tax notes international - Tuck School of Business - Dartmouth College

PRACTITIONERS’ CORNER
for German schools within the EEA, the practice of
the German tax authorities disallowing a tax deduction
for school fees for private schools located outside Germany
but within the EEA is not compatible with EC
law, in particular with the freedom of services and freedom
of movement principles in articles 49 and 18 of
the EC Treaty (Schwarz/Gootjes-Schwarz (Case C-76/
05)).
The ECJ concluded that the German rule constitutes
an obstacle to the freedom to provide services
because it dissuades German residents from sending
their children to private schools established in another
member state and impedes private schools established
in other member states from offering education to the
children of German residents. The German rule generally
results in a higher tax burden for taxpayers who
sent their children to a private school located in another
EU member state because the school fees would
not be deductible. Finally, the ECJ ruled that the German
provision violates the free movement of citizens
because it places the taxpayers who have children attending
schools in another member state at an unjustifiable
disadvantage compared with persons who have
not exercised that right.
Consequences of the ECJ Decision
Based on the ECJ decision, the Finance Court of
Cologne ruled on February 14, 2008, that the fees paid
by the taxpayers to the school in Scotland had to be
treated as special expenses on the taxpayer’s German
income tax return. However, the fiscal court granted
leave to the German tax authorities to appeal to the
German Federal Finance Court to obtain further clarification
on the impact on domestic tax law if EU law
is violated (for example, because of proof required by
the tax authorities related to requirement 3 above). The
tax authorities filed an appeal in April 2008, and the
outcome is still pending.
Following the ECJ’s decision, the German tax authorities
generally intend to consider fees paid to
schools within the EU/EEA as special expenses for
German income tax purposes. The tax authorities require,
however, that the foreign school leads to a
graduation approved by the Conference of Cultural
Ministers of the German Federal States or the Ministry
of Culture of a German federal state. Also, the German
tax resident claiming the tax deduction must provide
the tax authorities with confirmation from the foreign
school that access to the school is not limited to
students who can afford to pay the school fees (that is,
for purposes of meeting requirement 3 above), but that
students with limited financial funds also can attend
the school (for example, through scholarships).
Should the school fees not be taken into account in
a German income tax assessment notice (for example,
the taxpayer could not provide the requested proof because
the school had not forwarded necessary documents),
the taxpayer should file an objection and request
a postponement of the final assessment until the
Federal Finance Court issues its decision in the case.
2009 Tax Act
The lower house of the German Parliament (Bundestag)
on November 28, 2008, approved the 2009 annual
Tax Act (Jahressteuergesetz 2009), and the upper house
(Bundesrat) approved it on December 19, 2008. The
Tax Act provides that school fees for private non-
German schools in the EU/EEA whose graduation is
approved by the German authorities will be treated as
special expenses. While the act maintains the 30 percent
deduction level for school fees, the deduction will
be capped at €5,000. The new rule is retroactive from
January 1, 2008, and for all prior-year cases for which
a relevant income tax assessment notice has not become
final. ◆
420 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
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