This is contribution number 37 by KPMG Meijburg & Co regarding preliminary ruling of European Court of Justice on incompatibility of Dutch Netherlands increased income tax rate applied on non-residents taxpayers not subject to the Dutch General social security system.
EUROPEAN COURT OF JUSTICE REJECTED HIGHER DUTCH INDIVIDUAL TAX RATE FOR NON-RESIDENTS.
On 27 June 1996 the European Court of Justice in Luxembourg rejected the special Dutch income tax rate on the first bracket of income as far as derived by non-residents not subject to the Netherlands general social security system. The case (C-107/94) dealt with a Dutch individual (Asscher) who was resident in Belgium as from 1986. He was a director of two companies one of which was resident in Belgium and the other in the Netherlands. During 1990 Asscher received income from both directorships. Less than 90% of his aggregate income came from Dutch sources. Because Asscher was not liable for the Dutch general social security premiums, a statutory increased income and wage tax rate of 25% was applied to his Dutch-source income. The tax rate for certain other non-residents as well as residents was 13% in 1990 on the first income tax bracket of NLG 42,123. Asscher disputed this rate system before Court on the basis of, inter alia, EC Treaty non-discrimination rules.
The Dutch Supreme Court requested the European Court to rule on the following questions:
1. Does the EC Treaty, Art. 48 allow a Member State to tax employment income from that State derived by non-residents at a substantially higher rate than that applicable to residents?
2. If not, is the difference in treatment nevertheless allowed if less than 90% of the taxpayer's world-wide income is derived from Dutch sources?
3. Does EC law allow the higher rate if it applies only to employees not liable for the Dutch general social security premiums?
4. In answering question 3, is it relevant whether the employee is subject to similar social security premiums in Belgium?
5. Is it relevant that X was a national of the Netherlands?
The European Court first ruled that Art. 52 of the EC Treaty applied to Asscher rather than its Art. 48. As Asscher was director/owner of the Dutch company involved, he was not active in a subordinate position. Therefore, he qualified as an independent person rather than as an employee.
The Court then continued with Question 5. It held that Asscher as a Dutch national was allowed to invoke the Treaty against the Dutch Government, since he was, according to the Court, in a similar position as nationals from other Member States. Therefore, it is, to our opinion, justified to conclude that the Treaty may be invoked by a national against its own Member State provided that there is a cross-border economic activity (whereas in the Werner-case there was no cross border economic activity).
With respect to the first and second questions the Court replied as follows. Article 52 precludes that, in the case of performance of different activities simultaneously in the State of residence and in another Member State, the latter Member State applies a higher tax rate on income derived therefrom by a non-resident taxpayer in comparison to a resident taxpayer performing the same activities if there is no objective difference which may justify this different treatment. Concerning the third and fourth question the Court answered that Art. 52 prohibits a Member State to, by applying an increased income tax rate, consider that a taxpayer according to the rules of Regulation 1408/71 is not due social security payments in that State. The fact that the taxpayer is, pursuant to the said Regulation, subject to the social security system of his Member State of residence is irrelevant in this context.
The European Court thus ruled that the Dutch rate system for wage tax and income tax purposes was discriminatory in the meaning of EC Treaty, Art. 52.
The Dutch Supreme Court must now decide the case considering this preliminary ruling of the European Court.
Further information can be obtained from mr P.J. te Boekhorst, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247
Keywords: Netherlands / Europe / EC / European Union / KPMG Meijburg & Co / Asscher-case / European Court of Justice / directorship / non-resident taxpayer / non-discrimination / EC Treaty / income tax / special increased rate / general social security system
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