tax notes international - Tuck School of Business - Dartmouth College

Deduction of School Fees Under German Law
by Marko Wohlfahrt and Katrin Köhler
Marko Wohlfahrt is a consultant and Katrin Köhler is a senior manager with Deloitte Touche Tohmatsu in
Düsseldorf.
Copyright © 2009 Deloitte Touche Tohmatsu. All rights reserved.
German tax law allows a tax deduction for school
fees paid during the German tax year (the calendar
year) for some accredited private German schools.
Fees paid to foreign private schools, however, generally
cannot be deducted from the German income tax base.
This limit on the deductibility of school fees has given
rise to issues as to whether the rules are compatible
with EC law, specifically the freedom to provide services
in another EU member state.
German Domestic Law
According to article 10 of the German Income Tax
Code (Einkommensteuergesetz, or EStG), 30 percent of
fees paid for private German schools can be treated as
special expenses on a taxpayer’s German income tax
return if the following requirements are met:
1) the taxpayer is entitled to receive German
child benefit payments or the child allowance for
the child attending the private school;
2) the expenses relate to education costs (that is,
expenses for accommodation, meals, and general
mentoring are excluded); and
3) the school is recognized as an approved substitute
or supplementary school to the German public
school system.
In late 2004 the Federal Finance Court (Bundesfinanzhof)
decided that some private German and European
schools also are within the scope of requirement
3 above, even if the schools are located outside of
Germany but are within the European Economic Area.
Fees for other private schools are not considered deductible
as special expenses, even though the schools
are located in Germany.
The Case
The case involved German resident spouses who
were jointly assessed German income tax and whose
children attended a private school in Scotland in the
years at issue, 1998 and 1999. The German tax authorities
denied a deduction for the school fees paid to
the Scottish private school as special expenses for income
tax purposes.
The case was appealed to the local Finance Court of
Cologne (Finanzgericht Köln), which in 2005 had to
decide whether fees paid by German tax residents to a
private non-German school in Scotland could be considered
special expenses. The court had concerns about
the compatibility of the German legal position with the
freedom of services provision of the EC Treaty, because
restricting the deduction for school fees to German
schools could discriminate against foreign individuals
who move to work in Germany but whose
children attend schools in their home countries, as well
as German individuals who move to work abroad (but
remain subject to worldwide German tax liability) and
whose children attend schools abroad. Therefore, the
Finance Court of Cologne referred the issue to the European
Court of Justice.
The ECJ issued its decision on September 11, 2007,
concluding that while German law allows the deduction
for some accredited schools within Germany and
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 419
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