were contrary to Article 48(2) of the Treaty and Article 7(2) of the Regulation.
12.
The Luxembourg authorities did not answer that letter.
13.
In a reasoned opinion of 4 February 1992 the Commission reiterated the position taken in its letter 27 November 1989 and referred to the judgment in Biehl. The Luxembourg authorities responded to the reasoned opinion on 12 May 1992.
14.
Since it was not satisfied with that response, the Commission initiated the present proceedings on 3 June 1994. The Commission submits that Articles 145 and 154(6) of the LIR are unlawful because they deny workers leaving or entering the country during a tax year the right to a refund of overpaid tax conferred on permanent residents. They therefore impose a discriminatory restriction on the movement of migrant workers. The Commission points out that Luxembourg has not amended Article 154(6) of the LIR to comply with the Court's judgment in Biehl and that the Luxembourg Conseil d'Etat, when applying the Court's ruling in Biehl, held that Article 154(6) was contrary to Community law. The Commission considers that the fact that a migrant worker may submit a request for a refund on equitable grounds does not provide an adequate guarantee of the protection of the rights conferred by the Treaty in the absence of an express amendment of the relevant provisions.
15.
The Luxembourg Government replies that Articles 145 and 154(6) must be read in conjunction with the procedure laid down by Article 131(1) of the Abgabenordnung. It suggests that insufficient weight was attached to that provision by the Court in Biehl, where it was not referred to by the Luxembourg Government until the hearing. Decisions taken pursuant to that provision are not wholly discretionary and may be the subject of an appeal to the Conseil d'Etat. The Luxembourg Government adds that persons seeking refunds by way of the décompte annuel are issued with a form stating that they may seek a refund on equitable grounds.
The issues
16.
It seems to me that the case raises two basic issues:
(1)
Does Luxembourg law confer on workers taking up residence or ceasing to be resident in Luxembourg the right to obtain a refund of overpaid tax, and is that right based on sufficiently clear legal provisions?
(2)
Does the method used in practice by the Luxembourg authorities to calculate refunds of tax discriminate against persons taking up residence or ceasing to be resident in Luxembourg during a tax year and is the use of a refund procedure for such persons which differs from that applied to permanent residents justified?
I shall deal with those points in turn.
Absence of clear and binding provisions
17.
In my view the Commission's action must be upheld in so far as Luxembourg has failed to amend its legislation so as to confer unequivocally on persons entering or leaving the country during a tax year the right to a refund of overpaid tax. The Court's ruling in Biehl that the requirements of Article 48 of the Treaty were not met by a procedure allowing the migrant worker to claim a refund on equitable grounds was confirmed by the judgment in Schumacker. (
6
) It is moreover consistent with the general rule that the rights of individuals under Community law must be clearly laid down in binding legal provisions, whether those rights arise under directives (
7
) or, as in this case, under directly applicable provisions of the Treaty. (
8
) Accordingly, where a Member State's legislation is incompatible with Community law, it must enact a clear amendment to that legislation in order to remedy the incompatibility.
18.
For example, in Commission v Italy the Court stated:
‘... the right of individuals to rely on directly applicable provisions of the Treaty before national courts is only a minimum guarantee and is not sufficient in itself to ensure the full and complete implementation of the Treaty. It is clear ... that if a provision of national law that is incompatible with a provision of the Treaty, even one directly applicable in the legal order of the Member States, is retained unchanged, this creates an ambiguous state of affairs by keeping the persons concerned in a state of uncertainty as to the possibility of relying on Community law and that maintaining such a provision in force therefore amounts to a failure by the State in question to comply with its obligations under the Treaty.’ (
9
)
19.
In response to the argument advanced by the Italian Government in that case that, in view of the direct applicability of the relevant Treaty provisions, the rights of nationals of other Member States were adequately guaranteed by circulars or administrative directions, the Court added: (
10
)
‘The incompatibility of national legislation with provisions of the Treaty, even provisions which are directly applicable, can be finally remedied only by means of national provisions of a binding nature which have the same legal force as those which must be amended. As the Court has consistently held with regard to the implementation of directives by the Member States, mere administrative practices, which by their nature are alterable at will by the authorities and are not given the appropriate publicity, cannot be regarded as constituting proper fulfilment of obligations under the Treaty.’
20.
Whereas the Luxembourg legislation specifically confers on permanent residents the right to a refund of overpaid tax, it gives the impression of denying that right to temporary residents. That impression is not dispelled by Article 131(1) of the Abgabenordnung, which merely confers on taxpayers the general right to request refunds of tax on equitable grounds. The tax authorities' practice of circulating forms for requesting refunds, although commendable, cannot be regarded as a substitute for clear legal provisions.
21.
It is true, as the Luxembourg Government points out, that decisions taken by the Director under that provision may be the subject of an appeal to the Comité du Contentieux of the Conseil d'Etat. By a judgment of 10 July 1981 (
11
) that court held:
‘... le Comité du Contentieux s'est vu attribuer compétence pour statuer sur les recours dirigés contre les décisions du directeur des Contributions en matière de remise ou en modération d'impôts; qu'il lui incombe dès lors d'apprécier, en tant que juge d'appel, les circonstances dans lesquelles le paragraphe 131 alinéa 1er de la loi générale des impôts “Abgabenordnung” doit s'appliquer.’
22.
However, as might be expected in the case of a procedure for claiming refunds on equitable grounds, the Conseil d'Etat has also held:
‘le directeur des Contributions dispose en matière gracieuse d'un large pouvoir d'appréciation des faits pour arrêter sa décision (Ermessensentscheidung)’. (
12
)
23.
The Luxembourg Government has been unable to point to any provision laying down the method to be used by the Director for calculating refunds in the case of persons entering or leaving the country during a tax year. A taxpayer is unable, by examining the Luxembourg legislation, to determine whether he has overpaid tax and should apply for a refund. There is moreover no guarantee that the Director might not at will change the practice which he follows.
24.
Those considerations are sufficient to support a finding that Luxembourg has failed to fulfil its obligations under the Treaty. For the sake of completeness I shall nevertheless consider whether the administrative practice followed by the Luxembourg authorities involves unlawful discrimination contrary to Article 48 of the Treaty and Article 7(2) of Council Regulation No 1612/68.
The existence of discrimination
25.
It appears that, notwithstanding the impression given by the Luxembourg legislation, the Luxembourg authorities do now in practice grant refunds of overpaid tax to persons entering or leaving the country during a tax year. In appraising the practice followed it is necessary to consider two questions:
(1)
Is the method of calculating refunds discriminatory?
(2)
Does the requirement imposed on temporary residents to make a specific request for a refund entail discrimination at the procedural level, when no such requirement is imposed on permanent residents?
26.
It is apparent from the copies of decisions annexed to the defence that the method of calculation employed by the Director is as follows:
(1)
The taxpayer's Luxembourg income and foreign income are aggregated.
(2)
The notional Luxembourg tax payable on the taxpayer's total income is calculated using the appropriate scale.
(3)
That figure is reduced to reflect the proportion of the taxpayer's total income represented by income which he earned in Luxembourg.
(4)
That figure, which corresponds to the Luxembourg tax due, is compared with the tax deducted at source by the taxpayer's employer in order to determine whether a refund of tax is due.
27.
Thus, Luxembourg does not actually tax the foreign income earned by a worker before entering or after leaving the country but takes such income into account in determining the appropriate rate of tax to be applied to his Luxembourg income under its progressive system.
28.
In my view the method used for calculating refunds does not entail a discriminatory restriction of the freedom of movement of such a worker. In the simple case in which a worker entering or leaving the country during a tax year does not earn further income outside Luxembourg, the method is neutral in its effect. He will be entitled to a refund equal to that which he would have received if he had been resident in Luxembourg for the whole tax year. In cases where the worker earns further income during the tax year before entering or after leaving Luxembourg, the method ensures that Luxembourg tax is applied at the appropriate rate to the worker's Luxembourg income during his period of residence. In the absence of such a rule such a worker would be placed at an advantage over permanent residents who, by virtue of remaining in the same country, would be taxed at a higher rate.
29.
It remains to be considered whether there is nevertheless discrimination at the procedural level.
30.
The Commission refers in this connection to the judgment in Schumacker. (
13
) Mr Schumacker was a Belgian national who resided in Belgium but worked in Germany. As in the case of workers resident in Germany, tax was deducted at source from his income by his employer. However, as a nonresident his personal and family circumstances were not taken into account by the employer in calculating the deductions made, the rationale for that being that it was for the worker's State of residence — which had the right to tax the worker on his worldwide income — to take account of such circumstances. As a result he was taxed more heavily under the German rules than if he had been resident in Germany.
31.
The Court held first that Article 48 of the Treaty precluded heavier taxation of a nonresident by his State of employment where he obtained his income entirely or almost exclusively from his employment and did not have sufficient income in his State of residence to allow his personal and family circumstances to be taken into account.
32.
It then considered whether the German rules also discriminated at the procedural level. It held that rules excluding nonresidents from procedures for annual adjustment of tax by employers and annual assessment of tax by the tax authorities were contrary to Article 48 of the Treaty. The effect of the rules was to prevent nonresidents from bringing into account certain items, such as occupational expenses, special expenditure and extraordinary costs, which might give rise to partial refund of tax deducted at source. They were therefore placed in a less advantageous position than residents. It was no defence for the German Government to point to a procedure whereby the nonresident taxpayer could request a certificate from the tax authorities indicating certain reliefs to be taken into account by the employer. The provisions in question were not binding, and it had not been shown that the tax authorities were obliged to remedy the discrimination in all cases.
33.
The Court added that the exclusion of nonresidents from the annual procedures meant that those who entered or left Germany during the tax year, or who were unemployed for part of the tax year, could not obtain reimbursement of overpaid tax from their employer or the tax administration. Referring to the judgment in Biehl, the Court pointed out that the existence of an equitable procedure for recalculation of liability under the German rules was not sufficient to meet the requirements of Article 48.
34.
That judgment clearly establishes that discrimination at the procedural level may be contrary to Article 48. It also makes it clear that the procedures laid down must be binding on the authorities and must be capable of remedying all instances of substantive discrimination. However, it remains necessary to consider whether — on the assumption that the practice followed by the Luxembourg authorities in this case were embodied in binding provisions conferring a specific right to a refund — the application of a different procedure for refunding overpaid tax to taxpayers entering or leaving the country during a tax year would be discriminatory or whether it would be warranted by the different situation of such taxpayers.
35.
It seems clear first of all that it would not be possible for Luxembourg to apply the simplified procedure of the décompte annuel to such taxpayers. That procedure, which entails an automatic calculation of taxpayers' liability by the tax authorities, employers or pension funds, presupposes that those bodies or persons have a taxpayer's full employment or pension record for the tax year, so that the taxpayer's liability to tax under the progressive system of income tax may be calculated and compared with deductions made by the employer or pension fund. While that is possible where a migrant worker resides in Luxembourg for the whole of the relevant tax year, it is not possible if he enters or leaves the country during the year.
36.
Admittedly, it would seem possible, at least in principle, to require taxpayers entering or leaving the country to comply with the procedure applicable to persons taxed par voie d'assiette, that is to say, to submit a tax return to the tax authorities at the end of the tax year. If the return contained details of income earned during the periods of both residence and non-residence, it could be used to calculate whether a refund of tax was due.
37.
It may be noted however that many migrant workers are not, in complete years of residence, obliged to submit an annual tax return since their tax liability is adjusted under the simplified procedure of the décompte annuel. The Commission has not shown that for such tax payers the requirement to submit a request for a refund, providing details of their foreign income, is more burdensome than an obligation to complete an annual tax return in respect of the year in which they enter or leave the country. Nor has the Commission suggested that the application of a separate procedure has led to undue delays in the refund of overpaid tax.
38.
As regards taxpayers with substantial income who are in any event required to submit a tax return under the system of taxation par voie d'assiette, I do not see any reason why they should be required to make a separate request for a refund of tax. The tax return could, if necessary, be amended so as to request the details necessary for the calculation of the refund.
39.
I conclude therefore that it has not been shown that the method applied by Luxembourg for granting refunds of overpaid tax to workers leaving or entering the country constitutes a discriminatory restriction on their freedom of movement. Moreover, it would seem that the application of a different procedure for refunding tax may in many cases be justified. As already noted, however, it is unnecessary for the Court to rule on this issue.
Costs
40.
Since Luxembourg has failed in its main submissions, it should be ordered to pay the costs under Article 69(2) of the Rules of Procedure. It may be noted also that the relevant Luxembourg rules and practice did not become fully clear until they were explained by Counsel for the Luxembourg Government at the hearing.
Conclusion
41.
Accordingly, I am of the opinion that the Court should:
(1)
declare that, by maintaining in force provisions under which the excess amounts of tax deducted from the wages or salaries of employees who are nationals of a Member State are not repayable if the employee resided in Luxembourg or occupied a salaried position there for part of the year only, Luxembourg has failed to fulfil its obligations under Article 48(2) of the Treaty and under Article 7(2) of Council Regulation 1612/68 of 15 October 1968 on free movement for workers within the Community;
(2)
order Luxembourg to pay the costs.
(
*1
)	Original language: English.
(
1
)	OJ, English Special Edition 1968 (II), p. 475.
(
2
)	Jean-Pierre Winandy, Les Impôts sur le Revenu et sur la Fortune au Luxembourg, Editions Promoculture, p. 271.
(
3
)	Winandy, ibid.
(
4
)	Case C-175/88 [1990] ECR I-1779.
(
5
)	At paragraphs 11 and 12 of the judgment.
(
6
)	Case C-279/93 [1995] ECR I-225.
(
7
)	See for example the judgments in Case 102/79 Commission v Belgium [1980] ECR 1473; Cases 96/81 and 97/81 Commission v Netherlands [1982] ECR 1791 and 1819; Case 300/81 Commission v Italy [1983] ECR 449.
(
8
)	See for example Case 168/85 Commission v Italy [1986] ECR 2945; Case 38/87 Commission v Greece [1988] ECR 4415.
(
9
)	At paragraph 11 of the judgment. See also Case C-169/87 Commission v France [1988] ECR 4093, especially at paragraph 11.
(
10
)	At paragraph 13 of the judgment.
(
11
)	No 6852 du Rôle, Michel Schaadt and Denise Floener v Administration des Contributions,
(
12
)	Judgment of 11 October 1988, No 7803 du Rôle_/emp Bertrand v Administration des Contributions.
(
13
)	See note.