(VIP News) On 12 June 2003 the European Court of Justice (ECJ) issued its decision in the Arnoud Gerritse Case (C-234/01which has become a landmark test case for changes in the way that performing artists are taxed in foreign countries. Particularly in Germany the scale and methods of withholding tax has been an ongoing problem in the making and finalising of deals for agents, promoters, managers and artists alike. The outcome of this case will have a very real and direct effect on the taxation of foreign artists and sportsmen, not only in Germany but also in other EU Countries. The official decision is not yet available in English, but will be available soon. Dick Molenaar of All Arts Belastingadviseurs and Harald Grams of Grams und Partner Rechtsanwälte und Steuerberater have been directly involved in this in their roles as personal and company tax advisors and also for the ILMC tax working party. Dick has asked that this important message should be sent through to anyone involved in the live music industry.
Arnoud Gerritse is a Dutch musician, who in 1996 performed as a drummer for a few days for a radio station in Germany. His performance fee was 3000 Euros, which also covered his expenses. He was taxed under the German Income Tax Law at 25% of the gross earnings with no deductions for expenses. Because of surcharges the real tax rate rose to 29%, resulting in a withholding tax of 870 Euros. Back in the Netherlands Gerritse had to file this income again for the Dutch Income Tax. Taking into account his expenses and his free amount he received a tax compensation of just 62 Euros. This left him with an over-taxation of 808 Euros, approximately 37.5% of his earnings.
After the year 1996 Gerritse filed an individual German Income Tax return, to try and deduct his travel and accommodation expenses and make use of the free amount of 6000 Euros. He was refused a rebate, even after appeal. The German law rule was adopted, that the 25% withholding tax plus surcharges was the final taxation for artists, sportsmen and other foreign persons with limited tax liability in Germany.
In the appeal before the tax court, the Berlin obstruction of the EC Treaty was cited, supported by earlier decisions of the European Court of Justice. The tax court considered the plaintiff's arguments positively, but decided because of the impact on German Income Tax Law to ask two prejudicial questions to the European Court of Justice in Luxembourg:
Is it permissible to withhold tax at 25% from the gross fee without deducting expenses? 2. Is it allowed that a foreign artist cannot file a normal income tax return for a tax refund? The decisions on these questions have now been made as follows.
Production Expenses Need To Be Deductible:
The ECJ decided that the non-deductibility of (production) expenses prior to the performances of foreign artists in Germany is in breach of the freedom principles of the European Treaty. Foreign artists are worse off than domestic German artists; the non-deductibility of (production) expenses is an obstacle to entering the German market and cannot be acceptable within the EU. Also other European countries do not allow the deduction of expenses yet and are now in conflict with the European rules.
Normal income tax return:
Taxing foreign artists at a fixed tax rate of 25% is allowed under the European Treaty, as long as this taxation is not higher than the normal income tax rates. This opens the door to normal income tax returns for foreign artists, who have paid too much tax in the past in Germany (and other countries). In this normal income tax return the general free taxable amount will not be applicable.
Implications for the artist tax practice in Germany (and other EU-countries) :
After the decision in the Arnoud Gerritse Case it is inevitable that Germany and other European countries need to change their tax legislation for foreign artists. The international circulation of musicians and performing artists can profit very much from the lower taxation. In many cases no withholding tax will be due anymore because of the deductibility of (production) expenses.
Lobby work to do:
The Arnoud Gerritse Case is a major breakthrough for international artists, but it will need some lobbying in Germany and other European countries to change the tax legislation.
Dick Molenaar sums up what this decision means, and what are the pluses and minuses:
1: Foreign artists must have the right to deduct expenses prior to a performance. (+)
2: When profitable, foreign artists must have the right to be taxed at the normal, progressive tax rates (+).
3: The free taxable amount is not applicable to foreigners (-)
In total, a very positive result: item 1 is very important, item 2 is interesting for tax refunds, item 3 is negative but just a side issue. So Harald Grams and I can say that we have won a very important test case regarding foreign artist taxation in Germany (and other countries) !!! After this decision all EU-countries need to change their artist tax legislation and adjust to European standards. England and the Netherlands are examples of how to improve the artist tax rules.