The Consequences of The Arnoud Gerritse Decision

Tax is an unpleasant fact of life which the great majority of us would rather went away, unfortunately for us, as individuals and companies it won’t. Withholding tax particularly has a great impact on the incomes of the majority of those involved in the touring and concert business from promoter to artist and all stops in-between, we are therefore best to keep some sort of an eye on what is going on.

Fortunately we have Dick Molenaar and Harald Grams, those tireless champions of the touring music industry in its battles with the variance and peculiarities of the application of tax laws throughout Europe to help us out with this. They have again come through with an update on the withholding tax situation in the wake of the celebrated Arnoud Gerritse case. Most of you will I am sure have heard something about this, Gerritse is a Dutch drummer who, having been refused the deduction of his travel expenses, fought for the return or off-set of monies that had been withheld after an engagement in Germany. He believed that he was not treated equally with other foreigners and with German residents because he was paying more tax than under the normal income tax scheme. He was assisted by Dick and Harald who used this as a test case, which went all the way to The European Court of Justice which found in his favour..

Dick and Harald wrote an article that appeared in the magazine European Taxation in October this year, following the case. Here is an abbreviated copy of their conclusions:

After the ECJ’s decision in Gerritse, it no longer seems possible for countries to exclude non-resident artists and sportsmen from the deduction of expenses and from a normal income tax settlement. Equal treatment also applies to these groups of taxpayers. The present and new EU Member States need to adjust their tax legislation as soon as possible to comply with the EC Treaty. This will remove a major hindrance in the cultural sector.

There is clearly no place for a special treatment of non-resident artists and sportsmen in the ECJ’s case law, because equal treatment within an EU Member State has to apply to both residents and non-residents, to the extent they are in a comparable situation. And, according to the ECJ, artists and sportsmen are no different from other taxpayers.

The Arnoud Gerritse decision is more important than would seem when taking a first glance at a simple case of an unknown Dutch jazz drummer performing in Berlin.
The consequences of the decision for the taxation of non-resident artists and sportsmen can be enormous. The allocation of the taxation right to the country of performance seemed to be justified and most countries use their authority to levy a withholding tax on the income of artists and sportsmen. But the ECJ has decided in the Arnoud Gerritse case that the deduction of expenses must be made possible and that after the tax year a credit against the normal income tax rates must be possible. A study shows that the production expenses of international per-forming artists and sportsmen are very often quite considerable.

The ECJ decision means that not only Germany but also other (old and new) EU Member States will have to adjust their tax legislation. The legislation of the United
Kingdom and the Netherlands already meet the requirements. The decision may also have consequences for the OECD, (Organisation for Economic Co-operation and Development) which may have to revise its Commentary on Art. 17. (This allows the taxation of the personal income of a resident of a Contracting State derived as an entertainer in another Contracting State to be taxed in that State). Beyond that, the need for equal treatment with other EU citizens could lead to the discussion whether Art. 17, of the OECD Model may be in conflict with the fundamental freedoms of the EC Treaty.

Germany Resists Changes?

After all the foregoing manager Ed Grossman made available a copy of a letter he had received from Tax Advisor Dietmar Mittig of Faerber und Partner on the subject of German withholding tax for foreign artists, to various UK accountants and to Dick Molenaar, the letter seemed to indicate that revisions in the law would be slow in coming.

 

The content of the 24th June 2003 concerns the decision of the European court of 12th June 2003. The court decided that regarding the German withholding taxation it must be allowed to deduct all the costs in connection with the income out of the German performances. The court also decided that the flat withholding tax may not be higher than the German income tax would be if normal German tax calculations for German residents and German limited companies (GmbH) were applied.

The Attorney goes on to say:

Now we have received a letter from the finance minister in Berlin with the new regulations regarding the decision from the European court. The finance minister has decided that there is no amendment regarding the withholding tax. This means that the German promoter has to deduct the withholding tax with 21.1 % (including solidarity surcharge) from the gross fee.

If the artist / artist company wants to deduct costs in connection with the German performances he has to file an application for withholding tax refund. Until now this was possible only in the case that the costs have been higher than 50 % of the gross income. Now the application can be filed also if the costs are less than 50 % of the gross income.

Until now the profit was taxable with 50 % income tax plus 5,5 % solidarity surcharge of the income tax. Now the tax rate is the same as for German residents. Limited liable companies have to pay the tax rates like German companies. The tax rate for limited companies in the year 2003 is 26,5 % plus solidarity surcharge. Up from 2004 it will be 25 % plus solidarity surcharge.

So the German promoter has to deduct the withholding tax in the same way as in the past. Then the artist / artist company can file an application for withholding tax refund. For this is to file an official application form to the tax office in Bonn and we need all the original invoices to prove the deductible expenses. It is the same procedure, as you know since 1996. The application has to be filed to the tax office in Bonn until 31st December of the following year. So the application for withholding tax refund for performances in the year 2003 are to file until 31st December 2004 at the latest.

Questions and Comments:

Ed Grossman posed various questions to Dick Molenaar in the light of this letter:

1) Does this mean that a copy of the UK / Dutch system is never going to happen?
2) Have the withholding rates reduced?
3) It is still impossible to file with original Invoices? – It seems that has not changed.

Molenaar replies:

The changes in Germany are going slowly, but they are going into the right direction. I have concluded with Harald Grams that we are very happy that the German Bundesfinanzministerium has started to move and is giving up its position step by step.

The explanation by Färber und Partner means that the refund procedure after a performance (Vereinfachtes Erstattungsverfahren) has now been adjusted because of the Arnoud Gerritse decision of the ECJ, meaning that refunds can now also be given if the expenses are lower than 50% + that the normal tax rates are applicable (instead of the 50% fixed (top) rate). A major improvement, although the applications can only been done after the performance(s) and still the original invoices have to be attached to the application. But please, count your blessings, because it is not easy for the Germans to change their rules under the pressure of the rest of Europe. Would that be easy for the English? Remember that Arnoud Gerritse was about a normal income tax return procedure after the year, in which no original invoices are needed but a simple profit and loss account can be sufficient. That is also an opportunity after the ECJ decision, especially for the years 2002 and older. According to new ECJ cases, there cannot be a time limit on these tax returns. Interesting for your UK and U.S. clients?!

In reply to the questions:

1) UK / Dutch system: I expect that the Germans need to implement an artist withholding tax system, like the UK and Holland have. But it will take some time before they will do. It is unrealistic that this might happen per 1/1/2004, but hopefully we get this before 1/1/2005.

2) Withholding tax rates: there is nothing wrong with the 20% + solidarity surcharge = 21,1% withholding rate, as long as it is taken from the profit on a performance. Therefore, I do not expect the German withholding tax rate to be lowered. I do believe that we are going in the right direction in Germany and I am not surprised that the German authorities do not give up very fast. But we will succeed. My concern lies more with the other EU-countries, such as Spain, France, Italy and the newcomers in the East, who also have a German-type artist withholding tax system.

Dick Molenaar -All Arts Tax Advisers