European law report - Tax relief for private school fees
Tax relief for fees paid to private schools cannot be denied to those taxpayers who choose to send their children to a school situated in a member state other than their own, the European Court of Justice has affirmed.
Germany, similarly to Malta, allows its taxpayers to deduct from the taxable amount a percentage of the net price paid by them for attendance by dependent children at certain private schools in Germany. However, the German government did not extend this benefit to taxpayers who choose to send their children to private schools in another member state.
In this particular case, a German couple applied for tax relief in relation to school fees paid by them to a private school in Scotland. Such tax relief was refused. Proceedings were instituted by the taxpayers concerned before a national tribunal, which in turn made a preliminary reference to the European Court of Justice requesting guidance on the issue.
Basing itself on two fundamental freedoms - the freedom to provide services and the freedom of movement of EU citizens - the European Court of Justice concluded that tax relief may not be denied with respect to fees paid to schools in other member states. This applies both in cases where such foreign schools are financed by private funds and even when they are not. The exclusion of the fees of foreign schools financed by private funds from the benefit of the tax relief hinders these schools' freedom to provide services. In the case of those foreign schools not financed by private funds, the court maintained that the freedom to provide services does not apply. Nonetheless, the refusal to grant tax relief with respect to fees paid to such schools amounts to a breach of the freedom of movement of EU citizens of the Union, the court maintained.
It proceeded to point out that any national legislation which disadvantages certain nationals merely by reason of the fact that they have used their right to free movement and residence in another member state is in breach of EU law. Hence, the court concluded, it was illegal for the German government to refuse tax relief to those taxpayers who send their children to a school in another member state precisely because it is putting at a disadvantage all those who have exercised their freedom of movement.
Furthermore, in a separate case brought by the European Commission against Germany with regard to the same facts, the court also pointed out that the German legislation at issue also infringes the free movement of workers and the freedom of establishment of the parent taxpayers. This essentially because this law disadvantages employees and self-employed persons who have transferred their normal place of residence to Germany or who work there and whose children continue to attend a fee-paying school situated in another member state. Such workers do not enjoy tax relief whereas they would enjoy it if their children attended a school situated in Germany.
The European Court of Justice shot down all the arguments put forward by the German government in its defence. In particular, Germany argued that the principle of the freedom to provide services does not imply an obligation to extend the privileged tax treatment granted to certain schools under the educational system of a member state to those of another member state.
The court rebutted that even though both direct taxation and the content and organisation of the educational system are within the competence of the member states, the fact remains that, in exercising that competence, member states must comply with Community law.
The court pointed out that in the case under examination, Germany was not providing a direct subsidy to the schools concerned but it was granting a tax advantage to parents in respect of the school fees paid to those schools. Hence, such tax advantage was to be given to all parents who send their children to private schools, irrespective of where the school is situated. Any distinction in the school's location would result in a breach of the fundamental freedom of free movement.
• Dr Vella Cardona is a freelance consultant in EU, intellectual property and competition law. She is also a visiting lecturer at the University of Malta.
In this particular case, a German couple applied for tax relief in relation to school fees paid by them to a private school in Scotland. Such tax relief was refused. Proceedings were instituted by the taxpayers concerned before a national tribunal, which in turn made a preliminary reference to the European Court of Justice requesting guidance on the issue.
Basing itself on two fundamental freedoms - the freedom to provide services and the freedom of movement of EU citizens - the European Court of Justice concluded that tax relief may not be denied with respect to fees paid to schools in other member states. This applies both in cases where such foreign schools are financed by private funds and even when they are not. The exclusion of the fees of foreign schools financed by private funds from the benefit of the tax relief hinders these schools' freedom to provide services. In the case of those foreign schools not financed by private funds, the court maintained that the freedom to provide services does not apply. Nonetheless, the refusal to grant tax relief with respect to fees paid to such schools amounts to a breach of the freedom of movement of EU citizens of the Union, the court maintained.
It proceeded to point out that any national legislation which disadvantages certain nationals merely by reason of the fact that they have used their right to free movement and residence in another member state is in breach of EU law. Hence, the court concluded, it was illegal for the German government to refuse tax relief to those taxpayers who send their children to a school in another member state precisely because it is putting at a disadvantage all those who have exercised their freedom of movement.
Furthermore, in a separate case brought by the European Commission against Germany with regard to the same facts, the court also pointed out that the German legislation at issue also infringes the free movement of workers and the freedom of establishment of the parent taxpayers. This essentially because this law disadvantages employees and self-employed persons who have transferred their normal place of residence to Germany or who work there and whose children continue to attend a fee-paying school situated in another member state. Such workers do not enjoy tax relief whereas they would enjoy it if their children attended a school situated in Germany.
The European Court of Justice shot down all the arguments put forward by the German government in its defence. In particular, Germany argued that the principle of the freedom to provide services does not imply an obligation to extend the privileged tax treatment granted to certain schools under the educational system of a member state to those of another member state.
The court rebutted that even though both direct taxation and the content and organisation of the educational system are within the competence of the member states, the fact remains that, in exercising that competence, member states must comply with Community law.
The court pointed out that in the case under examination, Germany was not providing a direct subsidy to the schools concerned but it was granting a tax advantage to parents in respect of the school fees paid to those schools. Hence, such tax advantage was to be given to all parents who send their children to private schools, irrespective of where the school is situated. Any distinction in the school's location would result in a breach of the fundamental freedom of free movement.
• Dr Vella Cardona is a freelance consultant in EU, intellectual property and competition law. She is also a visiting lecturer at the University of Malta.