The facts are as follows. Mr Jundt, a German, resident in Germany and subject to income tax there, taught a 16 hour course at the University of Strasbourg, France. He received a very modest remuneration which was more an expense allowance than an actual remuneration. According to German income tax law, Mr Jundt could apply for his expense allowance to be exempted from German income tax if it had paid to him by a German university. But as it was paid to him by a French university, no exemption was possible and he had to pay full income tax on it. He challenged the refusal to exempt his expense allowance from tax in the German courts. The latter then referred three questions to the Court of Justice on the compatibility of the German exemption scheme with EC law and in particular with Article 49 EC on the freedom to provide services.
The first question deals with the issue whether a teaching activity carried out by a taxpayer of one member State for a public institution established in another member State comes within the scope of Article 49 EC even if it is carried out on a secondary basis and in a quasi-honorary capacity. The Court answered that it is covered by Article 49 EC.
The Court recalled that the concept of ‘services’ means ‘services ... normally provided for remuneration’ (Case C-355/00 Freskot, paragraph 54). It stated that the essential characteristic of remuneration lies in the fact that it constitutes consideration for the service in question (see, inter alia, Case 263/86 Humbel, paragraph 17; Case C-422/01 Skandia and Ramstedt, paragraph 23; Case C-76/05 Schwarz and Gootjes-Schwarz, paragraph 38; and Case C-318/05 Commission v Germany, paragraph 67). So, did the expense allowance received by Mr Jundt bring his activities within the scope of Article 49 EC ?
The Court held that it did. The decisive factor which brings an activity within the ambit of the Treaty provisions on the freedom to provide services is its economic character, that is to say, the activity must not be provided for nothing. There is no need in that regard for the person providing the service to be seeking to make a profit (see, C-157/99 Smits and Peerbooms, paragraphs 50 and 52).
But, it recalled also courses provided by certain establishments that are part of a system of public education and financed, entirely or mainly, by public funds are excluded from the concept of 'services' (see, to that effect, Case 263/86 Humbel, paragraph 18, and Case C-109/92 Wirth, paragraphs 15 and 16). The Court has thus stated that, by establishing and maintaining such a system of public education, normally financed from the public purse and not by pupils or their parents, the State does not intend to become involved in activities for remuneration, but carries out its task towards its population in the social, cultural and educational fields (see Case C-76/05 Schwarz and Gootjes-Schwarz, paragraph 39). However, the present case, the Court pointed out, does not relate to the teaching activity of the universities themselves, financed by public funds but concerns the treatment of the remuneration of services provided to those universities.
The second question referred concerned the justification of the German income tax scheme. The question asked whether the restriction on the freedom to provide services constituted by the fact that national legislation confines the application of an exemption from income tax to remuneration paid by public universities established on its national territory, in return for teaching activities carried out on a secondary basis, but refuses it where that remuneration is paid by universities established in another member State, is justified by overriding reasons in the public interest.
The Court held that the German system was not justified. Even if the objective of promoting teaching, research and development is an overriding reason relating to the public interest, the fact remains that, in order to be justified, a restrictive measure must comply with the principle of proportionality, in that it must be appropriate for securing the attainment of the objective it pursues and must not go beyond what is necessary to attain it (Case C‑478/98 Commission v Belgium, paragraph 41, and Case C‑334/02 Commission v France, paragraph 28). A difficulty was presented by the Court's previous judgment in Case C-39/04 Laboratoires Fournier. It held in that case that it was possible that the promotion of research and development may be an overriding reason relating to the public interest. However, it rejected the argument that a member State cannot be required to promote research carried out in another member State and held that national legislation which restricts the benefit of a tax credit only to research carried out in the Member State concerned amounts to a restriction of the freedom to provide services. The Court ruled that such legislation is directly contrary to the objective of EC policy on research and technological development which, according to Article 163(2) EC, seeks in particular to remove fiscal obstacles to cooperation in the field of research.
The Court held that the German legislation in issue in these proceedings is contrary to those objectives because it discourages persons teaching on a secondary basis from exercising their fundamental freedoms in order to offer their services in another member State by denying them a tax concession which they would have enjoyed had they provided the same services on national territory. By exercising an influence similar to that of the national legislation at issue in Case C-39/04 Laboratoires Fournier, the German legislation in these proceedings infringes the freedom of teachers exercising their activity on a secondary basis to choose where within the EU to provide their services, without it having been established that, in order to achieve the supposed objective of promoting education, it is necessary to limit the enjoyment of the tax exemption at issue in the main proceedings to those taxpayers working on a secondary basis as teachers in universities situated on national territory.
Finally, the third question. That asks whether the fact that the member States are themselves competent to organize their education systems is such as to render compatible with EC law national legislation which confines the benefit of a tax exemption to taxpayers carrying out activities for or on behalf of national public universities.
The Court answered that question in the negative. The Court recalled that member States are in fact bound, when exercising the areas of competence reserved to them, to comply with Community law, in particular the provisions on the freedom to provide services. The Court has ruled thus in several fields, including direct taxation and education (see, Case C-76/05 Schwarz and Gootjes-Schwarz, paragraphs 69 and 70, and Case C-318/05 Commission v Germany, paragraphs 85 and 86).