Opinion of Mr Advocate General Jacobs delivered on 26 November 1992. - Niels Kristoffersen v Skatteministeriet. - Reference for a preliminary ruling: Østre Landsret - Denmark. - Protocol on the Privileges and Immunities of the Communities - Tax on the rental value of immovable property. - Case C-263/91.



European Court reports 1993 Page I-02755



Opinion of the Advocate-General

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My Lords,

1. In this case the OEstre Landsret has requested a preliminary ruling on the interpretation of Article 13, second paragraph, and Article 14, first paragraph, of the Protocol on the Privileges and Immunities of the European Communities (hereafter "the Protocol").

2. The plaintiff in the main proceedings, Mr Niels Kristoffersen, is a Danish national who, since 1 April 1976, has been an official at the secretariat of the European Parliament in Luxembourg. His wife is a teacher at the European School in Luxembourg. As an official of the European Communities Mr Kristoffersen is subject to the Protocol. The second paragraph of Article 13 of the Protocol exempts his Community salary from national taxes; instead, that salary is subject to a "tax for the benefit of the Communities", as provided for in the first paragraph of Article 13. Mrs Kristoffersen, as a teacher at a European School, is not covered by the Protocol. The complex tax arrangements applicable to teachers at the European Schools are familiar to the Court from Case 44/84 Hurd v Jones [1986] ECR 29 and I shall not describe them in detail. It is sufficient to observe that Mrs Kristoffersen' s salary is subject to Danish income tax and is not subject to the Community tax referred to in the first paragraph of Article 13 of the Protocol.

3. It is to be noted that only Mr Kristoffersen' s Community salary is exempt from national taxation. Any other income that he may have is not exempt from national taxation. Article 14, first paragraph, of the Protocol provides:

"In the application of income tax, wealth tax and death duties and in the application of conventions on the avoidance of double taxation concluded between Member States of the Communities, officials and other servants of the Communities who, solely by reason of the performance of their duties in the service of the Communities, establish their residence in the territory of a Member State other than their country of domicile for tax purposes at the time of entering the service of the Communities, shall be considered, both in the country of their actual residence and in the country of domicile for tax purposes, as having maintained their domicile in the latter country provided that it is a member of the Communities. This provision shall also apply to a spouse, to the extent that the latter is not separately engaged in a gainful occupation, and to children dependent on and in the care of the persons referred to in this Article."

4. It seems to be common ground that, as a result of that provision, Mr Kristoffersen is liable to pay Danish income tax on any income (except his Community salary) that accrues to him in Denmark, Luxembourg or elsewhere. (Mrs Kristoffersen, although "separately engaged in a gainful occupation", is also liable to Danish income tax by virtue of the special arrangements governing the teachers at the European School.)

5. Under Article 4(b) of the Statsskattelov (the Danish Tax Law), the rental value of a home owned by the taxpayer is taken into account as part of his income, even if he uses it solely as his residence. Although Article 4(b) of the Statsskattelov states that the rental value is assessed as the amount which could be obtained in rent if the house or apartment were let, it appears that the rental value is in fact based on the capital value of the property in accordance with rules laid down in Articles 15B to 15H of the Ligningslov [Law on the Basis of Assessment]. Under Article 6(1)(e) of the Statsskattelov all the taxpayer' s interest payments are deductible from taxable income. That provision does not seem to be confined to interest payments in connection with a loan taken out for the purpose of financing the purchase of the house, but it is only such interest payments which are in issue in the present case.

6. In 1982-1983 the Kristoffersens had a house built in the Grand Duchy. They took up residence in it on 1 May 1983. In the income tax years 1983 and 1984 the rental value of the house was fixed at DKR 42 283 and DKR 70 927 respectively. The construction of the house had been financed with a loan, the interest on which amounted to DKR 138 804 in 1983 and DKR 153 604 in 1984. Thus, in income tax years 1983 and 1984, the interest payments made by Mr Kristoffersen exceeded the estimated rental value of his home. His taxable income was therefore negative. Under Danish tax law negative taxable income can be used to reduce the spouse' s taxable income. That is what was done in Mr Kristoffersen' s case in the income tax years 1983 and 1984, but the amount of negative income that Mr Kristoffersen could transfer to Mrs Kristoffersen for the purpose of reducing her taxable income was of course much less than it would have been if the rental value of the house had not been treated as income. Mr Kristoffersen argued before the national courts that by treating the rental value of his home as taxable income the Danish tax authorities infringed Articles 13 and 14 of the Protocol.

7. The OEstre Landsret has referred the following questions to the Court:

"1. Should the first paragraph of Article 14 of the Protocol on the Privileges and Immunities of the European Communities be interpreted as meaning that officials and other servants of the Communities who are covered by that provision are not liable to pay income tax in their original country of domicile on the rental value of a home which is owned by them and situated in another Member State when all taxpayers who own their homes are liable to tax on such rental value as personal income under the tax system in the original country of domicile?

2. Should the second paragraph of Article 13 of the Protocol on the Privileges and Immunities of the European Communities be interpreted as meaning that the application of income tax in the original country of domicile to officials or other servants of the Communities on the rental value of a home which is owned by them and situated in another Member State constitutes indirect taxation of salaries, wages and emoluments paid by the Communities?"

8. It is important to note that the questions submitted by the OEstre Landsret are worded in a way that does not reflect the precise situation in which Mr Kristoffersen finds himself. The OEstre Landsret asks in effect whether an official who remained fiscally domiciled in Denmark after entering the service of the Community may be required to pay Danish income tax on the rental value of his home located in the Member State in which he is employed. But Mr Kristoffersen is not in fact being charged Danish income tax on the rental value of his home in Luxembourg; the Danish tax authorities are simply limiting the amount of tax relief that can be granted to him (and transferred to his wife) in respect of his interest payments. It is true that they are limiting that tax relief by an amount equal to the rental value of the house, but the fact remains that they are not positively charging him income tax on the rental value of the house and would only do so if the rental value exceeded the interest payments. In my view, there is an important difference between positively charging tax on notional income from the rental value of an official' s home and taking that notional income into account for the purpose of limiting the extent to which the official is allowed to set interest payments off against actual income. I shall first deal with the former situation and then consider the specific situation that arises in the present case. Because Articles 13 and 14 are intimately bound up with each other, I shall not attempt to deal separately with questions (1) and (2). The essential issue raised by the two questions is whether and to what extent Articles 13 and 14 of the Protocol allow the Member State in which the official remained fiscally domiciled after entering the service of the Community to take account, for income tax purposes, of the rental value of his home situated in the Member State in which he is employed.

The straightforward situation of the official who is positively charged tax on his notional income

9. The situation that I now consider is the straightforward one of an official who has no actual income other than his Community salary, who owns the house he lives in and who makes no interest payments in connection with that house (or whose interest payments amount to less than the rental value of the house). Such an official is likely, if he had a tax domicile in Denmark prior to his recruitment, to be presented with a substantial income tax demand by the Danish authorities.

10. The Danish Government and the Commission consider that Article 14, first paragraph, of the Protocol empowers Denmark to charge income tax in such circumstances and that such a tax cannot be contrary to Article 13, second paragraph. The Danish Government argues that, since Article 14 does not define the term "income tax", the content of the term must be determined by national law; since the tax in question is classified as income tax in Danish law, Denmark is authorized to impose it on anyone who has a fiscal "domicile" in Denmark within the meaning of Article 14. I do not think that that can be correct; if such a view were accepted, the Member State in which the official retains his tax domicile under Article 14 would be able to impose any tax on him, even one that does not display the objective characteristics of an income tax, simply by describing it as such. Hence, the term "income tax", even if not capable of a single uniform interpretation, must be interpreted in the light of the general understanding of the term and in the light of the scheme and purpose of Article 14, in conjunction with Article 13.

11. It should be borne in mind that the effect of Article 14 appears to be to subject Community officials permanently, for the purpose of income tax, wealth tax and death duties, to the tax regime of the State to whose regime they were subject at the time when they entered the service of the Community, even if they subsequently sever their links with that State. (Indeed, that State might be one in which they had lived for a relatively short period before entering the service of the Community.) The maintenance for a period of many years of what may be a highly artificial tax domicile could lead to anomalous results; and while it is indisputably the purpose of the provision to treat officials as if they continued to be residents, it seems clear that the terms used by Article 14 should not be given an extensive interpretation.

12. I would not go so far as to say that the tax at issue cannot be regarded as an income tax within the ordinary sense of the term. Indeed, a similar tax, also regarded as income tax, is imposed in several, but not all, Member States. The tax is based on the notion that a person who owns his own home enjoys a recurring benefit equal to the rental value of the property. Another factor that supports the classification of the tax as an income tax is its progressive nature, the rate of taxation depending on the taxpayer' s total income. (However, as the Danish Government confirmed in reply to a written question put by the Court, the official' s salary is not taken into account for this purpose; otherwise, there would plainly be an infringement of Article 13: see Case 6/60 Humblet v Belgium [1960] ECR 559.) In two other respects, however, the tax resembles a property tax; first, the event giving rise to the charge to tax is the mere fact of ownership rather than the generation of actual income; secondly, the amount of the deemed income (the so-called rental value) is in fact based on the capital value of the property rather than on its genuine income-earning potential. Thus the tax is really a hybrid ° part income tax, part property tax.

13. I question whether a hybrid tax of this nature is encompassed within the expression "income tax" in Article 14 of the Protocol. If Article 14 were applied to a tax on purely notional income, in particular "income" represented by the use of immovable property as the official' s principal residence, it seems to me that that would be capable of producing undesirable consequences in several respects:

First, the State in which the official has his artificial tax domicile under Article 14 would trespass on the tax jurisdiction of the State in which he works and resides.

Secondly, the official' s salary would in effect suffer national taxation, contrary to Article 13, second paragraph.

Thirdly, there is a danger that certain persons would be dissuaded from entering the service of the Community or would be induced to quit its service, if they were required to pay such a tax in their State of origin.

I shall deal with those points in turn.

14. As regards the first point, the general rule must, I think, be that taxes based on the value of immovable property which is used as the taxpayer' s principal private residence are chargeable only in the State in which the property is situated. I would not go so far as to say that Denmark cannot, under Article 14, tax actual income from immovable property situated in Luxembourg; if, for example, Mr Kristoffersen owned a second house in Luxembourg and rented it out, the resulting income would presumably be taxable in Denmark. There is certainly nothing inherently wrong in one State taxing its actual residents on actual income from immovable property situated in another State, and there may be nothing inherently wrong in one State taxing its notional residents (such as Mr Kristoffersen) on actual income from immovable property situated in another State. But it would be wholly anomalous if a State were to tax its notional residents on notional income based on the value of the house in which they actually reside in another State. I do not think that Article 14 should be construed so as to bring about such anomalous results in the absence of very clear wording to that effect.

15. Moreover, difficulties would arise in relation to double taxation. Since a tax based on the value of a person' s residence might be differently classified in different States, there is a serious danger that the official would suffer double taxation, notwithstanding the existence of a double taxation treaty between the two States concerned. Thus, if for example a Member State in which an official were employed were to impose a substantial tax on immovable property situated in that State and classified it as a property tax, there is a danger that an official who is fiscally domiciled in Denmark under Article 14 would suffer double taxation and would be denied the benefit of a double taxation agreement concluded by the two States; since the tax paid in the State of employment would not be classified as income tax, the official might be given no credit for it when assessed to income tax in Denmark. The example illustrates the point that the system of double taxation agreements is based on a general understanding of what constitutes income tax or property tax, at any rate within certain limits.

16. As regards the second point, if an official who had no actual income other than his Community salary were positively charged income tax on the rental value of his home, that would in my view amount to indirect taxation of the official' s salary, contrary to the prohibition laid down in Article 13, second paragraph, of the Protocol. The mere fact that the official would in practice have to pay the tax out of his Community salary (unless he were to deplete his savings for that purpose) is not of course sufficient to bring that prohibition into operation; otherwise every indirect tax charged to an official who had no other source of income would be contrary to Article 13, second paragraph. However, where the tax is characterized as income tax (and would not otherwise be payable by the official at all), and where it is chargeable on purely notional income, that is likely to bring the tax within the scope of the prohibition.

17. That prohibition has been construed by the Court as precluding "any national tax, regardless of its nature and the manner in which it is levied, which is imposed directly or indirectly on officials and other servants of the Communities by reason of the fact that they are in receipt of remuneration paid by the Communities, even if the tax in question is not calculated by reference to the amount of that remuneration" (emphasis added): Case 260/86 Commission v Belgium [1988] ECR 955, paragraph 10. The crucial test is whether officials employed by a Community institution outside Denmark are subject to the tax in question "by reason of the fact that they are in receipt of remuneration paid by the Communities". It seems to me that that test must be satisfied in the case of an official who works and resides in Luxembourg and who is asked to pay tax in Denmark on the deemed rental value of his home in Luxembourg. Denmark would not normally attempt to charge the tax on a foreign resident. Its supposed power to do so is founded solely on Article 14 of the Protocol and hence on the person' s status as a servant of the Community. It is precisely because he is a servant of the Community that such a person might, on the view advocated by the Danish tax ministry and the Commission, be presented with a demand for Danish income tax on the rental value of his home in Luxembourg. If he happens to have a Danish neighbour who works, for example, in a private bank in Luxembourg, that neighbour will not receive such a demand from the Danish authorities. Thus the link between the charging of the tax and the person' s being in receipt of remuneration paid by the Community is at least as strong, in the situation described above, as it was in Case 260/86 Commission v Belgium. It will be remembered that in that case a tax reduction available to taxpayers in general was expressly denied to persons who were exempt from income tax by virtue of an international agreement. In that case the rule affected all persons exempt by virtue of an international agreement; in the present case, the sole connecting factor is Article 14 of the Protocol.

18. It might be objected that the above interpretation of Article 13, second paragraph, deprives Article 14, first paragraph, of its purpose. Why, it might be asked, should Article 13 be construed as preventing Denmark from charging a tax which Article 14 apparently authorizes it to charge? The answer to that is that Article 14 is by no means deprived of its purpose by the above interpretation. Article 14 authorizes Denmark to tax Mr Kristoffersen on actual income other than his Community salary; the power to tax actual income does not come into conflict with Article 13 because the tax would not be charged on the official' s Community salary. It is only if Article 14 is interpreted as permitting the taxation of purely notional income that it comes into conflict with Article 13.

19. The approach that I have suggested above is based on a coherent interpretation of the combined provisions of Articles 13 and 14 of the Protocol. If that approach is followed, neither article interferes with the sphere of application of the other. But if the view advocated by the Danish tax ministry and the Commission is adopted, there is a serious danger that Article 14 would undermine the purpose of Article 13. That provision is clearly intended to ensure that the salary paid to officials by the Community is subject to a common system of taxation and is not taxed differently depending on the State in which the official is employed or on the State from which he was recruited. That is confirmed by the Humblet case, cited in paragraph 12 above, in which the Court stated, with regard to the equivalent provision in the Protocol on the Privileges and Immunities of the ECSC, that the "application of national tax laws to the salaries paid by the Community would ... detrimentally affect the Community' s exclusive power to fix the amount of those salaries" and that "the total exemption from national taxes is indispensable in order to guarantee the equality of remuneration for officials of different nationalities" (see page 577 in the English version of the law reports). The Court stated: "It would be extremely unjust if two officials, for whom the Community institution had provided the same gross salary, were to receive different net salaries". The Court added that: "The difference in net remuneration could make the recruitment of officials from certain Member States more difficult, thus creating discrimination in respect of the real opportunities of access to Community service for nationals of each Member State."

20. But if Article 14 were interpreted as allowing the State of recruitment to tax the official on the rental value of his home, his salary might in effect suffer a heavier tax burden than the salary of an official recruited in a different State. That can be demonstrated if we compare the situation of two officials employed in Luxembourg, one recruited in Denmark and the other in the United Kingdom (where no such tax exists). Let us suppose, for the sake of argument, that each has the same salary, the same personal circumstances, a house of the same value and no income other than his Community salary. The official recruited in Denmark will bear a heavier tax burden, which can only be met from his salary, than the official recruited in the United Kingdom. The mere fact that the two officials resided in different States prior to their recruitment is surely insufficient to provide objective justification for that difference in treatment. I find it difficult to believe that Article 14 of the Protocol was intended to achieve such discriminatory results.

21. As regards the third and final point, it is clear that if Article 14 of the Protocol were applied to notional income from the rental value of the official' s residence, that could have a detrimental effect on the functioning of the Community institutions. As the Court held in Case C-333/88 Tither [1990] ECR I-1133 (at paragraph 16), Member States are prohibited by Article 5 of the Treaty from adopting measures which are likely to impede the functioning of the institutions. In Tither the Court observed that the British scheme known as "Miras" (mortgage interest relief at source) did not have such an effect because it was not likely to dissuade persons from entering the service of the Communities or to induce them to quit it.

22. The same could hardly be said of the tax at issue in the present case. That can be demonstrated by taking as an example an official recruited to a post in Luxembourg from Denmark who has sufficient capital to purchase a house without a loan. Such a person would have no interest to set off against the deemed income based on the rental value of the house and might receive a substantial income tax demand. He might have a strong incentive to leave the service of the Communities (thus terminating his artificial tax domicile in Denmark) and take a job with a private employer in Luxembourg. That consideration, while by no means decisive in itself, reinforces the argument which I have cited at paragraph 19 above from the Humblet case.

The specific situation in the present case

23. Having dealt so far with the straightforward situation of an official who has no income other than his Community salary and who is charged positive tax on the rental value of his house, I shall now examine the more complicated situation of someone like Mr Kristoffersen. He, it will be remembered, does not himself appear to have any income other than his Community salary, but his wife has a salary that is taxable in Denmark. He pays interest on a loan to finance the construction of the house they live in. Such payments can normally be deducted from taxable income. Mr Kristoffersen has no taxable income and so the interest payments can be deducted from his wife' s income. This is described in the Danish system as transfer of negative income. The Danish tax ministry has no objection to such a transfer of negative income but takes the view that the amount of negative income should be reduced by the rental value of the house.

24. At this point I should perhaps make one thing clear. When considering what I have called the straightforward situation, I discussed the position of a Community official who has no income other than his Community salary and I arrived at the conclusion that such a person cannot be taxed in Denmark on the rental value of his home situated in Luxembourg. I do not think that the conclusion should be any different simply because the person concerned (or his spouse) has other income taxable in Denmark. It would be pointless to argue that in such a case the tax on the rental value of the house could be paid out of the other income and would not therefore be a tax on the official' s salary. Apart from the fact that the other income might not be sufficient to cover the tax, the crucial point is that that income will already have borne Danish income tax at the rate deemed appropriate by the Danish tax system. Any additional income tax charged to the person concerned would have to be regarded as a burden on his Community salary.

25. But the most significant feature of the present case is not that Mr Kristoffersen and his wife have other income in addition to his Community salary, but rather that he wishes to set off against that other income the interest payments relating to the construction of the house, while at the same time objecting to any account being taken of the rental value of the house. Mr Kristoffersen is attempting, so to speak, to have the best of both worlds. He is claiming the beneficial part of the Danish tax system but is unwilling to take the burdensome part.

26. In my view, the arguments that militate against allowing Denmark to impose actual tax on notional income cease to be valid in so far as the notional income resulting from ownership and occupation of a house does not exceed the amount deducted from the taxpayer' s taxable income in respect of interest on a loan used to finance the purchase of the house.

27. In particular, I do not see how it can be said that, in the circumstances of the present case, Mr Kristoffersen' s Community salary suffers national taxation in breach of Article 13, second paragraph, if the negative income transferred to his wife is reduced by an amount equal to the rental value of the house. All that happens is that the tax relief granted to the Kristoffersens in respect of the interest payments is curtailed on account of the rental value of the house.

28. The Protocol does not of course require Denmark to grant the Kristoffersens tax relief in respect of the interest payments and I do not see how it can prevent Denmark from curtailing that relief in respect of the rental value of the house, in view of the obvious relationship in the Danish tax system between the tax relief for interest payments and the taxation of the rental value of the house. It little matters whether the tax relief for interest payments is regarded as the counterpart to the taxation of the rental value or vice versa; the essential point is that under the Danish system tax relief for interest on a housing loan is, in net terms, granted only in so far as the interest payments exceed the rental value of the house. It is difficult to see any justification for granting the Kristoffersens far more generous treatment, as regards the taxation of Mrs Kristoffersen' s salary, than that available to any other person subject to Danish income tax. If the Kristoffersens were allowed to claim the full tax relief in respect of the interest payments and no account were taken of the rental value of the house, the coherence of the Danish tax system would be seriously impaired. The importance of maintaining the coherence of national tax systems was recognized by the Court in its judgments of 28 January 1992 in Case C-204/90 Bachmann and Case C-300/90 Commission v Belgium.

29. Moreover, if Denmark is simply allowed to take into account the rental value of the official' s house up to an amount that does not exceed the amount deducted from his taxable income in respect of the interest payments made in connection with the house, there is no danger that in doing so Denmark will trespass upon the tax jurisdiction of Luxembourg or deter persons with a tax domicile in Denmark from working for the Community. As regards the first point, Denmark will not in fact be charging a tax on the value of immovable property situated in another Member State; it will simply be reducing the extent to which it grants tax relief in respect of interest on a loan used to purchase a property situated in another Member State. As regards the second point, there will be no incentive for the official to terminate his artificial tax domicile in Denmark by leaving the service of the Community, as long as the amount of notional income does not exceed the amount deducted from his taxable income in respect of interest payments. In particular, there will be no incentive for Mr Kristoffersen to resign from the European Parliament in order to sever his fiscal link with Denmark; on the contrary, he has every interest in retaining his tax domicile in Denmark, since it allows him to transfer a substantial amount of negative income to his wife for the purpose of reducing her tax liability.

Conclusion

30. Accordingly, I am of the opinion that the questions referred to the Court by the OEstre Landsret should be answered as follows:

Where, pursuant to the first paragraph of Article 14 of the Protocol on the Privileges and Immunities of the European Communities, a Community official has retained a domicile for tax purposes in a Member State other than the one in which he is employed, that paragraph, in conjunction with the second paragraph of Article 13 of the Protocol, must be interpreted as meaning that the Member State in which the official retains his domicile for tax purposes must not, by taxing notional income, impose by way of income tax any tax, direct or indirect, on his Community salary but is not prevented from treating as taxable income the rental value of a house owned and occupied by the official in the Member State in which he is employed, provided that the amount in question does not exceed the amount deducted from the official' s taxable income by way of tax relief in respect of interest payments made on a loan used to purchase the house.

(*) Original language: English.