WRITTEN QUESTION E-0673/02

by Ilda Figueiredo (GUE/NGL) to the Commission

(8 March 2002)

Subject: Dual taxation of workers income tax

Article 49 of the EC Treaty outlaws restrictions on the freedom to provide services (of which dual taxation is one). Nonetheless, the author of this question has recently been apprised of cases of Portuguese workers adversely affected by, precisely, dual taxation.

As is well-known, a large Portuguese community exists in the Federal Republic of Germany. In some cases, only one member of a married couple works in Germany while the other is still employed in Portugal.

As is to be expected, the spouse working in Germany pays income tax in that country. However, the spouse who is still employed in Portugal is obliged, when submitting a tax return, to annex a declaration of income from his or spouse, who is also considered a taxable person.

This creates an unfair situation on two fronts: firstly, one member of a couple is subject to dual taxation; and secondly, given that German wage levels are considerably higher than those obtaining in Portugal, the result is an automatic alteration in the tax bracket resulting in a higher percentage of income being deducted in tax.

Can the Commission state what measures need to be taken to prevent such situations from occurring?

Answer given by Mr Bolkestein on behalf of the Commission

(23 April 2002)

The problem referred to by the Honourable Member on which the Parliament has received many petitions concerns the tax situation of Portuguese working in Germany; these persons are considered to be residents of Portugal, if their home and family are still in Portugal. Those who have moved with their family to Germany, are only subject to German tax jurisdiction.

In the Double Taxation Agreement concluded between Germany and Portugal on 15 July 1980, double taxation of Portuguese resident taxpayers with employment income from Germany is avoided by granting them a tax credit. This credit allows them to deduct the tax already paid in Germany from their Portuguese tax obligation (so-called credit method). This method is one of the two options for eliminating double taxation which States are offered under the Organisation for Economic Cooperation and Development (OECD) Model Convention: the other is the so-called exemption method, by which one State has the exclusive right to tax the income, leaving that income exempt from taxation in the other State.

In the absence of harmonisation of income taxes at Community level, the choice of method is a matter for the Member States. In making this decision, the Member States have to respect the EC Treaty, in particular the Internal Market concept, but their choice will be valid as long as the aggregate amount of tax to be paid in both States is no more than that which would be due if the income was taxed in the State with the higher tax burden. Since Portugal gives full credit for the tax already paid in Germany, there is no violation of Community law.

Due to the progressive character of the Portuguese national tax, the rate for the Portuguese income is increased by taking the German income into account (which is not in itself taxable in Portugal). This is allowed by a so-called progression clause in Article 24(1)(b) of the Double Taxation Convention, which takes on board Article 23 B (2) of the OECD Model Convention. As an application of the principle of taxation according to one's ability to pay taxes, this clause is in line with Community law.

The situation deplored by the Honourable Member can only be altered by a modification of the bilateral tax convention, for which the contracting States, Germany and Portugal, are exclusively competent. Nevertheless, the Commission has informally drawn the attention of the authorities of both Member States to the fact that the Portuguese workers involved perceive the current situation as unfair and that it might be appropriate to reconsider it.