artist taxation and mobility in the cultural sector
TRANSCRIPT
ARTISTE TAXATION
AND
MOBILITY IN THE CULTURAL SECTOR
Report for the Ministry of Onderwijs, Cultuur en Wetenschappen (Education, Culture and
Science), The Hague, The Netherlands
26 April 2005
Dick Molenaar
All Arts Tax Advisers, Rotterdam, The Netherlands
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1. INTRODUCTION........................................................................................................3 2. HISTORY OF ARTISTE TAXATION ...........................................................................5
2.1. Double taxation and tax treaties ..........................................................................5 2.2. The development of tax treaties “to avoid double taxation” (until 1963)...............5 2.3. The 1963 OECD Model Treaty ..............................................................................6 2.4. Extension with Article 17(2) in 1977 ....................................................................7 2.5. Reversal of Article 17(2) in the 1987 OECD Report (and 1992 Commentary) ......10 2.6. The limited approach in the 1996 U.S. Model.....................................................12
3. NATIONAL ARTISTE TAX RULES........................................................................... 14 3.1. Summary for 35 countries .................................................................................14 3.2. The deduction of expenses.................................................................................16
4. EXPENSES FOR INTERNATIONAL PERFORMING ARTISTES ............................... 18 4.1. Expenses seem to be difficult.............................................................................18 4.2. The exclusion from a normal income tax settlement...........................................18 4.3. Study in the Netherlands...................................................................................19
5. TAX CREDIT PROBLEMS IN THE COUNTRY OF RESIDENCE................................ 22 5.1. Exemption or credit method...............................................................................22 5.2. Recommendation of the “credit” method for Article 17 .......................................22 5.3. Tax credit problems in the residence country .....................................................23 5.4. Excess tax credits..............................................................................................25
6. EXAMPLES OF EXCESSIVE (DOUBLE) TAXATION................................................ 26 7. TAX REVENUE IN THE PERFORMANCE COUNTRY ................................................ 29
7.1. Study by All Arts Tax Advisers (2001 – 2003)....................................................29 7.2. Evaluation by Ministry of Finance of the Netherlands (2002)...............................29 7.3. Estimate of tax revenue for other countries........................................................30
8. THE ADDITIONAL ARTICLE 17(3) ........................................................................ 31 8.1. Exception in the OECD Commentary ..................................................................31 8.2. More frequent use than expected.......................................................................31 8.3. Variations in the content of Article 17(3)............................................................33 8.4. Defending the state’s budget?............................................................................33 8.5. Chances of unequal treatment...........................................................................33
9. INFLUENCE OF THE EUROPEAN UNION AND EC LAW......................................... 34 9.1. Excessive taxation is an obstacle for entering other EU markets.........................34 9.2. First action by the Council of the European Union...............................................34 9.3. The Arnoud Gerritse decision of the European Court of Justice (C-234/01).........35 9.4. New pending cases before the European Court of Justice....................................38 9.5. New initiative by the Council of the European Union...........................................39
10. CONCLUSIONS AND RECOMMENDATIONS....................................................... 41 10.1. Conclusions .......................................................................................................41 10.2. Recommendations .............................................................................................43
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1. INTRODUCTION
Many countries levy a withholding tax from the performance fees of artistes, even when they
are self-employed, their fees are business income and they do not have a permanent
establishment in the country of performance. This practice is in accordance with international
tax treaties, pursuant to which the taxation of artistes1 is allocated to the country of
performance. The OECD supports the general rule in Art. 17 of its Model Tax Convention
(OECD Model) for both self-employed artistes as well as employees:
Article 17 OECD Model Treaty
1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a
Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a
musician, or as a sportsman, from his personal activities as such exercised in the other Contracting
State, may be taxed in that other State.
2. Where income in respect of personal activities exercised by an entertainer or a sportsman in his
capacity as such accrues not to the entertainer or sportsman himself but to another person, that
income may, notwithstanding the provisions of Article 7, 14 and 15, be taxed in the Contracting State
in which the activities of the entertainer or sportsman are exercised.
According to the 1987 OECD Report2 the rule can be seen as an anti-avoidance measure to
prevent
(1) highly mobile artistes who pretend to live in tax havens from taking gross self-employed
income with them without paying tax in any country; and
(2) artistes from not reporting the foreign income in their home country.
Taxation at source sounds reasonable in order to ensure that every artiste pays his share of
his earnings to the government, although some authors question whether this system is still
necessary in modern times3.
The 1987 OECD Report suggests that artists are not trustworthy. It states that “sophisticated
tax avoidance schemes, many involving the use of tax havens, are frequently employed by
top-ranking artistes and athletes” and “there is a tendency to be represented by adventurous
but not very good accountants”. The report concludes, that “there is a general agreement
that where a category of – usually well-known – taxpayers can avoid paying taxes this is
harmful to the general tax climate”. This means, in other words, that artistes have been
singled out to be used as an example for the rest of the tax world. This picture of artistes
trying to escape normal taxation has been reinforced, for example, by artistes such as
1 The same rules apply to international sportsmen, but they will not be mentioned further in this report. 2 “Taxation of Entertainers, Artistes and Sportsmen”, in Issues in International Taxation No. 2 (Paris: OECD, 1987). 3 See the critique of Article 17 of the OECD Model by Harald Grams, “Artist Taxation: Art. 17 of the OECD Model Treaty – a relic of Primeval Tax Times?”, 27 Intertax (1999), pp. 188-193, Joel Nitikman, “ Article 17 of the OECD Model Treaty – An Anachronism?”, 29 Intertax (2001), pp. 268-274 and Dick Molenaar and Harald Grams, “Rent-A-Star – The Purpose of Article 17(2) of the OECD Model”, 56 Bulletin for International Fiscal Documentation 10 (2002), pp. 500-509.
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Luciano Pavarotti, the famous Italian opera singer, who pretended to live in Monte Carlo but
ended up paying ITL 25 billion in Italy after court cases4. Further, Sting performed in Canada
and used a personal holding company called Roxanne Inc. to try to bring offshore a part of
his Canadian performance income 5.
However, this picture is far from complete. Most artistes are not so rich and famous that
they fall under the categoriz ations of the 1987 OECD report. They are just normal people
who live in normal cities in normal houses with their families, and report their foreign income
in their normal income tax return at the end of the year in their home country. It will be
demonstrated in examples in this report that without a doubt they suffer from the lack of
trust that government officials have in artistes.
The actual withholding tax rules that countries have implemented as a consequence of the
anti-avoidance treaty rules are ofte n very onerous. Four items are most often used:
1. Production expenses are not deductible at source6
2. Payments for the performances to others than the artistes or sportsmen themselves are
very often also made taxable7
3. The withholding tax rate for foreign artis tes and sportsmen is often higher than the
average income tax rate for domestic taxable persons
4. No normal income tax settlement is possible at the end of the year
This leads to international excessive taxation, because a part of the withholding tax in the
country of performance cannot be credited against income tax in the home country.
4 Carmine Rotondaro, “The Pavarotti Case”, 40 European Taxation 8 (2000), pp. 385-391. 5 Sumner v. R., 7 December 1999, 2000 D.T.C. 1667, [2000] 2 C.T.C. 2359. 6 Following the advice in Subpara. 10 of the Commentary on Art. 17 of the OECD Model. 7 In many tax treaties the anti-avoidance rule of Art. 17(2) of the OECD Model with its unlimited scope has been taken over. See Dick Molenaar and Harald Grams, “Rent-A-Star – The Purpose of Article 17(2) of the OECD Model”, 56 Bulletin for International Fiscal Documentation 10 (2002), pp. 500-509.
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2. HISTORY OF ARTISTE TAXATION
2.1. Double taxation and tax treaties
Most countries raise tax from the income of both residents and non-residents. But there is a
difference, because residents will have an unlimited tax liability, which makes their
worldwide income taxable, regardless where it has been earned, while non-residents will
have a limited tax liability, which means that only the income with a source in the foreign
country can be taxed. Not only artistes experience this non-resident income taxation; also
others, individuals and companies, are subject to tax in the country with the source of their
income.
Taxing both the worldwide income of residents and the source income of non-residents
creates the risk of international double taxation. The foreign income can be taxed in the
source country, but will anyway be taxed as part of the worldwide income in the home
country. Problems arise when the taxes of two or more countries overlap in such a manner
that persons liable to tax in more than one country bear a higher tax burden than when they
would be subject to one tax jurisdiction only.
This double taxation obstructs the international trade. To avoid this countries have started to
conclude bilateral tax treaties with each other, reducing the risk of possible international
double taxation.
Tax treaties normally do not create tax rights nor introduce source tax rules, because
individual countries decide themselves whether they initiate a source tax. Tax treaties are
mainly restricting and not enhancing. In most countries, the restrictive rules of double tax
treaties have priority over domestic tax law.
2.2. The development of tax treaties “to avoid double taxation” (until 1963)
European countries started in the early 1900s to conclude bilateral tax treaties to avoid
international double taxation. The first coordination of bilateral tax treaties took place under
the authority of the League of Nations, which drafted in 1928 a Model Bilateral Convention
for the Prevention of Double Taxation in the Special Matter of Direct Taxes. This Model
divided the taxing rights for self-employed activities (including companies) to the country of
residence, unless there was a permanent establishment in the other country, and for
employees to the country of work, when a specific period of time was exceeded. The Model
of the League of Nations followed the basic idea, that a non-resident should only contribute
to the state’s budget, when he would make a considerable use of the country’s public
facilities. Short-term visits of non-residents did not qualify for source taxation, but were only
taxable in the residence country.
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Most of the tax treaties that were concluded in the period 1928 – 1950s followed the Model
of the League of Nations and did not contain a special rule for non-resident artistes.
The first special tax rules for artistes were inserted in the 1939 USA-Sweden tax treaty. This
treaty held that non-resident artistes were taxable in the country of performance, even when
there was no permanent establishment (for self-employed artistes) or when it was only for a
short period of work (for employees). There was discussion about this new rule during the
ratification procedure in the U.S. parliament, but it was finally accepted as it was proposed.
The special artiste tax rule was also inserted in later U.S. tax treaties, although not with the
UK (1945) and the Netherlands (1948).
Germany brought the special tax treatment of artistes (and sportsmen) in its tax treaties in
the 1950s and 1960s. An interesting division was been made between
• artistes/self-employed: taxable in the country of performance, even without permanent
establishment,
• artistes/employees: not taxable in the country of performance, when they are paid by
an employer in the home country and do not work longer than 183 days in the country
of performance.
It is unclear how this exceptional treatment has entered the tax treaty policy of Germany
during the period 1954-1967. Some treaties, such as with the Netherlands, still exist and
have not been renegotiated.
2.3. The 1963 OECD Model Treaty
The OECD (Organization for Economic Co-operation and Development) has continued the
coordination work of the League of Nations after the Second World War. After some
preparations in the 1950s, a Draft Model Treaty was issued in 1963, which contained a
special provision for artistes:
Article 17 (of the 1963 OECD Model Treaty)
Notwithstanding the provisions of Articles 7 and 15, income derived by a resident of a Contracting
State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician,
or as a sportsman, from his personal activities as such exercised in the other Contracting State,
may be taxed in that other State.
The 1963 Model Treaty was accompanied by an official OECD Commentary, also with regards
to Article 17, explaining the reasons behind this new provision:
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1. The provisions of Article 17 relate to public entertainers and athletes and stipulate that they
may be taxed in the State in which the activities are performed, whether these are of an
independent or of a dependent nature. This provision is an exception, in the first case, to the
rule laid down in Article 14 (Independent activities), in the second case, to the rule laid down in
paragraph 2 of Article 15 (Salaries and wages)
2. This provision makes it possible to avoid the practical difficulties which often arise in taxing
public entertainers and athletes performing abroad. Certain Conventions, however, provide for
certain exceptions such as those contained in paragraph 2 of Article 15. Moreover, too strict
provisions might in certain cases impede cultural exchanges. In order to overcome this
disadvantage, the States concerned may, by common agreement, limit the application of Article
17 to independent activities by adding its provisions to those of Article 14 relating to
professional services and other independent activities of a similar character. In such case,
public entertainers and athletes performing for a salary or wages would automatically come
within Article 15 and thus be entitled to the exemptions provided for in paragraph 2 of that
Article.
Apart from the cryptic reasoning (“… practical difficulties …”) for the introduction of this new
article, the 1963 OECD Model Treaty did not give any evidence or examples of the problems
that national governments had experienced with taxing non-resident artistes. Where did this
anxiety for artistes come from? With its reasoning the OECD seemed to have its eye more on
securing taxation than on eliminating double taxation.
Already the 1963 OECD Model Treaty made implicitly clear that the allocation of the taxation
of artistes to the source country would lead to obstacles in the international arts world: the
new Article contained a very strict provision and the OECD were afraid to impede cultural
exchanges. This meant that the cultural world was going to suffer from a tax measure for
which need no evidence was given.
2.4. Extension with Article 17(2) in 1977
Article 17(2) was introduced in the 1974 Report of the OECD Committee on Fiscal Affairs
updating the 1963 Draft and was included in the 1977 OECD Model. The 1974 Report added
a new paragraph to Article 17:
Article 17(2) OECD Model Treaty 1977
Where income in respect of personal activities exercised by an entertainer or an athlete in his
capacity as such accrues not to the entertainer or athlete himself but to another person, that
income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting
State in which the activities of the entertainer or athlete are exercised.
This change to the OECD Model was explained in Paragraph 4 of the 1977 Commentary on
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Article 17, stating:
4. The purpose of paragraph 2 is to counteract tax avoidance devices in cases where remuneration
for the performance of an entertainer or athlete is not paid to the ente rtainer or athlete himself
but to another person, e.g. a so-called artiste -company, in such a way that the income is taxed
in the State where the activity is performed neither as personal service income to the
entertainer or athlete nor as profits of the enterprise in the absence of a permanent
establishment. Paragraph 2 permits the State in which the performance is given to impose a tax
on the profits diverted from the income of the entertainer or athlete to the enterprise where for
instance the entertainer of athlete has control over or rights to the income thus diverted or has
obtained, or will obtain, some benefit directly or indirectly from that income. It may be,
however, that the domestic laws of some States do not enable them to apply such a provision.
Such States are free to agree to alternative solutions or to leave Paragraph 2 out of their
bilateral convention.
With Article 17(2), the so-called “star companies” could be attacked. Some countries had
reported to the OECD that top artistes and sportsmen were loaned out by companies more
often, giving the artistes and sportsmen a small salary and receiving the main part of the
performance income as company profits. These companies were based mostly in tax havens,
that do not have a normal income or corporation tax. It also appeared that the artistes or
sportsmen were the actual shareholders of these offshore companies or received a large
share of their profits. That was often combined with the change of residence of the artistes
and sportsmen personally to tax havens.9
Paragraph 4 of the Commentary on Article 17 shows that, in 1977, the OECD did not have its
eye on normal employer-employee situations with Article 17(2). There seemed to be no
threat that artistes and sportsmen employed by companies or non-profit organizations, such
as orchestras, theatre groups, dance companies, football clubs, baseball teams, etc., were
trying to escape from taxation. These employers were normally based in a treaty country
and did not have the intention to relocate to a tax haven. For the artistes and sportsmen as
employees, a move of residence was also not very likely because they were linked mainly to
the central place of the organization and had to come to rehearsals, home matches, group
travel, etc. The text of the 1977 Commentary made it clear that the new rule did not have
these artistes or sportsmen and their employers as its focus; rather, the purpose was to
counter the tax avoidance schemes of self-employed top artistes and sportsmen. According
to Paragraphs 2 and 3 of the 1977 Commentary on Article 17, especially cultural exchanges
9 A classic example is the Swedish heavy-weight boxing-champ Johansson, who was knocked out by the U.S. tax authorities, Johansson v. United State s, 14 American Federal Tax Reports 2d (AFTR 2d.) 5605 (1964). See also Frantisek J. Safarik, “Entertainment Company: Simulated Employment”, 30 European Taxation 9 (1990), at 307, about a Swiss-based “star-company”. For more recent examples, see Carmino Rotondaro, "The Pavarotti Case", 40 European Taxation 8 (2000), at 385, or Boris Becker, who was in the newspapers after his 2002 conviction by the court in Munich, Germany. Both top stars pretended to live in Monaco, but in fact were living in Ita ly resp. Germany.
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and subsidized artistes and sportsmen could suffer from the far-reaching impact of the
article:
2. This provision makes it possible to avoid the practical difficulties which often arise in taxing
entertainers and athletes performing abroad. Moreover, too strict provisions might in certain
cases impede cultural exchanges. In order to overcome this disadvantage, the States concerned
may, by common agreement, limit the application of paragraph 1 to independent activities by
adding its provisions to those of Article 14. In such a case, entertainers and athletes performing
for a salary or wages would automatically come within Article 15 and thus be entitled to the
exemptions provided for in paragraph 2 of that Article.
3. The provisions of the Article do not apply when the entertainer or athlete is employed by a
Government and derives income from that Government. Such income is to be treated under the
provisions of Article 19. Certain conventions contain provisions excluding entertainers and
athletes employed in organisations which are subsidised out of public funds from the application
of Article 17. The provisions of the Article shall not prevent Contracting States from agreeing
bilaterally on particular provisions concerning such entertainers and athletes.
Strange enough, however, the wording of Article 17(2) itself was much broader than
necessary for this object and purpose in 1977; there was more room in the text of the article
than the limited explanation in the Commentary required. This was already the case in the
1963 OECD Draft Model and was extended in 1977 with the introduction of Article 17(2).
Unfortunately many countries did not recognize the subtleness of the Commentary and just
inserted the new Article 17, including Paragraph 2, in their new tax treaties.
Canada and the United States were suspicious, already in 1977, of the new provision in
Article 17. They registered an observation on the Commentary in Paragraph 6 of the 1977
Commentary on Article 17:
6. Canada and the United States are of the opinion that paragraph 2 of the Article applies only to
cases mentioned in paragraph 4 above and these countries will propose an amendment to that
effect when negotiating conventions with other Member countries.
The United States also added an reservation in Paragraph 9 of the 1977 Commentary on
Article 17:
9. The United States reserves the right to limit paragraph 1 to situations where the ente rtainer or
athlete is present in the other State for a specific period or earns a specified amount.
But most of the OECD Member countries followed the 1977 recommendation to add Article
17(2) to their tax treaties, because they believed it gave them the means to fight against tax
avoidance behaviour by the top stars.
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2.5. Reversal of Article 17(2) in the 1987 OECD Report (and 1992 Commentary)
The mistrust of artistes (and sportsmen) became more evident in the 1987 OECD Report,
that used phrases such as: "clear evidence of non-compliance", "rarely disclose casual
earnings", "sophisticated tax avoidance schemes, many involving the use of tax havens, are
frequently employed by top-ranking artistes and athletes", "relatively unsophisticated
people, in the business sense, can be precipitated into great riches", and "travel,
entertainment and various forms of ostentation are inherent in the business and there is a
tendency to be represented by adventurous but not very good accountants"10.
The report acknowledged that the entertainment industry covers a larger entourage than
only the performers and includes ”managers, various administration and publicity staff and
road crews”. “Besides performance fees also music and/or writing royalties and fees are
involved”. Sources of income are taken through different companies, “crossing inte rnational
boundaries”. The report found it “likely that the inventiveness and complexity of the industry
will continue to expand”11.
The international world represented at the OECD believed in 1987 that especially the rich
and famous artistes and sportsmen tried to escape from normal taxation via avoidance
schemes and that small artistes did not report their non-resident income in their home
countries. The 1987 OECD Report mentioned that systematic audits in Canada and the
Netherlands and studies in Canada had been undertaken, but figures were not disclosed12.
The suspicion became even clearer when the use of "slave agreements" with "slave
companies" was explained: “rent-a-star companies”, based in tax havens, were assuming
that the top artistes (and sportsmen) were employed against a small salary, while the main
part of the performance fee remained in the company in the tax haven, that was fully
controlled by themselves, directly or indirectly13.
This was mentioned as if Article 17(2) had not been introduced already ten years earlier.
Resident countries had reported having problems with gathering information about the
foreign performance income of their ta xpayers.
The OECD Committee on Fiscal Affairs, responsible for the 1987 OECD Report, put fo rward
two principles, namely
1) as main principle underlining the report, “income from entertainment and sporting
activities should be taxed in the same way as income from any other activities.
Exceptions to this principle should be kept to a minimum” 14.
2) as second principle, “artistes and athletes are, as are other taxpayers , fully liable to tax
10 Paragraphs 6, 7 and 8 of the 1987 OECD Report 11 Paragraph 9 of the 1987 OECD Report 12 Paragraph 6 of the 1987 OECD Report 13 Paragraphs 25 and 26 of the 1987 OECD Report 14 Paragraph 14 of the 1987 OECD Report
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in their country of residence and, ideally, should be taxed accordingly”15.
But because of the lack of trust and “the difficulties for the country of residence in identifying
the activities of its residents abroad”, the 1987 OECD Report concluded that taxation of
artistes and sportsmen in the source country was still the right way, although it was an
exception to the normal international tax allocation rules. The main purpose of the 1987
Report was therefore “to help Member countries to establish a system by which the income
of artistes and athletes could effectively be taxed in the country of performance”16. When
fighting non-compliance and the tendency to avoid tax, even a distortion of competition
turned out to be acceptable17.
The Committee also decided to make more use of the wording of Article 17(2). Not only star
companies but also incorporated teams, troupes, etc., should fall within the scope of Article
17(2), meaning that, in addition to the artistes' and sportsmen's salaries for their personal
performance, the profits of the (separate) legal entity were also taxable in the country of
performance. Thus, even without having a permanent establishment in the source country, a
separate production company or legal entity could be taxed in that country, although it was
not itself performing as an artiste or sportsman. The Committee realized that the original
intention of Article 17(2) in 1977 was different, but decided in favour of a reversal to the
unlimited approach18. No further arguments were given to support this reversal.
The 1987 OECD Report also discussed the deduction of expenses from the performance
income in the source country, because “Article 17 says nothing about how the income in
question is to be computed”. The report concluded that some countries “provide for taxation
at source at an appropriate rate based on the gross amount paid to artistes and athletes”,
but did not want to interfere in these national tax rules: “it is for a Contracting State to
determine the extent of any deductions for expenses”19.
Can this be considered as an OECD position supporting gross taxation? Not from the text,
because the OECD left this issue with its member countries. But not taking a position in the
1987 OECD Report has been the reason why many countries have changed their artiste tax
rules over the years into gross taxation without allowing the deduction of expenses.
Unfortunately, this gross taxation often leads to excessive taxation internationally, as will be
shown in the next chapters.
The Committee was honest in its conclusions in the 1987 OECD Report when it stated that it
has made tentative recommendations20. It is beyond doubt that an unlimited taxable base
15 Paragraph 15 of the 1987 OECD Report 16 Paragraphs 16 and 17 of the 1987 OECD Report 17 Paragraph 61 of the 1987 OECD Report 18 Paragraph 89 of the 1987 OECD Report; see also Dick Molenaar and Harald Grams, “Rent-A-Star – The Purpose of Article 17(2) of the OECD Model”, 56 Bulletin for International Fiscal Documentation 10 (2002) 19 Paragraph 94 of the 1987 OECD Report; taken over in paragraph 10 of the 1992 Commentary 20 Paragraph 105 of the 1987 OECD Report
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without any exceptions for persons or deductions is without reference in the tax world. The
question can be raised: what did the artistes (and sportsmen) do so wrong to deserve this
treatment?
In its final paragraphs, the 1987 OECD Report suggested improvements, especially in the
exchange of information and assistance in collection. The Committee recommended that
Member countries would “make a more intensive use of such exchanges, either upon
request, or preferably spontaneously, when tax authorities of a Contracting State come to
learn that some of their residents are about to visit the other State, or when a resident of
that State has performed services in the first-mentioned State”. But this exchange of
information was mainly to be used to cover for missing tax earnings, because “in the
absence of effective exchanges, income of artistes and athletes is likely to go very lightly
taxed, or not even taxed at all when exemption is provided for in the State of performance” 21.
Unfortunately, also this part of the 1987 OECD Report only paid attention to the possibility of
undertaxation and did not start a discussion about the possible excessive taxation of
international performing artistes.
The 1987 OECD Report was implemented in the 1992 Commentary on Article 17 of the OECD
Model, and the Commentary was adjusted in length and content.
2.6. The limited approach in the 1996 U.S. Model
The United States issued a new Model Income Tax Convention in 1996, replacing the 1981
Model. Regarding the taxation of non-resident artistes (and sportsmen), there are
remarkable differences between the OECD Model and the U.S. Model. Article 17 of the 1996
U.S. Model provides22:
Article 17
1. Income derived by a resident of a contracting State as an entertainer, such as a theatre, motion
picture, radio, or television artiste, or as a musician, or as a sportsman, from his personal
activ ities as such exercised in the other Contracting State, which income would be exempt in
the other Contracting State under the provisions of Article 14 (Independent Personal Services)
and Article 15( Dependent Personal Services) may be taxed in that other State, except where
the amount of the gross receipts derived by that entertainer or sportsman, including expenses
reimbursed to him or borne on his behalf, from such activities does not exceed twenty thousand
United States dollars ($20,000) or its equivalent in the currency of the Contracting State for the
taxable year concerned.
2. Where income in respect of activities exercised by an entertainer or a sportsman in his capacity
21 Paragraphs 106-109 of the 1987 OECD Report 22 See also Appendix II for both the text of Article 17 of the 1996 U.S. Model and the Technical Explanation to the article
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as such accrues not to the entertainer or sportsman himself but to another person, that income,
notwithstanding the provisions of Articles 7 (Business Profits) and 14 (Independent Personal
Services), may be taxed in the Contracting State in which the activities of the entertainer or
sportsman are exercised, unless it is established that neither the ente rtainer or sportsman nor
persons related thereto participate directly or indirectly in the profits of that other person in any
manner; including the receipt of deferred remuneration, bonuses, fees, dividends, partnership
contributions, or other distributions.
With this wording, the United States brings into practice both its observation and its
reservation on Article 17 of the OECD Model, as mentioned in the 1977 Commentary, the
1987 OECD Report and the 1992 Commentary.
First, the de-minimis-rule of $20,000 gross earnings per person per year catches the eye.
This rule applies when the earnings stay below this amount during a taxable year, but when
the earnings exceed the amount the full fee becomes taxable in the country of performance.
Reimbursed expenses and expenses borne on behalf of the artiste need to be comprised in
the earnings. This is more than the gross artist fee in money terms, because also hotels,
flights, travel, meals, drinks, etc. qualify for being included. Not all the American tax treaties
contain an amount of $20,000, but sometimes have a lower threshold (see chapter 3).
Second, the United States has chosen to follow the limited approach to Article 17(2),
which means that only tax avoidance schemes are confronted. The United States is not
impressed by the reversal in the 1987 OECD Report and the 1992 OECD Commentary to the
unlimited approach. Separate legal entities with normal employer-employee relationships fall
outside the scope of Article 17(2) of the U.S. Model, although the salaries of the
artistes/employees remain taxable in the source country under Article 17(1) of the U.S.
Model. Separate legal entities fall under Article 7 and cannot be held taxable in the source
country if they do not have a permanent establishment there .
The bilateral tax treaties concluded by the United States with various countries usually
include Article 17 of the U.S. Model, with both the de-minimis-rule of Paragraph 1 (in 94% of
the treaties) and the limited approach of Paragraph 2 (in 86% of the treaties).
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3. NATIONAL ARTISTE TAX RULES
3.1. Summary for 35 countries
In this paragraph a summary is given of the main characteristics of the national artiste tax
rules in 35 countries. For this summary a division has been made in 7 categories, explaining:
• Is the country taxing the performance income of non-resident artistes?
• Can expenses be deducted prior to performances?
• What withholding tax rate is applicable?
• Which threshold amount has been set in the tax treaty with the USA?
• Is a normal income tax return allowed?
• Are there specific national exemptions, besides treaty exemptions?
Artiste tax Deduction Withholding USA treaty Income National
of expenses tax rate tax return exemptions
Australia Yes Yes 29-47% $20,000 Yes ---
Austria Yes No 20% $20,000 Yes No
Belgium Yes No 18% $3,000 No No
Canada Yes No 15% $15,000 Yes No
Czech Republic Yes No 25% $20,000 No No
Denmark No --- --- $20,000 --- ---
Estonia Yes No 15% $20,000 No No
Finland Yes No 15% $20,000 No No
France Yes No 15% $10,000 Yes No
Germany Yes No 21,1% $20,000 No / Yes Yes
Greece Yes No 20% $10,000 No No
Hungary Yes Yes 38% --- Yes No
Iceland Yes No 10% $100/day No No
India Yes No ??? $1,500 No No
Ireland No, but … --- --- $20,000 --- ---
Italy Yes No 30% $20,000 No No
Japan Yes No 20% $10,000 No No
Korea Yes No 20% $3,000 No No
Latvia Yes No 15% $20,000 No No
Lithuania Yes No 15% $20,000 No No
Mexico Yes No 25% $3,000 No No
Netherlands Yes Yes 20% $ 10,000 Yes No
New Zealand Yes Yes 20% $10,000 Yes Yes
Norway Yes Yes 15% $10,000 No Yes
Portugal Yes No 25% $10,000 No No
Russia Yes No 30% --- No No
- 15 -
Slovak Republic Yes No 25% $20,000 No No
South Africa Yes No 18% $7,500 No No
Spain Yes No 25% $10,000 Yes No
Sweden Yes No 15% $6,000 No No
Switzerland Yes Yes 0–32% $10,000 No No
Turkey Yes No 22% $3,000 No No
United Kingdom Yes Yes 22% $15,000 Yes Yes
USA Yes Yes 30% *** Yes No
The summary provides an interesting overview of the national artiste tax rules in the world.
It will not be surprising that almost all countries have special legislation for non-resident
artistes, but there are also exceptions to this general rule:
• Denmark does not levy a withholding tax from non-resident artistes who perform just
occasionally in the country. This seems to be strange when one takes into consideration
that the country has concluded 68 tax treaties with an artiste article comparable with
Article 17. But the country believes that the ties of foreign artistes who are just visiting
for one or two days, are too small and that they are using the country’s public facilities
too little to make taxation defendable23. This is different when artistes are staying longer
in the Denmark, e.g. as employee of a Danish orchestra, theatre or dance company,
because then the normal tax rules for Danish residents apply. There is also an exception
for festivals, that have to pay 36% municipal tax to the local community. This tax falls
outside the scope of the Danish bilateral tax treaties and can therefore not be used as a
foreign tax credit in the residence country.
• Ireland is another exception, not having an income tax on the performance fees of non-
resident artistes. But the country levies an alternative tax, namely a VAT of 21% from
net performance fees, i.e. after the deduction of allowable production expenses. Also this
VAT/withholding tax falls outside the scope of the Irish tax treaties and can therefore not
be credited in the residence country. Very strange because Ireland included Article 17 in
43 of its 44 treaties (= 98%) and agreed in almost any treaty that the credit method
should eliminate the chance of double taxation.
It happens that also some smaller countries ór countries coming from a communist history
and not having much experience with a detailed system of taxation, have not inserted a
special non-resident artiste tax (or any non-residents tax in general) in their legislation. But
many of these countries are catching up, e.g. because they have entered the European
Union in 2004, and are looking at the other countries for creating their new tax system.
23 This has been confirmed in a Danish court decision about an opera singer, who had performed for only one day in Denmark, Tax News Service 1997/35.
- 16 -
3.2. The deduction of expenses
Very interesting is that a majority of the countries (25 of 33 countries) does not allow the
deduction of expenses, following the “recommendation” of Paragraph 10 of the OECD
Commentary on Article 17. They are taxing the gross performance fees, as Paragraph 10
specifies:
10. The Article says nothing about how the income in question is to be computed. It is for a
Contracting State’s domestic law to determine the extent of any deductions for expenses.
Domestic laws differ in this area, and some provide for taxation at source, at a low rate based on
the gross amount paid to artistes and sportsmen. Such rules may also apply to income paid to
groups or incorporated teams, troupes, etc.
This special treatment can be defended with the argument that the determination of the
deductible expenses for performances is too complicated, especially when the production
expenses of an international tour need to be allocated over the performances in various
countries24. Also some countries try to simplify the tax rules for non-resident artistes as
much as possible, perhaps even more than for other taxable persons25.
But the experience in the countries that do allow the deduction of expenses prior to artiste
performances seems to be quite positive. There is an administrative procedure needed for
the applications for approval of the deductible expenses, but with a special department of the
tax administration the knowledge about the arts business can be brought together and be
used efficiently. These are the experiences in the UK and The Netherlands:
• The United Kingdom started in 1987, after it changed its tax rules for non-resident
artistes, with a special department of the Inland Revenue, called the Foreign
Entertainer’s Unit and momentarily based in Solihull, West Midlands. When a non-
resident artiste or local promoter of performances wants to apply for a “Reduced Tax
Payment Application” (RTPA), they can fill in an application form, attach a budget and
ask for approval. Details of the regulations can be found in publication FEU 50, called “A
Guide to Paying Foreign Entertainers”, while the FEU is also sometimes publishing a
newsletter26.
Any RTPA needs to be followed by a tax return at the end of the tax year under the
normal income tax scheme; the withholding tax of 22% (and perhaps even more) can
then be offset against the final income tax, with refund of excess, if any. The FEU
attempts to come with the approvals of RTPAs as close to the final income tax obligation
24 For example, Belgium has changed its non-resident artiste tax law in 1993 25 For example, the Netherlands was in the year 2000 promoting a “broad taxable base, at a low tax rate”, although it had to change this later with the adjustment that expenses had to be deductible. But the Ministry of Finance restarted the discussion in May 2004 with the proposal of some technical changes to the artiste tax rules. 26 Much information about the Foreign Entertainers Unit can be found on their website www.inlandrevenue.gov.uk/feu.
- 17 -
as possible. The top rate in the UK income tax is 40%, non-residents are entitled to the
general allowance of GBP 4,745 (year 2004-2005).
The FEU also allows “middleman” arrangements, which means that one person or
organization27 takes the responsibility for the payment of the non-resident artiste tax,
covering the original withholding agents for the transfer of their obligations to the
“middleman”28.
Without an approval for a “reduced artist tax rate”, the artiste can receive GBP 1,000 per
year free of tax as deemed reimbursement for expenses. This helps artistes with low
performance fees.
• The Netherlands started in 2001, after a general change in their tax legislation, with an
administrative procedure for non-resident artistes to deduct their expenses from the
taxable fee prior to performances. This so-called “kostenvergoedingsbeschikking” (cost
reimbursement approval), or KVB as it was abbreviated, gave both domestic and non-
resident artistes the opportunity to reduce the taxable performance fee to the level of
their real profit. The Belastingdienst Buitenland (Tax Office for Foreigners) in Heerlen
became responsible for applications. As in the UK, the application form together with a
budget needs to be sent in to the tax administration. No time limit has been given,
leaving room for late applications.
For very small artistes a threshold of EUR 136 per person per show has been
implemented, that can be considered as an approved KVB. This even applies when two or
more shows per day are taking place.
An income tax return at the end of the year is optional for non-resident artistes in the
Netherlands. This means that a non-resident artiste with a high income does not have to
pay the higher progressive income tax rates, but with a lower income can make use of
the low starting rates and apply for a tax refund.
Also other countries have experience with the deduction of expenses prior to performances,
such as the USA, Australia, Canada, Switzerland, Norway and Hungary.
27 In practice very often a booking agent, management, production company or specialized accountant or tax adviser 28 A list of approved “middlemen” is published on the website of the FEU.
- 18 -
4. EXPENSES FOR INTERNATIONAL PERFORMING ARTISTES
4.1. Expenses seem to be difficult
When artistes perform in other countries, they will incur expenses. These can vary from just
simple travel and lodging expenses to more complex production expenses needed to
undertake a tour through other countries. Normally enterprises and professionals can deduct
their expenses from their gross earnings and are taxed on the net profit from their activities.
A profit and loss account needs to be drawn up to give the tax administration sufficient
information to judge the reliability of the earnings and the acceptability of the expenses.
Enterprises with branches abroad need to calculate their profits in each of the countries,
allocating both the direct and head office expenses “at arm’s length”. Special rules are
developed for the transfer pricing between the branches of an international company to
come to a fair portion of the international profit that can be allocated to and taxed by each
individual country.
Employees can also deduct their expenses or can have their expenses tax-free reimbursed
by their employe rs. In general, taxation of the income after the deduction of expenses is
very normal and seems to be an undisputed general rule.
Unfortunately, this is not the case for internationally performing artistes. Many countries
have decided in the past to tax the gross performance income of non-resident artistes and
not take the production and other expenses into account. These countries argue that artiste
expenses are difficult to determine, especially when the artistes perform in more than one
country. A strange approach when compared with the attention for the transfer pricing and
expenses allocation rules for normal companies. It is unclear where this conviction has come
from, there is no information available about countries that actually had problems
determining the expenses of artistes. The countries just did not seem to like the
inconvenience, were perhaps thinking that the expenses of non-resident artistes could not be
that high and decided to simplify the taxation of a special group of taxpayers.
The OECD has decided not to intervene in these national practices, but to follow them, as
explained in paragraph 3.2.
4.2. The exclusion from a normal income tax settlement
Even stranger is the exclusion of non-resident artistes from a normal income tax settlement
in many countries. Very often artistes are not given the right of filing a normal income tax
return after the taxable year and cannot sufficiently credit the rough withholding tax against
- 19 -
the normal, progressive income tax rates (from the taxable income after the deduction of
expenses). This will always lead to differences, because the rough withholding tax will never
come close to the final outcome in the income tax, mainly because of the incurred expenses.
Therefore, a correction procedure after the year to comply with the general income tax
system should be available for non-resident artistes to make sure that equal treatment with
other taxable persons is respected.
4.3. Study in the Netherlands
The artiste tax system in the Netherlands allows the deduction of expenses prior to
performances. Artistes or promoters of performances can apply for a
“kostenvergoedingsbeschikking” (KVB), as explained in paragraph 4.1. The Rotterdam-based
firm All Arts Tax Advisers is responsible for many applications for non-resident artistes. This
firm has set up a database with all (confirmed) KVB-applications done from 1 January 2001,
the date the new Dutch artiste tax system started, until 31 December 2003. It has also
added the applications from some other music, dance and theatre promoters.
The database contains over the 3 years 2001 – 2003 in total the details of 1.605 applications
for 2.498 performances in the Netherlands. All these applications have been checked and
confirmed by the “Belastingdienst Buitenland” (Tax Office for Non-Residents) in Heerlen,
Limburg, the Netherlands. The artistes have received an official tax ruling from the tax
department on their deductible e xpenses.
It needs to be stressed that the percentages for the expenses and the profit from the various
performances are averages in which higher performance fees, causing high expenses, have
more influence on the percentages than the smaller performance fees. A performance fee of
EUR 800.000 has 8 times more impact on the averages than a performance fee of EUR
100.000 and around 89 times more than a performance fee of EUR 9.000. This “weighted”
calculation of the average of expenses and profit gives more balance in the results than
when each performance would have been given the same influence. In the following
paragraphs more detailed information will be provided about the variation of the expenses at
different levels of performance fees.
The results from the total database for the period of 3 years are:
- 20 -
No. of No. of Performance
Year applications shows fees Expenses Profit
2001 415 677 16.496.427 -11.935.509 4.560.919
100% -72% 28%
2002 579 891 14.835.054 -11.855.690 2.979.364
100% -80% 20%
2003 611 930 15.313.109 -11.085.309 4.227.829
100% -72% 28%
TOTAL 1.605 2.498 46.644.590 -34.876.508 11.768.111
100% -75% 25%
The total results from the preceding paragraph can be specified with the detailed figures for
a certain period. We have chosen for the year 2003. The database contains for that year 611
KVB applications on production expenses, covering 930 performances, ranging from very
small to very big performances. This leads to the following graph:
- 21 -
Year 2003 - The Netherlands
0%
20%
40%
60%
80%
100%
120%
140%
160%
100 1.000 10.000 100.000 1.000.000 10.000.000
Performance fees
Exp
en
ses
(%)
- 22 -
5. TAX CREDIT PROBLEMS IN THE COUNTRY OF RESIDENCE
5.1. Exemption or credit method
After returning from performances abroad, the artiste is again confronted with taxation,
because his residence country wants to tax his foreign performance fees as part of his
worldwide income . But this threat of economic double taxation is normally taken away with a
financial compensation by the residence country (tax credit or tax exemption), WHICH has
been inserted in all bilateral tax treaties. Also, some countries provide this double tax relief
already unilaterally29.
In general, there are two methods for avoiding double taxation:
1. Exempting foreign income from domestic taxation
2. Granting a credit for foreign taxes.
With the “exemption” method, an equal part of the income tax in the residence country is
exempted. When e.g. 50% of the income has been earned abroad, the exemption will be
50% of the income tax in the residence country. Taking the progressive tax rates into
consideration, the tax exemption will normally be equal to the average tax rate on the
worldwide income.
With the “credit” method, the foreign income tax can be used as a credit against the income
tax in the residence country. But the tax credit cannot be more that income tax due on the
foreign income in the country of residence, which means the tax credit is limited to the
outcome of the “exemption” method.
5.2. Recommendation of the “credit” method for Article 17
The OECD recommends the use of the “credit” method in § 12 of the current OECD
Commentary on Article 17:
12. Where, in the cases dealt with in paragraphs 1 and 2, the exemption method for relieving double
taxation is used by the State of residence of the person receiving the income, that State would be
precluded from taxing such income even if the State where the activities were performed could not
make use of its right to tax. It is therefore understood that the credit method should be used in such
cases. The same result could be achieved by stipulating a subsidiary right to tax for the State of
29 An example is Austria, that has inserted a unilateral measure in Sec. 49 of the Bundesabgabenordnung (BAO) (Federal Tax Code). An explanation can be found in Heinz Jirousek, Josef Schuch and Franz Sutter, “Unilateral relief form Double Taxation in Austria”, 58 Bulletin for International Fiscal Documentation 8/9 (2004), at 372.
- 23 -
residence of the person receiving the income, if the State where the activities are performed cannot
make use of the right conferred on it by paragraphs 1 and 2. Contracting States are free to choose any
of these methods in order to ensure that the income does not escape taxation.
Many countries follow the advice from the OECD to use the “credit method”, although some
countries have inserted the “exemption” method as the only method for avoiding double
taxation in their national legislation and have not changed this with regards to their resident
artistes with foreign source income. Examples of the latter are Belgium and Germany.
5.3. Tax credit problems in the residence country
In practice quite some tax credit problems can arise for international performing artistes.
Some examples are explained here:
a. Basket system versus per-country system: The effect of a tax credit is influenced by the
restrictions that a country can make to the cross-collateral clearance of the artiste taxes
from the various foreign countries.
b. Tax certificate : A requirement for a foreign tax credit in the country of residence is that
the withholding agent in the foreign country issues a tax certificate showing the taxable
fee and the tax that has been paid to the foreign tax administration. Without an official
tax certificate many countries are reluctant to allow a credit for the foreign tax.
c. Qualification of foreign tax: What foreign tax is creditable? Not e.g. road tolls, VAT, sales
tax, excise/duty tax or water tax, also not interest and penalties or social security
contributions30, but just the taxes that have been specified in Article 2 of a tax treaty,
namely direct taxes on income (and capital).
d. Final and compulsory payments: The foreign tax must be a compulsory payment and
final . Most countries do not allow a tax credit for taxes that were paid but could have
been avoided. When a later settlement, application or tax return is possible to finalize
the income tax, this procedure must be followed to get the taxes assessed, perhaps even
leading to a tax refund.
e. The person of the artiste: For the tax credit and exemption method the person of the
taxpayer must be the same in both the foreign and the resident country. This very often
causes problems for orchestras, theatre groups, musicals and dance companies, for
whom the foreign tax in the country of performance is withheld and paid in the name of
the group, but the tax credit or exemption in the residence country needs be granted
individually, i.e. on the personal tax declarations of the performing artistes. Very often a
30 Social security contributions are levied in e.g. France and Germany. Sometimes these extra levies cannot be avoided, not even with a E-101 (or D-101 from the USA), as occurs in Germany with the Künstlersozialversicherung (Artistes Social Insurance).
- 24 -
tax credit cannot be divided over the artistes31, is not accepted by the tax authorities or
is just simply forgotten. This a major tax credit or exemption problem for artistes; very
often the foreign artiste tax remains as a unrecove rable loss in the annual account32.
f. Triangular situations: If a third party is involved in the agreement between the artiste
and the organizer of the performance and the three parties are based in different
countries, a tax credit problem can arise for either the artiste or the third party, or even
for both. This gets even more complicated when the performing artistes of a group live in
different countries.
g. Net deals, transfer of the tax burden to the organizer: The unrecoverable artiste tax can
also become a problem for the organizers of performances, i.e. when a net performance
fee has been agreed and the organizer needs to pay the artiste tax on top of the fee.
When the artistes cannot achieve a tax credit or exemption in their residence country,
they try to raise their performance fee to a gross level, sufficient to pay the normal taxes
in the residence country from the earnings. Then the artiste tax buck will be passed to
the organizer, who is confronted with a higher performance fee and still has to pay the
(unrecoverable) artiste tax on top of this (net) fee. The result is that the non-resident
artiste becomes more expensive and will be in a less competitive position towards
resident artistes33.
h. Creditable domestic tax in the residence country: The question can also arise against
what domestic tax in the residence country the tax credit or exemption can be offset.
Federal income, corporation and capital tax are evident, but not so clear are surcharges
as “Solidaritätszuschlag” (Solidarity Tax) in Germany or municipal tax as surcharge on
the income tax in Belgium. In Switzerland the foreign tax credit or exemption is set
against the federal, cantonal and municipal tax, each for 1/334. In the USA the foreign
tax credit cannot be offset against the state taxes, which vary from 0% to 8% from the
taxable income. In the Netherlands the foreign tax credit or exemption cannot be offset
against the “premies volksverzekeringen” (national insurances), even though they are
part of the two lowest rates in the income tax brackets and do not have a direct link with
later benefits anymore35.
i. Complexity of the system of foreign tax credits: The application of the system of foreign
tax credit in the residence country can be very complex, as the decision Evans v. Famous
31 See also Jörg Holthaus, “Besteuerung international tätiger nichtselbständiger Berufssportler und Künstler: Ein totgeschwiegenes Problem der Umsetzung der Regelungen der DBA in der Praxis”, IstR 18/2002, at 633 32 This problem was also discussed in chapter 8.3 of Dick Molenaar and Harald Grams, “Rent-A-Star – The Purpose of Article 17(2) of the OECD Model”, 56 Bulletin for International Fiscal Documentation 10 (2002), p. 500-509. 33 In the European Union this might lead to unequal treatment and an obstruction for entering other markets within the Union. See also Chapter 10. 34 See Rolf Wüthrich, “Switzerland: Foreign Tax Credit Modifications”, 41 European Taxation 10 (2001), p. 408-412. 35 This leads in the Netherlands very often to excess tax credits or insufficient tax exemption, because the income tax rates start at 1% resp. 8% before going up to a reasonable percentage.
- 25 -
Music Corp. in February 2004 has shown36. The court quoted that the foreign tax credit is
“one of the most intricate and convoluted features of the entire U.S. tax system”. An
interesting decision, that shows the possible foreign tax credit problems in the residence
country.
5.4. Excess tax credits
It can easily happen that a tax credit in the residence country is insufficient for compensating
the foreign artiste tax. The result will then be an excess tax credit, which in many countries
must be taken as an unrecoverable net loss for the artiste. This is the case in e.g. the UK,
Germany, Belgium and France.
Some countries have introduced the opportunity to carry back and/or carry forward this
excess tax credit to years where there is more room for compensation. Examples are the
USA and the Netherlands. For artistes who are resident in these countries the tax credit
method may in this specific situation lead to a better result than the tax exemption method,
because the latter method does not take the amount of foreign tax into account and can
therefore not “carry forward” or “carry back” any excess.
36 Evans v. Famous Music Corp., Court of Appeals of New York City (USA), 24 February 2004, 302 AD2d 216.
- 26 -
6. EXAMPLES OF EXCESSIVE (DOUBLE) TAXATION
In the preceding paragraphs remarks have been made about the taxation of international
performing artistes. On one side, countries have simplified the withholding tax rules for
visiting non-resident artistes, do not accept the deduction of expenses and do not allow
normal income tax settlements at the end of the year. This might lead to a higher tax burden
than for other (non-resident) taxable persons. On the other side, resident countries do not
give a full credit for the foreign tax, but are restricting the compensation for the elimination
of double taxation to the amount of domestic income tax that is due on the foreign income.
With these limitations on both sides it may happen that international performing artistes
experience excessive taxation, i.e. that the source tax in the country of performance has
been higher that the tax exemption or credit in the residence country. Two examples:
1. Individual artiste
A German artiste performs five shows in Spain. He is not very famous but can make a living from
his performances. His fees are 20.000 and his direct expenses are 10.000. The withholding tax in
Spain is 25% from the gross fees, without taking production expenses into consideration. Therefore
5.000 is withheld, which is effectively 50% of the 10.000 profit.
In Germany, the foreign earnings and expenses are reported in the artiste’s income tax return as
part of his worldwide income and a total taxable income of 50.000 remains. This leads, after
personal allowances, to 16.000 of income tax, on average 32% of the taxable income.
Foreign income is exempted in Germany, but limited to the (average) amount of German tax that is
due on the foreign income. The tax exemption therefore is 32% x 10.000 = 3.200. Because 5.000
was withheld, the result is an excess of taxation of -1.800.
Gross fee in country of performance 20.000
Expenses for performance -10.000
--------
Profit 10.000
Withholding tax rate (from gross fee) 25%
Withholding tax 5.000
Effective tax rate (from profit) 50%
World income in home country 50.000
Total tax in home country 16.000
Average tax rate in home country 32%
Maximum tax credit in home country 3.200
Excess taxation - 1.800
- 27 -
2. Non-profit classical orchestra
The orchestra in this example has more expenses than market earnings, but receives a subsidy from
the government to cover the deficit. The orchestra is exempted from corporation tax in the country
of residence, when any profit would result.
Performance fee 60.000
Production expenses -35.000 (directly related to performance)
Indirect expenses -20.000 (yearly expenses / performances)
Salaries for musicians -27.000 (monthly salaries / performances)
---------
Remaining balance for orchestra - 22.000 (to be subsidized)
Unlimited approach:
Country of performance: source tax
20% x 60.000 = 12.000
Home country: income/corporation tax
35% x 27.000 = 9.450
Tax credit (max.) - 9.450
------
Balance to be paid in home country 0
Excess taxation: 12.000 (source tax) – 9.450 (credit) = - 2.550
Limited approach:
Country of performance: source tax
20% x 27.000 = 5.400
Home country: income/corporation tax
35% x 27.000 = 9.450
Tax credit - 5.400
----------
Balance to be paid in home country 4.050
Excess taxation: 5.400 (source tax) – 5.400 (credit) = 0
- 28 -
These examples show that the risk of exce ssive taxation is very present for international
performing artistes. The source tax in the performance country is too high, because
expenses are not deductible, and the tax credit in the residence country is insufficient.
The second example shows that the change in the 1992 OECD Commentary to the unlimited
approach of Art. 17(2) leads to excessive taxation internationally. This would not have
happened with the limited approach (see paragraph 2.5 and 2.6).
These examples assume that it is easily possible to obtain a tax credit in the residence
country. But as explained in chapter 4 this might be problematic. When any of these
difficulties lead to a refusal of the ta x credit by the tax authorities in the country of
residence, the excessive taxation turns into double taxation, causing that the artiste has to
pay the full amount of tax in both countries.
- 29 -
7. TAX REVENUE IN THE PERFORMANCE COUNTRY
The tax revenue from non-resident artistes can be calculated with the information from two
sources in the Netherlands.
7.1. Study by All Arts Tax Advisers (2001 – 2003)
The tax revenue from the The All Arts Tax Advisers study on the expenses in the years 2001-
2003 (see paragraph 4.3) includes the performance fees of non-resident artistes. Together
with the deductible expenses and an estimate of the size of the market, the tax revenue can
be calculated. The study gave a total of performance fees for the years 2001-2003 of EUR
46,6 million, on average EUR 15,5 million per year. According to information from the Dutch
tax administration the applications in the study reflect 50% of the total market of non-
resident artistes, leading to an average of gross performance fees of EUR 31 million per year.
This gives the following calculation of the tax revenue for the Netherlands (in million euros):
Tax revenue in the Netherlands (1) Rate Tax revenue
Gross performance fees 31,0 20% 6,2
Deduction of expenses -75% -23,3 20% - 4,7
---------- --------
Profit on performances 7,7 20% 1,5
7.2. Evaluation by Ministry of Finance of the Netherlands (2002)
The Dutch Ministry of Finance has issued an evaluation of the artiste and sportsman tax rules
in the Netherlands, including Figures about tax earnings and the influences of deductions for
expenses in the year 2002. These figures can be summarized as follows (in million euros):
Tax revenue in the Netherlands (2) Rate Tax revenue
Performance fees (without applications) 15,5 20% 3,1
Performance fees (with applications) 18,0 20% 3,6
--------- --------
Total gross fees 33,5 6,7
Deduction of expenses -11,6 20% - 2,3
---------- --------
Total taxable 21,9 20% 4,4
- 30 -
The conclusion from these figures is that the tax revenue from performances of non-resident
artistes in the Netherlands lies between 6,7 million (gross taxation) and 1,5 million (net
taxation) euros per year.
7.3. Estimate of tax revenue for other countries
The tax revenue in other countries can be estimated, using the Dutch minimum and
maximum figures and extrapolating with the number of citizens and the applicable
withholding tax rate (in million euros, per year):
citizens multiply tax rate tax revenue
(millions) (min. - max.)
The Netherlands 16 1 20% 1,5 - 6,7
Germany 80 5 21,1% 7,9 - 35,3
Greece 11 0,7 20% 1,0 - 4,7
United Kingdom 70 4,4 22% 7,3 - 32,4
France 60 3,8 15% 4,3 - 19,1
Belgium 9 0,6 18% 0,8 - 3,6
Spain 60 3,8 25% 7,1 - 31,8
United States 290 18,1 30% 40,7 - 181,9
Australia 20 1,3 29-47% 2,8 - 20,5
These figures of estimated tax revenue in the various countries are far from impressive. It
seems to be an illusion that the taxation of the performance fees of non-domestic artistes
and sportsmen would generate a significant contribution to a country’s budget.
- 31 -
8. THE ADDITIONAL ARTICLE 17(3)
8.1. Exception in the OECD Commentary
An important exception to the general rules of Article 17(1) and (2) is the addition in 1992 of
the optional Article 17(3). This possibility comes from paragraph 14 of the OECD
Commentary, which discusses the wish of countries to exclude events supported from public
funds from the scope of Article 17. The Commentary allows a restrictive provision in the
article under the condition that the exemption “should be based on clearly definable and
objective criteria to ensure they are given only where intended”. The Commentary also gives
a text proposal for the additional Article 17(3):
The provisions of paragraphs 1 and 2 shall not apply to income derived from activities performed in
a Contracting State by artistes or sportsmen if the visit to that State is wholly or mainly supported
by public funds of one or both of the Contracting States or political subdivisions or local authorities
thereof. In such a case, the income is taxable only in the Contracting State in which the artiste or
the sportsman is a resident.
8.2. More frequent use than expected
Many countries have implemented the use of the additional Article 17(3) in their tax treaty
policy, some already (long) before 199237, other countries just recently38.
The 1987 Intra -ASEAN39 Model Double Taxation Convention has standardized the “Article
17(3) clause”. The multilateral 1996 NORDIC Convention between Denmark, Finland,
Iceland, Norway and Sweden also contains Article 17(3) as a standard addition to Article 17.
The idea might exist that mainly Eastern European, African, Latin American and Asian
countries insert Article 17(3) in their bilateral tax treaties with the countries of the Western
world, but the results of a survey show that that suggestion is not correct. The percentage
use of Article 17(3) is higher for these countries, but also the Western countries score high
percentages, on average in 66% of all bilateral tax treaties.
The following table gives an overview of the use of Article 17(3) in order of percentages:
37 E.g. the use of Article 17(3) in the tax treaties of Poland goes back to the older tax treaties with Germany (1972) and France (1975) 38 E.g. The Netherlands had inserted Article 17(3) in only few tax treaties in earlier years, but started more regular use from the mid 1990s and just recently in the treaties with Belgium (2001) and Portugal (2001). 39 Including the countries Indonesia, Malaysia, Philippines, Thailand, Singapore, Brunei, Vietnam, Laos, Myanmar and Cambodia.
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0 10 20 30 40 50 60 70 80 90 100
Chile 0 %
Brazil 33 %
Ireland OECD 37 %
Egypt 41 %
Switzerland OECD 41 %
New Zealand OECD 41 %
Australia OECD 43 %
Austria OECD 44 %
United Kingdom OECD 44 %
Netherlands OECD 45 %
Greece OECD 46 %
South Africa 48 %
Italy OECD 49 %
USA OECD 49 %
Sweden OECD 51 %
Iceland OECD 52 %
Luxembourg OECD 52 %
Zimbabwe 54 %
Finland OECD 54 %
Belgium OECD 55 %
Spain OECD 62 %
Czech Republic OECD 63 %
Russia 65 %
Canada OECD 65 %
Portugal OECD 65 %
Japan OECD 66 %
Mexico OECD 69 %
Denmark OECD 69 %
Germany OECD 74 %
Argentina 75 %
France OECD 75 %
Slovak Republic OECD 77 %
Norway OECD 81 %
Bulgaria 83 %
Jamaica 86 %
Poland OECD 91 %
Estonia 91 %
Korea OECD 92 %
Ukraine 92 %
Turkey OECD 93 %
Yugoslavia 96 %
Indonesia 96 %
India 97 %
Slovenia 97 %
China 98 %
Hungary OECD 98 %
Average 66 %
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8.3. Variations in the content of Article 17(3)
In the various tax treaties not only the criterion “supported by public funds” is used in Article
17(3). The exception can also be based on “cultural exchange”, “cultural and sports
exchange”, “cultural agreement”, “cultural cooperation” or “non-profit organizations”.
Sometimes more than one item is mentioned in an Article 17(3)-clause40. Unfortunately, the
variety in criteria for Article 17(3) makes the exception not very reliable.
8.4. Defending the state’s budget?
The question can be raised whether countries are trying to protect their own interests with
the Article 17(3)-clause. It looks as if the OECD and the individual countries are aware of the
excessive taxation resulting from the main rules of Article 17, which, evidently, would lead to
an extra need for subsidies for the cultural (and sports) organisations and extra expenses for
the country’s budget. With a reversal of the allocation of the tax right for artistes, who are
relying on governmental subsidies and comparable public funds, from the performance
country to the country of residence, these countries seem to defend their own national
budgets.
8.5. Chances of unequal treatment
The use of Article 17(3) in tax treaties can raise questions regarding equal treatment.
Especially within the European Union, where the additional provision might be in conflict with
the freedom principles of the EU Treaty or be seen as forbidden subsidies. It can become
easier for a subsidized artiste group to enter a foreign market with the exceptions of Article
17(3) than for a commercial theatre group, that experiences problems with withholding taxes
in the country of performance and tax credits in the residence country. Both excessive
taxation and extra administrative expenses can lead to a disadvantage on the (new) foreign
market.
It is also be possible that the non-discrimination principles of other international agreements,
such as Article 24(1) of the OECD Model Treaty, Article 26 of the International Covenant on
Civil and Political Rights (BUPO) and the Covenant for the Protection of the Human Rights
(ECPHR), cannot justify the division between subsidized and non-subsidized artistes (and
sportsmen) organizations.
40 An example is the 2003 tax treaty between Austria and Cuba, that is mentioning both performances supported by public funds and culture and/or sports exchange programs.
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9. INFLUENCE OF THE EUROPEAN UNION AND EC LAW
9.1. Excessive taxation is an obstacle for entering other EU markets
It seems odd that international excessive taxation for performing artistes, as shown with the
examples in Chapter 6, can occur in the Community of a united Europe, that tries to bring
together the markets of the individual Member States to one single market with as little
borders and obstacles as possible. Both the European Commission and the Member States
put, on one side, much effort in legal and administrative measures to stimulate the mobility
of artistes from their Member States throughout Europe, while, on the other side, the
problem of excessive taxation brings hesitation to these artistes to accept invitations for
foreign performances. Artistes question whether the positive effect of the foreign
performance is worth more than the extra expense of the excessive taxation. The same
concerns the organizer of a concert, theatre play or dance performance, who will calculate,
when the extra tax burden has been put on him because the artiste had insisted on a net
performance fee, whether the foreign artistes are giving enough extra value to his
programming.
9.2. First action by the Council of the European Union
The excessive taxation raises obstacles for the mobility of artistes through the European
Community. This problem was initially not recognized by the European Commission. In 1999
the European Commissioner Frits Bolkestein expressed in his answers to questions raised by
a member of the European Parliament, Ian White, that the German artist and sportsman tax
system was in accordance with the requirements of the non-discrimination principle41.
But later in the year 1999, the Council of the European Union decided on a resolution “on the
promotion of the free movement of persons working in the cultural sector”42 and invited the
European Commission to undertake a study and the Member States to develop cooperation
to facilitate the mobility of artistes and other persons working in the cultural sector.
41 40 European Taxation 8 (2000), p. EC-28. 42 Council Resolution of 17 December 1999 on the promotion of the free movement of persons working in the cultural sector, 2000/C 8/02
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The study was undertaken by the University of Paris, which presented its report in April
200243. It concludes in Chapter III:
The persons interviewed were fairly unanimous in their criticism of the extreme diversity in tax
legislation in force throughout Europe and which can restrict the mobility of performing artists and
their productions in the European Union. It is a fact that certain national provisions can create
obstacles or at least be a disincentive to the circulation of artists and cultural workers in the EU.
9.3. The Arnoud Gerritse decision of the European Court of Justice (C-234/01)
The first case for the European Court of Justice, in which non-resident artiste taxation was
tested to the freedom principles of the EC Treaty, was the Arnoud Gerritse case.
Arnoud Gerritse is a Dutch musician, who performed in 1996 for a few days as drummer for
a radio station in Berlin, Germany. His performance fee was ca EUR 3.000, which also
covered his rehearsals and expenses. He was taxed under §50a Abs. 4
Einkommensteuergesetz (German Income Tax Law) at 25% of the gross earnings without
deductions of expenses. Because of surcharges the real tax rate rose to 29%, which resulted
in a withholding tax of EUR 870. Besides this, Arnoud Gerritse earned EUR 27.500 in his
home country the Netherlands and partly in Belgium.
He filed an individual Einkommensteuererklärung (German Income Tax return) for the year
1996 in Germany, because he wanted to (1) deduct his direct e xpenses for travel and stay of
EUR 500 and (2) make use of the normal income tax rates, including the free amount
(Grundfreibetrag) of EUR 6.000. The Finanzamt Neukölln-Nord in Berlin rejected the request
for an income tax assessment and refund, not even after appeal, because the rule of § 50
Abs. 5 EStG made the withholding tax of 25% (+ surcharges) the final taxation for artistes,
sportsmen and other foreign persons with limited tax liability in Germany.
In the appeal, the Finanzgericht (Tax Court) Berlin considered the arguments by the plaintiff
positively, but decided because of the impact on the German Einkommensteuergesetz to ask
the following prejudicial questions to the European Court of Justice in Luxemburg on 28 May
2001:
“Is there an infringement of Article 52 of the EC Treaty (now Article 43 EC) where, under
Paragraph 50a(4), first sentence, point(1) and second sentence, of the Einkommensteuergesetz
(Law on Income Tax) as in force in 1996 (EStG 1996), a Netherlands national who earns in the
Federal Republic of Germany taxable net income of approximately DM 5.000 from self-employed
activity in the calender year is subject to deduction of tax at source by the person liable to pay his
fees at the rate of 25% of his (gross) revenue of approximately DM 6.000 plus solidarity charge,
43 Professor Olivier Audéoud, Study on the Mobility and Free Movement of People and Products in the Cultural Sector, University of Paris X, No. DG EAC/08/00, April 2002 (europa.eu.int/comm/culture/ eac/sources_info/pdf-word/mobility_en.pdf).
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where it is not possible, by means of an application for a refund or an application for a tax
assessment, for him to recover, in whole or in part, the taxes paid?”
The ECJ reached its decision on 12 June 2003, after a conclusion by the Advocate -General
Léger44. The considerations in the decision were commensurable with the advice of the
Advocate -General45. Both issued that, where, in relation to direct taxes, the situations of
residents and non-residents are normally not comparable46, this was different for the
deductibility of expenses, because these were for both groups of taxpayers directly linked to
the activities that generated the income in Germany. Therefore, Gerritse had to be allowed
to deduct his business expenses from his taxable income47.
The considerations with regards to the fixed tax rate of 25% were combined with those
regarding the free taxable amount. Both the Court and the A-G held that the free taxable
amount needs to be reserved for the country of residence, because the income earned in the
foreign country is in most cases only a part of the total income and the concentration in
country of residence made it easier to take into account the personal circumstances and
grant an allowance with a social purpose, that guarantees and essential minimum exempt
from tax48. But a fixed withholding tax rate (of 25%) was compatible with Treaty provisions,
as long as this tax rate was not higher than the normal, progre ssive income tax rates49.
Finally, the European Court of Justice gave the following answers to the prejudicial question:
“55. In view of the whole of the above considerations, the answer to the Finanzgericht Berlin must
be:
- Articles 59 and 60 of the EC Treaty (now, after amendments, Article 49 and 50 EC) preclude a
national provision such as that at issue in the main proceedings which, as a general rule, takes into
account gross income when taxing non-residents, without deducting business expenses, whereas
residents are taxed on their net income, after deduction of those expenses;
- However, those articles of the Treaty do not preclude that same provision in so far as, as a
general rule, it subjects the income of non-residents to a definitive tax at the uniform rate of 25%,
deducted at source, whilst the income of residents is taxed according to a progressive table
including a tax-free allowance, provided that the rate of 25% is not higher than that which would
actually be applied to the person concerned, in accordance with the progressive table, in respect of
net income increased by an amount corresponding to the tax-free allowance”.
44 The conclusion of A-G Léger was released on 13 March 2003 and can be found on the website of the European Court of Justice, http://curia.eu.int, under the case number C-234/01. 45 There was one difference in the conclusions, i.e. that the A-G found the fixed income tax rate justifiable, while the ECJ ruled that the Mr. Gerritse should be entitled to a tax refund when the (progressive) income tax rates were lower than the fixed withholding rate of 25%. This difference in outcome is odd, because the lines of reasoning in the advice of the A-G and the ECJ decision were almost identical. 46 The A-G referred to the paragraphs 31, 33 and 34 of the Schumacker decision (C-279/93 [1995] ECR I-225). 47 Paragraph 25–29 of the decision. 48 Paragraph 43 and 48 of the decision. 49 Paragraph 53-54 of the decision
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In Germany, the answers of the European Court of Justice led to a decision by the
Finanzgericht Berlin, the tax court that had raised the prejudicial questions50, but both the
representatives of Arnoud Gerritse and the German tax authorities appealed against this
decision at the Bundesfinanzhof (Federal Supreme Court). The BFH decided to postpone its
(final) decision in this case51, because it had already another case about the German non-
resident artiste taxation on its list, for which it was planning to ask prejudicial questions to
the European Court of Justice, i.e. the FKP Scorpio Konzertproduktion case, which will be
discussed in the next paragraph of this chapter.
But the Bundesfinanzhof, in the mean time, had to decide in other cases on the question
whether the flat income tax rate without the deduction of expenses of §50a(4) of the
Einkommensteuergesetz (Income Tax Law) is still enforceable after the decision in the
Gerritse case. The BFH did not hesitate in its decisions to follow the considerations of the ECJ
and ruled that §50a(4) of the EStG was incompatible with the ECJ Treaty52.
Also the Ministry of Finance in Germany reacted on the decision in the Arnoud Gerritse
case53. It changed the so-called Vereinfachtes Erstattungsverfahren (Simplified Tax Refund
Procedure) of §50a(5) of the Einkommensteuergesetz (Income Tax Law), by crossing out the
conditions that the deductible expenses54 had to be more than 50% of the earnings and that
the fixed income tax rate was to be set at 50%, and allowing tax refunds when the normal,
progressive income tax rates are lower than the withholding tax rate. But the Ministry of
Finance reluctantly refused to allow the deduction of business expenses already at the
moment of the withholding of the income, i.e. prior to performances55.
It was not surprising that the decision in the Arnoud Gerritse case led to much discussion in
Germany, but it was disappointing that the tax authorities only came with a minor
adjustment to the existing tax system. The European Commission considers this change as
insufficient and has filed on 13 October 2004 a complaint regarding Vertragsverletzung
(Breach of the EC Treaty) against Germany56.
50 Finanzgericht (Tax Court) Berlin, 25 August 2003, 9 K 9312/99, Internationales Steuerrecht 21/2003, with comments of Harald Grams and Dick Molenaar. 51 Bundesfinanzhof (Federal Supreme Court), 15 September 2003, I R 87/03. 52 Bundesfinanzhof (Federal Supreme Court) 19 November 2003, I R 34/02 and 28 January 2004, I R 73/02. The chairman of the Bundesfinanzhof, Franz Wassermeyer, even referred to the Gerritse decision in an opposite case, about a German resident, who could not get a tax exemption in German for foreign withholding tax because his net income after the deduction of expenses was too low. Wassemeyer wrote, that the German resident should be given the chance to file for tax refunds in the source countries, the Netherlands and Finland (Franz Wassermeyer, “Keine Erstattung ausländischer Quellensteuern”, Internationales Steuerrecht 8/2004). 53 Bundesministerium der Finanzen (Federal Ministry of Finance), 3 November 2003, IV A 5 – S 2411 – 26/03. 54 The Vereinfachtes Erstattungsverfahren only accepts expenses that are directly connected to the activities in Germany. This condition is questioned in the case of Centro Equestre de Leziria Grande Lda, that is pending at the ECJ at the moment (C-345/04). See also paragraph 11.5.3. 55 Countries such as the Netherlands and the United Kingdom allow non-resident artistes this deduction of business expenses before the tax is calculated. See Chapter 6 of this book. 56 European Commission 13 October 2004, Internationales Steuerrecht-Länderbericht 21/2004.
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At the same time it was odd, that there was almost no reaction from the tax authorities in
other countries with a gross taxation of non-resident artistes comparable to the German
income tax law57. It is as if many countries did not notice the ECJ decision in the Arnoud
Gerritse case. Unfortunately, the European Commission did not take initiative yet to also
approach other EU Member countries.
9.4. New pending cases before the European Court of Justice
Especially persons working in the cultural field in Germany were unhappy with the reluctant
approach of the German tax authorities and the just minor changes that were made to the
tax rules for non-resident artistes after the decision in the Arnoud Gerritse case. Germany is
the biggest music, theatre and dance market in Europe and many artistes from the United
States, the United Kingdom, France, the Netherlands and other countries like to perform for
audiences in Germany, that appreciate their performances very much.
While some concentrated on lobbying in Berlin at the parliament, ministries or other
institutions, others were pushing new court cases forward. It became clear that the decision
in the Arnoud Gerritse case was not clear in every respect and that the German
Bundesfinanzministerium (Federal Ministry of Finance) was using a strict interpretation. But a
reluctant approach could also be seen at members of parliament from both government and
opposition sides, that all were trivializing the issue of excessive taxation that results from the
German non-resident artiste taxation.
But representatives of non-resident artistes or German organizers brought two new cases to
the German tax courts, for which the German Bundesfinanzhof (Federal Supreme Court)
decided to ask prejudicial questions to the European Court of Justice (ECJ). These cases, FKP
Scorpio Konzertproduktion GmbH (C-290/04) and Centro Equestre da Leziria Grande Lda. (C-
345/04) continue the discussion, which started with the earlier Arnoud Gerritse decision of
the ECJ.
FKP Scorpio Konzertproduktionen GmbH (C-290/04) is the most important case. The
prejudicial questions are quite long, but can be summarized as follows:
1. Is it correct to levy a withholding tax from non-resident artistes and not from (German)
residents?
2. Is this different for artistes from non-EU countries?
3. When the answer to question 1 is negative:
a. Do expenses need to be deductible before calculating the withholding tax?
57 Countries such as Spain, Italy, Greece, Belgium, Sweden and Portugal. See also Björn Westberg, “New Swedish Rules on the Taxation of Non-Resident Individuals”, 45 European Taxation 2 (2005), at 77, about the passive Swedish authorities.
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b. Is it correct when only direct expenses are deductible at the withholding stage and
that other expenses are deductible in a later refund procedure?
c. Can a exemption following from a tax treaty be used directly or is a written
confirmation by the tax authorities needed?
d. Are the answers to the preceding three questions different for artistes from non-EU
countries?
The European Commission has already officially commented on the Scorpio case58. The
Commission holds the opinion, that a withholding tax on source income of non-residents
should be acceptable, but only when business expenses are already deductible and
exemption provisions are directly usable when the withholding tax is calculated. Other
business expenses, that are not yet clear at the withholding stage, should be deductible in a
refund procedure. And the Commission recommends to make no difference between
residents from EU Member States and other countries.
With this case so evidently questioning the basic correctness of the German tax system of
non-resident (artiste) income from German sources, the German tax authorities decided to
react how that income is to be treated during the procedure before the European Court of
Justice. More than in the Arnoud Gerritse case, they seem to understand that the answers in
the Scorpio case might have a major influence on the taxation of non-residents, both artistes
and others. The Bundesministerium der Finanzen issued a statement on 17 October 200459,
that payments of the withholding tax can be postponed for the duration of the case, either
when a periodical tax return has been filed or when a tax assessment has been raised, under
the condition that the non-resident is coming from a EU Member State or from a country
with a tax treaty with Germany. At the moment, the organizers of performances with non-
resident artistes are still withholding the German tax from the performance fees, but are
upholding the payment of the tax to the Finanzämter (tax administration).
9.5. New initiative by the Council of the European Union
At the EU conference under the Dutch presidency of the EU on 8 October 2004 in Rotterdam
a resolution was accepted, which called for removal of the tax obstacles for non-resident
artistes in the EU Member States, with special attention to the implementation of the Arnoud
Gerritse decision60.
58 European Commission 26 October 2004, JURM (2004) 10039. 59 Bundesministerium der Finanzen (Federal Ministry of Finance) 17 October 2004, IV C 8 – S 2411 – 4/04. 60 Resolution of the EU conference “Artists on the Move”, held on 8 October 2004 in Rotterdam (www.sicasica.nl/pdf/conclusions_and_recommendations_conference_artists_onthe_move.pdf).
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The Council of the European Union has taken over this resolution in its meeting on 15/16
November 2004 in Brussels and inserted it in its Work Plan for Culture 2005/2006:
Topic Actor(s) Objective (specific) Result Deadline
5. Mobility (persons) Solving obstacles caused by taxation of mobile artists
Member States, European Commission
Define and assess taxation problems specific to mobile artists in the EU Include the findings in the report on Economics of Cu lture (see above under 1)
Report (see above under 1)
first half 2006
With these actions in the cultural field the pressure on the Member States to change their
rigid non-resident artiste tax rules is mounting further.
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10. CONCLUSIONS AND RECOMMENDATIONS
10.1. Conclusions
1. International performing artistes are taxed in both the countries of their performances
and their country of residence. Countries have concluded bilateral tax treaties to avoid
double taxation. The OECD coordinates these tax treaties with its Model Tax Treaty, in
which Article 17 allocates the taxing right to the performance country and Article 23
obliges the residence country to grant a tax credit for the foreign tax.
2. Reason for this deviant taxation is that the OECD believes that international artistes are
not trustworthy. The 1987 OECD Report states that artistes are either assuming that
they live in tax havens or not reporting their foreign income in the country. This
prejudice does not correspond with reality, but is still the basis for the international
allocation of taxing rights for artistes.
3. Not only payments to artistes personally but also payments to companies, third parties
and any other person involved are taxable under Article 17(2). Initially, in 1977, the
scope of this second paragraph was limited, but this was changed in an unlimited
approach in 1992, after the 1987 OECD Report.
The USA does not follow this reversal and keeps the limited approach of Article 17(2) in
its 1996 U.S. Model Treaty.
4. The performance country very often taxes gross performance fees, without accepting the
deduction of direct or indirect expenses. This is different from the taxation of normal
companies, which can deduct their direct and indirect expenses, and are only taxable
when they have a branch or permanent establishment in that country.
5. Very often the performance country also does not allow normal income tax returns after
the year to make use of the normal income tax rates.
6. The summary of the national artiste tax rules in chapter 3 shows that most countries
have this very strict tax system for non-resident artistes. Only a few countries are more
flexible, such as the United Kingdom and the Netherlands.
7. Because of the high taxation in the performance country, the tax credit in the residence
country is very often insufficient, because that country will not compensate more foreign
tax than the national tax due on the foreign income. This leads to excessive taxation;
examples are given in chapter 6.
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8. It is also possible that double taxation occurs, when one of the tax credit problems
occurs, as explained in chapter 5, and leads to the effect that no tax credit is allowed in
the residence country. Then the artiste pays the full amount of tax in both countries.
9. A study in the Netherlands under 2500 performances in 3 years shows that expenses for
international performing artistes are on average 75% from the performance income.
The variance of the percentage of expenses is high, but most artistes have expense of
between 40% and 120% from the performance income. The conclusion is that expenses
are important for performing artistes.
10. The tax revenue in the performance countries is far from impressive. Calculations for the
Netherlands lead to (max.) 6,7 million euro, based on gross taxation, and (min.) 1,5
million euro, based on net taxation. These figures can be extrapolated to other countries.
The suggestion that non-resident artiste taxation contributes to a state’s budget is not
supported by these figures. It seems that the tax revenue can only be collected at a high
administrative expense.
11. In 66% of the bilateral tax treaties an Article 17(3) has been included. This third
paragraph allocates the taxing right for subsidized artistes or groups to the residence
country and allows an exemption in the performance country. Sometimes there are other
conditions, such as cultural exchange, cultural agreement or non-profit institutions. This
Article 17(3) takes away the threat of excessive or double taxation, but why only for the
artistes who meet the conditions? It is very likely that this deviant treatment creates
unequal treatment within the European Union.
12. The excessive (and double) taxation is an obstacle for international artistes for
performing in other countries and entering foreign markets. This seems to be in breach
with the freedom principles of the EC Treaty. The European Court of Justice has
recognized this in the Arnoud Gerritse decision (C-234/01) and has ordered germany to
change its rigid tax legislation.
Unfortunately Germany did not follow up the decision completely. Therefore, the
European Commission has started a procedure against Germany and new case have
been brought forward to the European Court of Justice, such as FKP Scorpio
Konzertproduktionen GmbH (C-290/04).
13. The Council of the European Union has recognized the problem of artiste taxation and
has asked for measures to take away this obstacle for the mobility in the cultura l sector.
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10.2. Recommendations
a. Advice the EU Member countries to implement the Arnoud Gerritse decision of the ECJ as
soon as possible in their national legislation. This would make the deduction of expenses
and a normal income tax return possible for non-resident artistes in all EU Member
countries.
b. Create a database with information about national artiste tax systems, rates, allowances,
exceptions and refund procedures.
c. Discuss with the OECD in Paris, whether the unlimited approach of Article 17(2) of the
OECD Model Treaty is needed or can be reversed to the original limited approach from
1977.
d. Take over the $20,000 income limit of Article 17(1) of the 1996 U.S. Model Treaty, under
which non-resident artistes do not have pay tax in the performance country.
e. Improve the exchange of information about performance income of non-resident artistes
from the performance country to the residence country. The EU Directives for this
exchange of information are already accepted and in force; the technical means ought to
be available in this modern time.
f. Undertake a further study on the tax revenue from non-resident artistes in the EU
Member countries.
g. Inform the residence countries about the tax credit problems and ask them to take
measures to avoid these problems.
h. Discuss with the European Commission, whether the different treatment from Article
17(3) leads to unacceptable unequal treatment with those who do not meet the
conditions for this exception.
i. Discuss with the OECD whether Article 17 in general is necessary for countries with
normal taxation and tax treaty networks. There are no tax havens within the European
Union, which brings this threat from the 1987 OECD Report down to nil. Article 17 can be
turned around, so that international performing artistes can get a tax exemption in the
performance country and only pay tax in their residence country.