Herbert Schwarz and Marga Gootjes-Schwarz v Finanzamt Bergisch Gladbach.

• Jurisdiction: European Union
• Celex Number: 62005CC0076
• ECLI: ECLI:EU:C:2006:596
• Docket Number: C-76/05
• Court: Court of Justice (European Union)
• Procedure Type: Reference for a preliminary ruling
• Date: 21 September 2006

OPINION OF ADVOCATE GENERAL

STIX-HACKL

delivered on 21 September 2006 ¹(1)

Case C-76/05

Herbert Schwarz

Marga Gootjes-Schwarz

v

Finanzamt Bergisch Gladbach

(Reference for a preliminary ruling from the Finanzgericht Köln (Germany))

and

Case C-318/05

Commission of the European Communities

v

Federal Republic of Germany

(Freedom to provide services – Freedom of movement – Freedom of establishment – Taxation law – Income tax – School fees – Right to deduct tax limited to expenses incurred for domestic private schools – Relationship to the Member States’ education policy)

Table of contents

I – Introductory remarks

II – Legal framework

A – Community law

B – National law

1. The Einkommensteuergesetz (Law on income tax: the EStG)

2. Grundgesetz (Basic Law) of the Federal Republic of Germany (the Basic Law)

III – The order for reference (Case C‑76/05)

A – Facts and main proceedings

B – Main arguments of the parties

C – Assessment

1. Introductory remarks on the course of the investigation

2. Freedom to provide services under Article 49 EC et seq.

a) Scope of application

b) The discriminatory character of Paragraph 10(1)(9) of the EStG

i) The relevance of the constitutionally enshrined prohibition of segregation of pupils according to the means of their parents

ii) The comparability of domestic and foreign private educational establishments

c) Justification

d) Conclusion

IV – Treaty infringement proceedings (Case C‑318/05)

A – Pre-litigation procedure and judicial proceedings

B – Main arguments of the parties

C – Assessment

1. The alleged infringement of freedom to provide services

2. The alleged infringement of freedom of movement for workers and freedom of establishment (Articles 39 EC and 43 EC)

3. The alleged infringement of the general right to freedom of movement (Article 18(1) EC in conjunction with the first paragraph of Article 12 EC)

a) Scope of application

b) Discrimination

c) Justification

d) Conclusion

4. Costs

V – Conclusion

I – Introductory remarks

1. The present reference for a preliminary ruling and the present treaty infringement proceedings both concern the question whether – notwithstanding the Member States’ fundamental competence in education policy – Community law prohibits national tax legislation under which payments of school fees to certain schools in the Member State in question, but not payments to schools in the rest of Community territory, may be treated as special expenditure leading to a reduction of income tax.

2. The question to be examined therefore lies at the meeting point between direct taxation and education policy. As Community law stands at present, both areas fall within the competence of the Member States. Under Article 149(1) EC, it is for the Member States to organise their education system and to determine the content of teaching. They are also free to determine the organisation and conception of their tax system. (2)

3. However, according to the Court’s consistent case-law, even in the absence of a corresponding rule-making competence on the part of the EC, the Member States must exercise the powers in the field of direct taxation consistently with Community law. (3) The absence of a Community legislative power in the field of education policy does not mean that any education policy decision by the Member States would not in principle be subject to a review of its compatibility with Community law. (4) In an internal market ‘characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital’, (5) the Member States are no longer at liberty to ignore the constraints imposed by those matters on the definition and application of their national policies.

4. In so far as the fundamental freedoms laid down in the EC Treaty apply, a tension could therefore exist in the present cases between national education policy, which may inter alia lay down the criteria governing the eligibility for assistance of places of education, and the safeguarding of the rights stemming from those fundamental freedoms – for example where a foreign school is attended. There will therefore be doubts as to the extent to which a balance can be achieved between the exercise of national competences and the requirements of the internal market.

5. Thus, in the following examination, regard must be had to the particular respect which is due to the tax and education policy competences of the Member States. (6)

II – Legal framework

A – Community law

6. The Finanzgericht Köln (Finance Court, Cologne) is seeking an interpretation of Articles 18 EC, 39 EC, 43 EC and 49 EC. In the treaty infringement proceedings the Commission is applying for a declaration that the Federal Republic of Germany has infringed those same provisions.

B – National law

1. The Einkommensteuergesetz (7) (Law on income tax: the EStG)

7. Paragraph 10(1)(9) of the EStG states:

‘Special expenses are the following expenses, where they are neither operating expenses nor professional charges:

30% of the amount paid by the taxpayer for the attendance by a child, in respect of whom he enjoys tax relief for dependent children or family allowances, of a substitute school approved by the State or authorised by the law of the Land, in accordance with Paragraph 7(4) of the Basic Law, or of a complementary school for general education recognised by the law of the Land, with the exception of the price of lodging, supervision and meals.’

2. Grundgesetz (Basic Law) of the Federal Republic of Germany (8) (the Basic Law)

8. Paragraph 7(4) reads:

‘The right to set up private schools is guaranteed. Private schools as substitutes for public schools need the approval of the State and are governed by statutes of the State. Such approval is to be given if private schools are not inferior to public schools in their teaching aims and arrangements and the training of teachers, and separation of the pupils according to the means of their parents is not promoted. Approval is to be refused if the economic and legal standing of the teachers is not adequately secured.’

III – The order for reference (Case C‑76/05)

A – Facts and main proceedings

9. The married couple Herbert Schwarz and Marga Gootjes-Schwarz were assessed jointly for income tax purposes in the years at issue, 1998 and 1999. They have three children together, of whom both daughters, Lydia (born in 1981) and Lilian (born in 1986), attended Cademuir International School in Scotland.

10. As the couple did not initially submit their income tax returns, the basis of taxation was estimated. The couple appealed in good time against the estimated assessment notices.

11. In the tax returns submitted while that appeal was in progress, they claimed extraordinary expenses in the sum of DEM 43 426.78 for 1998 and DEM 64 549.79 for 1999. These included DEM 33 867.79 in 1998 and DEM 27 415.62 in 1999 in respect of the two daughters’ attendance at Cademuir International School, which is at issue in the preliminary ruling proceedings.

12. According to the referring court, the couple have not yet produced detailed evidence of the school fees included in those figures which do not relate to board, lodging or welfare, but they amount to at least DEM 10 000 a year.

13. On 13 September 2001, while the administrative appeal proceedings were in progress, the Finanzamt Bergisch Gladbach issued amended income tax assessment notices for the years at issue, taking the basis of taxation as declared, with the exception of the extraordinary expenses claimed. As the couple continued to pursue their administrative appeal, by decision of 6 December 2001 the Finanzamt rejected it as groundless.

14. Thereupon the couple brought an action before the Finanzgericht Köln, in which they applied in the alternative inter alia for the special expenditure deduction under Paragraph 10(1)(9) of the EStG to be granted.

15. According to the Finanzgericht Köln, however, the action does not have any prospect of success under national law, since Paragraph 10(1)(9) of the EStG applies only to attendance at certain domestic schools, but not to payments of school fees to schools in other Member States. However, a different outcome could possibly arise on the basis of Community law, which has primacy.

16. By an order of 27 January 2005 the Finanzgericht Köln therefore stayed the proceedings and referred the following question to the Court of Justice for a preliminary ruling:

‘Is it contrary to Articles 8a/18 (freedom of movement), 48/39 (freedom of movement for workers), 52/43 (freedom of establishment) or 59/49 (freedom to provide services) of the EC Treaty (9) to treat payments of school fees to certain German schools, but not payments of school fees to schools in the rest of the European Community territory, as special expenditure leading to a reduction of income tax, pursuant to Paragraph 10(1)(9) of the Einkommensteuergesetz as applicable in 1998 and 1999?’

B – Main arguments of the parties

17. The German Government takes the view that the contested provision of national law does not fall within the scope of freedom to provide services. As is clear from the Court’s case-law, (10) the provision of schooling is to be regarded as a service within the meaning of Article 49 EC et seq. only as an exception, if the school is financed primarily out of private funds and seeks to make an economic profit. This has not been shown in respect of the school in question in the United Kingdom.

18. In any case material differences justify the difference in treatment. If, however, the school referred to in the reference for a preliminary ruling did provide services, it is not comparable with the schools which are given preferential treatment by Paragraph 10(1)(9) of the EStG, since both the alternative schools mentioned therein and the complementary schools referred to could not as a rule operate...