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 commercially.

19.   In addition, according to the case-law of the Court of Justice, (11) a Member State is not barred from laying down criteria preventing a tax advantage from having to be reduced below a level which the Member State considers to be necessary.

20.   In the view of the German Government, the Treaty provisions on freedom of movement (Article 39 EC) and on freedom of establishment (Article 43 EC) are irrelevant in the light of the facts of the case. Lastly, no rights can be inferred for the applicant in the main proceedings from Article 18 EC in conjunction with Article 12 EC either.

21.   The Commission, on the other hand, takes the view that there is an infringement of passive freedom to provide services. Relying on the Court’s case-law, (12) it considers freedom to provide services to be applicable. In its opinion, freedom to provide services is not rendered inapplicable on the ground that independent financing of private schools established in Germany is not really possible on the basis of the prohibition of segregation of pupils according to the means of their parents under Paragraph 7(4) of the Basic Law and against that background the remunerative nature of the corresponding educational services could appear doubtful. The assessment of the question of remunerative nature is to be based not only on the private schools accorded preferential treatment by the German provision, but also and above all on the – foreign – private schools excluded from preferential treatment.

22.   Article 18 EC in conjunction with Article 12 EC also precludes a national provision like the one described.

23.   In contrast, however, Articles 39 EC and 43 EC are not applicable on the basis of the facts of the case.

C –    Assessment

1.      Introductory remarks on the course of the investigation

24.   As is apparent from the wording of the question referred for a preliminary ruling, the Finanzgericht Köln is seeking to ascertain whether Articles 18 EC, 39 EC, 43 EC and 49 EC are to be interpreted as precluding a national provision under which a Member State treats payments of school fees to certain domestic schools, but not payments to schools in the rest of European Community territory as leading to a reduction of income tax.

25.   It is not necessary to interpret Articles 39 EC and 43 EC below. Since the parents have not exercised their right to pursue an activity as employed persons in another Member State or their right to become established there as self-employed persons, those rules are clearly not applicable in the present case.

26.   It is still uncertain whether freedom of movement under Article 18(1) EC in conjunction with the principle of non-discrimination under Article 12(1) EC is applicable. As far as the scope rationepersonae is concerned, Articles 12 EC and 18 EC are applicable because, where there is a cross-border element, the individuals may rely on the principle of non-discrimination even vis-à-vis their own country of origin. (13)

27.   As regards the scope ratione materiae, the principle of non-discrimination laid down in Article 12(1) EC – possibly in conjunction with freedom of movement under Article 18(1) EC – may be applied ‘within the scope of application of the Treaty’, but only ‘without prejudice to any special provisions’, such as Article 49 EC. Consequently, the principle of non-discrimination under Article 12(1) EC in conjunction with Article 18(1) EC should be examined only if freedom to provide services under Article 49 EC et seq. does not apply, and we should therefore begin by examining Article 49 EC et seq.

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

a)      Scope of application

28.   First of all, it is uncertain whether Article 49 EC et seq. applies.

29.   As regards the scope ratione personae, the provisions are applicable in any case because, where there is a cross-border element, the individuals may rely on Article 49 EC even vis-à-vis their own country of origin. (14)

30.   As far as the scope ratione materiae is concerned, account should be taken first of all of passive freedom to provide services. Under that freedom, the recipient of services goes to another Member State to the service provider. Article 50(3) EC expressly mentions only the active variant, where the provider of the service goes to the recipient. The Court’s consistent case-law also recognises passive freedom to provide services, however. (15) It is the necessary complement to the active form which corresponds to the objective of covering any activity performed for remuneration which does not fall within the scope of free movement of goods and capital or freedom of movement for persons. The main proceedings concern the refusal of a possibility to deduct tax on the basis of attendance at a private school established in another country – and therefore the possibility of taking advantage of education offered across the border.

31.   Nevertheless, it must be examined whether the education offered comprises services. This would be the case under Article 50(1) EC if it were ‘services’ ‘where they are normally provided for remuneration’.

32.   However, it is disputed in the present case whether such services provided for remuneration exist. The examination therefore centres on whether the payment of school fees can be regarded as ‘remuneration’ and the provision of schooling can be regarded as a ‘service’.

33.   In this regard the Court held in Humbel, (16) with regard to school fees payable in a national education system, that the essential characteristic of remuneration lies in the fact that it constitutes consideration for the service in question. That characteristic is, however, absent in the case of courses provided under a national education system, since the State is not seeking to engage in gainful activity but is fulfilling its duties in the social, cultural and educational fields and also, as a general rule, funds the system from the public purse. The nature of the activity is not affected by the fact that pupils or their parents must sometimes pay enrolment fees in order to make a certain contribution to the operating expenses of the system.

34.   The Court further clarified its case-law in this regard in Wirth. (17) It made clear first of all that the principles developed for payments of school fees also apply to fees payable for studies at higher education establishments. However, it also stated that there were higher education establishments which were financed mainly out of private funds, in particular by students or their parents, and which sought to make an economic profit. Courses given in such establishments were to be regarded as services within the meaning of Article 50 EC. By contrary inference from the abovementioned finding of the Court of Justice, these statements then have to be considered to be applicable in turn to payments of school fees.

35.   The decisive criteria for assuming that the service is for remuneration and thus that Article 49 EC et seq. is applicable ratione materiae in the present case are therefore the private financing of a school, to cover a large proportion of its costs, and its intention to make an economic profit.

36.   It is not immediately clear from the order for reference that the school in the United Kingdom described in the facts of the case satisfies those requirements. However, as is apparent from the statements made by the referring court, the school fees alone for the two children amounted to at least DEM 10 000 a year and the total costs for attending the school in 1998 and 1999 came to DEM 33 867 and DEM 27 415 respectively. It cannot automatically be inferred from the amount of the sums that the school in question operates commercially. However, according to the arguments put forward by the German Government, these sums are considerably higher than the school fees required by private schools – established in Germany – which are given preferential treatment under Paragraph 10(1)(9) of the EStG. It cannot therefore be ruled out in any case that the school in question in the United Kingdom is privately financed, to cover a large proportion of its costs, and operates to make an economic profit. However, it is ultimately for the national court to make the appropriate factual findings.

37.   It is probably not crucial for the applicability of Article 49 EC, on the other hand, that schools in the service recipient’s Member State – in this case Germany – do not as a rule provide services for remuneration within the meaning of the first paragraph of Article 50 EC on the basis of constitutional or ordinary-law requirements because they do not operate commercially and are funded primarily from the public purse. (18) In the judgment in Watts (19) the Court held, with regard to a similar line of argument in connection with benefits in kind under the UK health system, that there was no need to examine ‘whether the provision of hospital treatment in the context of a national health service such as the NHS is in itself a service’ within the meaning of the Treaty provisions on the freedom to provide services.

38.   This is a recent judgment of the Grand Chamber of the Court of Justice which also deals specifically with the issue of whether benefits may be classified under the Community-law notion of services in connection with national systems to cover the costs of treatment, where in a cross-border situation there is no provision for cash benefits in at least one of the Member States concerned.

39.   However, I do not think that this legal opinion is without problems as far as its logical consequences are concerned. First of all, it leads to a far-reaching liberalisation requirement which is difficult to reconcile with the sovereignty of the Member States in that the fundamental freedoms laid down in the Treaty are applicable even where a benefit is provided in only one other Member State according to free market principles. It does not necessarily follow from the applicability of the fundamental freedoms that certain national legislation would not be compatible with Community law; however, the Member State in question must justify such legislation if necessary, which restricts considerably its margin of discretion in making policies falling outside Community competences. Secondly, and above all, such a liberalisation requirement is difficult to reconcile with the Court’s case-law on the notion of undertaking in Community competition law, in so far as in that case-law the Court takes the view that systems based on the principle of national solidarity (20) do not as a rule fall within the scope of the notion of undertaking. It is not denied that the approach for the notion of undertaking is different from the approach for the notion of services, in so far as classification as an undertaking requires only consideration of national legislation, without any cross-border perspective and therefore without any risk of conflict. However, the creation of a ‘way out’ of closed systems of national solidarity, accompanying the possibility of exercising the fundamental freedoms laid down in the EC Treaty – whether in branches of social security or, for example, compensation funds for non-insurable risks – is in itself detrimental at least to the idea of national solidarity, because the spreading of risk is restricted.

40.   Whilst I also believe that the consequences of that case-law should be reconsidered, it can hardly be expected realistically, as it is a relatively recent judgment of the Grand Chamber, that the Court considers itself in a position to review the legal opinion underlying the judgment in Watts at this point in time.

On the basis of the decision in Watts, however, Article 49 EC would be applicable in principle.

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

41.   Paragraph 10(1)(9) of the EStG would not be discriminatory if the difference in the tax treatment of payments of school fees to domestic and foreign private educational establishments were justified on objective grounds, in particular because the two categories of educational establishments were not comparable.

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

42.   As is clear from the statements made by the Finanzgericht, under Paragraph 10(1)(9) of the EStG payments of school fees to schools in another Member State may not generally be treated as special expenditure leading to a reduction of income tax. (21) In accordance with the recent case-law of the Bundesfinanzhof the only exceptions are the German Schools Abroad, (22) recognised by the national conference of ministers for education and culture, and European Schools. (23) In the view of the Bundesfinanzhof, this is because German Schools Abroad – like domestic schools – are subject to the supervision of the German education inspectorate and European Schools have a status corresponding to that of a State-approved school.

43.   Apart from these special cases, schools established abroad (‘foreign schools’) are not subject to the supervision of the German education inspectorate, with the result that preferential tax treatment for payments of school fees to such schools is precluded by that requirement. Paragraph 10(1)(9) of the EStG thus does not lay down any objective criteria on the basis of which the deductibility of school fees for German and foreign schools could be determined. The sole connecting factor for preferential tax treatment is establishment in the Federal Republic of Germany (with the exception of German Schools Abroad and European Schools, which appear to be treated in the same way). Foreign schools are therefore automatically excluded from tax deduction irrespective of the amount of their school fees. If, then, the formal criterion of establishment is the crucial factor for preferential treatment, the material criterion of segregation according to means cannot be cited as a possible justification for a difference in tax treatment.

ii)    The comparability of domestic and foreign private educational establishments

44.   Since the discriminatory character of Paragraph 10(1)(9) of the EStG follows from the formal criterion of establishment, the argument put forward by the German Government that domestic and foreign private educational establishments are not comparable is to be examined only in the alternative.

45.   Community law recognises that the Member States have discretion in organising their national education systems. As has already been explained in the introductory remarks, it is for the Member States to organise and provide education. As a consequence, the Member States may lay down their own criteria, based on national ideas, which they expect the schools to fulfil in order to perform this function.

46.   There cannot therefore be any objection from the point of view of Community law – in so far as it is applicable at all on the basis of the remunerative nature of the education services in question – to linking indirect State assistance through the grant of tax advantages to the fulfilment of these criteria, (24) against which schools in other EC countries must also be measured. If foreign schools do not satisfy the requirements laid down, they are not in a position to participate adequately in performing the State’s educational function on the basis of the ideas of the Member State in question, which are to be recognised under Community law. In such a case, the difference in tax treatment does not constitute a restriction, since the comparability with domestic schools which are given preferential treatment, which is in principle necessary for that purpose, is lacking.

47.   It is uncertain whether the necessary comparability is lacking in this case because, in the opinion of the German Government, Paragraph 10(1)(9) of the EStG covers only schools which do not operate commercially and are funded primarily from the public purse. Consideration must be given in the main proceedings only to foreign schools which (evidently like the school mentioned in the summary of the facts) provide services within the meaning of Article 50 EC and are therefore largely privately funded and intend to make an economic profit; otherwise, the fundamental freedom would not be applicable. (25)

48.   The necessary comparability is not in any case established by the fact that the domestic schools assisted under Paragraph 10(1)(9) of the EStG, as is clear from the reference to Paragraph 7(4) of the Basic Law, are private organisations, like the relevant foreign schools, and not State schools. Despite their private constitution, these domestic schools cannot generally charge fees in order to cover their costs since they are subject to the prohibition on segregation of pupils according to the means of their parents. An entitlement to considerable State assistance is specifically the result of this situation. In the case of the ‘alternative schools approved by the State’ this follows directly from Paragraph 7(4), third sentence, of the Basic Law and for the other schools covered by Paragraph 10(1)(9) of the EStG it can stem from the relevant authorisation or recognition under the law of the Länder.

49.   One cannot, however, rule out the possibility that there may be domestic schools that both are service providers within the meaning of Article 49 EC et seq. and satisfy the material requirements laid down in Paragraph 10(1)(9) of the EStG and therefore fulfil the condition of comparability, as was clear from the examples cited at the hearing.

50.   Whilst this is not the normal case, it is perfectly possible in the two scenarios described below. First of all, payments of school fees lying below the threshold of the prohibition on segregation may be supplemented by donations from private institutions (26) to the extent that the school may operate commercially. Secondly, in exceptional cases a school may also be financed primarily from fees and nevertheless be eligible for assistance under Paragraph 10(1)(9) of the EStG, since that provision does not require absolutely that the schools covered be supported primarily from the public purse.

51.   As far as the first variant is concerned, reference can be made to the possibility of private mixed financing of a private school from fees and payments by private institutions in order to reach the point where costs are covered. (27) Nor is this precluded by the fact that the school is supported only in part by students or parents. As can be seen from the abovementioned judgments in Humbel and Wirth, remunerative nature for the purposes of Article 50 EC requires private financing only ‘in particular’ by pupils or their parents. (28) If such remunerative nature is to exist, it is therefore sufficient for payments of school fees to cover a significant proportion of the financing requirement and to be supplemented by further payments by other private parties, such as support associations, which are sustained to a sizeable extent by donations from parents. It is ultimately crucial that financing is not essentially from State payments. (29) This is also consistent with the Court’s case-law in other areas under Article 49 EC, according to which it is not important that the service is paid for by the person for whom it is performed. (30)

52.   As regards the second variant, an alternative school financed largely by school fees is ruled out under Paragraph 7(4)(3) of the Basic Law. However, the prohibition on segregation and therefore the entitlement to State assistance apply constitutionally only to such alternative schools and certainly do not apply to the complementary schools also covered by Paragraph 10(1)(9) of the EStG under the wording of that provision, (31) from which follows at least the possibility of such complementary schools being largely privately financed.

53.   It cannot be inferred on this basis alone that complementary schools financed largely from fees are also given preferential tax treatment in general, since a further requirement for preferential treatment is recognition under the law of the Länder. According to the German Government, using that instrument it is possible for the Bundesländer to subject complementary schools to a legal regime similar to that for alternative schools approved by the State. It is apparent from the communication from the Federal Government of 26 August 2002 in the Treaty infringement proceedings (32) and the examples cited by the applicant in the main proceedings that this has not entirely been the case.

54.   Furthermore, in this connection, the view taken by the Federal German Government that it is not sufficient for the comparability required above for only some of the domestic private schools which are given preferential treatment to be financed from fees cannot be supported by means of the references cited by it for that purpose. (33)

55.   In so far as Advocate General Sir Gordon Slynn (34) takes the view that the classification of education provided by the State as non-commercial is not affected by the fact that the service recipients are required to pay a charge, which is usually negligible, but exceptionally may almost cover the costs of the services, this could support the German Government’s view. However, it is a general statement which has no bearing on the issue of comparability which is relevant in this instance.

56.   The finding that a school which is financed by the State in principle, but which exceptionally receives private funding, does not thereby lose its character as an institution operating without remuneration cannot therefore really be applied to the present issue of comparability. In particular, it cannot be concluded from this that predominantly privately financed schools are not to be regarded as private schools solely on the ground that the majority of schools given preferential tax treatment are subsidised by the State.

57.   Lastly, the Court’s case-law according to which discrimination is sufficient for a finding of prohibited differentiation only in certain cases also militates against the view taken by the German Government. (35)

58.   Paragraph 10(1)(9) of the EStG must therefore be regarded as discriminatory in so far it makes the preferential tax treatment of certain private schools inherent in it dependent on the place of establishment of those schools and therefore also differentiates between schools that are otherwise comparable. This means that there is an infringement of Article 49 EC.

c)      Justification

59.   In order to justify the discrimination, it is argued with reference to the judgment in Bidar (36) that the Court recognises it as legitimate for a Member State to lay down criteria for the grant of assistance to cover the maintenance costs of students (the same must apply to the grant of a tax advantage), which prevent the assistance (or the advantage) having to be reduced below a level which the Member State considers to be necessary. In the view of the Federal German Government, this should be seen against the background that, where there are limited State funds, the quantitative extension of a tax advantage must lead to the reduction of the level of the individual preferential treatment in order to ensure revenue neutrality. The German Government thus essentially relies on the additional financial burden on the national budget if Paragraph 10(1)(9) of the EStG is also to apply to payments of school fees to certain foreign schools.

60.    However, that objection is not without problems. As the Court has consistently held, shortfalls in tax revenue are neither among the grounds referred to in Article 46 EC in conjunction with Article 55 EC, nor are they to be taken into consideration as matters of overriding general interest. (37) In so far as the Federal German Government regards the extension of the tax deductibility of payments of school fees to certain foreign schools as problematical, because it leads to shortfalls in tax revenue, there appears to be no justification for the abovementioned breach of the principle of freedom to provide services.

61.   It is also uncertain whether the Court’s findings in Bidar are applicable to the grant of tax advantages in connection with the fundamental freedoms under the EC Treaty. This question could be left open, however, if the objective pursued through the exclusion of foreign schools from preferential tax treatment under Paragraph 10(1)(9) of the EStG, namely to cover costs in accordance with the judgment in Bidar, could in any case be achieved by less onerous means, in keeping with the principle of proportionality.

62.   As is clear from the statements made by the German Government, the excessive financial burden if deductibility were extended to certain foreign schools results specifically from the fact that the amounts of assistance for those schools would be much higher than for domestic educational establishments since the former would have to finance themselves through high school fees. In order to prevent this, however, a Member State is not prevented under Community law, as a less onerous, equally effective means, from limiting the deductibility of school fees for domestic and foreign schools to a certain level (based on existing national values). It is therefore possible for it to avoid an escalation in total expenditure, whilst at the same time granting the assistance which it regards as appropriate in an individual case and not excluding foreign schools. The total exclusion of foreign schools under Paragraph 10(1)(9) of the EStG thus appears to be disproportionate in any case, with the result that the initial question of whether the Bidar judgment may be applied can remain open.

63.   There is no evident further justification for discrimination against foreign schools. (38) In this connection, the Commission also points out that under Article 149(2) EC dissemination of the languages of the Member States and encouraging mobility of students are to be regarded as aims of the Community.

d)      Conclusion

64.   The answer to the question referred by the Finanzgericht Köln (Case C‑76/05) must therefore be that Article 49 EC is to be interpreted as meaning that passive freedom to provide services precludes a national provision under which payments of school fees to certain domestic schools, but not payments of school fees to schools in the rest of European Community territory are tax deductible. As Community law stands at present, the national legislator is free to limit the level of preferential tax treatment for private schools or to lay down objective criteria for determining whether such schools are eligible for assistance.

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

A –    Pre-litigation procedure and judicial proceedings

65.   By a letter of formal notice of 19 July 2002, the Commission informed the Federal Government for the first time of its reservations regarding the compatibility of Paragraph 10(1)(9) of the EStG with Community law. With reference to the special character of the German private schools which form part of the State schools system, the Federal Government replied by a communication of 26 August 2002, stating that preferential treatment accorded to certain domestic schools did not infringe the EC Treaty.

66.   Whilst maintaining its view, on 9 January 2004 the Commission delivered a reasoned opinion, whereupon the Federal Government announced at first that it intended to repeal Paragraph 10(1)(9) of the EStG. By a subsequent communication of 3 February 2005, however, it revealed to the Commission that it was not possible to secure a majority for the repeal of the abovementioned provision.

67.   After subsequent discussions were unsuccessful, on 16 August 2005 the Commission brought an action before the Court of Justice.

68.   The Commission claims that the Court should:

–       declare that, by excluding payments of school fees in respect of attendance at a school abroad without exception from the deduction of special expenditure provided for in Paragraph 10(1)(9) of the EStG, the Federal Republic of Germany has failed to fulfil its obligations under Articles 18 EC, 39 EC, 43 EC and 49 EC;

–       order the Federal Republic of Germany to pay the costs.

B –    Main arguments of the parties

69.   In the view of the Commission, Paragraph 10(1)(9) of the EStG infringes Article 49 EC. First of all, passive freedom to provide services is affected. Reference can be made in this respect to the Commission’s arguments in the preliminary ruling proceedings (Case C‑76/05). (39) In this connection, the Commission also points out that the private organisation of the schools assisted under the contested rule in itself suggests that a service is provided for remuneration.

70.   Nor does the German Government’s objection, described in point 18 above, have any relevance to an infringement of Article 49 EC. Paragraph 10(1)(9) of the EStG does not lay down any objective criteria making it possible to determine under what circumstances school fees payable to German and foreign schools are deductible.

71.   Secondly, going beyond the facts in the main proceedings in Case C‑76/05, active freedom to provide services is also infringed in the present case. As a result of the preferential tax treatment accorded to domestic schools, it is made more difficult for foreign private schools to offer their services successfully in Germany.

72.   Furthermore, in the opinion of the Commission, Articles 39 EC, 43 EC and 18 EC are also infringed. This concerns both employed persons from other EC countries, self-employed persons who have become established and parents who have moved to Germany for private reasons and who continue their children’s school education in their country of origin, on the one hand, and German parents who, because they move to another Member State, send their children to a private school there, on the other.

73.   In addition, there is also an infringement of the freedom of establishment of the foreign private schools concerned. Paragraph 10(1)(9) of the EStG requires them to be established in the Federal Republic in order not to be discriminated against in competition with German schools.

74.   Lastly, the exclusion of tax relief in respect of attendance at foreign schools is contrary to Article 10 EC in conjunction with the Community aim referred to in Article 149(2) EC.

75.   The German Government, on the other hand, takes the view that there is no infringement of Community law. With regard to Article 49 EC, reference can be made to its arguments in the preliminary ruling proceedings (Case C‑76/05). Furthermore, it is argued in the defence that German schools in other EC countries may also be covered by Paragraph 10(1)(9) of the EStG.

76.   Articles 18 EC, 39 EC and 43 EC are not infringed either, since the legal consequence of recognition of an infringement of Community law – that is to say the tax deductibility of school fees paid to foreign schools – is not consistent with the fact that the organisation of the education system does not as such fall within the competence of the Community organs.

C –    Assessment

1.      The alleged infringement of freedom to provide services

77.   The subject-matter of the Treaty infringement proceedings is the same national rule as in the preliminary ruling proceedings, namely Paragraph 10(1)(9) of the EStG.

78.   The above arguments concerning the scope of application of Article 49 EC (40) and concerning the infringement of Article 49 EC on account of the discriminatory character of the national rule in question in the preliminary ruling proceedings (Case C‑76/05) (41) may be applied in the present case.

79.   Going beyond passive freedom to provide services, however, (active) freedom to provide services for private schools established in other EC countries is itself also affected. Preferential tax treatment of domestic private schools makes it difficult for foreign schools to offer their services in Germany successfully.

80.   The infringement of freedom to provide services stemming from Paragraph 10(1)(9) of the EStG is not justifiable, however. (42)

81.   It must therefore be stated that through Paragraph 10(1)(9) of the EStG the Federal Republic of Germany has infringed active and passive freedom to provide services under Article 49 EC.

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

82.   Unlike in Case C‑76/05, in the Treaty infringement proceedings (Case C‑318/05) it must also be examined whether Paragraph 10(1)(9) of the EStG infringes Articles 39 EC and 43 EC.

83.   Paragraph 10(1)(9) of the EStG in particular discriminates against employed persons and self-employed persons who have moved to Germany or have their place of work there and their children continue to attend a fee-paying school in another Member State. Resident employed persons are subject to unlimited income tax liability under Paragraph 1(1)(1) of the EStG. The same may also apply to simple frontier workers who have their place of work in Germany, but do not live there. Under Paragraph 1(3) of the EStG they are also subject to unlimited income tax liability upon request. Paragraph 10(1)(9) of the EStG bars those persons from making a special tax deduction for a proportion of the school fees to be paid, unlike in the case of attendance at a school established in Germany, and thus causes discrimination that is liable to deter them also from availing themselves of their rights under Articles 39 EC and 43 EC in the future.

84.   Conversely, Paragraph 10(1)(9) of the EStG is also liable to discriminate against German nationals where they move to another Member State and their children attend a fee-paying school there. As a rule, when they move away from the Federal Republic, they are no longer liable to pay tax there, with the result that discrimination on the basis of German tax provisions is ruled out. However, this does not apply to civil servants working abroad under Paragraph 1(2) of the EStG or to German EU officials pursuant to Article 14 of the Protocol on the Privileges and Immunities of the European Communities of 8 April 1965. (43) If their children attend fee-paying schools abroad – but not German Schools Abroad and European Schools (44) – Paragraph 10(1)(9) of the EStG bars the parents from making tax deductions in respect of the school fees paid.

85.   In so far as Paragraph 10(1)(9) of the EStG makes the tax deductibility of school fees dependent on the place of establishment of the school, on the other hand, this does not directly impair the freedom of establishment of foreign private schools – that are excluded from tax advantages – which would have to be established in Germany in order to be given preferential tax treatment; this is in fact the reverse side of the impairment of its passive freedom to provide services.

86.   The cases of discrimination highlighted cannot be justified either. (45)

87.   It must therefore be stated that by excluding the tax deductibility of payments of school fees to foreign schools under Paragraph 10(1)(9) of the EStG the Federal Republic of Germany has also infringed 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

88.   First of all, it is uncertain whether – as in the preliminary ruling proceedings (Case C-76/05) (46) – the first paragraph of Article 12 EC and Article 18(1) EC are rendered inapplicable simply on the ground that precedence should be given to a more specific provision of Community law. Where, as the Commission argues, parents exercise their right to freedom of movement indirectly by sending their children to a school in another Member State, such a situation generally falls within the scope of application of (passive) freedom to provide services under Article 49 EC et seq. and also within the scope of Case C‑76/05.

89.   The Commission further argues that, in any event, going beyond the circumstances that form the basis for Case C‑76/05, the situation of nationals from other EC countries who have moved to Germany for private reasons and who leave their children in private schools in their country of origin also falls within the scope of application of Article 18(1) EC in conjunction with the first paragraph of Article 12 EC.

90.   That argument must be upheld. Where foreign parents move to the Federal Republic of Germany for purely private reasons, they exercise their general right to freedom of movement (Article 18(1) EC) if they do not take on any employment in Germany. (47) Nevertheless, it cannot be ruled out that they could be assessed for income tax purposes on the basis of other income.

91.   Nor are the first paragraph of Article 12 EC and Article 18(1) EC rendered inapplicable on the ground that in such a case no economic activity is carried on in another Member State. (48) Under Article 12 EC, the situation must fall ‘within the scope of application of the Treaty’. In earlier judgments the Court has stated that only rules concerning access to vocational training fall within the scope of application of the Treaty. (49) However, Paragraph 10(1)(9) of the EStG gives preferential treatment to German private schools of any kind – i.e. including, and above all, schools providing a general education. However, since those judgments were given, the Treaty on European Union has introduced citizenship of the Union into the EC Treaty and added to Title VIII (now Title XI) of Part Three a Chapter 3 devoted inter alia to education and vocational training, as a result of which the scope of the Treaty has been expanded. For that reason, according to settled case-law, a citizen of the European Union lawfully resident in the territory of the host Member State can now rely on Article 12 EC in all situations which fall within the scope ratione materiae of Community law. (50) Those situations include those involving the exercise of the fundamental freedom to move and reside within the territory of the Member States, as conferred by Article 18 EC. (51)

92.   Tax advantages for payments of school fees to schools providing a general education may therefore also fall ‘within the scope of application’ of the first paragraph of Article 12 EC and Article 18(1) EC.

b)      Discrimination

93.   It follows from the first paragraph of Articles 12 EC and Article 18(1) EC that parents whose children attend a school in another EC country are entitled to be treated in the same way as nationals. (52) That principle is infringed by a national tax rule under which – as has already been shown with regard to Article 49 EC in Case C‑76/05 (53) – parents are automatically more heavily taxed because their children attend a foreign private school.

c)      Justification

94.   In this respect too, reference may be made to the arguments on freedom to provide services in Case C-76/05. (54) No reliance on the division of powers established by the Treaty can justify another conclusion. Education and vocational training are the responsibility of the Member States in principle. (55) However, as is shown by the abovementioned Article 149(2) EC, this does not relieve the Member States entirely of the obligation to have regard to the rules of Community law in the context of education measures.

d)      Conclusion

95.   It must therefore be stated that by excluding the tax deductibility of payments of school fees to foreign schools under Paragraph 10(1)(9) of the EStG the Federal Republic of Germany has also infringed Article 12 EC in conjunction with Article 18 EC.

4.      Costs

96.   Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has applied for costs and the Federal Republic of Germany has been unsuccessful, the latter must be ordered to pay the costs.

V –  Conclusion

97.   In Case C‑76/05 it is proposed that the question referred by the Finanzgericht Köln be answered to the effect that:

Article 49 EC is to be interpreted as meaning that passive freedom to provide services precludes a national provision under which payments of school fees to certain domestic schools, but not payments of school fees to schools in the rest of the territory of the European Community are tax deductible.

However, as Community law stands at present, the national legislator is free to limit the level of preferential tax treatment for private schools or to lay down objective criteria for determining whether such schools are eligible for assistance.

98.   In Case C‑318/05 it is proposed that the Court should:

–       declare that, by excluding payments of school fees in respect of attendance at a school abroad without exception from the deduction of special expenditure provided for in Paragraph 10(1)(9) of the EStG, the Federal Republic of Germany has failed to fulfil its obligations under Article 12 EC in conjuction with Articles 18 EC, 39 EC, 43 EC and 49 EC;

–       order the Federal Republic of Germany to pay the costs.

---

1 – Original language: German.

---

2 – See inter alia Case C-204/90 Bachmann [1992] ECR I‑249, paragraph 23.

---

3 – Case C-319/92 Manninen [2004] ECR I‑7477, paragraph 19, Case C-315/02 Lenz [2004] ECR I‑7063, paragraph 19, Case C-136/00 Danner [2002] ECR I‑8147, paragraph 28, and Case C‑118/96 Safir [1998] ECR I‑1897, paragraph 21.

---

4 – See Case C-147/03 Commission v Austria [2005] ECR I‑5969, paragraph 31 et seq. According to the judgment in that case, contrary to the view taken by the Austrian Federal Government, a national rule on the recognition of secondary education diplomas for the purpose of gaining access to Austrian universities does fall within the scope of the EC Treaty.

---

5 – Article 3(1)(c) EC.

---

6 – See also the Opinion of Advocate General Poiares Maduro in Case C-446/03 Marks &Spencer [2005] ECR I-10837, paragraphs 21 to 40.

---

7 – BGBl. 1997 I, p. 821; the version of the EStG applicable both at the time of the main proceedings in Case C-76/05 and at the time of the letter of formal notice in Case C-318/05 does not differ from the currently applicable version as far as the relevant provisions at issue are concerned.

---

8 – BGBl. 1949, p. 1.

---

9 –      Hereinafter all Treaty articles will be cited using the numbering system which has applied since the Treaty of Amsterdam. The articles relevant to the proceedings have not been amended substantively since the years at issue, 1998 and 1999.

---

10 – Case 263/86 Humbel [1988] ECR 5365, paragraphs 15 to 19, and Case C‑109/92 Wirth [1993] ECR I‑6447, paragraph 17.

---

11 – Case C‑209/03 Bidar [2005] ECR I‑2119, paragraph 56.

---

12 – Humbel (cited in footnote 10), paragraphs 15 to 19, and Wirth (cited in footnote 10), paragraph 17.

---

13 – Case C‑224/98 D’Hoop [2002] ECR I‑6191, paragraphs 29 to 31.

---

14 – Case 292/86 Gullung [1988] ECR 111, paragraphs 11 to 13.

---

15 – Case C‑224/97 Ciola [1999] ECR I‑2517, paragraph 11; Case C‑384/93 AlpineInvestments [1995] ECR I‑1141, paragraph 22; Case 186/87 Cowan [1989] ECR 195, paragraph 15; and Joined Cases 286/82 and 26/83 Luisi and Carbone [1984] ECR 377, paragraph 10.

---

16 – Cited in footnote 10, paragraphs 17 to 19; also the Opinion of Advocate General Van Gerven in Case C‑19/92 Kraus [1993] ECR I‑1663, point 19.

---

17 – Cited in footnote 10, paragraph 16 et seq.

---

18 – See, however, the arguments put forward by the Bundesfinanzhof (German Federal Finance Court) to reject the relevance to the decision of an interpretation of Community law having regard to Paragraph 10(1)(9) of the EStG and thus to decline to make a reference for a preliminary ruling; see Bundesfinanzhof, judgment of 11 June 1997, X R 74/95 BStBl II 1997, p. 617; Bundesfinanzhof, judgment of 16 December 1998, BFH‑NV 1999, p. 918.

---

19 – Case C‑372/04 [2006] ECR I-4325, paragraph 91.

---

20 – See in particular Joined Cases C‑264/01, C‑306/01, C‑354/01 and C‑355/01 AOK Bundesverband and Others [2004] ECR I‑2493, paragraph 47, and Joined Cases C‑159/91 and C‑160/91 Poucet and Pistre [1993] ECR I‑637, paragraphs 15 and 18.

---

21 – See also Söhn, in: Kirchhof/Söhn, Einkommensteuergesetz, Kommentar, Vol. 9, Paragraph 10(1)(9), L 66, Heidelberg 2005.

---

22 – Judgment of the Bundesfinanzhof of 14 December 2004, File ref.: XI R 32/03.

---

23 – Judgment of the Bundesfinanzhof of 5 April 2006, File ref.: XI R 1/04.

---

24 – See also the arguments on the recognition of charitable status for foundations governed by private law in my Opinion in Case C‑386/04 Stauffer [2006] ECR I‑8203, points 91 and 93.

---

25 – See point 30 above.

---

26 – To that effect see also the comments made by the Commission in its pleading in the proceedings under Article 234 EC (paragraph 38, footnote 14) and in the application under Article 226 EC (paragraph 42, footnote 22).

---

27 – At the hearing on 2 May 2006, the legal representative of the applicant in the main proceedings pointed out that in certain cases private schools are financed not only from payments of school fees, but also from payments from support associations, whose income comes from ‘voluntary’ donations, from parents in particular.

---

28 – Humbel (cited in footnote 10), paragraph 17, and Wirth (cited in footnote 10), paragraph 17.

---

29 – To that effect see also the Opinion of Advocate General Van Gerven in Kraus (cited in footnote 16), point 20, and the Opinion of Advocate General Sir Gordon Slynn of 16 January 1985 in Case 293/83 Gravier [1985] ECR 593.

---

30 – Case C‑157/99 Peerbooms [2001] ECR I‑5473, paragraph 57, Joined Cases C‑51/96 and C‑191/97 Deliège [2000] ECR I‑2549, paragraph 56, and Case 352/85 Bond van Adverteerders and Others [1988] ECR 2085, paragraph 16.

---

31 – Schmitt-Kammler, in: Sachs, Grundgesetz, Kommentar, Article 7, paragraph 62, Munich 1999; Gröschner, in: Dreier, Grundgesetz, Kommentar, Vol. I, Article 7, paragraph 105, Tübingen 1996; Robbers, in: v. Mangoldt/Klein/Starck, Das Bonner Grundgesetz, Kommentar, Vol. 1, Article 7, paragraphs 191, 199, 209, Munich 1999.

---

32 – In that communication, the Federal German Government argued that the private schools given preferential treatment by Paragraph 10(1)(9) of the EStG do not provide services since they do not as a rule operate commercially. Special cases where some schools receive lower subsidies in accordance with the requirements laid down in the law of the Länder and therefore have to charge higher school fees does not affect the assessment in its view.

---

33 – Opinion of Advocate General Sir Gordon Slynn of 15 March 1988 in Humbel (judgment cited in footnote 10) and in Gravier (cited in footnote 29), p. 603.

---

34 – Opinion in Humbel (cited in footnote 33).

---

35 – Case C‑213/96 Outokumpu Oy [1998] ECR I‑1777, paragraph 34; Case C‑152/89 Commission v Luxembourg [1991] ECR I‑3141, paragraph 20; and Case 45/75 REWE [1976] ECR 181, paragraph 17.

---

36 – Bidar (cited in footnote 11), paragraph 56.

---

37 – Case C‑436/00 X and Y [2002] ECR I‑10829, paragraph 50; Danner (cited in footnote 3), paragraph 56; and Case C‑35/98 Verkooijen [2000] ECR I‑4071, paragraph 59.

---

38 – See also Gonella, ‘Unvereinbarkeit des § 10 Absatz 1 Nr. 9 EStG mit Europarecht’, Der Betrieb 1994, Vol. 28, p. 1395.

---

39 – See point 21 above.

---

40 – Point 29 et seq.

---

41 – Point 41 et seq.

---

42 – Point 59 et seq.

---

43 – JO 1967 L 152, p. 13 et seq.

---

44 – See the recent case-law of the Bundesfinanzhof (cited in footnotes 22 and 23).

---

45 – See the above arguments in Case C‑76/05, point 59 et seq.

---

46 – See point 26 above.

---

47 – Otherwise they would have to be regarded as either employed persons (Article 39 EC) or self-employed persons (Article 43 EC).

---

48 – The judgment in Case C‑413/99 Baumbast [2002] ECR I‑7091, paragraphs 80 to 84, held that a reliance on Articles 12(1) EC and 18(1) EC requires an economic activity within the meaning of Articles 39 EC, 43 EC or 49 EC to be carried on in other Member States.

---

49 – Case 24/86 Blaizot and Others [1988] ECR 379, paragraphs 11 and 15, and Gravier (cited in footnote 29), paragraph 25.

---

50 – Bidar (cited in footnote 11), paragraph 32; Case C‑184/99 Grzelczyk [2001] ECR I‑6193, paragraph 32; and Case C‑85/96 Martínez Sala [1998] ECR I‑2691, paragraph 63.

---

51 – Case C‑148/02 Garcia Avello [2003] ECR I‑11613, paragraph 24, and Case C‑274/96 Bickel and Franz [1998] ECR I‑7637, paragraphs 15 and 16.

---

52 – Grzelczyk (cited in footnote 50), paragraphs 30 to 32.

---

53 – See point 41 et seq. above.

---

54 – See point 59 above.

---

55 – See points 2 and 45 above.