What is preliminary ruling in income tax

BFH calls the ECJ: Is the determination of the maximum amount compatible with EU law when offsetting foreign taxes?

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EStG § 34c I 2

The maximum amount calculated in Section 34c, Paragraph 1, Sentence 2 of the Income Tax Act (EStG) for determining the creditable foreign taxes on the German income tax has the consequence that, in particular as special expenses and extraordinary burdens, deductible costs of living are partly also attributable to the foreign income and thus reduce the maximum creditable amount . The Federal Fiscal Court doubts whether this is compatible with the free movement of capital, since such privately induced deduction items are primarily to be taken into account by the country of residence and not by the source country. He has therefore submitted this question to the European Court of Justice for a preliminary ruling with the decision of February 9, 2011, which has now been communicated (Ref .: I R 71/10, BeckRS 2011, 95035).

Plaintiffs object to the calculation of the maximum amount with the crediting of foreign taxes

The plaintiffs were jointly assessed for income tax in Germany. They generated capital income from investments in corporations in the Netherlands, France and Luxembourg as well as in Switzerland, the USA and Japan. They sought the crediting of foreign capital gains taxes that had been levied on dividends of the respective corporations in the respective countries. The tax office determined the creditable foreign tax within the framework of the maximum amount calculation according to § 34c paragraph 1 sentence 2 EStG at 1,282 euros. The plaintiffs complain of a violation of the free movement of capital and strive to reduce their tax liability by 1,200 euros.

Crediting of foreign taxes limited to the maximum credit amount

If persons with unlimited tax liability in Germany earn income abroad and pay taxes on it abroad, these taxes can be offset against German income tax under certain conditions according to § 34c EStG. This is to avoid double taxation of foreign income in Germany and abroad. The tax credit is limited to a maximum amount. This maximum amount is to be determined in a proportional calculation in accordance with Section 34c (1) sentence 2 EStG.

Deductible living costs are also incurred on foreign income and reduce the maximum credit

The German income tax, which results from the assessment of the taxable income including the foreign income, is divided in the ratio of the foreign income to the sum of the income. As a result, privately-induced lifestyle expenses that can be deducted from taxpayers in Germany as special expenses and extraordinary burdens, in particular, are partly attributable to foreign income and thus reduce the maximum credit.

BFH: Is the deduction of living expenses from foreign income also compatible with EU law?

The BFH considers it possible that this “sharing” of foreign income in those deductible items within the scope of the maximum amount calculation violates the free movement of capital (Art. 56 EGV; now Art. 63 TFEU). According to the established case law of the ECJ, such privately induced deduction items are to be taken into account primarily by the country of residence, but not by the country in which the relevant income is generated (source country).

From the beck-online database

BFH, request for a preliminary ruling to the ECJ, BeckRS 2011, 95035 (detailed reasons)

FG Baden-Württemberg, The calculation formula of Section 34c (1) sentence 2 EStG does not violate the free movement of capital, BeckRS 2010, 26029427 (lower court)

Hechtner, The crediting of foreign taxes in the system of the schedule according to the changes by the JStG 2009, BB 2009, 76

beck-current editors, C.H. Beck, April 13, 2011.

Reference: BeckRS, 2011, 95035