Report for the Hearing in Case C-263/91

I — Community legal framework

1. Article 13 of the Protocol on the Privileges and Immunities of the European Communities (hereinafter the ‘Protocol’) is worded as follows:

‘Officials and other servants of the Communities shall be liable to a tax for the benefit of the Communities on salaries, wages and emoluments paid to them by the Communities, in accordance with the conditions and procedure laid down by the Council, acting on a proposal from the Commission.

They shall be exempt from national taxes on salaries, wages and emoluments paid by the Communities.’

2. Article 14 of that Protocol provides that:

‘In the application of income tax, wealth tax and death duties and in the application of conventions on the avoidance of double taxation concluded between Member States of the Communities, officials and other servants of the Communities who, solely by reason of the performance of their duties in the service of the Communities, establish their residence in the territory of a Member State other than their country of domicile for tax purposes at the time of entering the service of the Communities, shall be considered, both in the country of their actual residence and in the country of domicile for tax purposes, as having maintained their domicile in the latter country provided that it is a member of the Communities. This provision shall also apply to a spouse, to the extent that the latter is not separately engaged in a gainful occupation, and to children dependent on and in the care of the persons referred to in this Article.

Movable property belonging to persons referred to in the preceding paragraph and situated in the territory of the country where they are staying shall be exempt from death duties in that country; such property shall, for the assessment of such duty, be considered as being in the country of domicile for tax purposes, subject to the rights of third countries and to the possible application of provisions of international conventions on double taxation.

Any domicile acquired solely by reason of the performance of duties in the service of other international organisations shall not be taken into consideration in applying the provisions of this Article.’

II — National legislation

1. The provisions relating to national income tax are laid down in Paragraphs 4, 5 and 6 of the Statskattelov (Tax Law, Law No 149 of 10 April 1922). The amount which constitutes the basis for the calculation of income tax is the difference between gross taxable income, as laid down in Paragraph 4, and gross deductible expenses, as fixed in Paragraph 6. Pursuant to Paragraph 6(1)(e), all interest on loans connected with immovable property is deductible from the taxable income of the taxpayer. By way of derogation from Paragraph 4, Paragraph 5 lists various types of income which are not taxable.

2. Paragraph 4 of the law lays down what must be included as taxable income. With regard to the rental value of a property which the proprietor occupies himself, irrespective of whether it is situated in Denmark or abroad, the final sentence of Paragraph 4(b) is worded as follows:

‘The rental value of a home owned by the taxpayer shall be taken into account as part of his income, whether or not he has made use of his right to reside therein; the value is assessed as the amount which could be obtained in rent for the house or flat in question if it was let; however where special circumstances make that yardstick inappropriate, the value may be estimated.’

3. Paragraph 4(b) of that Law has been supplemented by the provisions of the Ligningslov (Tax Assessment Law) laying down standard rules for the calculation of the rental value of a home where the taxpayer occupying the home is himself the owner. In the relevant tax years those provisions were set out in Paragraphs 15A to 15L as published in Lovbekentgørelse (Consolidation Regulation) No 327 of 7 July 1983. For property in Denmark, the starting point for fixing the basis of assessment of the rental value for a home occupied by the owner is the value of the property at the time of the last official assessment.

4. In so far as the person concerned spends more than DKR 200000 on improving the home, the basis for assessment corresponds to the value of the house plus 80% of the costs thus incurred, in accordance with Paragraph 15B(3) of that law. Should the value of the house not have been assessed at the beginning of the tax year, Paragraph 15C provides that the basis for assessment shall be fixed at 70% of the purchase price plus the cost of improvements. For houses occupied by a single family, the rental value of a home situated in Denmark is, according to Paragraph 15G of the same law, equal to 2.5% of the part of the basis for assessment which does not exceed a basic amount, which, for the 1983 and 1984 tax years, was set at DKR 771100 and DKR 802100 respectively. For the part exceeding the basic amount, the rental value is equal to 7.5%.

III — Facts of the main proceedings

1. Since 1 April 1976 Mr Kristoffersen, the plaintiff in the main proceedings, has worked as an official in the Secretariat of the European Parliament in Luxembourg. Together with his wife, who also works and lives in Luxembourg, he had a house built there between 1982 and 1983.

2. The defendant in the main proceedings, the Danish tax authorities, considers that Mr Kristoffersen was liable, for the 1983 and 1984 tax years, for tax calculated on the rental value of the home in which he lives and which he owns.

3. For the tax years in question, the tax authorities calculated the basis for assessment of the rental value in accordance with Paragraph 15C of the Ligningsloven, in this case 70% of the purchase price (the cost of acquiring the land plus the construction costs), in the same way as for houses situated in Denmark which had not been officially valued at the beginning of the tax year.

4. The taxable rental value was fixed at DKR 42283 in 1983 and DKR 70927 in 1984. The construction and fitting-out of the house were to a large extent financed by a loan. The cost of servicing the interest was, pursuant to Paragraph 6(1)(e) of the Statskattelov, allowed as a deduction from taxable income equal to DKR 138804 in 1983 and DKR 153604 in 1984. Mr Kristoffersen's taxable income was fixed by the tax authority at minus DKR 104903 in 1983 and minus DKR 85739 in 1984. For that reason he was not called upon to pay taxes in Denmark on any part of his income.

5. Before the national court, Mr Kristoffersen argued that it was contrary to Articles 13 and 14 of the Protocol to treat as income the rental value of the home which he occupies as owner in Luxembourg. He also contended that an interpretation of the concept of ‘income’, referred to in the first paragraph of Article 14 of the Protocol, leads to the conclusion that the Danish authorities cannot subject him to a tax on income corresponding to the rental value of a home occupied by the owner, since that is not income within the meaning of ‘income’ as referred to by that provision. According to Mr Kristoffersen, to charge to the income of a European official the rental value of his own home assumes the character of indirect taxation of the income constituted by the salary paid by the Communities.

6. The Skatteministerium, the defendant in the main proceedings, took the view that it is not contrary to Articles 13 and 14 of the Protocol to tax Mr Kristoffersen on the basis of the rental value of a home occupied by the owner and situated in Luxembourg. It argued that those provisions are not intended to impose restrictions on the tax rules adopted by the Member States within the framework of their income tax systems.

7. The defendant in the main proceedings also emphasized that the fact that the rental value of a house occupied by the owner is treated as income constitutes, pursuant to Danish law, a tax on income, as is shown by the fact that the rental value is taxed at a rate which varies according to the overall income of the owner. It pointed out that the delimitation of the concept of taxable income by each of the Member States depends on the provisions of domestic law, and that the use of the term ‘income’ in the first paragraph of Article 14 of the Protocol does not allow the description of a particular tax as income tax in the legislation of a Member State to be disregarded when European officials are taxed pursuant to that provision.

8. The defendant in the main proceedings considered that the taxation of Mr Kristoffersen on the basis of the rental value of the home in which he lives as proprietor does not constitute indirect taxation of the salary which he receives from the European Communities. All taxpayers subject to the Danish tax system are taxed on the basis of the rental value of the home which they occupy as owner, irrespective of where it is situated.

9. The Østre Landsret, seised on appeal in the dispute, therefore submitted to the Court, by order of 7 October 1991, the following preliminary questions:

‘1) Should the first paragraph of Article 14 of the Protocol on the Privileges and Immunities of the European Communities be interpreted as meaning that officials and other servants of the Communities who are covered by that provision are not liable to pay income tax in their original country of domicile on the rental value of a home which is owned by them and situated in another Member State when all taxpayers who own their homes are liable to tax on such rental value as personal income under the tax system in the original country of domicile?

2) Should the second paragraph of Article 13 of the Protocol on the Privileges and Immunities of the European Communities be interpreted as meaning that the application of income tax in the original country of domicile to officials or other servants of the Communities on the rental value of a home which is owned by them and situated in another Member State constitutes indirect taxation of salaries, wages and emoluments paid by the Communities?’

IV — Procedure before the Court

1. The order for reference of 7 October 1991 was lodged at the Court Registry on 14 October 1991.

2. Pursuant to Article 20 of the Protocol on the EEC Statute of the Court of Justice, written observations were submitted by the plaintiff in the main proceedings, represented by A. Torbøl, of the Copenhagen Bar, by the defendant in the main proceedings, represented by T. Lehmann, Head of the Legal Department of the Ministry of Foreign Affairs, acting as Agent, assisted by K. Hagel-Sørensen, of the Copenhagen Bar, by the Italian Government, represented by P. G. Ferri, Avvocato dello Stato, acting as Agent, and by the Commission of the European Communities, represented by J. F. Buhl, Legal Adviser, acting as Agent.

3. On hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry and to assign the case to the Sixth Chamber.

V — Written observations submitted to the Court

1. With regard to the first question, Mr Kristoffersen, the plaintiff in the main proceedings, claims that the taxation of the rental value of a home occupied by the owner must be considered as the taxation of a usufruct. That taxation takes the form of income tax on an estimated rental value. However, the taxable amount is calculated in such a way that that rental value does not correspond to the amount which could be realized by renting the property in question. As regards the provisions according to which all interest payable during the year is deductible from the taxable income, Mr Kristoffersen points out that that rule applies to interest regardless of the debt giving rise to it, and thus does not apply only to interest paid in connection with the financing of immovable property, and that the taxation of the rental value is imposed whether or not the landowner has taken out a loan and is thereby entitled to take advantage of the right to deduct the interest from the basis for taxation. In order to determine whether the interpretation of the concept of ‘income tax’ which appears in Article 14 of the Protocol extends to the taxation of the rental value of a house occupied by the owner, it is necessary to begin with the idea that, from the point of view of taxation, to keep in one's possession a consumer item which could be hired out does not constitute income. According to the national provisions on the taxation of the rental value of a house occupied by the owner, it is not a matter of income tax but of a tax on the usufruct, which constitutes an exception to the general rule of Danish law according to which the usufruct of assets held by the owner is not subject to taxation. In Mr Kristoffersen's view, it must therefore be concluded that it is only from the point of view of the tax system that the rental value of a house occupied by the owner has something in common with taxable income, and that a tax on that rental value must be considered, in the context of both Community law and Danish law, as a tax on the usufruct of assets held by the owner, or even a land tax. Since neither the taxation of the usufruct of assets held by the owner nor land tax comes within Article 14 of the Protocol, the Danish tax authorities cannot, on the basis of that provision, tax the rental value of a house occupied by the owner which is situated in another Member State and which belongs to an official of the Communities. If the term ‘income’ in Article 14 of the Protocol were to be interpreted as including the rental value of a house occupied by the owner, that would mean that the rental value of any consumer item whatsoever must equally come within that provision. As a result, any Member State could then freely tax the salaries of Community officials by introducing a tax on such fictional incomes. Mr Kristoffersen does not see how the fact that he may possibly have taken out a loan for the acquisition of the property can have any significance whatsoever for the purposes of replying to the questions submitted. None of the provisions in question in the instant case refers to a loan for the acquisition of the property. Furthermore, it can hardly be supposed that the interpretation of the provisions of Community law should vary according to the personal circumstances of an official. In response to the argument put forward by the other side that Articles 13 and 14 of the Protocol are not intended to set limits with regard to the detailed rules on income tax adopted by the Member States, and that the Danish income tax system must be considered as a body of provisions in accordance with which income tax on the rental value is complemented, as far as the taxpayer is concerned, by the possibility of deducting interest, Mr Kristoffersen claims that Articles 13 and 14 of the Protocol are aimed precisely at setting limits on the detailed rules of the tax systems in force in the Member States with regard to income tax. Mr Kristoffersen points out finally that there is no correlation between the taxation of the rental value of a home occupied by the owner and the deduction of interest connected with debts. Tenants are also entitled to make full use of the right to deduct interest connected with debts, just as homeowners must pay tax on the rental value of their homes, regardless of whether or not they have loans. He is thus of the opinion that the first question must be answered in the affirmative. According to Mr Kristoffersen, the answer to the second question must be based on the idea that the application of the national law in proportion to the rental value of properties situated in another Member State and owned by officials of the Communities has the effect of indirectly taxing their salaries. Taxation in proportion to the rental value can be considered either as the taxation of a usufruct, as a land tax or as income tax. In all the three cases it is an indirect taxation of Community income as long as the official's salary constitutes his only source of income. As to whether such indirect taxation is contrary to the second paragraph of Article 13 of the Protocol, Mr Kristoffersen contends that the limits set by Community law with regard to taxation by the Member States is based on the division of the taxation of European officials into three categories, namely: tax on salaries, wages and emoluments paid by the Communities; taxes on other sources of income, wealth tax and death duties; and all other forms of duties and taxation. The basis of that division is to establish a global system which is applicable to the taxation of Community officials, according to which all officials are subject to tax on sources of income other than Community income, wealth tax and to death duties according to the Member State where they previously resided, and to uniform taxation in all other spheres, namely either the duties and taxes of the Member State of residence or Community tax. Mr Kristoffersen explains that when the rental value of a home occupied by a Community official is taxed by the Member State where the official had previously established his residence then, no matter how that tax is described, it goes beyond the framework of those limits. If the charge in question is described as a tax on a usufruct or as a land tax, that means that a Community official can be taxed both by the State of domicile and by the Member State of origin. If that charge is considered as the taxation of a fictional income, it constitutes double taxation of the official's Community income. It then only remains to ascertain whether the global system has effects which were not desired by the Community legislature. Taxation of the rental value is not an economic advantage, but quite the contrary, since the tax is collected regardless of the Community official's position within the tax system of the Member State of origin, in particular whether he enjoys tax deductions. Finally, in Mr Kristoffersen's opinion, this case does not concern the taxation of the rental value of a house in the Member State of origin, which, like the taxation in the State of residence of the rental value of a house situated there, lies outside the exemption in the second paragraph of Article 13 of the Protocol. It thus cannot be said that the application of the Community regulations leads to effects which were not intended by the Community legislature. The exemption referred to in the second paragraph of Article 13 of the Protocol must thus extend to the taxation mentioned in the second question. As a result, Mr Kristoffersen is of the opinion that the second question equally calls for an affirmative reply.

2. The Skatteministerium, defendant in the main proceedings, emphasizes, with regard to the first question, that it follows from Article 14 of the Protocol that Community officials who, solely by reason of the performance of their duties in the service of the Communities, establish their residence in the territory of another Member State continue to be subject to tax in the original State of domicile for the purposes of income tax, wealth tax and death duties. That provision must be read in conjunction with Article 13 of the Protocol and with the restrictions on their Lability to national taxes to be found in the second paragraph thereof. The Skatteministerium points out that the taxation of the rental value of a home owned by the taxpayer constitutes, in internal Danish tax law, a tax on income. Article 14 of the Protocol can only prevent such taxation of the rental value of a home occupied by its owner if that provision could be said to contain a rule determining, for the Member States, what can be described as income tax payable by officials of the Communities who have established their residence in the territory of another Member State. Article 14 of the Protocol does not contain such a rule. The extent and the terms of tax obligations must on the contrary be determined on the basis of the domestic provisions of each Member State. In the opinion of the Skatteministerium, that conclusion is confirmed by the terms of Article 14 of the Protocol. It follows from that provision that, in the application of income tax, Community officials are considered as having maintained their previous domicile. Following a linguistic interpretation of those terms, it must be concluded that, subject to Article 13 of the Protocol, Community officials must be subject to income tax, which, in its extent and terms, corresponds to the income tax applied in the case of other individuals who, due to the circumstances of their domicile, are fully taxable in the various Member States. The Skatteministerium points out that there are significant differences between the tax systems of the Member States with regard to the extent and terms of tax obligations. Community law contains no provision which levels out, or which is intended to level out, these differences between the tax systems. In those circumstances, it is inevitable that there will be differences regarding taxation between the nationals of the Member States. Since it is not contrary to the rules of Community law for the rental value of a home occupied by the owner and situated in Denmark to be the subject of taxation in a general and undifferentiated way, it is thus impossible, on an interpretation of Article 14 of the Protocol, to attach any significance to the fact that that form of income tax is not applied throughout all the Member States. The Skatteministerium considers that if on the contrary Article 14 of the Protocol should be taken to mean that the concept of income tax must be interpreted in a uniform manner throughout all the Member States, the consequence would be that an isolated category of Community nationals would be subject to a specific harmonized tax. Such an interpretation of Article 14 of the Protocol would lead to an obvious difference in treatment between Community nationals, since two persons subject to taxation by Denmark and possessing a house abroad would be treated differently, for the sole reason that one was a European official. There is no particular consideration of Community law that can argue in favour of such a difference in treatment. The Skatteministerium emphasizes that, within the framework of the interpretation of Article 14 of the Protocol, particular importance attaches to the fact that the various income tax systems of the Member States are the result of the balancing of complex tax and political considerations. The various rules of the tax system of a Member State will often be interdependent to a great extent, so that changes in certain isolated spheres will necessitate a series of consequential modifications in the entire income tax system. The Skatteministerium explains that the Danish income tax system is a striking example, given that the taxation of the rental value of a home occupied by the owner finds its counterpart in the possibility recognized for the owner to deduct the interest, which means genuine tax advantages for the owner. If it were accepted that Article 14 of the Protocol precluded a tax on the rental value of a home occupied by the owner in a situation such as that in the instant case, there would not however be any reason to accept that it was possible for the Danish tax authorities to refuse the right to deduct all the interest. An affirmative reply to the question submitted would mean the breakdown of the internal coherence between the provisions imposing taxes and those authorizing deduction of interest within the framework of the tax system in question. If the terms and extent of the tax obligation regarding income tax were not a matter for the provisions applicable in each Member State, the tax affecting the European official in question would depend on the place where he decided to establish his domicile within the context of his employment as an official or other servant. The Skatteministerium is of the opinion that that interpretation complies with the purpose of Article 14 of the Protocol. The purpose of that provision must be to ensure that the change of domicile brought about by entering the service of the European Communities is without consequence from the point of view of the tax jurisdiction of the Member State of original domicile, apart from the exemption under Article 13 of the Protocol. According to the Skatteministerium, Article 14 of the Protocol implies that both Member States in question can tax income from a single source, since it provides that the previous domicile must equally be recognized as having been maintained within the framework of the application of conventions on the avoidance of double taxation. In accordance with that provision, the Member State on whose territory the Community official resides because of his duties may apply a tax affecting the European official in so far as that tax does not depend, under the national tax provisions of the Member State concerned, on the fact that the taxpayer has his domicile in that Member State. The Skatteministerium contends finally that the taxation of the rental value of a home occupied by the owner certainly cannot be regarded as contrary to Article 14 of the Protocol where the tax has the sole effect of leading to a reduction in the negative taxable income of the Community official concerned. Thus Article 14 of the Protocol cannot mean that the Community officials concerned have the possibility of taking full advantage of specific and favourable rules on deduction in the national tax system and at the same time be exempt from certain forms of taxation normally levied on nationals of the Member State concerned. The Skatteministerium is thus of the opinion that the answer to the first question should be that the first paragraph of Article 14 of the Protocol must be interpreted as not preventing officials and other servants of the Communities within the scope of that provision from being subject to income tax by the original State of domicile on the rental value of the homes in which they live, and which they own, in another Member State, provided that all taxpayers who own their homes are subject to taxation according to the tax system of the original State of domicile on the rental value, considered as personal income. With regard to the second question, the Skatteministerium submits that the fact that the category of persons referred to by the Protocol is taxed on the rental value of a home occupied by the owner is not contrary to the second paragraph of Article 13 of the Protocol. The category of persons referred to by the Protocol is not exempt from the national tax applicable to sources of income other than salaries, wages and emoluments paid by the Communities, provided that those salaries are not taken into consideration for the purposes of that tax. In the opinion of the Skatteministerium, the case-law of the Court on the subject implies that taxation of the rental value of a home occupied by the owner, when it is not influenced, directly or indirectly, by the salaries paid by the Communities to their officials, obviously does not come within the second paragraph of Article 13 of the Protocol. In that respect, the Skatteministerium emphasizes that the taxation of the rental value of a home occupied by the owner is linked to the idea of treating the possession of immovable property as an autonomous source of income. For that reason, such taxation does not constitute double taxation of the salaries, wages and emoluments paid by the Communities and does not affect the salaries actually paid to the categories of persons referred to in the Protocol. Finally, the Skatteministerium emphasizes that the taxation of the rental value of a home occupied by the owner is not in any event contrary to the second paragraph of Article 13 of the Protocol where the tax merely means that the negative taxable income of the taxpayer in question is reduced. In such a situation, the actual remuneration paid by the Communities is not reduced in any way and there is no double taxation. Since the taxpayer's taxable income is negative, he will not be liable for any tax. The Skatteministerium thus considers that, with regard to the second question, the second paragraph of Article 13 of the Protocol must be interpreted as meaning that the application of income tax in the original country of domicile to officials or other servants of the Communities on the rental value of a home owned by them and situated in another Member State does not constitute indirect taxation of the salaries, wages and emoluments paid by the Communities.

3. The Italian Government observes that the first question formulated by the national court serves to determine whether the tax which the Danish tax authorities wish to apply to the home may be considered as income tax as referred to in the first paragraph of Article 14 of the Protocol, taking into account the fact that, according to Danish law, that tax is calculated on the rental value corresponding to the amount which would be realized if the property were rented, the rental value being included in the person's taxable income, and the tax payable thus depending on the taxable person's other income, since the Danish system of income tax is a progressive system. The Italian Government is of the opinion that the fact that the rental value is included among the components which make up the personal income which is subject to the progressive tax suffices to indicate that the rental value is taxable as income tax. That conclusion does not appear to be contradicted by the facts referred to above, since the reference to the rental value constitutes a yardstick for determining taxable income in respect of immovable property, and it is thus an income tax rule which falls within the legislation of the Member State of origin referred to by that provision of the Protocol. With regard to the second question, the Italian Government does not see any reason to consider that the taking into account of the rental value of immovable property as part of personal income subject to tax could in itself constitute a form of indirect taxation of Community salaries, wages and other emoluments.

4. According to the Commission, it is apparent from the scheme of the Protocol on the Privileges and Immunities that the purpose of making Community staff liable to Community tax on the basis of uniform conditions is to safeguard the independence of the Communities and the equal treatment of their officials and other servants. That principle however applies only to the salaries, wages and emoluments paid to the officials by the Communities. The provisions of the Protocol have always been interpreted as meaning that the Member States, when determining the taxable income of the officials of the Communities and when calculating any tax on that income, must avoid taking into account the salaries and emoluments paid to those officials in respect of their employment in a Community institution. The Commission points out that the rules of the first paragraph of Article 14 of the Protocol concerning the determination of the domicile for tax purposes of the officials of the Communities mean that officials employed by the same institution are subject to different tax rules regarding national tax on income other than that from salaries, wages and emoluments for employment by the Communities. The Commission emphasizes that the corollary of the notional income representing the value of a home occupied by its owner, on which Danish taxpayers are taxed, is the possibility for the homeowner to reduce his taxable income by deducting the interest on debts paid during the tax year, part of which is the interest on the debts which the owner has incurred in respect of his home. If his income were not increased by the value of the home which he occupies, the owner would, by deducting the costs of the interest, pay less tax than a taxpayer renting his home. The Commission emphasizes that Article 14 of the Protocol is silent with regard to the material content of the tax systems of the Member States. It merely lays down rules in respect of the domicile for tax purposes of the officials and other servants of the Communities who come within its provisions. According to the Commission, the rules of the Danish tax legislation concerning the taxation of the rental value of a home occupied by the owner apply to all taxpayers, whatever their level of income and whether or not they receive income which is exempt from tax in Denmark. That form of taxation does not therefore impose upon Community officials a financial burden different from that imposed on other Danish taxpayers. The Commission therefore proposes that the Court should give the following answers to the preliminary questions: 1) The first paragraph of Article 14 of the Protocol lays down rules for the determination of the fiscal domicile of officials and other servants of the Communities and does not prevent them from being taxed on their income in the country of domicile for tax purposes according to the rental value of the home which they occupy, even where it is situated in another Member State. 2) The taxation of the income, in the country of domicile for tax purposes, of an official or other servant of the Communities according to the rental value of a home which he occupies and which is situated in another Member State is not contrary to the second paragraph of Article 13 of the Protocol in so far as that taxation does not apply, directly or indirectly, to those officials or other servants by reason of the fact that they receive a salary from the Communities.

M. Diez de Velasco

Judge-Rapporteur

1 Language of the case: Danish.